When illness or disability derails retirement plans
An unexpected health problem can be a financial and emotional shock, but a holistic approach to retirement planning can protect assets.
By: VIRGINIA GALT
Date: September 28, 2015
The abolition of mandatory retirement has led many Canadians to believe they can work past 65 for as long as they need or want to. However, "many people don't realize how common a serious illness can be," says Rocco Taglioni, Senior Vice-President, Distribution and Marketing, Individual Insurance and Wealth, at Sun Life Financial.
The reality is that almost 70 per cent of Canadians stop working before they actually plan to – with health problems a predominant cause of sudden forced retirement, according to Sun Life’s most recent Canadian Health Index survey.
"Coming by surprise – as they almost always do – these experiences generally present us with unforeseen costs just as they threaten our ability to earn an income," Sun Life notes in its fifth annual Canadian Health Index, which is based on a poll of 2,799 Canadians from 18 to 80 years of age last year.
Almost 30 per cent of the retirees who participated in the survey reported they had retired earlier than expected because of personal health or medical issues, while 10 per cent had to stop working because of involuntary job loss. Others (15 per cent) moved up their retirement dates because of optional early retirement offers from employers, 14 per cent retired for some other reason and 2 per cent left work to take care of someone else with health issues.
Major events such as stroke, cancer diagnosis or a serious injury can result in severe financial shock as well as emotional shock, Mr. Taglioni says. Canadians also seriously underestimate the cost of out-of-pocket medical expenses – underscoring the need for a more holistic approach to retirement planning. Advisors can help clients see the bigger picture and provide strategies to protect their retirement assets from unanticipated events.
"When our advisors think of protection, they think of a number of things, but mainly planning,” says Mr. Taglioni. “We like to believe that the majority of people don't plan to fail, but fail to plan. Various forms of protection, such as life and health insurance, are valuable parts of the planning process. They help ensure that a serious health event or accident won’t derail retirement savings and allows the peace of mind that you’ll leave something for your family when you die.”
Part of the holistic discussion advisors should have with their clients includes identifying beneficiaries and preparing Powers of Attorney, granting authority to others to act on their behalf in the event of incapacity, says Mr. Taglioni. “It can be an extremely difficult conversation to have, but it is a necessary one, and advisors recognize that.”
The advisor-client discussion should also address the prudence of having an emergency fund and a legacy plan, says Mr. Taglioni. "The emergency fund can be savings in a TFSA [tax-free savings account]. Regarding legacies, an insurance product can protect savings and ensure a smooth transition should anything happen during your career," he adds.
The Ontario Securities Commission concurs. Health issues have been underestimated as a source of potential financial disruption and it is important that advisors address these issues with their clients, the OSC says in a new investor education report issued this spring. "Planning for the unexpected needs to be a bigger part of the planning process, both before and after retirement," says the report, prepared for the OSC by the Brondesbury Group and written by Edwin Weinstein.
In his report, Dr. Weinstein notes that some retirees are caught off guard by "the magnitude of costs" when they lose their employee health benefits.
Adrian Mastracci, an independent financial advisor based in Vancouver, says advisors have a crucial role to play because most prospective clients "are not prepared for the high cost of health care, like a retirement home facility."
Retirement projections should take a number of factors into account, including long-term retirement income goals, possible health costs and inflation factors, says Mr. Mastracci, an advisor and portfolio manager at KCM Wealth Management Inc. He takes his clients through various scenarios, including, "What's it going to look like if I can't work anymore?"
Some employer-sponsored group benefit plans offer retirees the option of picking up the costs of continued coverage, Mr. Mastracci says, while other clients prefer to invest in their own policies to cover the costs of prescription drugs and other medical expenses in retirement.
The OSC's investor education arm advises that insurance needs can also change in retirement: "For example, if you have fewer debts and dependants, you may not need as much life insurance, but you may have more health problems, so you may want to consider critical illness insurance or long-term care insurance."
Sun Life said in its 2014 Canadian Health Index report that "despite Canada's justifiably celebrated universal health care system, out-of-pocket expenses are commonplace," and these expenses typically increase as people age. Last year, according to Sun Life's research, respondents reported paying $1,511 out of pocket for health care expenses.
Yet, "a remarkable number" expect to pay nothing for prescription drugs, eye care, hearing aids, home care, psychiatric treatment, physiotherapy, nursing home or long-term care – mistakenly assuming that they will be fully protected by provincial government health plans in retirement.
This is where a well-informed advisor can help protect investors from health-related shocks that can threaten their financial security in retirement, says Mr. Taglioni.
"We know Canadians are living longer and that might mean longer health care costs,” he says. Sun Life recently released health care funding guidelines on their website, which are separated by province and give information about health services such as disability protection, home care, palliative care and prescription drugs.
“These guidelines can help Canadians have that conversation with their advisors and understand what is and is not covered by provincial health plans.”
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