Guaranteed Minimum Income:

Predictable, sustainable, and potentially increasing income.

A New Idea

In the traditional investment environment, it is the market value of the investments that determines how much income an investor will receive. By adding a guarantee on income, we can ensure that a minimum income level is provided if market returns are unfavourable. We call this product the Guaranteed Minimum Withdrawal Benefit (GMWB).

            The important part to keep in mind about the GMWB is that this is a product designed to produce future income. The most common use for it will be in an RRSP/RRIF scenario. If the client is looking for something other than income (for instance, a scenario that involves lump sum withdrawals such as saving for a house purchase, or education planning), then the GMWB may not be the best fit.

Stage One – Growing

The amount that the future income is based on is guaranteed to increase by 5% per year until withdrawals start. We call this the accumulation phase. If the market value is higher than the guaranteed amount, the income level is determined by the market value, just like traditional investments. But if the market value does not increase by at least 5% per year, the guaranteed “bump” kicks in and the income base will go up by 5%.

The market value fluctuates independently from the guaranteed base. Every three years the market value is compared to the guaranteed income base. If, at this time, the market value is higher than the guaranteed base, the guaranteed income base is reset to the higher market value. The 5% annual guaranteed increase continues, but now it is 5% of the higher, reset guaranteed base.

          Stage Two - Income

The next phase is called the withdrawal phase. This is the point where you begin to begin to receive income from your investments. At age 65, guaranteed income is calculated as 5% of the guaranteed base. You can take income before 65, however it might have an impact on future guarantees. During the withdrawal phase the market value continues to be compared to the guaranteed base every three years. If the markets co-operate and the market value is higher than the guaranteed base, the guaranteed base will again be bumped up to the higher market value.

With the GMWB, once the income base is reset up to the higher market value it cannot be bumped down again. Even if the markets have a devastating decline and lose all of their value, the income base remains level at the last reset level and the income payments continue.

            If the income is taken after age 65 the income is guaranteed for life. Any market value that is not used for income can pass directly to your beneficiaries.

What’s the catch?

There is a cost to add the guarantees to future income, which runs about 0.0085 per year. If the markets are favourable you are paying for a guarantee that you don’t need. However, the guaranteed minimum income idea protects you in case the markets are not as favourable.

In other words, if the markets make 10%, the guaranteed income product will appreciate by 9.15%. But if the markets return anything less than 5%, your guaranteed income base still goes up by at least 5%.

Many investors would prefer to give away a bit of the upside in a very positive scenario in order to take away the downside in a less-than positive scenario.

The following illustrations show different scenarios for the value of investments. In Scenario 1, the markets are very favorable and the investments are consistent with our expectations. In the third year, when the market value is higher than the guaranteed amount, the guarantee increases to the higher market value. In this scenario, the additional cost of the guarantee may not be necessary.

However, in Scenarios 2 and 3, where the markets have flat or disappointing performance, a base income level is established. Income becomes predictable and gives an investor peace of mind while still allowing them to pursue future growth.

Please contact us for more information.

The information in this communication is subject to change without notice.