GMWB (Guaranteed Retirement Income Program) Canada
Saving for your retirement involves a lot of careful planning. Not only do you have to ensure your savings will be sufficient to fund your future need for income, you also have to ensure that your nest egg will last as long as you’ll need it. With longer life expectancy, this could be 30 years or more.
This highlights the fact that we need to make sure that we don’t outlive our savings, at the same time when we are nearing our retirement years, we can’t afford to take any major negative hits on our investment.
A quick example will help to illustrate this concept. Assume an individual invests $200,000 for three years and withdraws nothing from her portfolio during that time. If the investment portfolio returns 10% in the first year, 20% in year two but loses 30% in year three, then the ending portfolio value is $184,800 (scenario A). If we reverse the sequence of returns so that the 30% loss happens in year one, followed by a 20% gain and then a 10% gain, the value of the portfolio still ends at $184,800 (scenario B).
However, if that investor is withdrawing $10,000 per year at the end of each of those three calendar years, then the order of returns matters greatly. Under scenario A, the ending portfolio value is $159,400 while under scenario B it falls to $150,600. In short, it is very important that an investor do well in the early years of their retirement or they may outlive their investment portfolio.
Guaranteed Minimum Withdrawal Benefits (GMWB) answer this issue. It is a product which has the features of Annuity & Segregated funds combined in one.
Most common features of the GMWB products available in the market are as below:
Predictable income guaranteed not to decrease no matter how investments perform: GMWB provisions enable investors to hold long-term asset classes while also ensuring that they'll receive regular cash flow from withdrawals. Depending on the contract, withdrawal amounts can range from 5% to 7% of the initial amount invested, regardless of the investment performance of the funds. In addition, if you delay the commencement of your regular withdrawals you will receive a 5% increase in your guaranteed withdrawal balance each year that you defer withdrawals, to a maximum of 10 years.
Sustainable income that will last for life: your principal is guaranteed. Some products even offer Lifetime withdrawal amount (LWA) beginning at age 65 i.e. a guaranteed stream of payments equal to 5% of Guaranteed Withdrawal Balance for life.
Potentially increasing guaranteed income to help offset inflation: If your investment portfolio grows, Every three years, the value of the investment policy is reset to the current market value if this value is higher than the previous guaranteed amount.
Spousal Continuation & Death benefit guarantee: Most of the GMWB products allow to continued income to a surviving spouse in the event of death of the Annuitant or guarantee 100% of your deposit value reduced proportionally for withdrawals, as a lump sum death benefit. This feature provides the surviving spouse with maximum flexibility to choose the option that best suits them.
Benefits that ensure the smooth transition of your estate: Your investment proceeds pass directly to your named beneficiaries without the time delay and expense of probate.
The flexibility to change your investment: You can switch between funds or fund managers at any time. Various fund options are available, depending on the product you choose.
