Ensuring that clients have a sustainable stream of income during retirement has become more challenging for financial advisors. Uncertain equities markets and basement-low to negative interest rates are making that task difficult.

Although a well-designed asset mix strategy has the potential to meet the income expectations of retirees, some want the greater certainty offered by investments that either guarantee a level of income or are structured to provide a sustainable stream of income.

Among the available options for guaranteed retirement income are annuities and guaranteed minimum withdrawal benefits (GMWB) products, both of which are offered by insurers. Guaranteed income products with the same purpose as GMWBs, but with different names, include guaranteed withdrawal benefits, guaranteed life withdrawal benefits and guaranteed income funds.

On the other hand, several mutual fund companies offer mutual funds, such as target date and target click funds and private investment pools. These products use asset-allocation strategies to provide an optimal income stream to investors – but without guarantees.

Life annuities pay a stream of guaranteed income each month. Clients turn over a lump sum to an insurance company, which then commits to paying a fixed amount for the annuityholder’s life.

Life annuities come with different guarantees. For example, a straight life annuity makes payments for as long as the annuityholder lives and stop when the annuityholder dies. Meanwhile, a life annuity with a guaranteed period makes payments for as long as the annuityholder lives, but, if death occurs before the end of the guaranteed period, the annuityholder’s beneficiary will receive the remaining payments.

Life annuity sales have been relatively flat over the past two years, says Benjamin Reed-Hurwitz, senior analyst at Strategic Insight Inc. in Toronto, largely because of low interest rates that make annuity payments less attractive. He suggests that clients invest only a portion of their portfolios in annuities and not neglect growth and income products.

One pitfall of annuities is that annuityholders do not have any flexibility once they have invested in the annuity, says Ahad Ali, portfolio analyst with Octane Capital Inc. in Toronto: “You are locked in and cannot make any changes because you give up control of your money.”

Conversely, a GMWB is a variable annuity – with segregated funds as the underlying investment – that guarantees a minimum annual income regardless of how the investments perform.

“GMWBs also may offer annual income bonuses and resets to lock in higher market values,” says Mike Stocks, vice president and chief marketing officer, retail, at Empire Life Insurance Co. in Toronto., thereby potentially enhancing the payout to your client. GMWBs enable investors to participate in the upside of the markets, but protects against the downside.

Several insurance companies, such as Empire Life, Sun Life Financial Inc., Manulife Financial Corp. and Desjardins Financial Security Independent Network continue to offer GMWBs, says Reed-Hurwitz, although “the number of available options has decreased” and demand has not kept up with expectations.

Notes Asher Tward, vice president, estate planning, at TriDelta Financial Partners Inc. in Toronto: “Five to six years ago, the product landscape was different when GMWBs flooded the market in an attempt to target a niche for guaranteed income.”

For a time, these products offered a guaranteed income as high as 7%, but that period was short-lived in the wake of declining interest rates. Most insurers suspended sales of their original GMWBs in or around 2012.

Although product features vary among insurance companies, Tward cautions, clients and their advisors should note that fees for GMWBs are lofty – as high as 4%-4.5% in some cases.

Although mutual funds do not provide guaranteed income streams, several mutual fund companies offer products that use asset-allocation mechanisms to provide a sustainable stream of income and to guarantee higher market values at a certain point in time, even if the market declines.

“To the average eye, mutual fund products may appear to guarantee an income stream. But, in reality, they simply actively manage asset-allocation strategies to generate sustainable income in canned products,” says Ali. “Although diligent efforts are made to minimize risk, investors are not protected on the downside.”

For example, Target Click Funds offered by IA Clarington Investments Inc. are labelled by the firm as Canada’s first guaranteed mutual funds. Unitholders can lock in higher gains in any given month and retain the higher value of the fund to maturity even if the market declines. These funds are designed to meet defined investor time horizons to retirement: 2020, 2025 and 2030.

Another example of funds that use asset-allocation strategies to meet target retirement dates are Toronto-based Bank of Montreal’s Asset Allocation Funds. These funds cater to clients who are retired already, as well as those clients who have target retirement dates of 2020, 2025, 2030 and 2035.

One of the newest products that target retirees, the Sentry Investments private investment program, offered by Toronto-based Sentry Investments Inc., is designed for high net-worth clients. An option in the program, actively-managed Sentry Real Income Managed Portfolios, is based on the investor’s year of birth and offered in three classes: 1951-55, 1946-50 and 1941-45.

This is the final article in a three-part series on decumulation

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