Guaranteed Income for Life
“Retirement is like a long vacation. The goal is to enjoy it to the fullest,
but not so fully that you run out of money.“
Jonathan Clements, columnist at the Wall St. Journal
In the past couple of years Canadian insurance companies introduced some new retirement income plans that marry the growth potential of mutual funds with the protective features of an insurance contract. They are available under names such as Income Plus, SunWise Elite Plus and EcoFL Extra. The “Plus” or “Extra” is a distinctive feature – the “Guaranteed Minimum Withdrawal Benefit” or GMWB, to help provide a predictable, guaranteed income for life.
A closer look at the Canadian retirement landscape reveals that: we are living longer; close to one-half of Canadians over 50 are uncertain of the best options for their retirement nest-egg; and one-third is concerned about maintaining their current lifestyle in retirement.
The retirement risk zone exacerbates these concerns. When you are in your 20’s, 30’s or 40’s, you’re not too concerned about market volatility. Over the long term, equity markets will generally continue to rise, and your investments will likely perform well.
But things change in the years leading up to retirement, as well as those years immediately after you retire. As you enter this period, a market downturn can significantly reduce your retirement portfolio and you may have little or no time to recover.
Let’s look at the risks to gain a better appreciation of their effect.
Market risk is the most difficult to control and predict. What if you had planned to retire in a down market? You may have to change your plans and retire later, or live with a reduced retirement income.
Longevity risk simply refers to the risk of outliving your money. For a couple who are age 65 today, there is almost a 70% chance that at least one of them will live to age 85.
Lastly, we have inflation risk. It’s rising prices, of course, and if you have a fixed income, it means that your income will buy fewer real goods over time. In retirement, you will want an income that will grow and stay ahead of inflation.
You need to find out where your retirement income will come from, and how much of it will be guaranteed. In order to maintain your lifestyle during retirement, you will need 60% to 70% of your current income, or perhaps more.
Typically, guaranteed retirement income sources are the government program such as Canada Pension Plan and Old Age Security. Some may also have a company pension. We require an income solution that will serve to fill the gap between these sources of retirement income and both our essential expenses and discretionary spending.
So, what should you consider? Generally, as people transition toward retirement they change their investment mix and become more conservative. Bonds and GICs provide relative safety, but the interest they pay faces inflation risk and they offer very little growth potential, and without growth, the investments may not last for life.
Equity investments, alternatively, can provide higher growth potential, but there’s exposure to market risk and the income may fluctuate year-to-year.
For retirement income we need to balance income security with growth. Introducing Guaranteed Minimum Withdrawal Benefit (GMWB)!
GMWB delivers that balance by providing a guaranteed minimum income for life, by eliminating market risk and longevity risk and mitigating inflation risk.
Typical benefits:
• A guaranteed minimum income for life so that you won’t outlive your money.
• For those close to retirement, a 5% annual guaranteed bonus is there to offset market risk during the critical years before retirement.
• Automatic income guarantees resets that can act as a hedge against inflation and ensure that you benefit from equity investing.
• Tax efficiency for non-registered accounts since withdrawals from equity funds are treated partly as return of capital (which is not taxed) and capital gains (which are taxed at a preferred rate).
• Possible creditor’s protection available for insurance contracts. This is especially valuable for professionals and business owners.
What to look for in a plan?
Available plans are different based on the terms and the investments they offer. Obviously, the bigger the choice within an income plan offering, the closer your portfolio will meet your needs. Plans that offer equity funds can provide you with a better potential for growth. For non registered funds, plans that allow you to invest in equity funds would be more tax-efficient.
A financial advisor can work with you to develop the best strategy for your situation, plan for your income needs and set a strategy based on those needs.
Joe A Salib, CFP®
joe.salib@sunlife.com
905-886-2200x259
2600 John Street, Unit 207, Markham, ON L3R 3W3 T: 905.475.5222 F: 905.475.6369
