Manulife financial Corp.’s new guaranteed income fund, GIF Select IncomePlus, offers hope to pre-retirement- and retirement-age investors concerned about outliving their money because of poor market performance.
Being touted as the first entry in Canada in a new product category, the product is designed to provide a guaranteed minimum withdrawal benefit (GMWB) in a segregated fund structure. It provides:
> downside protection, regardless of market performance;
> upside potential that can be locked in to escalate payments and extend guaranteed payments;
> estate and creditor protection;
> a death benefit guarantee; and
> an annual bonus in years when withdrawals are not made.
In developing GIF Select In-comePlus, Waterloo, Ont.-based Manulife drew upon trends in the U.S. market in which one-third of all variable annuities have flowed into GMWB products in recent years, says Roy Firth, executive vice president of individual wealth management at Manulife.
Firth says this new GMWB product category is expected to make significant inroads in the Canadian market, with total assets growing to between $29 billion and $54 billion over the next five years, based on forecasts done by Toronto-based Investor Economics Inc. for Manulife.
The development of GIF Select IncomePlus is based on the premise that Canadians are more likely to be vulnerable to potential market volatility as they enter the “retirement risk zone” — that is, the five- to 10-year period just before or after they retire. This is because weak market performance could erode the value of their retirement portfolios during this critical period, leaving their portfolios with inadequate time to recover. Consequently, there is the possibility they will run out of money during retirement.
The risk becomes even greater if investors begin withdrawing their funds when the markets are falling or experience poor market conditions early in retirement, which would lead to faster erosion of their capital.
“As baby boomers approach retirement, the sequence of returns becomes a critical determinant of a portfolio’s success because a negative experience close to the intended retirement age can defer retirement for years,” says Dr. Moshe Milevsky, associate professor of finance at York University and executive director of the Individual Finance and Insurance Decisions Centre.
The Manulife product guarantees withdrawals for at least 20 years or longer, based on a 5% annual withdrawal rate, regardless of how the market performs. For example, if an investor places $200,000 in the product and withdraws $10,000 (or 5%) a year, but the market value of the investment falls to zero because of disastrous performance before the 20-year period is up, the investor will still get a return of capital of $10,000 a year for the full 20 years.
Investors can choose from 20 seg funds — including money market, bond, balanced and equity — managed by AIM Funds Management Inc. , CI Investments Inc., Fidelity Investments Canada Ltd., MFC Global Investment Management and Mackenzie Financial Corp. A minimum initial investment of $50,000 is required, subject to a minimum of $10,000 per fund selected. Investments in the product can be made up to age 75.
Withdrawals can begin as soon as they are needed and restarted at any time. Investors can, however, receive a 5% guarantee bonus in each of the first 10 years after they purchase the product, to a maximum 50% increase, if no withdrawals are made. This would mean that a $200,000 investment would be worth $300,000 after Year 10, increasing the minimum amount available for withdrawal.
The length of time of withdrawals can be extended beyond the minimum 20-year period by any gains made in the underlying funds chosen by the investor. These gains are automatically locked in every three years, for a total of 10 resets over a 30-year period, increasing the guaranteed withdrawal benefit. The higher GWB would guarantee more money would be available to the investor for a longer period.
Take, for example, an investor who places $200,000 in GIF Select IncomePlus and commences withdrawing $10,000 a year immediately. After three years, the market value of the investment increases to $208,400 — based on a 7% constant average return — even after withdrawing $10,000 for three years. The GWB is reset to $208,400, increasing the 5% withdrawal benefit to $10,420 annually and extending the GMWB period for three additional years. Both the benefit and the payout period can be extended by additional resets in positive market conditions.
@page_break@Resets of the guaranteed death benefit occur every three years, but are available only up to and including the investor’s 80th birthday, when the final reset is made. The death benefit is directly linked to the reset value of the investment.
The product is fully liquid and investors can withdraw all their money at any time, says Firth. However, they will lose any bonus amounts accumulated in years when withdrawals were not made, he adds.
Guaranteed benefits come at a small price. Fees, which are in addition to the management expense ratios of the underlying funds, range from 0.25%-0.35% for fixed-income, conservative and moderate funds to 0.55%-0.75% for balanced and growth funds. Fees are calculated at the end of each year and are based on the GWB at the end of the previous calendar year, not the funds’ market value. Fees are paid through the automatic redemption of fund units and do not reduce the guaranteed benefits.
The product can be used in both registered and non-registered plans. For RRIFs with a minimum mandatory annual withdrawal based on age, the payout is modified to fit the prescribed schedule. Therefore, in years when the required RRIF payout is greater than 5%, investors will be able to withdraw the prescribed amount.
Because GIF Select IncomePlus is offered through an insurance company, the investment potentially can be protected from creditors in case of personal or professional liability or business failure.
According to Firth: “More and more Canadians are vulnerable as they approach retirement. They find it increasingly difficult to create a monthly retirement income that is predictable, sustainable and potentially able to grow.”
Milevsky and Thomas Salisbury, a mathematics professor at York University and an executive member of the IFID centre, last month conducted a study for Manulife entitled Asset Allocation and the Transition to Income: The importance of product allocation in the retirement risk zone. It demonstrates the impact of the sequence of returns on a retirement portfolio.
For instance, if a 65-year-old investor with $100,000 obtained a 7% annual return for three years and withdrew $9,000 a year, he would run out of money when he was 86.5 years old. However, if the investor obtained the same 7% average return in a different sequence: +7%, -13% and +27%, and withdrew the same amount, he would run out of money when he was 83.33 years old — 38 months earlier. The sequence of returns makes a significant difference in how long the investor’s money will last.
“Losing money in the risk zone can double or even triple your risk,” says Milevsky. So, although asset allocation is key to investment per-formance as investors save for retirement, product allocation will determine their success in the payout phase, he says. IE
Product aims to lower risk to retirement income
Manulife’s GIF Select IncomePlus is based on the premise that Canadians are vulnerable to market risk just before and after retirement
- By: Dwarka Lakhan
- October 16, 2006 October 16, 2006
- 12:54