The Longevity Pension Fund, recently introduced by Purpose Investments, is the world’s first income-for-life mutual fund. It combines features of a defined benefit (DB) pension plan with the flexibility of a mutual fund. It’s designed for investors who don’t know how long they’ll live but want to be able to embrace retirement without worrying that they will run out of money.
Here, we created a hypothetical scenario of what a Canadian couple’s retirement portfolio could look like both with and without the Longevity Pension Fund solution. *
Anil and Nicki have both hit age 65 this year and are looking forward to a long and happy retirement. By most measures, they seem to have a big enough nest egg to last them through retirement.
The couple, who live in a major Canadian city, has $1.7-million in total investible assets, which they need to last for 30 to 35 years if they live to age 95 or 100. They also own a mortgage-free home worth about $1.8-million today, which they want to stay in as long as possible.
Besides ensuring that they don’t run out of money in retirement, they have one other main goal: leaving a significant inheritance to the families of their two children who have typical salaries as a teacher and journalist.
Together, Anil and Nicki will receive a base government income of $27,000 annually from Canada Pension Plan (CPP) and Old Age Security (OAS) benefits. They estimate that they will require an annual income of $90,000, which needs to rise with inflation.
Assuming a conservative estimate of 3.75 per cent net investment returns annually for the next 35 years, let’s see how their retirement unfolds using two scenarios: fully invested in markets, or a novel strategy that generates retirement income by investing their assets almost equally between a balanced market portfolio and Purpose Investments’ new Longevity Pension Fund.
Option A: Fully invested in a balanced market portfolio
Anil and Nicki will need to withdraw $63,000 annually from their investment portfolio, an amount that will need to rise by 2.2 per cent annually to keep pace with inflation. (That inflation rate does not sound like a lot but to put it in context, that initial $63,000 per year annual draw will rise to $99,497 by the time they hit 86 years of age.) By age 100, in this scenario, they would have fully depleted their retirement portfolio.
With this strategy, they would likely have to adjust their annual withdrawals in years in which markets suffer severe declines, and they also face the prospect of running out of money. (They could even be forced to sell their home earlier than envisioned), and they may also not be able to give their children the sizeable inheritance they planned upon.
If one of them lives to 97, Anil and Nicki would leave about $367,000 to their kids, which would be less than $190,000 in today’s dollars, assuming a 2.2 per cent inflation rate.
Option 2: Split between the Longevity Pension Fund ($900,000) and market portfolio ($800,000)
In this option, the amount invested in the Longevity Pension Fund would do most of the heavy lifting in retirement, based on its objective to generate annual returns of 6.15 per cent. **
Monthly payouts from the Longevity Pension Fund would form the base of their annual income and the rest would be drawn from their investment portfolio (recognizing that monthly payouts are never guaranteed and can change).
What’s the main difference? Rather than drawing to zero at age 100, if the Longevity Pension Fund performs according to its objective, the Fund will grow to cover all their annual needs ($135,000) and their investment portfolio will have grown from the initial $800,000 in assets to $1.1-million. **
With the combined approach, Anil and Nicki will have achieved their two retirement goals: they won’t have to worry about running out of money and they will leave a substantial inheritance for their kids.
If, for example, they live to 97, they will still have more than $1-million to leave for their children compared to $367,000 with the market-only investment option. If they lived to age 100, instead of dying with zero assets, they would pass on $1.15-million to their children. If they passed away earlier than anticipated, their redemption value (if any remains) would be redeemable by their estate. ***
The mixed Longevity Pension Fund and market approach, with 53 per cent of assets in the Longevity Fund, could accomplish Anil and Nicki’s goals because it’s structured with the intension of providing them with one of the key features of a typical DB pension plan, namely longevity risk pooling. Put simply, the additional financial costs of people in a pension pool who live longer than average are subsidized by those who pass away sooner.
“The beauty of the 50-50 approach is that they are very likely to leave $1-million plus to their kids, no matter when they pass away, whereas if they live beyond their mid-90s with the investment fund only approach, their kids get very little,” says Fraser Stark, president of the Longevity Retirement Platform.
With a targeted return of 6.15 per cent provided by risk pooling and a conservative investment strategy, the Longevity Pension Fund could outperform the annual income provided by alternatives such as an annuity, or the balanced fund plan outlined in the first example.
In effect, with the risk pooling feature of the Longevity Pension Fund, people are betting on themselves to live longer than other same-aged investors in the Fund.
What’s the takeaway?
The roughly 50-50 Longevity Pension Fund strategy outlined in the second scenario allows Anil and Nicki will meet both their retirement goals. The Longevity Pension Fund is structured with the intention that Anil and Nicki don’t outlive their savings, no matter how long they will live, and other investment products can help to preserve a significant portion of their savings to pass on to their children when they die.
*This hypothetical scenario is intended to be an illustrative example of how the Longevity Pension Fund could be used as a complement to an investment portfolio and should not be considered investment advice nor a guarantee of investment performance of the Longevity Pension Fund, or the market generally. The above scenarios are general examples, have not been tested as hypothetical performance data, and do not consider investors’ specific needs. For professional advice, speak to your advisor.
** Although distributions from the Longevity Pension Fund are designed to increase over time, they may go up or down and are never guaranteed. The level will be assessed regularly and impacted by market conditions and unitholder redemptions (both voluntary and due to death). For individuals 64 years and younger, investment returns are reinvested, and distributions begin in the month after turning 65 years old. The calculator assumes an annualized net return of 3.75%. The income payments shown are gross of taxes. Please review the prospectus or speak to your advisor for more details.
*** The Longevity Pension Fund has a unique mutual fund structure. Most mutual funds redeem at their associated Net Asset Value (NAV). In contrast, redemptions in the decumulation class of the Fund (whether voluntary or at death) will occur at the lesser of NAV or the initial investment amount less any distributions received. You can always access the lesser of unpaid capital (initial value of your investment less any income payments made) or your net asset value. Fees may apply. Please review the prospectus or speak to your advisor for more details.
Purpose Investments Inc. – Disclaimers
Commissions, trailing commissions, management fees and expenses all may be associated with the Fund. Investments in the fund are not guaranteed, and the Fund’s value may change frequently. Past performance may not be repeated. Income in the form of Fund distributions is not guaranteed, and the frequency and amount of distributions may increase or decrease. The Fund has a unique mutual fund structure. Most mutual funds redeem at their associated Net Asset Value (NAV). In contrast, redemptions in the decumulation class of the Fund (whether voluntary or at death) will occur at the lesser of NAV or the initial investment amount less any distributions received.
This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters. The information provided is subject to change without notice and neither Purpose Investments Inc. nor is affiliates will be held liable for inaccuracies in the information presented.
This article contains forward-looking statements (“FLS”). FLS include anything other than historical information, including expected returns, the expected rate of inflation, etc. FLS depend on future events or conditions, are subject to risks and uncertainties, and are based on numerous assumptions. FLS are not guarantees of future performance – results could differ materially from those set forth in the FLS. The reader is cautioned to consider the FLS carefully, not to place undue reliance on the FLS. Purpose specifically disclaims any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.
Advertising feature produced by Globe Content Studio with Purpose Investments. The Globe’s editorial department was not involved.