The past few years have not been very kind to investors, especially to those recently or soon to be retired.  Just as investors dragged themselves out of the rubble of 2008, along came 2011.  For those nearing retirement, there just isn’t enough time to be able to make up any losses so caution is the key word.  For those who are already retired and are receiving our income in the form of RRIF payments a downturn in market could be disastrous.  If you are looking for shelter from the roller coaster ride of volatility inherent in the market and maybe trying to find a “sure thing”, you may want to consider PensionBuilder from Manulife Financial.

An individual who invests in PensionBuilder will receive a guaranteed income for the rest of his or her life at a fixed rate of return (income benefit payout percentage).  The payout percentage is set at the time of the income selection, from 3.75% at age 50 to 6.75% at age 80.  If the income option is deferred for one or more years after deposit, the investor will receive a 5% bonus for each year deferred.  This bonus is notional and increases the value against which the payout percentage is applied.  For example, let’s assume that an individual makes a $100,000 deposit into PensionBuilder at age 65 but defers taking his or her income until age 71.  With bonuses, at age 71, the total retirement fund for income purposes has grown to $125,000. At age 71, the income benefit payout percentage is 5.85% resulting in a guaranteed income for life of $7,312.  If income had been taken at age 65 the income benefit payout percentage would have been 5.25%.  The effect of waiting five years to take income has increased the payout percentage from 5.25% to 7.312% guaranteed for life.

If, however, the funds deposited were an RSP and were converted to a RRIF at age 71, the minimum income required by law to be withdrawn as a RRIF minimum may be higher than the benefit payout percentage of the Pension Builder. In this case, PensionBuilder guarantees that the payout will be the RRIF minimum or the benefit payout percentage whichever is the HIGHER.  Income may also be structured as a joint life payout with a benefit payout percentage that is 50 basis points less than a single life payout. 

At first glance, PensionBuilder may resemble a life annuity which also pays a guaranteed income for life.  PensionBuilder, however, has features and contract provisions which differentiate it from an annuity.  Some of these are as follows:

• An annuity is a single, closed transaction meaning that once contracted it cannot be undone or surrendered for value, whereas PensionBuilder can be surrendered for its market value at any time (a charge may apply):
• In an annuity, should the annuitant die after the expiration of the guaranteed period, there is no residue to the estate or beneficiaries.  With PensionBuilder if market conditions are favourable a death benefit could result which could be significant;
• PensionBuilder allows for additional deposits to be made prior to the income period.  In our previous example, the investor could make contributions for the first five years in addition to the $100,000 deposit, providing for even more lifetime guaranteed income when that option is taken.

For investments which are non-registered the income provided by PensionBuilder is very tax efficient.  Most of the income received is considered to be a return of capital and compares most favourably to other non-registered investments such as bonds or guaranteed investment certificates.

All deposits made to PensionBuilder are invested in a “fund of funds” that Manulife has created for this purpose. The PensionBuilder fund is comprised of three of Manulife’s conservative investment funds.  PensionBuilder is a segregated fund and, as such, may provide protection against creditor claims. Also, since a beneficiary is named there is no probate nor administrative costs at death, nor any Wills Variation legislation concerns.

For investors who have been concerned with market stability in the years leading up to their retirement, PensionBuilder from Manulife Financial may be as close to a sure thing as they are going to find. 

If you are interested in reviewing your retirement planning, call us and we can discuss this and other investment opportunities in more detail.

In the last bull market many investors started to develop unhealthy expectations as to the long term yields their investments would provide. Many had come to accept returns as high as 15% to 20% per annum as the base return their fund and portfolio managers would earn for them. Of course, these expectations came crashing back to earth in 2008 as the bull was chased away by a very large bear. Today, many fund managers are of the option that double digit returns are going to be very difficult to achieve with any consistency over the long term. Perhaps it is time to lower our expectations.

If we have to accept lower rates of return do we want to be exposed to the same previous level of risk? Currently, there is tremendous volatility in the equity markets and, as a result, many of us are now wondering wether or not we are on the right track with our investment strategies. Given recent developments in the world markets over the past few years, there are other questions we should ask ourselves in order to make this determination.

1. What are my goals?

If we don’t know what the target is, chances are it is going to be difficult to hit. It is important to have an understanding of what we are investing for. Are we accumulating for shorter term goals, such as the purchase of a house, the education of our children? or is the major objective to save for retirement? Perhaps it is a combination of these goals. If we know why we are investing and what the time frame for accumulation is we can determine how much risk is acceptable.

2. What is my risk tolerance?

This probably will depend on where you are in the life cycle. Investors who are in their 20′s to mid 30′s usually tolerate greater risk as they have sufficient time to make up any losses. In the middle years, especially when trying to save while raising and educating our children, steady growth with less risk is often the approach. At retirement, investors usually become extremely risk averse as this is the time that capital is turned into income to replace earnings.

3. What are my retirement needs?

Converting capital into a consistent income might be the objective for the retirement years. For example, if we know what our fixed expenses will be, providing a guaranteed investment income that covers these expenses will help us to enjoy a comfortable retirement.  While GIC’s might guarantee the capital, it only guarantees the interest rate up to the maturity date.  The new Guaranteed Minimum Withdrawal Benefit plans (GMWB) guarantee the cash flow for life while still providing the opportunity to enjoy investment growth.

In the years prior to retirement we pay particular attention to ensure that our investments receive favorable tax treatment. We should not have to abandon that concern in retirement to have safety of our capital. 

4. Are my investments tax efficient?

With a registered plan (RSPs, IPP’s etc.) all investments are treated the same – tax deductible going in (highly tax efficient), totally taxable as income coming out (highly inefficient).  Looking at non-registered investments, usually the higher the risk the more tax efficient the investment.  Pure capital gains are taxed at the lowest rate, guaranteed income (such as a GIC) at the highest rate.  Dividends are taxed somewhere in the middle.  Ideally, it would be extremely beneficial to have the safety of a GIC paying a reasonable rate of return that is guaranteed for life, while at the same time taxed at the lowest possible rate – exactly what the GMWB provides.

There are many types of financial vehicles and most of them are appropriate in the right circumstances.  Employing effective portfolio allocation can ensure that you are not unduly affected by equity volatility, fluctuating interest rates, or high rates of income tax.

Knowing the answer to these four questions should go a long way in determining whether or not you are on the right track.  Having a full understanding of the options available to you is important.

There is nothing as certain as uncertainty.  We live in very turbulent times with respect to the investment climate and developing an investment strategy during this time can be a very daunting and confusing task.  Given that there are now investment vehicles that deal specifically with many of the issues facing investors today, discussion and consultation has never been more important.