Despite pandemic, retirement savings are still ticking along: report

As the brutal financial impacts of the pandemic washed over us – businesses forced to close, workers laid off, and so on – many observers expected that retirement savings might have to be raided so people could keep afloat.

New research from the U.S. suggests otherwise, reports Yahoo! Finance.

Recent research carried out by the Investment Company Institute found that “most Americans have not taken any withdrawals from their defined contribution (DC) retirement plans,” Yahoo! Finance reports. As well, “the vast majority of U.S. savers have continued to make contributions to their plans through the pandemic,” the article notes.

“Despite the economic challenges over the past year and a half, retirement savers show deep commitment to preserving their retirement nest eggs,” Sarah Holden, ICI senior director of retirement and investor research, states in the article. “The combination of ongoing contributions and few participants taking withdrawals reflects DC plan participants’ long-term mindset and preference to keep this money earmarked for retirement and avoid dipping into it.”

Paradoxically, the pandemic – a period where many thought money would be very tight – has turned out to be a period of higher rates of savings, the article notes.

“Though many households have been faced with financial constraints over the past year and a half, the aggregate personal savings rate has increased since COVID-19 first reared its head in the beginning of 2020,” the article states.

Indeed, here in Canada, the CBC reports that the average Canadian has saved $5,000 during the pandemic, thanks to “the combined impact of reduced spending and collecting more money from government support programs,” the broadcaster reports.

With less to spend on, Canadians attacked their debt loads and were still able to stash away “$5,574 per Canadian on average in 2020, compared to $479 in the previous year,” the CBC notes.

Back in the U.S., the ICI report found that only “1.1 per cent of all DC plan participants stopped contributing to their plans in the first half of 2021,” reports Yahoo! Finance.

It’s good to hear that people generally are leaving their retirement savings alone, despite the strange economy and overall odd spending era the pandemic has brought us. No matter what’s going on today, eventually all of us will reach an age where the income we get from working declines, and the income we need from our savings escalates.

Workplace pensions certainly help with retirement income; if you are in a program at work, be sure to maximize your participation if you can. If you don’t have a workplace pension plan, the Saskatchewan Pension Plan is a voluntary DC plan that professionally invests your savings and can help you turn it into an income stream when you hang up your working hat for the last time. They’ve been doing it for 35 years – check out SPP today!

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By Sheryl Smolkin

If you are considering purchasing a life annuity using funds in your registered (RRSP, RRIF, LIRA, RPP) or unregistered accounts (Savings Accounts, GIC, TFSA, etc) you will need to consider what features to select and how your decision will impact the level of benefits you receive.

For example, a life annuity may be:

• A single life annuity based only on the age of one annuitant.
• A joint and survivor annuity that pays a portion of the benefit (i.e. 60%) until the death of the surviving spouse.
• A single or joint and survivor annuity that guarantees payments for a specific period (i.e. 10 years).
• A deferred annuity that does not start paying monthly benefits in the same year the annuity is purchased.

Other more specialized annuities include term certain or fixed term annuities, guaranteed annuities with cash back features, impaired and child inheritance annuities. You can read about them here.

To give you an idea how the nature of an annuity can impact your monthly benefits, I got a series of quotes from the RetirementAdvisor.ca Standard Annuity Calculator on October 28, 2014 which I summarized in the table below. In all cases it is assumed that a lump sum of $100,000 was used to purchase an annuity and when invested by the insurance company, the lump sum earned 4%.

While these quotes assume the primary annuitant is female and the second annuitant is male, when a male and female of the same age purchase individual life annuities, the male will receive a slightly higher periodic payment than the female because the male’s life expectancy is shorter.

Table 1: Annuity Purchase quotes

	Single life	Joint	Single Life, COLA	Joint, COLA	Single, 10 yr, COLA
Gender of primary annuitant	F	F	F	F	F
Age purchased	65	65	65	65	65
Age payouts begin	65	65	65	65	65
Gender of joint annuitant		M		M
Age when annuity purchased		65		65
Cost of living increases (COLA)			X	X	X
10 yr. guaranteed payments					X
% Payable to 2nd annuitant when 1st dies		60%		60%
MONTHLY BENEFIT	$637	$592	$522	$481	$503

	Joint, 10 yr, COLA	Single, 10 yr, COLA Age 71 start	Joint, 10 yr, COLA Age 71 start	Single, 10 yr, COLA Age 80 start	Joint, 10 yr, COLA Age 80 start
Gender of primary annuitant	F	F	F	F	F
Age purchased	65	65	65	65	65
Age payouts begin	65	71	71	80	80
Gender of joint annuitant	M		M		M
Age when annuity purchased	65		65		65
Cost of living increases (COLA)	X	X	X	X	X
10 yr. guaranteed payments	X	X	X	X	X
% Payable to 2nd annuitant when 1st dies	60%		60%		60%
MONTHLY BENEFIT	$473	$762	$719	$1,401	$1,355

Source: RetirementAdvisor.ca calculator as of October 28, 2014. Assumption: $100,000 lump sum purchase earns 4%.

It is apparent that the stripped down single life annuity pays a higher monthly amount ($637) than single or joint annuities with various combinations of guarantee periods and COLAs.

Benefit payments also increase significantly if the annuity payouts are deferred to age 71 ($762, single; $719, joint) even with a 10 year guarantee and COLAs. The payments are even higher payment if an annuity with the same features is deferred to age 80 ($1,401 single; $1,355 joint).

Furthermore, annuity payouts also vary as between insurance companies. For example, you can find current quotes from a series of insurance companies for single life annuities on a premium of $100,000 based on a guaranteed period of 5 years for both males and females on the Morningstar Canada website.

Receiving monthly annuity benefits in retirement can give you peace of mind. However, the monthly benefit you can purchase for any given lump sum varies considerable depending on the type of annuity you select, the age when you purchase the annuity, the age you begin collecting benefits and the interest rate assumptions.

Your financial advisor or an annuity broker can get quotes tailored to your situation that will help you to get the features you need for the best possible price.

You can also use your SPP balance to purchase a life annuity directly from the plan. For more information about SPP annuities, take a look at Understanding SPP annuities. Because you purchase the annuity directly from SPP, there are no commissions or referral fees and you can be sure you are getting competitive rates.

 

By Sheryl Smolkin

Receiving a regular paycheque makes it easy to budget. The amount that appears in your bank account every month is what you have available to spend on necessary and discretionary items.

But once you retire and have to figure out how to make your lump sum savings last for the rest of your life, budgeting isn’t as easy. How much can you afford to spend? What if your investments earn less than you expected when you set up a withdrawal plan?

One way to add financial certainty is to buy a life annuity with all or a part of your retirement savings. A life annuity is purchased from an insurance company for a lump sum amount and it guarantees that you will receive a set monthly amount for life (unless the annuity is indexed).

While payments from a basic life annuity typically end when you die, at an additional cost you can add provisions like a guarantee period (i.e. payments will be made for a minimum of 10 years even if you die) or a joint and survivor feature that will continue to pay out until the death of the last spouse.

Annuities are purchased from licensed life insurance agents representing insurance companies. Life insurance agents are compensated by commissions that are factored into the cost of the annuity.

Life annuities have got a bad rap in recent years because with lower interest rates they are more expensive to purchase. Also, many people do not like the idea that they lose control of their money and that upon the death of the last annuitant or the expiry of the guaranteed payment period, the principal will not revert to their estate.

However, the upside of an annuity purchase is that if you live beyond the age that it is assumed you will live to when the original annuity purchase is made, your return on investment could be much higher than if you invested the money yourself.

If you purchase an annuity with funds from a registered plan (i.e. SPP, RRSP, DC pension plan) you must begin receiving payments by the end of the year you turn 71. Because all of the money in your account has been tax-sheltered, the full amount you receive monthly will be taxed at your incremental rate.

In contrast, you can purchase an immediate or deferred annuity from a non-registered account. For example, at age 65 you could opt to manage a portion of your money for the next 15 years, but use a lump sum to purchase a life annuity beginning at age 80. Your monthly payments will be higher than if the annuity started at age 65. Furthermore, only a portion of the benefit representing investment earnings after the purchase will be taxed.

You can use the RetirementAdvisor.ca Standard Annuity Calculator (or other similar online calculators) to model either the size of the lump sum it will take to generate a specific monthly benefit or the amount of the monthly benefit a specific lump sum will generate.

Monthly benefits you receive from the Canada Pension Plan, Old Age Security or a defined benefit pension plan are in effect, life annuities. Depending on your expected expenses and the amount of savings you have available, you may decide you do not need additional annuity income.

In the conclusion to his 2013 book “Life Annuities: An Optimal Product for Retirement Income”[1], Moshe Milevsky, Associate Professor of Finance at York University’s Schulich School of Business notes the following:

“Behavioural evidence is growing that retirees (and seniors) who are receiving a life annuity income are happier and more content with their financial condition in retirement than those receiving equivalent levels of income from other (fully liquid) sources, such as dividends, interest, and systematic withdrawal plans. Indeed, with growing concerns about dementia and Alzheimer’s disease in an aging population, automating the retiree’s income stream at the highest possible level—which is partly what a pension life annuity is all about—will become exceedingly important and valuable.”

If you have rejected an annuity purchase in the past or if you have never seriously considered investing in a retirement annuity, it may be time to take another look.

You can also use your SPP balance to purchase a life annuity directly from the plan. For more information about SPP annuities, take a look at Understanding SPP annuities. Because you purchase the annuity directly from SPP, there are no commissions or referral fees and you can be sure you are getting competitive rates.

[1] This book can be downloaded in pdf and ebook format at no cost.