The article “Solo Retirement Is On The Rise — Here’s How You Can Mitigate The Risks” was originally published on Financial Post on March 16, 2018.
The three most important ways to minimize the chances of outliving your retirement savings are stocks, pensions and planning
A survey released earlier this year from TD Wealth entitled “Retiring Solo” found that 47 per cent of single Canadians over the age of 40 are concerned about outliving their retirement savings. This fear probably is not much different from that of many Canadian couples, but what is different is how many Canadians will be navigating retirement on their own compared to previous generations.
According to Statistics Canada, in 1951, only 7.4 per cent of households were one-person households. That number has nearly quadrupled to 28.2 per cent currently. Part of this increase is because Canadians are getting married later. But part of it is because they may not get married at all. Or because divorce is on the rise, including an increase in grey divorce amongst seniors. And as longevity increases, the healthiest of retirees are living longer retirements on their own if their partners die young.
One of my primary concerns for single people planning for retirement is the risk of the unforeseen derailing their long-term plans. While having an emergency fund is important — whether cash, liquid investments or a low-interest line of credit — these are short-term strategies and there are other ways to insure against long-term financial risks.
Consumers and insurance agents tend to focus more on life insurance than living benefit insurance. For a single person, life insurance may be entirely unnecessary, given the primary objective for it is to provide for dependents on death. Single people are often their own primary dependent, meaning an insurance payout during their lives is probably more important than an insurance payout if they die.
One third of Canadians will have a period of 90 days or more during which they are disabled before the age of 65. One in seven over the age of 35 will be disabled for over five years. Disability insurance pays a monthly benefit if you are disabled and unable to work and earn an income. It is effectively income replacement insurance. It can be essential to stay on track for retirement in the event of a disability, especially for single people.
Group disability insurance may have optional enhancements that employees can choose to top up their basic coverage. But even the best group plans may be inadequate and private disability policies can be used to complement them. Given how many Canadians are self-employed — over 2.8 million in 2017, according to Statistics Canada — there are plenty of people who are not even covered by group plans in the first place.
When it comes to retirement planning, TD’s survey found the three biggest fears for single people were rising daily living expenses, not having enough money for necessities, and increasing healthcare costs.
All three of these fears focus on not having enough money in retirement. These concerns are not much different from those that couples have about retiring. In my experience, I have found that these fears are surprisingly constant regardless of how much money someone has saved as well.
I feel the three most important ways to personally mitigate these risks for yourself are: 1) stocks; 2) pensions; and 3) planning.
Stocks are scary to some investors. They are volatile. They are risky. But that is exactly the reason to own them. More volatile investments with higher risk are priced in such a way that their future return is also higher. People are willing to pay more for a sure thing — like a guaranteed investment certificate (GIC) — and therefore accept low interest rates from the bank in return.
Canadian stocks have returned 8.34 per cent annualized over the past 30 years and, in Canadian dollar terms, U.S. stocks have returned 10.57 per cent, through Dec. 31, 2017. And over the same period, the worst 5-year return for a global balanced portfolio, including Canadian, U.S., and international stocks, was 2.6 per cent annualized. The best was 16.5 per cent.
Stocks are also a good hedge against inflation in retirement. If prices go up, chances are corporate profits are going up, as are stock markets. Stocks are an important tool to help single retirees avoid outliving their retirement savings.
Pensions are coveted by retirees. But fewer Canadians have access to them. That does not, however, mean that retirees cannot increase or even create pension income on their own. The Canada Pension Plan (CPP) and Old Age Security (OAS) pensions can be deferred as late as age 70. Retirees who defer their pension start dates past 65 are rewarded with higher payments for life.
CPP deferral results in 8.4 per cent more for every year of deferral plus inflation (roughly 2 per cent more per year). For OAS, the increase is 7.2 per cent plus annual inflation. These higher payments are indexed to inflation for life, providing a degree of protection against the higher retirement costs (inflation) most retirees say they fear.
Retirees can also buy a pension by buying an annuity from an insurance company. Annuities pay a monthly benefit for life, in exchange for a lump-sum of cash. They have been unappealing in recent years as interest rates have fallen, but as rates continue to rise, annuities will be more worth considering for some people — especially for single retirees who may be less concerned with providing an inheritance.
Increased CPP, OAS and annuity income can help insure single retirees against the risk of living too long, since all three sources continue to make monthly payments for the rest of a recipient’s life. So, while retirees are worried about rising daily living expenses, not having enough money for necessities, and increasing healthcare costs, these risks are less pronounced for those who die young. It is the single retirees who live to 100 who have the biggest risk, and CPP, OAS, and annuity income may help mitigate this risk.
Finally, planning is important for single retirees. Financial planning can help them check off all the boxes and get their finances in order. Retirement planning can help them set targets for monthly savings and eventually monthly spending. Estate planning is also important for single people, since the typical decision to name a spouse as beneficiary and appoint them in legal documents is not an option.
I think the government needs to help single retirees as well. Single CPP recipients are arguably discriminated against given their retirement benefit dies with them. A surviving spouse, on the other hand, is entitled to a CPP survivor benefit. Obviously, contributions by single retirees are helping fund the benefits paid when someone loses their spouse.
In addition, the government allows pension income splitting between spouses. Up to 50 per cent of eligible pension income, including defined benefit (DB) pension income and registered retirement income fund (RRIF) withdrawals can be allocated from the recipient’s tax return to their spouse’s tax return. The result is less tax payable for the couple.
Single retirees have all their income taxed on one tax return. This means a single retiree may pay significantly more tax than a couple with the identical “family” income, even if most or even all that couple’s income comes from one of the two spouses.
Financially, I think it is important for single people to plan to be single, but hope, if they want one, for a relationship. If you plan, instead of hope, for a relationship, it could mean you come up short of financial independence in the long run if that relationship never happens. Or it could limit your relationship options to someone who is well-off financially.
On that basis, if you are single and planning for retirement, consider some of the single-specific implications. But plan financially to stay single, so that meeting Mr. or Mrs. Right is that much more of a bonus if it happens.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.