The idea of generating a sustainable retirement income throughout your lifetime is becoming increasingly
challenging.
This article focuses on one option for generating a lifetime income — the new guaranteed minimum benefit
programs offered by some insurance companies.
In general, if you invested $100,000 in one of these programs, you will be guaranteed to receive $417/month
(5 per cent of your initial deposit) for the remainder of your lifetime (if you start your income at age 65
or later).
If you die prematurely, your beneficiary will receive the guaranteed withdrawal benefit, or the market value
of the underlying investments (whichever is higher).
Every year that you do not withdraw funds from this product the guaranteed withdrawal benefit account
increases by 5 per cent (not the underlying investments). This can provide some needed income protection if
the stock market corrects right before or right after you retire.
If the market for the underlying investments increases in value, your guaranteed withdrawal benefit will be
reset at the higher level. For example, if the underlying investments increased to $120,000, then your
monthly income would increase to $500/month. This reset typically happens every three years.
It is important to realize that the initial guaranteed withdrawal benefit account is reduced over time by any
withdrawals made by you and can only increase in value if the underlying investments are higher at one of the
reset times.
There are many benefits to this type of program but there are also some serious drawbacks that need to be
considered.
The 5 per cent is a withdrawal amount, not a guaranteed rate of return on your investments.
If you withdraw more than the 5 per cent then the guarantee payment stream is no longer valid and your new
guaranteed income stream will be 5 per cent of the then market value of the account, not the guaranteed
withdrawal benefit account.
There are some other strategies that may achieve what you are trying to do with more flexibility.
For example, a couple aged 65 could purchase an annuity for $72,775 that would generate a monthly income of
$417/month for as long as they live or at least 10 years. Therefore, they are guaranteed to receive $50,040
back if both of them die prematurely (12 x 10 x $417). If they live as long as their joint life expectancy,
they would receive $130,104 (12 x 26 x 417) back.
The remainder of the funds ($27,225) could be invested in a fixed income (GIC and bond) portfolio and
generate approximately $90/month and still preserve the capital. This would provide them with an initial
income of $507/month or 6.1 per cent of the original $100,000 invested.
Alternatively, they could invest the remainder in a diversified portfolio (a mixture of stocks and bonds) and
use these proceeds to alleviate the effects of inflation over time.
If, however, the underlying investments were left untouched and increased at an annualised rate of 7.5 per
cent for 26 years (joint life expectancy), this side account would grow to $178,479.
You should analyse your overall retirement income situation before buying any product to see if it fits your
personal situation. •
Clay Gillespie is a financial advisor and portfolio manager with Rogers Group Financial. The views
expressed are those of the author and not necessarily those of Rogers Group Financial, which makes no
representations as to their completeness or accuracy.
