Making a case for government-run long term care insurance: NIA

It’s not something we are ever prepared for. But many Canadians find out the cost of long-term care can range into the thousands per month when something happens to a loved partner or parent. It’s a cost that few expect or plan for.

Those are some of the reasons why the National Institute on Ageing (NIA) is calling for a national long-term care insurance plan, reports The Toronto Star.

NIA’s Dr. Samir Sinha calls such a program “a necessary `social contract’ that will especially help GenXers, the eldest of whom are marching towards 60, and the massive cohort of millennials, who will start turning 50 in the early 2030s,” the newspaper reports.

“More people are living paycheque to paycheque and so they aren’t really doing a great job saving for their retirement,” Sinha, who is also director of geriatrics at Sinai Health and University Health Network, tells The Star.

“And the biggest thing that can really threaten anyone’s retirement or how they live in retirement will be if they all of a sudden have long-term-care needs,” he adds.

Long-term care is defined by the NIA “not as the traditional nursing home depiction, but as a mix of supports or health care services from public or private care providers across a range of settings, including institutions, the community and individual homes.”

“Many will one day need extra help, with bathing or getting dressed; or from physiotherapists or occupational therapists. It’s not just the potential vulnerability of old age, many will be living with disabilities. Some coverage is provided currently by a patchwork of provincial systems across Canada, the paper said, but often expenses are paid by the individual, if they can afford it,” the article notes.

Often, the article reports, people think they can look after an elder family member on their own. This is harder than it may sound, states York University’s Pat Armstrong in the article.

“The assumption that care will be provided by family, especially women, often leads to an unhappy awakening, given that many caregivers are not qualified to provide the support needed,” the article notes.

“It takes medical training that many don’t have, whether it’s looking after a partner with dementia or a chronic disease,” the article continues.

“It’s especially the case now when you have people with catheters and kidney failure and all kinds of other equipment they go home with,” Armstrong tells The Star. “That requires an incredible amount of training and skill. And the recognition that those skills mean you have to pay for them.”

The article notes that Germany, Japan, the Netherlands, Taiwan and the US state of Washington all provide state-run long-term care insurance programs for citizens.

Without any state insurance program, we face some rather dizzying costs, the article reports.

“In nursing homes… co-payment fees cost more than $33,000 a year for a private room and $28,000 for a semi-private room. In-home services, the paper said, can range from $1,000 to $3,500 dollars per month while the cost of complex home care in Ontario can cost as much as $25,000 a month.”

It will be interesting to see if any levels of government in Canada explore this idea, particularly given the fact that the NIA predicts that one quarter of Canadians will be over 65 by 2030 and by 2048, the eldest GenXers will be in their 80s.

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What if there was a way to convert some or all of the money you’ve saved up for retirement into cash for life – monthly payments for as long as you live?

And once you made this conversion, you’d no longer have to make any investment decisions for this money; you’d just have to trot over to the Super Mailbox each month to collect a cheque.

There is just such a product, the annuity, but for some reason, it’s not something people choose very often. Writing in MoneySense, David Aston calls annuities “the best retirement product that hardly anyone buys,” adding that they amount to a sort of do-it-yourself defined benefit (DB) plan.

“Like DB pensions, (annuities) provide guaranteed income for as long as you live. But while employer pensions are considered the gold standard of retirement income plans, few Canadians ever think about annuities,” writes Aston, calling their unpopularity “baffling.”

Aston says that for some people, such as those with wealth or who have DB pensions from work, an annuity is probably not necessary. And others don’t like the idea of “their finality – once you give your cash to the insurance company, you’re locked in for life.” There’s no more “growth potential” for this investment and you can’t tap into it for lump sum amounts, he explains.

But, says Aston, they are ideal for cash flow. Many people buy an annuity which, along with government pensions, “meets all your non-discretionary needs,” such as keeping the lights on, the furnace going, and the rent paid via the steady, predictable and guaranteed income. And if you convert part of your retirement savings to an annuity, you can “afford to take more risks with the rest of your portfolio.”

One would imagine that those who took out annuities prior to the market downturn in 2008 are happy with their choice, because while you may miss out on investment gains, you also miss out on investment losses with an annuity.

In a video posted to Save with SPP, Moshe Milevsky, Professor of Finance at York University’s Schulich School of Business, calls annuities “insurance against something that is really a blessing, longevity.” Because the annuity pays you for life, you can never run out of money, he notes.

Writing in the Globe and Mail financial columnist Rob Carrick notes that unlike withdrawing money from a RRIF or other vehicle, the withholding tax on an annuity is not automatically deducted but is taxed the same as regular income, he explains.

He reports that a good time to consider buying an annuity is when you are older. “The later you buy, the shorter the period of time the insurer selling an annuity expects to have to pay you. As a result, payments are higher than they would be if you bought at a younger age,” he explains.

The cost of an annuity depends on current interest rates, which have been quite low for a while but are rising, which is good news for annuity buyers.

The Saskatchewan Pension Plan (SPP) is somewhat unique in that it can convert your savings into an annuity. They offer four different kinds of guaranteed annuities, and your money continues to be invested by SPP while you sit back and wait for the monthly cheque. For full details, check out the Retirement Options chapter in the SPP Retirement Guide.

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. After a 35-year career as a reporter, editor and pension communicator, Martin is enjoying life as a freelance writer. He’s a mediocre golfer, hopeful darts player and beginner line dancer who enjoys classic rock and sports, especially football. He and his wife Laura live with their Sheltie, Duncan, and their cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22

The pros and cons of annuities

Annuities are usually insurance against something bad – but there’s a kind of insurance that you can look forward to, explains Moshe Milevsky, Professor of Finance at York University’s Schulich School of Business.

In his YouTube video, Why Annuities Now?, Prof. Milevsky talks about how annuities are really insurance “against something that is a blessing, longevity.” Longevity insurance is “the insurance you buy to protect you against the cost of living for a very long time.”

An annuity is certainly something to think about when converting your SPP savings into retirement income. It’s a way to set up your savings to provide you with a fixed monthly income for your life – and there are ways to also provide for your survivors. Check SPP’s retirement guide for an overview of the annuity options the plan provides.

The retirement spending “smile”

Writing in the Financial Post, Jason Heath talks about the “retirement spending smile” that seems to occur for most of us. What is the smile? We generally spend more money in our early retired years, see a decline in the middle, and then see spending increase in the end – on a chart, it looks like a smile.

Research, the article notes, finds that “spending tends to rise by more than the rate of inflation in later years, on average.” This, the article notes, is likely due to the fact that in extreme old age, “few 95-year-olds cut their own grass, live independently in their homes, or avoid prescription drugs.”

The article warns us that spending may rise modestly if we are fortunate enough to live into our late 80s, and advises that idea to be part of our financial planning.

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. After a 35-year career as a reporter, editor and pension communicator, Martin is enjoying life as a freelance writer. He’s a mediocre golfer, hopeful darts player and beginner line dancer who enjoys classic rock and sports, especially football. He and his wife Laura live with their Sheltie, Duncan, and their cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22

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.