Worried about outliving your retirement savings? There’s insurance for that

Long-term care costs can drain your retirement savings fast. Getty Images

The majority of Canadians in or approaching retirement are worried about outliving their savings. And yet, many fail to prepare for the one thing that has a very good chance of blowing up seniors’ living costs.

That’s according to a couple of recent surveys. One, by RBC, shows that 62 per cent of those aged 55 to 75 are worried about running out of money in old age. The other, by Home Instead,  a provider of in-home care for seniors, finds that only 13 per cent of seniors have a financial plan in place in case they need their long-term care (LTC), either at home or in a nursing facility.

READ MORE: How much do you really need for retirement? We did the math

The thing is, though, LTC can be extremely expensive — and there’s a good chance you’ll need it if you live past 85.

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More than half of today’s 65-year-olds will reach that mark and more than two-thirds of Canadians who get to that age have a disability, according to a recent report by the C.D. Howe Institute.

For an average 50-year old couple, there is a 92 per cent chance that at least one spouse or partner will have to rely on LTC, with those needs lasting on average three years, according to Sun Life Financial Canada.

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The cost of living in an LTC facility in Canada ranges from $900 to $5,000 a month, depending on the province and room-type, according to the Canadian Life and Health Insurance Association (CLHIA). For in-home care, you’re looking at anything between $12 to $90 an hour depending on whether you simply need help with household chores, have to rely on someone to, say, assist you in and out of the bathtub, or need an actual nurse by your side, CLHIA figures show.

The average cost of eight hours a day of in-home care stands at nearly $75,500 per year, Sun Life told Global News.

In other words, if you’re going to be like the average senior, you may blow through more than $200,000 during your last years of life. And that’s assuming you won’t need 24-hour assistance or LTC for more than three years.

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Longer life spans and the prospect of steep health costs are complicating factors when doing retirement math, which is already considerably complicated, according to Bonnie-Jeanne MacDonald, a senior research fellow at Ryerson University’s National Institute on Ageing, who authored the C.D. Howe paper.

For one, pension plans that guarantee a set payment for life — so-called defined-benefit pension plans — are going the way of the Dodo for anyone working in the private sector. But there is also the fact that seniors with chronic health needs are increasingly less likely to be able to rely on family to provide much of the care they need. That informal help used to provide a “75 per cent discount” on the cost of care, writes MacDonald, who is also a resident scholar at Eckler, an actuarial firm.

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And “LTC is not covered by the Canada Health Act,” said Clay Gillespie, a financial advisor and managing director at RGF Integrated Wealth Management. “Provinces have their own rules about what they will and will not cover.”

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So what can Canadians do to protect themselves to avoid the risk of their retirement funds drying up too soon?

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Postponing CPP and OAS benefits

The good news for Canadians is that the Canada Pension Plan (CPP) and Old Age Security (OAS) benefits work much like a government-backed defined-benefit pension plan. You’ll get a certain inflation-adjusted amount every month, and that money won’t stop until you die.

CPP and OAS generally provide between $10,000 and $15,000 of income a year, but you can increase those payments by pushing out the age at which you decide to take those benefits beyond 65. If you start taking CPP at 70, for example, you can count on a payout boost of 36 per cent for life, according to Robb Engen, a fee-only financial planner based in Lethbridge, Alta., and co-author of the popular personal finance blog Boomer and Echo.

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READ MORE: Nest-egg inequality explains why women need to save more than men

Long-term care insurance

You can think of this as disability insurance for old age. There are two main types of LTC insurance for Canadians, according to the CLHIA. One covers the cost of certain expenses, like private nursing care, up to a pre-established ceiling. The other provides a pre-determined level of weekly or monthly income that you can use as you see fit, if and when you become unable to look after yourself. You can use the money for a nursing facility, care at home or even to pay a family member to take care of you.

The catch with LTC insurance, though, is that you have to purchase it well before you’re going to need it, if you want to avoid steep premiums.

READ MORE: When saving into an RRSP instead of a TFSA could cost you dearly

The ideal time to buy coverage is in your early 50s, said Sun Life Financial advisor Brian Burlacoff. At that stage of life, though, you may still be coping with a number of things draining your monthly cash flow, from university tuition for the kids to mortgage payments, he added.

Something to note, though, is that some policies that offer classic disability insurance can be converted into LTC coverage later on, said Gillespie.

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Still, so far, take-up on LTC insurance has been poor, he added. Few people who are 10-15 years away from retirement are ready to talk about LTC insurance, which is seen as “an old people’s problem.”

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Another way to hedge the risk of outliving your money is buying a life annuity, which is also sold by insurance companies. This is one of the options you have when they convert your Registered Retirement Savings Plan (RRSP) (which must happen by the end of the year you turn 71). You can either turn it into a Registered Retirement Income Fund (RRIF), which allows you to pace your withdrawals as you want, as long as you meet a legislated annual minimum. Or you can use some or all the money to buy an annuity, which provides a guaranteed monthly income for life.

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Annuities sound like the perfect solution to the lived-too-long problem, but for years they have been unpopular with both retirees and financial planners, for a number of reasons.

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For one, “retirees don’t want to lose control of their money,” writes MacDonald in her study.

Another issue is that interest rates have been low. Interest rates are one of the main factors that determine how much income you’ll receive from an annuity based on the amount you put in. That’s because financial institutions use interest rates to predict how much they can earn by investing your money. On top of that, not all annuity payments rise with inflation, leaving you stuck with a fixed income even as the general cost of living rises.

Still, annuities represent a better deal if you buy one in your mid to late 70s, according to Gillespie. That’s because annuity payments increase with the death rate, as the financial institution has a bigger pool of money to distribute among fewer people. Needless to say, the longer you wait to buy an annuity, the higher the payout for outliving your peers.

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Whatever you do, have a plan

Choosing between LTC insurance and an annuity isn’t necessarily an either/or case, according to Sun Life’s Burlacoff.

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“Annuities and LTC insurance can be used together to ensure that you have both a steady cash flow, as well as contingency funds that can be used once the need for long-term care arises, without major impact to your day-to-day retirement income,” he told Global News via email.

A financial advisor can walk you through the different options and how to balance them, he added. Couples should consider which spouse should get LTC if they can’t afford to buy policies for both, as women tend to live longer and may have more use for that kind of coverage.

Also, he added, “some products also have a refund of premium option that will return your premium payments to your beneficiary or estate if you don’t make a claim within a period of about 20 years or if you pass away without making a claim.”

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