Creating a ‘DIY pension’ with guaranteed income products
For many Canadians, workplace and government pensions won’t be enough to fund a long, comfortable retirement. Guaranteed income products can help fill that income gap.
By: DAVID ISRAELSON
Date: May 2, 2016
When investors think about the building blocks that support a comfortable retirement, it’s often workplace and government pensions that come to mind. But investors shouldn’t forget about one of the most important components of retirement planning — the money they have saved.
In an era when defined benefit workplace pension plans are scarce, savings are a key component of a solid retirement income plan, says Paul Fryer, vice-president, individual business management, individual insurance and wealth, Sun Life Financial. In fact, among the three pillars of retirement planning — the other two are workplace and government pensions — private savings require the most attention.
“Saving and investing early in life is the number one piece of advice that retirees themselves recommend for making the most of retirement years,” Mr. Fryer says. In the 2016 Sun Life Retirement Now report, 89 per cent of mid-market retirees surveyed ranked starting to save and invest early as their number one tip.
“Savings are an increasingly important pillar because Canadians are living longer, with retirement spanning 20 or 30 years or more,” he adds. The other pillars are important too, but only two out of five Canadians are covered by workplace pension plans.
“If [investors] are missing one of the three pillars, or if one turns out to be shorter than the others, it’s better to know about it sooner rather than later,” says Sandra Foster, Toronto-based financial author and President of Headspring Consulting Inc.
No one should be under the illusion that the pension provided by government will be enough to get by. In 2015, the maximum payout for the Canada Pension Plan (CPP) was only $12,780 per year. The federal government says it is committed to enhancing the CPP, but it has so far offered no details, and even an enhanced plan won’t be enough for a full retirement.
To ensure they have enough income to last through their retirement years, many investors will need to create their own do-it-yourself (DIY) pension plans, says Mr. Fryer.
“The original idea behind the CPP was that an individual would also need employer pensions and private savings to generate enough income for a comfortable retirement,” explains Mr. Fryer. “Advisors should let clients who don’t have workplace pensions know that it’s essential to complement government pensions with savings they can convert into guaranteed retirement income for as long as they live.”
Individuals who enjoy a defined benefit workplace pension plan can count on receiving a predictable amount each month when they retire. But defined benefit plans are increasingly rare in Canada; more and more Canadians have defined contribution plans, where an employer contributes to or matches the contributions that an employee makes to a retirement account such as a registered retirement savings plan (RRSP).
“A defined contribution plan at work is an investor’s own personal pension fund and fortunately or not, they are responsible for building an appropriate investment portfolio,” says Ms. Foster. “If an employer matches any contributions, investors should take advantage of that added opportunity to increase their future retirement income — otherwise they are missing out on easy money.”
Mr. Fryer says that advisors should remind clients with a workplace pension that contributing is a form of saving — they can potentially increase their retirement income in the future by making sure they don’t leave money on the table now.
“Sun Life Financial research estimates that Canadians are missing out on more than $3-billion per year of ‘free money’, because employees don’t take full advantage of corporate pension and savings plans and their contribution-matching programs,” he says. Whether employers match indviduals’ contributions at 50 cents on the dollar, or dollar for dollar, advisors should be ready to show clients how this extra money will grow.
One idea for investors to consider for growing a guaranteed income for life is segregated fund products. Also called guaranteed investment funds (GIFs), most of these products ensure that at least 75 per cent of the original value of the investment will be available when it matures, regardless of what happens in the markets.
GIFs can serve as a DIY pension investment, providing clients protection, flexibility and reassurance, says Mr. Fryer.
Products such as the Sun Lifetime Advantage GIF have many of the positive attributes of both defined benefit pension and defined contribution pension plans, he adds. They’re similar to defined benefit plans in that clients can be certain of receiving lifetime guaranteed income, and they’re similar to defined contribution plans in that clients can choose their own investments to suit their own risk tolerance.
GIFs can be particularly suitable for certain types of clients, says Mr. Fryer. For example, certain GIFs can be appropriate for an individual who is looking for a guaranteed income for life, or someone who is building savings but looking for protection against market downturns.
Segregated fund products are also good for those seeking insurance benefits, because when the investor dies, settlements go directly to beneficiaries, potentially saving estate and probate fees. If the claim is straightforward and the paperwork is in order, the guaranteed proceeds from a GIF can be paid out quickly to beneficiaries.
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