Guaranteed Minimum Withdrawal Benefit (GMWB) products have become hugely popular with clients. This popularity is most likely attributable to the growing awareness that individuals will increasingly have to be responsible for looking after their own retirement needs. Companies and perhaps Governments too, face significant challenges in providing retirement income to their retirees and citizens.
Canadian’s are aging and within the next 5 to 10 years there will be the largest number of people at retirement age our country has ever had in its history.
This group of Canadians aged 65 and older will control the majority of investible assets for many years to come. In 2008 they controlled $1.93 trillion and are forecasted to control $4.75 trillion in 2018. They are and will increasingly demand products that will help them fund their retirement years.
On the face of it, segregated funds with the GMWB don’t guarantee anything more than the equivalent of principal return, but these features allow the client to enjoy some upside without risking capital — a guarantee that appeals to aging Canadians.
The principal features of GMWB products address the three key risks facing pre-retirees and retirees, outliving one’s money, poor market returns and inflation. These three risks are addressed by guaranteeing income for life or a fixed period of time. Clients participate in the stock markets with limited downside risk and the potential to lock-in market gains. As well, a notional bonus adds 5% a year to the deposited capital for every year that the client does not take his or her first withdrawal.
The income period can vary, as well. Starting in the year in which the client retires — as early as age 50 and as late as age 70 — the plans offer 4%-7% of the deposit back in annual income, with most plans continuing until the client dies. And let’s not overlook the basic features of segregated funds, guarantees at maturity and death, probate avoidance and creditor protection.
If you do not have a company Defined Benefit Plan or pension – give me a call and we can see how this product class fits into your financial plan.