How the coronavirus pandemic could change the way we think about retirement in Canada

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The attractiveness of guaranteed income will increase, increasing the attractiveness of income annuities

Amid falling stock markets, the allure of retirement income backed by the guarantee of a solid counterpart, like the Canada Pension Plan, is hard to deny. When other sources of financial security collapse, Canadians become more aware of the security of their CPP retirement benefits and Old Age Security (OAS) and the importance of securing an income level of basic pension that is not subject to market risk.

The good news is that workers’ CPP contributions go into a separate fund managed by an independent advisory board whose chairman assured Canadians that their contributions are secure even as Canadians’ personal investments have plummeted due to the turmoil in the COVID-19 market. The fact that the CPP does not pay the promised payments to retirees “is one thing. [Canadians] should remove from their list of concerns, ”said Mark Machin, chairman of the CPP Investment Board, as the CPP fund“ has been designed to withstand these types of significant market downturns from time to time ”.

The Old Age Security benefit, for its part, is financed by general government revenues (the largest part—about half– which comes from personal income tax). Although the OAS benefit is not guaranteed like the CPP is, some form of old age pension has been put in place since 1927 in Canada, suggesting that government income programs can weather any storm.

If you are planning for retirement during a global pandemic, securing your sources of retirement income becomes a new priority when an uncertain horizon reveals itself. However, many Canadians expect to retire on more than what CPP and OAS provide. As a result, in the search for a stable income, life annuities may gain in importance. A life annuity is a financial product, sold by an insurance company, that pays out a guaranteed monthly income to the annuitant (s) as long as they are alive, much like a “DIY version” of a pension. defined benefit.

While academics, actuaries and economists have long sang the praises of the income annuity as a means of securing retirement income, retirees have never adopted the annuity solution en masse. But when a retiree’s other sources of income – real estate, assets held on the stock exchange through ETFs and mutual funds, and employment – disappear just as interest rates hit an effective rate of zero without any sign of recovery, the conditions can be met. for the income annuity to shine as a source of retirement income backed by a well-capitalized life insurance company.

Consider, for example, how the Spanish flu pandemic shaped the life insurance industry in North America. In 1918, when a young father or mother died of the Spanish flu and an insurance company then paid a death benefit, no one questioned the need or value of life insurance. , writes finance professor Moshe Milevsky. This hundred-year-old pandemic “not only made the death of a breadwinner salient, it also legitimized its economic and financial antidote: life insurance”.

Today, the global pandemic resulting from the coronavirus disease COVID-19 could do the same for annuities issued by life insurance companies today.

Reconsider unwritten assumptions

Today, many of the unwritten assumptions that underlie our ideas about retirement are being reexamined in the search for strategies to cope with less certainty. In reassessing where we are now, Canadians need to rethink the risk in their approaches to retirement savings, the operating assumptions that led to high consumer debt, and the value of guaranteed income once you’ve left. the world of work . Retirement is all about timing, and when times change we are smart to watch what is revealed.

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