With interest rates as low as they are buying an old fashion GIC is not very appealing to a lot of people. At 1, 2 or 3% returns, investors must really think about whether they can achive their retirement goals at these low rates.
Can you get a 5% guaranteed income?
This past month as I have been delivering our financial education programs, I have had a number of people suggest that they can get a 5% guarantee. After a little conversation, most of these people are referring to the Manulife Income Plus product which is really a segregated fund with a guarantee.
Let’s be very clear and up front . . . it guaranteed return of 5% is a huge misconception and needs to be addressed.
Income guarantee does not mean a capital guarantee
The 5% is not guaranteed return in cash equivalent to a GIC. Let’s check out Jack who is 65 and has $100,000 to invest and wants income. Under the Manulife Guaranteed Withdrawal Benefit, Jack would get $5000 per year income, but would not be guaranteed to get his $100,000 back. Part of the $5000 income could be repayment of your own capital back if the investments do not make at least 5% after fees.
In the case where the investments do not perform, the 5% income is more like an annuity or a pension. To put this in perspective, let’s say a 65 year old took $100,000 and invested in GICs at a guaranteed return of 3% but wanted to take out the same $5000 per year. This person would run out of money at age 94 (29 years).
In the case where the markets do perform better than 5%, then Jack wins but he would have won with or without the guarantee.
What if you don’t need income?
In another scenario, I had Amanda tell me that she is not taking income but her Manulife Income Plus portfolio is making her a guaranteed 5%.
It is really important that we distinguish the difference between guaranteed value and market value. Let’s say Amanda invested $100,000 and was not planning to take income. Let’s say the market value of her portfolio dropped 20% and was now worth $80,000, she did not make 5%. Her guaranteed value might have increased to $105,000 but if she needed money today after her portfolio fell, she would not get $105,000.
The Manulife Income Plus literature is very clear that “withdrawals proportionately reduce maturity and death benefit guarantees. Exceeding withdrawal thresholds and taking withdrawals prior to age 55 or prior to the Election of Life Withdrawal Amounts may have a negative impact on future income payments.
In both cases, Jack and Amanda claimed they were mislead and their advisors did not explain this properly. If that’s the case, then these advisors should lose their license to sell these products.
However, in defence of the advisors, it’s possible they did explain it and Jack and Amanda did not get it. It’s possible that Jack and Amanda heard it differently or that they forgot. Many of these things happen quite often too.
The bottom line is these products are extremely complicated and not easy to understand. Even someone like me, who spends a lot more time than the average person looking personal finance and investing, finds it really complicated. As a result, remember these cliches:
If it’s too good to be true, it probably is
If you don’t understand how it works, don’t buy it
Make sure you read the fine print
And it’ better to lower the fees you pay, not increase the fees you pay (These products are quite expensive).
My disclaimer: I do not sell investment or insurance products so I do not profess to be an expert with this financial product or any other. If you do not feel you understand the Manulife Income Plus product, talk to your financial advisor or contact Manulife Financial directly.