We’ve all seen the commercials – happy and fit retirees living lives free of financial concern because they solved their retirement income problems. These products, often referred to as guaranteed minimum withdrawal benefit (GMWB) products, combine the guarantees of an annuity with insurance benefits and the potential to realize benefits from being invested in the market.
You make an initial investment in segregated funds and a percentage of those funds, usually around five percent, are guaranteed to be paid out annually for life.
As the money is invested in segregated funds in the market, there is the potential for that initial investment to increase in value.
For investors approaching retirement that saw what the market turbulence of 2008/2009 did to the retirement plans of people they know, these plans can deliver peace of mind.
You know exactly how much money you will be guaranteed and can manage the rest of your finances accordingly.
If you are able to leave your investment for some time, without withdrawing income, you are eligible for bonuses that increase the percentage of income you are entitled to withdraw in the future. The earlier you can put money in and leave it untouched, the higher level of income you will be entitled to receive when the time comes. These bonuses stretch your potential income regardless of market performance and make these products ideal for boomers who are still a few years off from retirement and can leave the money in place without it affecting their current lifestyle.
Over time, if your investment has gone up in value, there are reset opportunities to increase the amount which is used to calculate your income entitlement, giving you more income. If the investment goes down, however, your annual guaranteed payments do not change.
As they are insurance products, you can name beneficiaries who are guaranteed to receive a death benefit of at least the starting investment minus any withdrawals, regardless of the market performance.
These products are meant for the long term retirement income, so look at all aspects of your potential retirement savings and assets before investing. Each company has their own stipulations on unscheduled withdrawals and penalties. As well, once you begin taking the income, you cannot stop taking the income to accumulate further bonuses.
As well the built in insurance features to these products come with higher fees when compared to other investments, and your segregated fund investment options are limited.
When contemplating a GMWB, make sure the guarantees and features of these products work with or enhance your personal situation. Everyone wants a secure retirement, just like in the commercials, but GMWBs may not be the way for everyone to have one.