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The New Kid on the Block…the Variable Annuity / GMWB!

The New Kid on the Block…the Variable Annuity!

The variable annuity of commonly referred to as a GMWB is on the horizon. In June 2006, I attended the Morningstar Investment Conference, which focused on “Retirement Income Planning”. One well-known speaker, Moshe Milevsky, introduced the concept in retirement planning of not just how to generate retirement income in your portfolio by having a proper asset allocation (a mix of cash, bonds and equities according to your risk tolerance) but also the importance of product allocation. Product allocation refers to your allocation to various products such as GICs, mutual funds, annuities and a new category called the “variable annuity”. This article focuses on the variable annuity as a consideration.

While the variable annuity has existed in the US for over five years, Manulife introduced it to the Canadian market in the fall of 2006. Manulife calls it “Income Plus”.

In a nutshell, it addresses concerns retirees might have of outliving their money, inflation and the effect of poor early returns in their portfolio.  The variable annuity attempts to address this as follows.

  • It offers a guaranteed payment of 5% of your original investment each year for 20 years with the potential to increase the payments in the future, using a “reset” feature (resets are beyond the scope of this article).  For example, a $100,000 investment would have a minimum guaranteed payment of $5,000 annually for 20 years.
  • It offers a 5% “bonus” of your original investment for each year your defer taking a withdrawal (up to 10 years maximum). For example, a $66,667 investment today would get a 5% bonus of the original investment each year i.e. $3,333 and grow to a balance of $100,000 in 10 years.  The investor could then start payments and get a guaranteed minimum payment based upon 5% of the $100,000 value i.e.$5,000 annually for 20 years.

These products can be used in registered and non-registered accounts.

As there is no free lunch, a variable annuity has an added cost to get the guarantee. This cost depends on the percentage equity held in the underlying investment.

While the basics of how a variable annuity works is quite simple, the product can get complicated as you dig deeper. This article only serves to raise the awareness that “variable annuities” are the new kid on the block. As with any new investment, do your due diligence.

For further information on “variable annuities” or to learn how they might compliment your current retirement income strategy, please contact me.

Disclaimer:” “Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.”

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