Sept. 29, 2018
Most of us can't rely on a company pension to see us through to retirement. Defined benefit pension plans are quickly disappearing from our corporate landscape. Fewer than 30 per cent of the Canadian labour force currently belongs to a formal, or registered, pension plan, according to a new book by York University professor Moshe Milevsky, Ph.D., and Certified Financial Planner professional Alexandra Macqueen. The rest of us are facing retirements funded by RRSPs, RRIFs and other retirement accounts that are exposed to volatile financial markets. The reality is even harsher for women.
"The risk is more acute for women because of their higher expected longevity," says Ms. Macqueen. Also, on average, women work fewer years and earn less than men, making it even more important for their nest egg to work for them.
In Pensionize Your Nest Egg, the authors suggest that all Canadians consider securing their futures by turning retirement savings into a monthly source of income through products such as annuities, rather than relying on traditional investment portfolios to pay off. An annuity is a type of insurance that protects you against outliving your money and it especially makes sense for women.
The book urges readers to think about annuities as a personal pension that can supplement other income streams such as CPP and OAS in retirement. An annuity can be purchased from an insurance company and there are several different types available, which the authors describe in detail. An "immediate annuity" starts paying out right after it is bought, whether purchased at the time of retirement with one lump sum payment or purchased slowly over time. A "deferred income annuity" lets you start receiving payments at a later date, regardless of when the annuity is purchased.
When you get your quote from the insurance provider, you'll need to carefully compare your options. Different insurance companies will pay out at different rates. There are also riders available that will affect the payout you receive, including riders that protect against inflation and cost of living increases. You can also choose from annuities that pay out funds to your spouse and annuities that only pay out for a specified amount of time.
Of course, the price for an annuity will vary greatly depending on the type of product, the riders attached, and your age at the time of purchase as well as when it starts paying out. As a rule of thumb, delaying your purchase or your payouts to an older age will reduce the annuity's cost for two reasons. First, the money will be paid out over a shorter period of time. Second, annuities are set up by insurance companies as a pool of money that will be paid out to an age cohort. The longer you outlive your peers in the cohort, the larger the portion of the pool you'll receive.
Women should be aware, however, that they will pay a gender-biased penalty when purchasing an annuity due to their longer life expectancy. Ms. Macqueen and Mr. Milevsky's research found that the average cost of an annuity that pays $50,000 annually is $842,634 for a 65-year-old man. The same annuity costs a 65-year-old woman $1,020,209. To manage this disparity, women will either need to save more or live on less to get a desired level of income in retirement.
Still, for women who fear they'll one day be living alone and broke, annuities can help them plan a dignified, independent retirement. "When you annuitize, the financial decision is done," says Ms. Macqueen, "and you have more capacity now than you will later. When you're 85 years old, you don't want to have to think about yields."