The GMWB: Retirement income, guaranteed

Guaranteed minimum withdrawal benefit products are of mixed value.

Do I have your attention yet?

Maybe you are one of many Canadians who in total hold $17.9 billion in guaranteed minimum withdrawal benefit products as of June 30, 2012.

These products became particularly successful after the 2008 financial crisis and have continued to grow ever since.

Invest in the markets, but with guarantees. It seemed too good to be true. And maybe it was.

In fact quite a few of the early investors are sitting on funds now that are down in market value. But because of the guarantees they do not need to worry about losing money — for they are assured to receive back at least what they put in and possibly more through income guarantees.

When first introduced, these products allowed you to invest in some cases up to 90 per cent of your portfolio in the stock market. As part of the deal, if you kept your money invested for at least 20 years you were guaranteed to receive back five per cent per year for 20 years, totaling 100 per cent of your investment. As an added benefit, if you chose to defer withdrawing funds until a future year, the companies would offer bonuses that would provide additional future income.

In truth the guarantees were nothing to write home about. Five per cent per year for 20 years, after all, amounts to a zero percent return on your money.

The true benefit of the product was that if the markets went up, you could do much better. But if they went down — at least you wouldn’t lose anything.

Overall it was a pretty good proposition. Too good, in fact, to the point where companies offering these products have had to scale back benefits substantially.

Which brings us to today’s question: are these programs still worthwhile?

That depends, I suppose, on whether you own one of the earlier versions of the product, or are considering committing new money.

In the case of new money, it is debatable. The fees have risen; the available investment options have become more conservative; and based on life expectancy, you are no longer assured to receive a full return of your initial investment in guaranteed income.

However, if markets perform well by historic standards, you will likely fair better than would be the case with other guaranteed investments.

What about the case where you already have money in one of these programs.

Should you continue?

That would depend on a number of factors. Chances are your guarantees have been left intact, which would be comforting if your market value has dropped. But at the same time your investment options and your fees have changed.

If that is the case it may be worth your while to seek out an objective opinion from a qualified financial advisor as to your best course of action.

For more on this feel free to call or e-mail.

 

Jim Grant, CFP (Certified Financial Planner) is a financial advisor with Raymond James Ltd (RJL). The views of the author do not necessarily reflect those of RJL. This article is for information only. Raymond James Ltd. is a member of Canadian Investor Protection Fund.  For more information feel free to call Jim at 250-594-1100, or e-mail at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.

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