Retirement anxiety? How to reduce the risks
As lifespans lengthen and DB pension plans disappear, your clients may be feeling anxious about retirement income. Guaranteed income products can help
Date: December 8, 2017
For Canadians considering what their lives will look like in retirement, the issue of longevity risk — outliving your retirement savings — looms large.
"Longevity magnifies all the other risks — health, inflation, mortality and market risk," explains Jim Lyons, director, strategic account development, wealth distribution, at Sun Life Financial.
The rising spectre of longevity risk is borne out in statistics that show Canadians are living longer. According to Statistics Canada, life expectancy has increased steadily since the 1920s — a male born last year can expect to live to age 86, with women expected to reach nearly 90 years old. And as Canadians spend more time in retirement, they need more savings.
At the same time, employers and governments have downloaded much of the responsibility, risk and uncertainty around retirement onto the shoulders of Canadians by reducing their financial commitments over recent decades. Perhaps the clearest indication that people are more on their own than ever is the steady disappearance of defined benefit (DB) pension plans from employer benefit packages, particularly in the private sector.
"The larger challenge that is facing Canadians is a lack of DB pensions," says Mr. Lyons. "DB pensions, through guarantees, create certainty."
The disappearance of DB plans not only raises risks and anxiety for Canadians, it presents a challenge for financial advisors who need to replace the income certainty that these plans provide for retirees, notes the Sun Life executive.
Defined benefit plans provided another critical, often overlooked component of a retirement plan: professional management of the fund. For the most part, DB pension plan members do not worry that the money will be there for them in retirement because it is managed by a team of professionals (and in most cases, financially backstopped by the government or a large company).
"To the advice community, when talking about retirement income planning, I talk about strategically using guarantees to cover off base income and health costs in retirement," says Mr. Lyons. "If we can put the right amount of certainty into place, we can minimize the anxiety around unknown risks."
The average advisor's challenge of creating certainty around income in retirement will only grow in the future as more medium and large corporations shift away from DB plans to defined contribution (DC) plans.
"Guarantees and income planning strategically will make a lot of sense in a new world with minimal DB pensions," says Mr. Lyons.
Another challenge is that as clients near retirement, their anxiety about not having enough money rises while their risk tolerance typically drops, he notes.
Although the strategy can often be overlooked, advisors can assist their clients in "building" a pension through financial products like annuities or guaranteed investment funds. These products are issued by insurance companies and can offer income guarantees along with other benefits of insurance contracts such as death benefit guarantees and beneficiary designations, notes Mr. Lyons. Though there's no single product solution that can solve for all client needs, guaranteed income products can "minimize retirement anxiety" around income gaps for those who are relying on a DC pension, RRSPs or other savings in retirement.
Frank Wiginton, a Toronto-based financial wellness expert and author, sees guaranteed products playing a role for Canadians who are retiring with a DC pension or RRSPs and want to convert some of those savings into a predictable and safe stream of income in retirement.
"For somebody who struggles with day-to-day cash flow or not overspending, being able to go to [an advisor] and create that guaranteed income can be of significant value," he says.
People might also want to buy an annuity to receive a guaranteed income base, suggests Mr. Wiginton. This group is not necessarily poor at managing their money, but wants the certainty of knowing their basic living costs will be covered throughout retirement through guaranteed income products.
"It's so they know that no matter what happens, at least that is taken care of," he says. "And they can alleviate themselves of the stress of, 'Will I be able to pay my bills?'"
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