In this article, Jim Lyons, director, strategic account business development, wealth distribution, Sun Life Financial, discusses how guaranteed income in retirement can help ease clients’ anxieties.
Think for a minute about the most valuable benefits you offer clients. Perhaps investment and financial advice, tax minimization, income maximization, or wealth transfers come to mind. These are all very important. But if you funnel all the things you do to help clients into one ultimate benefit, you might find the biggest advantage could actually be emotional, not financial. Many clients will look to you to help them feel reassured when it comes to their financial situation.
Canadians worry about money. In the 2016 Sun Life Canadian Health Index, the top drivers of excessive stress were related to finances:
- 45% of individuals were experiencing uncomfortable levels of stress related to personal or household finances,
- 32% faced excessive stress in trying to maintain a budget, and
- 31% were stressed by unexpected expenses.
Adding to financial worries are the low interest rate environment and volatility of market-based investments. These can be unsettling for clients of any age — and can be especially unsettling for those in retirement who worry they will spend their last dollar before they take their last breath.
Guaranteed income products, a solution that is sometimes overlooked, can help provide clients with some comfort knowing their basic needs in retirement will be covered.
The worry is real
Canadians recognize the important role that guaranteed income can play in retirement planning. Research suggests 98% feel it’s very or somewhat important that some of their retirement income is guaranteed, no matter how long they live in retirement.1 And nearly half (48%) of retired Canadians surveyed by Angus Reid are worried about outliving their money.2
This issue is that Canadians have less access to guaranteed sources of income than they used to have. In the pension world, private sector employers have largely transitioned out of defined benefit (DB) plans in favour of defined contribution (DC) plans that offer no income guarantee. Pension plan coverage overall is also dropping slightly. The proportion of all employees covered by a registered pension plan (DB and DC) dropped from 38.1% in 2014 to 37.8% in 2015.3 While the decline is small, the more important fact is that nearly two-thirds of Canadians have no workplace pension plan coverage at all.
And with average life expectancies rising significantly in recent years, the need for lifetime income guarantees has never been greater. A 65-year-old Canadian will live into their 80s on average, whether male or female.4 Many people will spend 20 to 30 years or more in retirement. Those are a lot of years in which income funding is needed. At the very least, clients will want the confidence of knowing their basic living expenses could be covered.
Three steps to reducing retirement income anxiety
One way you can help clients achieve this peace of mind is with a planning model that guarantees a portion of their basic retirement income. Consider these three steps:
- Calculate the basic income gap: Help clients divide their expenses into discretionary and basic. It’s the basic expenses — such as food, shelter, clothing, transportation, tax, health care — that clients need guaranteed lifetime income to cover. Deduct their existing sources of guaranteed income, such as income from DB pensions, the Canada/Quebec Pension Plan and Old Age Security. If there’s a difference after deducting guaranteed income from basic expenses, that’s the basic income gap.
- Educate clients about how they can cover their guaranteed income needs: A key issue with guaranteed income options is that clients don’t know what they don’t know. Only 26% of Canadians are familiar with guaranteed investment funds (segregated fund products, for example), and just under half (48%) are familiar with income annuities.5
Clearly, educating clients about how they can bridge this income gap is key. You can show them how incorporating a guaranteed solution into their investment portfolio can accomplish this. A payout annuity can provide a guaranteed source of income, potentially at one of the highest levels, for the lifetime of your client and their spouse — and it can be indexed to help offset the effects of inflation. Some guaranteed investment funds can offer guaranteed annual income, along with the potential ability to grow this guaranteed amount by deferring the start date for payments. And depending on the product, these funds may also allow access to capital6 if needed.
- Bridge the gap: The guaranteed income solution that you choose will be based on your client’s specific needs, and will build on the guaranteed income base provided by government programs and any income from other retirement savings plans or retirement pension plans that they and their spouse might have. In most cases, your proposed retirement income solution will draw on a basket of product opportunities for an individual — mutual funds, ETFs, GICs, guaranteed investment funds, payout annuities. The craft and the value are in putting these together in a tax-efficient way that balances factors such as risk tolerance, ongoing income needs and long-term financial security.
Did you know?
Interest rates may not be as important to payout annuity income as you think. They do affect income, but not proportionately. For example, an interest rate increase from 2% to 2.5% does not result in a 25% increase in income. Three components make up each annuity income payment:
- Return of premium, and
- Insurance credits.
Guaranteed income solutions – for other planning needs
While not everyone will have a basic income gap, guaranteed investment funds and annuities can be a valued solution for many other needs, from legacy planning to alleviating concerns about covering future health care costs. And there are single-product solutions that provide the flexibility to meet these different needs.
Ease financial worry
The act of retiring is already bundled with a host of emotional and logistical challenges for clients. It can involve changes to social networks, living location, spousal interactions, activities and much more. One of your key roles is taking the emotional worry relating to finances out of the equation.
The work you do advising clients and managing their investments is invaluable — so don’t let client anxiety and worry about outliving their savings mask the value you bring. By listening carefully to clients’ retirement goals — and analyzing any need for additional guaranteed lifetime income — you can help provide them with the confidence they need to view the financial side of their retirement as a success. It can be a key differentiator for you — and a key benefit for clients.
Did you know?
Sun GIF Solutions combines three different series in one flexible contract, with the ability to move between series at any time.
- The Estate Series provides a 100% death benefit guarantee, and the estate value is automatically locked-in annually if the market value is higher than the previous guaranteed amount.
- The Income Series provides guaranteed income for life, with full access to capital* if the need arises.
- The Investment Series lets clients maximize their potential investment growth by choosing from approximately 60 funds, with no restrictions on their equity fund exposures.
And for all three series, the death benefit payment is not part of the public probate process and is paid quickly and privately to the beneficiaries clients have named.
*Withdrawals proportionately reduce the guaranteed income
You might also like…
- Great reasons to transfer money from a RRIF to an annuity
- Increase your wealth opportunities as Canadians live longer
- Retirement income: how to get your clients their best withdrawal rates
1 Sun Life Financial Unretirement Index, 2015.
2 Retirement in Canada: Lots to enjoy about ‘golden years’ but financial worries loom large — especially for those still working, Angus Reid, 2015.
3 Pension plans in Canada as of Jan. 1, 2016, Statistics Canada.
4 Life expectancy, abridged life tables, Statistics Canada, 2014.
5 CANNEX/Greenwald & Associates, Canadian Guaranteed Lifetime Income Study (GLIS), August 2015.
6 Any withdrawal of capital will affect the guarantee.
Jim Lyons is the Director of Strategic Account Business Development at Sun Life Financial. Drawing on two decades of industry experience, he provides advisors with practice management and thought leadership advice about investments and retirement planning. Jim focuses on demonstrating how Money for Life, Sun Life Financial’s customized approach to retirement planning, can help Canadians retire their way.