How Longevity Fits Into a Retirement Portfolio
23 Sep 2022.
As an advisor, you always strive to do what’s best for your clients. In retirement, they want to feel secure and know that their investments will fund their desired lifestyle, generating the income and returns they need to live their best life.
Today’s historic inflation and rising interest rates may be causing your clients to pause, reflect, and perhaps question how their investment portfolio is designed to navigate these rough waters and the uncertainty ahead.
The traditional 60/40 portfolio has evolved over the years through an ever-expanding product shelf of solutions accessible to more advisors and their clients. Beyond stocks and bonds, advisors can now help their clients lower portfolio volatility and diversify across more asset classes than ever before. Some examples include:
Alternative Strategies where derivatives or options support higher income
Private Assets in the fixed income, equities, and real estate space to reduce portfolio volatility
Real Assets like agriculture, energy, base- and precious- metals for inflation protection
Crypto assets providing exposure to innovative new currencies and web3 technologies
A new asset class incorporating longevity risk pooling is now available for every Canadian investor’s portfolio. Traditionally, this pooling benefit has been delivered through access to a defined benefit (DB) pension plan or by purchasing an annuity from an insurance company. Now, you can incorporate this through a standard mutual fund structure, making it easy to incorporate into your practice.
Through a combination of financial planning and conversations with your clients, you have a strong understanding of their retirement budget, broken down into basic needs (housing, groceries, transportation, medical, etc.) and discretionary wants (entertainment, travel, dining out, gifts, etc.). You likely have some sense of how those might evolve over time while, of course, acknowledging the inherent uncertainty.
People are adaptable to some degree, and these spending levels are not written in stone. In tough times, clients may ratchet down their spending and portfolio withdrawals without compromising what's important to them; in good times, they may choose to take those excess returns and spend them on a big family trip or other indulgences.
What's important is making sure that those basic needs are always covered, regardless of how the market is performing. With some sense of those spending needs and wants, let's explore a framework that displays how the Longevity Pension Fund can benefit your clients.
Let’s look at Bill (65) and Norma (65), a recently retired couple looking for stability from their investments and planning to live a long life.
They’re each collecting full OAS of ~$16,000 per year, have a combined CPP income of $24,000 per year (~83% of their combined maximum), with their $1,000,000 investment portfolio needing to supplement their income goal of $85,000 per year (adjusted each year for 2% long-term inflation).
Of this $85,000 goal, their basic needs are $55,000 per year, and their discretionary wants are $30,000 per year. You have them invested in a balanced portfolio generating average returns of 3.1%* (net of fees).
Here is what their income and portfolio balance could look like over their lifetime
For illustrative purposes only.**
As you can see in the chart above, Bill and Norma would not be able to meet their retirement income goals by the time they reach 90 years old using a traditional balanced portfolio. While this may sound unlikely, mortality tables suggest a 50% chance that at least one will live past 90. More importantly, they wouldn’t even be able to fund their basic needs past this age, which would require them to change their retirement plans significantly and would lead to a high level of financial stress for Bill, Norma, and the rest of their family. This is a significant risk that retirees face but is often overlooked or underestimated.
Now here is what adding a 33% allocation to the Longevity Pension Fund can do for your client
For illustrative purposes only.**
As you can see in the chart above, Bill and Norma now expect to cover their basic income needs for life, even if they live to 100 or beyond. This peace of mind could help them weather the volatility they might experience in other areas of their portfolio, helping you solidify a long-term relationship as their advisor.
Adding the Longevity Pension Fund into a diversified portfolio not only benefits your client, but it also benefits you as the advisor:
Your client’s inflation-adjusted basic income needs are addressed through income for life solutions ($24,000 from CPP, $16,000 from OAS, and $15,450 from the Longevity Pension Fund > $55,000 needs)
Deepen the client relationship by retaining the investment assets, allowing you to manage their entire retirement portfolio rather than moving a portion to a third party like an insurance company
Your client could receive $90,000 to $315,000+ more cashflow from their portfolio should they live a reasonably long life and require the income, covering their basic income needs for many more years, including more than one year of additional discretionary spending
To learn more about how the Longevity Pension Fund can streamline your portfolio management and help your clients, reach out to your Purpose Investments sales representative, give us a call directly at 1-888-273-8471 or email us at firstname.lastname@example.org
*Investment Portfolio Assumptions: 60% fixed income and 40% equity, with average long-term returns of 3% and 7% respectively. Fees (investment management fees, or trailing commissions, plus MERs) of 1.50%.
**This example is for illustrative purposes only and are not indicative of expected or guaranteed performance by the Fund. In no circumstances should this be considered investment advice or professional guidance, and these scenarios should never be interpreted as predictive of the potential performance of their investment.
Commissions, trailing commissions, management fees and expenses all may be associated with investment fund investments. The prospectus contains important detailed information about the investment fund. Please read the prospectus before investing. There is no assurance that any fund will achieve its investment objective, and its net asset value, yield, and investment return will fluctuate from time to time with market conditions. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Income in the form of Fund distributions is not guaranteed, and the frequency and amount of distributions may increase or decrease. The Fund has a unique mutual fund structure. Most mutual funds redeem at their associated Net Asset Value (NAV). In contrast, redemptions in the decumulation class of the Fund (whether voluntary or at death) will occur at the lesser of NAV or the initial investment amount less any distributions received. You can always access the lesser of unpaid capital (initial value of your investment less any income payments made) or your net asset value. Fees may apply.
The Longevity Pension Fund is managed by Purpose Investments Inc. The document is not investment advice, nor is it tailored to the needs or circumstances of any investor. Talk to your investment advisor to determine if the Longevity Pension Fund is right for you and always read the prospectus before investing. Nothing on this document shall be considered a solicitation to buy or an offer to sell, or a recommendation for, a security, or any other product or service, to any person in any jurisdiction where such solicitation, offer, recommendation, purchase or sale would be unlawful under the laws of that jurisdiction. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.
Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments believe to be reasonable assumptions, Purpose Investments cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.