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Three in four Canadian workers have a big decision to make when they retire: How will they convert the money they saved into a lifelong flow of income?
The people who make up this majority are the country’s pension-disadvantaged. They may have workplace savings plans of one sort or another, but not a defined benefit pension that pays a predictable amount a month for life. If you’re in this group, you can now buy something that aims to provide the retirement income security your employer never offered.
Introducing the Purpose Longevity Pension Fund , a mutual fund that will be officially launched Tuesday. Buy it at age 65 and start receiving monthly payments targeted to return 6.15 per cent annually for now, with more possible as you age.
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The Longevity fund was created to supplement income from the Canada Pension Plan and Old Age Security and help pay fixed living costs, said Som Seif, CEO of Purpose Investments Inc. “It’s designed for someone who doesn’t know how long they’re going to live and doesn’t want to run out of money,” he said. “It’s all about longevity risk.”
On the shelf of retirement income investments, this new fund sits between a monthly income product such as the Vanguard Retirement Income ETF Portfolio (VRIF-TSX) and annuities. An annuity is an insurance contract where you pay a set amount upfront and receive a set amount of income for as long as you live.
Consider the Longevity fund if:
- Rather than managing your own investments, you’d like a turn-key solution for generating retirement income.
- You are prepared to commit long term to the fund and don’t see yourself swapping it out for something else down the line.
- You have a reasonable expectation of living a long life and want some assurance you won’t outlive your savings.
The Longevity Fund’s targeted 6.15-per-cent payout is based on the amount you contribute. “You put in $100,000, you get $6,150 a year,” Mr. Seif said. Income is generated by a portfolio of Purpose’s exchange-traded fund products in a rough mix of 45 per cent stocks, 40 per cent bonds and 15 per cent alternative investments such as commodities and gold. Financial instruments called derivatives will be used in the portfolio. Investors will also get some of their own money back through a return of capital.
How does 6.15 per cent compute at a time when five-year bonds and guaranteed investment certificates yield in the 1- to 2-per-cent zone, at best, and the dividend yield on the S&P/TSX Composite Index is around 2.6 per cent?
Some quick background: If you redeem your holdings in the fund, you get what you put in, minus any monthly income you were paid. When you die, your estate gets your initial contribution minus the total amount of income payments. The investment gains generated by your investments over the years stay in the fund and are used to top up monthly payments for everyone, a structure used by both pension funds and annuities.
Mr. Seif said someone who started with the Longevity fund at age 65 and received level income of 6.15 per cent would be paid back their initial investment by age 81. He expects monthly payments to be increased by 3 per cent annually at age 83 or 84 as some investors in the fund die prematurely, leaving their investment returns in the fund.
Monthly payments from the Longevity fund are not guaranteed for life, as with an annuity. Cuts could happen if the managers feel the distribution is unsustainable because of financial market conditions, if the investments held by the fund underperform or if the number of investors in the fund living long lives is more than expected.
The Longevity fund comes in a Series A version available from investment advisers, and Series D or F versions from online brokers. The management expense ratio for the A version is estimated at 1.25 per cent, while the D and F versions will both be around 0.71 per cent.
There are sub-versions of each fund designed for different age cohorts currently ranging from age 65 through 76, and an “accumulator” version for people younger than 65 who want to use the fund to save for retirement. If you inadvertently buy the wrong fund version for your age, Purpose will fix that for you.
The fund is available for all kinds of accounts, including tax-free savings accounts and registered retirement income funds. In non-registered accounts, monthly income distributions in the first year are expected to be roughly half a return of capital with the remainder from capital gains, dividends and interest.
Buying the Longevity Pension Fund is a little like a marriage in that you’re making a long-term commitment and will pay a price in forgone investment gains if you want out. So you’ll need to be comfortable with both the product and the company offering it.
Mr. Seif started Purpose after building the ETF company Claymore Investments and selling it to BlackRock Inc., and he’s a co-founder of Wealthsimple Inc., which dominates the robo-adviser business in Canada. Purpose ETFs include higher-cost funds with comparatively complex investing strategies. Earlier this year, the company was the first to issue a bitcoin ETF.
We seem to be entering a period of creativity in the investment industry for creating retirement income products. VRIF has attracted a respectable $230-million since its launch in September, 2020, and is certainly worth a thought for income-seeking retirees who don’t want to be their own portfolio manager. As something like a pension-in-a-box you buy from a broker or adviser, the Longevity fund is a welcome addition to the mix.
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