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For physicians, the transition from working years to retirement years can affect more than their lifestyle. Finances also undergo a big transition when one switches from “accumulation” (building up a retirement nest egg) to “decumulation” (turning a saved nest egg into retirement income). Physicians can find this transition especially challenging as most need to create retirement income without the help of a traditional defined benefit pension plan.
Two new risks that come into play in one’s retirement years:
During most of your working years, you might not worry about any of these risks. That’s because the funds you’re using to meet your day-to-day needs before you retire are likely from your practice, not from your savings. But as you approach retirement, you’ll need to start thinking about how you use your savings to generate income that will last throughout your retirement. Finding ways to help protect against risks that may jeopardize steady monthly income streams that last for as long as you live may be helpful.
One way you can protect your retirement income against these two new risks is through a life annuity — an insurance product that will provide monthly income for as long as you are alive, regardless of what age you live to be. You may want to begin thinking about these issues as early as age 50. Opting to purchase a life annuity — “guaranteed lifetime income” — can mean you’re using up a portion of your savings before retirement. But opting to purchase guaranteed lifetime income can help you protect the savings that you’ve earned so far, for your use after you retire.
A life annuity is a contract with an annuity issuer under which the issuer — in Canada, a life insurance company — pays a regular, guaranteed amount to the policyowner based on the life of the insured person. Because annuity contracts are paid based on a person’s life, only life insurance companies may legally issue them.
Life annuities have been used to provide income and security at older ages for more than 100 years, yet remain relatively unknown to the average Canadian. The basic premise of a life annuity is simple: in exchange for payment of a premium to a life insurance company, you receive lifelong income, starting at a defined time and lasting as long as you are alive. Life insurance companies in Canada are required to meet capital adequacy tests to confirm they are able to meet their financial obligations to annuity purchasers, and are also required to maintain membership in Assuris, a federally regulated, non-profit organization that protects policyholders of life insurance instruments in the event that a life insurance company should become insolvent. Today, many defined benefit pension plans use group life annuities insurance companies have issued to meet their obligations to retired pension plan members.
Annuities can either be immediate or deferred. Payments for immediate annuities start right away, whereas payments for deferred annuities start at a later date.
The perceived need for guaranteed lifetime income might increase when you start to turn your nest egg into retirement income.
While it is possible to create your own lifetime income from your savings alone, without a life annuity, you still carry both the risk of outliving your savings (i.e. a longevity risk) and a sequence of returns risk and thus likely need to save more to prepare more conservatively. With a life annuity, you can save less to achieve the same outcome since you gain certainty that you won’t outlive your savings, transferring your longevity and sequence of returns risks to the issuing life insurance company.
In Canada, most retirees will receive some form of guaranteed income in retirement. The Canada Pension Plan (CPP) retirement benefit (for those who’ve worked and paid into the CPP program in Canada) and Old Age Security (OAS) benefit (for those who’ve lived in Canada for at least 10 years since age 18 and have income below a certain level) are both paid monthly, indexed to inflation, and will continue for your lifetime. This means that CPP and OAS both protect against longevity and sequence of returns risks.
But you will likely not have enough monthly income during your retirement years if you choose to rely solely on CPP and OAS, and may wish to purchase additional guaranteed income for your retirement years. If you were receiving the maximum payment from both CPP and OAS today, in total you would have about $21,215 per year (~$13,855 from CPP and ~$7,360 from OAS, using 2019 benefit amounts). Note that the OAS benefit can be “clawed back” if your income is above a minimum threshold and eliminated completely once your income is above about $126,000 per year as of 2019.
Since CPP and OAS will likely cover only a relatively small portion of your expected retirement spending needs, OMA Insurance has created a unique guaranteed lifetime income program for the physician community and physicians’ spouses/common-law partners as part of the Advantages Retirement Plan™.
With the Advantages Retirement Plan™, you can choose how much of your retirement income from your RRSP savings you want to guarantee, if any, starting as early as age 50. The Advantages Retirement Plan™ gives you the option of purchasing a deferred life annuity, which is unlike typical annuities found in the retail market. This means that you pay a premium today to receive guaranteed lifetime income later. Since guaranteed lifetime income is purchased with RRSP assets, you will be taxed upon withdrawal of guaranteed lifetime income through your RRSP account.
As you consider guaranteed lifetime income, we encourage you to speak to an OMA Insurance advisor by calling 1-800-758-1641 or emailing firstname.lastname@example.org.
The deferred life annuity available through the Advantages Retirement Plan™ is provided by Brookfield Annuity Company, a wholly owned subsidiary of Brookfield Asset Management Inc. Brookfield Annuity Company is licensed and regulated by the Office of the Superintendent of Financial Institutions of Canada (OSFI).
OMA Insurance uses group purchasing power to negotiate and secure competitive pricing on deferred life annuities for the Advantages Retirement Plan™ and allows its members to purchase deferred life annuities in increments over time, adding longevity and sequence of returns risk-protected income to your retirement income stream gradually as you move towards and into retirement. This incremental payment option is usually more difficult — and more costly — to implement as an individual retail customer. The deferred life annuity offered by the Advantages Retirement Plan™ is not your typical retail market annuity; it is designed to offer plan members flexibility around when they want to take income from the product. Deferred life annuities are designed to allow individuals to benefit from “dollar-cost averaging,” which reduces the impact of prevailing interest rates on annuity pricing.
The Advantages Retirement Plan™ also takes into account your other sources of retirement income such as government benefits (e.g. Canada Pension Plan and Old Age Security) so that you can see a more holistic picture of how much you may wish to purchase in deferred annuities available to you through the Advantages Retirement Plan™.
If you’re interested in adding financial security to your retirement through the Advantages Retirement Plan™’s guaranteed lifetime income offering, you’ll need to make decisions about how much of your income from your RRSP savings you’d like to guarantee. One possibility is to ensure that just the income you need to meet your basic spending needs can’t fluctuate, go down, or disappear. This method is often called the “floor” approach and uses annuity products to create monthly income that will last for as long as you live. Or you may want to ensure that more than your basic spending needs are secured for life. The precise amount that’s right for you will depend on your personal circumstances and preferences, and the Advantages Retirement Plan™ offers you an annuity modelling tool to help you understand your options and make a selection.