Investment Strategies to Deal with Uncertainty

You thought you had it all organized.

The succession plan is in place and working quite nicely. The business plan has shown satisfying results and your retirement from your business is almost complete. A few hours a week in the office and the rest of the time on the golf course, or...

You've been retired for some time. Your financial position is secure. Your estate plan is going nicely and you expect to leave a significant portion to your children and grandchildren. A significant portion of your assets is invested in mutual funds, and these have performed quite well over the past few years.

Everything seemed comfortable and then the stock market took a dive. Over the past few months the stock market has made, what experts refer to as a "correction", but as "corrections" go, this one has been dramatic and it has made all investors realize that any investment in the stock market is subject to fluctuation.

In your position, depending on cash flow from your investments, this "correction" can lead to sleepless nights.

At this stage of your life, your focus is more likely on preserving capital and achieving a reasonable rate of return than it is for increasing the amount of capital. It is not a pleasant prospect to think of spending your retirement years earning a guaranteed interest rate of 5% or less and paying income tax of up to 54% on that income. When you were younger and active in your business and the stock market, you took your broker's advice just to ride it out. You had lots of time for the market to recover , and over the long term they always did. However, that strategy may not work for you now. You are looking for alternatives.

There are two financial vehicles that you should investigate in order to produce higher incomes without risking your capital.

1. Guaranteed Investment Funds, and
2. Lifetime Term Deposits (Insured Annuities)

These can be summarized as follows:

1. Guaranteed Investment Funds
   Guaranteed Investment Funds are an investment vehicle offered by life insurance companies that are a hybrid of life insurance, segregated funds are mutual funds. These plans allow a retiree the opportunity to invest in mutual funds while protecting the principal investment. Several companies offer guaranteed investment plans and a wide array of features are available including capital guarantees, rest options and a wide range of mutual funds or indices.
   
   Capital Guarantees
   Capital Guarantees can vary between 75% and 100% at death or at maturity, which is typically ten years from the purchase date. This contractual feature typically specifies that the principal (less withdrawals, of course) will be guaranteed both at death or maturity. The contract specifies that maturity cannot be less than 10 years from the purchase date.
   
   The Capital Guarantee is an extremely important feature as it insures that there will be no loss in capital if funds are held to maturity, if the 100% guarantee is selected.
   
   Investment Options
   The investment options that are offered in Guaranteed Investments Fund- type investments, offer a wide range of choice. The type of investments include Equity Funds, Bond Funds and Balanced Funds, which are primarily Canadian based, as well as similar funds which are international. A wide choice of fund managers is also available. Some companies also offer indexed funds on Canadian, U.S. or international indices.
   
   One additional feature of the Guaranteed Investments Fund Contract is that it can hold a variety of different investment funds, offered by many different companies, all within the same contract. Unlike the Self- Directed RRSP, you may switch between similar (i.e. Growth) funds offered by different companies, without incurring any ongoing fees to set up and maintain the contract, again, unlike the self- directed plan.
   
   In short, the " GIF " contract offers the investment expertise of top mutual fund managers combined with the financial guarantees of some of Canada's largest insurance companies.
   
   Reset Options
   Reset Options allow you to increase the guaranteed amount if your fund value increases. Different companies have different rules as to the number of times you can reset the guarantee and also whether there are limitations as to age and type of fund. The reset feature allows the amount of capital that is guaranteed at maturity or death to be increased where the value of the fund has increased and to be reset to that amount. This forms a new guaranteed amount rather than the guarantee as to the original principal less withdrawals. These guarantees are contractual and are applicable for funds that are offered currently. However, given the current market volatility and the fact that some markets have even shown negative returns over long periods, suppliers of these guaranteed funds may be forced to make changes to these types of plans in the future to protect against losses.
   
   Systematic Withdrawal Plans
   These types of plans allow for systematic withdrawals, thereby allowing retirees to enjoy a tax efficient cash flow on a monthly basis. Many investors set up their withdrawal plans to take out a reasonable monthly amount equal to 5% to 7% annualized return on their capital and let the capital fluctuate up and down depending on performance. This type of plan allows investors to sleep better because they know that no matter what happens to the investment, the life insurance company has to write a cheque at maturity (usually 10 years from inception), or death even if the investment has suffered negative returns.
   
2. Insured Annuities or Lifetime Term Deposits
   Guaranteed Investment Funds, Mutual Funds and Segregated Funds are all financial vehicles which allow investors to use the talents of fund managers to attempt to achieve greater returns than can be obtained with fixed income securities. Currently, fixed income securities like Guaranteed Investment Certificates, T-Bills, Government of Canada Bonds, etc., offer yields of around 5% or less. Much of the capital invested in Mutual Fund- style investments is there because the alternative of fixed income securities has produced such a low rate of return in recent years. However, the fixed income- type securities have little or no risk to capital.
   
   For seniors, there is a form of investment which has little or no risk and produces an after tax cash flow or yield which can be substantially higher than the traditional fixed income investments. The yield on this type of investment could be double what is available with traditional fixed income investments. In addition, the plan can be structured so that the capital flows to your beneficiaries outside your Will and free of probate (currently 1.4% of value).
   
   The investment itself is a combination of single life or joint life annuity and life insurance. The advantages and disadvantages of this type of investment can be summarized as follows:
   

Advantages:
• Significant increase in after tax income
• Little or no risk
• Probate free
• Certainty
  

Disadvantages:
• Capital is locked in
• Investors must medically qualify
• Because the capital is locked in for life under an insured annuity, this type of investment is like holding a long term bond to maturity. You may not wish to lock in most of your portfolio in this type of investment, but it could be an extremely attractive component of your investment portfolio by increasing income without risk.

The Guaranteed Investment Fund- style investment and the Lifetime Term Deposit are both designed to create more certainty and/or reduce risk. Both vehicles offer the opportunity of providing higher income than traditional fixed income securities while offering guarantees or certainty that traditional Mutual Fund- style investments do not provide.

For more information or a meeting to review your situation, please call your Zlotnik, Lamb & Company advisor or Lynn Newsome at 604-688-7208.

RESP ALERT

If you contribute $2,000 or more this year to an R.E.S.P. for a child or a grandchild who is younger than 16, the federal government will add $400 to the plan. It's that simple, contribute $2, 000 to an educational savings plan for your child or grandchild and the government adds $400. Remember, unlike RRSP's the contribution must be made before December 31.

For more information call Eleanor Wong at 688-7208