If one of the components in the recent federal budget brought back memories of Hawkeye Pierce from the 1970’s television show M*A*S*H, you were not alone in that thought!
The role of Hawkeye was played by the actor Alan Alda. The 2019 Federal budget, in turn, has introduced the Advanced Life Deferred Annuity (ALDA).
Being a “deferred annuity”, payments will not begin right away – they will start at a point in the future, but no later than by the end of the year the annuitant turns age 85. By contrast, investors are required to convert their Registered Retirement Savings Plan (RRSP) assets into retirement income options such as a Registered Retirement Income Fund (RRIF) no later than the end of the year they turn age 71. Should this budget proposal pass into law therefore, the ALDA will provide an interesting option in addressing longevity risk in retirement planning, particularly for those people without defined benefit (DB) pension plans.
ALDAs will be made available for money in RRSPs, RRIFs, Deferred Profit Sharing Plans (DPSPs), Pooled Registered Pension Plans (PRPPs), and Defined Contribution (DC) pension plans. No more than 25% of the assets in each type of plan (eg: RSP) could be directed into an ALDA, and there will be an initial lifetime limit of $150,000 that can be placed into ALDAs. The intent is that this limit will be indexed to inflation.
While it is encouraging to see the government begin to acknowledge increasing life spans in their fiscal program, the widespread acceptance of ALDAs (should they come into existence) will face the headwinds most annuities face, such as:
The statistics showing increased life expectancy are clear (check out, for example, Statistics Canada). In 2011, Canadians lived an average of 81.7 years: an increase of 24.6 years from 1921.
Despite that, I find that many people still find it hard to acknowledge they may live to 90 or beyond. Of course, “living” and “living well” are (regrettably) not necessarily the same thing. Your retirement planning needs to take longevity into consideration. Life annuities, be they of the traditional “immediate” type or the ALDA variety described here, provide longevity insurance, a commodity that becomes more valuable the lower the amount of defined benefit income you have in retirement.
There are two aspects here, which can be addressed by two questions. First, how many people would enjoy seeing the balance showing on their investment statement drop by $100,000 or more, and not because of anything that “the market” is doing? Second, how would you feel knowing that a portion of your investment assets was no longer available for lump sum purchases such as vehicles or vacations?
For many people, it is hard to let go of an investment asset that they can see on a quarterly statement in exchange for a series of lifetime income payments when they do not know in advance what that lifetime will be. The very uncertainty of that lifetime, however, underscores the fact that life annuities are products of insurance – to be specific, insurance against living too long.
The sure approach to determining whether an ALDA – or any other annuity product – would be worth consideration in your future is to have a retirement income plan in place which looks at your desired level of after tax income in retirement in the context of your pre existing income sources as well as your investment assets.
By working with your Scrivens Advisor team, we can put both the plan and the appropriate products in place – a prescription I am sure Hawkeye would support!