Retirement Income

Surviving the retirement risk zone with guaranteed income products

The retirement risk zone is the critical period leading to and just after retirement. Some have said it is the five years before retirement and the five years after retirement.

The retirement risk zone should be important to retirees because short-term portfolio losses due to markets during this time can have significant long-term effects on the longevity of the portfolio.

One of the ways to survive the retirement risk zone is to simply avoid the market altogether. While this may sound appealing to conservative investors, the reality is guaranteed investments are not attractive in today’s low-interest-rate environment. Few people have the savings to be able to live comfortably in retirement based on a return of only 3% to 5%. If you take inflation into account, the picture looks even worse because guaranteed interest products are barely keeping up with inflation.

Retirees face a pretty big dilemma. Play it safe and stay out of the markets but risk low returns that may not provide enough income and chance not keeping up with inflation. Or move some money into the markets to try to earn higher returns knowing that early losses may be devastating to the portfolio increasing the risk that you may run out of money.

One possible solution may be something called guaranteed minimum withdrawal benefit products (GMWB). If you’ve never heard that term before, you may recognize a product called Manulife Income Plus. Manulife has invested millions of advertising dollars into promoting this product and so far it looks like it has paid off. If you have not seen or heard the advertising, you will probably hear about it from a financial advisor.

Manulife Income Plus was the first of it’s kind to come to Canada. But now, many other insurance companies have launched their versions to stay competitive.

Products like Manulife Income Plus help protect retirees in the retirement risk zone by offering (in their words), “predictable, sustainable, guaranteed income for life” for those at the age of 65 and later. For example, if you were 65 and you had $250,000 invested in the Manulife Income Plus product, you would be guaranteed $12,500 of income per year no matter how bad the markets did. That’s a pretty attractive benefit if you are concerned about the unpredictable markets during the retirement risk zone.

Are guaranteed minimum withdrawal benefit plans too good to be true? Remember the old saying, “If it is too good to be true, it probably is.” Critics suggest that the downside to these products is the price tag or the fees investors pay. These benefits are not free. What you won’t see and hear in the advertising pitches of these products is they typically come with a higher than average management expense ratio (MER) which can sometimes be higher than 4%. Studies have shown that high MER products often underperform significantly over the long term because they hit investor’s pockets hard. Investors should always be aware of the fees they are paying and try to seek lower fee investments.

I have always believed that retirees need to be very careful about taking too much risk in their portfolios when they are drawing an income. The combination of market losses and income withdrawals can dramatically increase the risk of running out of money. Although guaranteed minimum withdrawal benefits now play a role in reducing this risk, it can come with a pretty hefty price tag. Investors need to look beyond all the sizzle and hype of the fancy marketing pieces and determine if these products are really for them. There are other alternatives to helping retirees survive the retirement risk zone. Remember there is no such thing as the perfect investment. Every investment has good and bad points. Research wisely before you buy it.

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