January 7, 2012

5% Guaranteed RRSPs & TFSAs

The Guaranteed Minimum Withdrawal Benefit Plan is an investment plan that works for you in two phases:

Accumulation Phase:

During this first phase, when you are still looking to grow your retirement funds but you are close enough to retirement that you can not afford to take any big downturns.

With the Guaranteed Minimum Withdrawal Benefit Plan or GMWB plan you are able to invest in the equity markets as in a normal investment account and this determines the market value of your portfolio. In addition, you have a bonus account which calculates your GMWB guaranteed value for the retirement phase.

When markets do well, your account increases with your market value. When they do poorly, the GMWB gives you the 5% guaranteed return each year.

Your GMWB guaranteed value is automatically reset every 3 years. On the reset anniversary and/or when you’re ready to start drawing retirement income, we look at both the market value and the GMWB value and base your income off the higher value.

Example: RRSP Account of $100,000

Market Value (after 3 years) = $118,000

Bonus account (after 3 years) = $115,000

Your Guaranteed Minimum Withdraw Benefit will be the higher of the two which in this case is $118,000. The bonus account would come into affect only if the markets had not performed as well as a 5% (simple rate of return) each year.

Income Phase:

After protecting and growing your retirement fund, it is now time to move into the income phase. This contract will now provide you with a lifetime income stream that continues for life regardless of the market value of your portfolio. If you out live the amount in your portfolio, the contract will continue to pay an annual income, protecting yourself from longevity risk.

In the meantime, you are able to stay invested in the equity markets and continue to experience growth throughout your retirement years.

Each year the investments will pay out your investment minimum or the GMWB lifetime guaranteed minimum, whichever is higher.

For an example using registered retirement funds:

A 71 year old male who has $200,000 in a RRIF and no other assets. He takes the RRIF minimum on a monthly basis and is concerned that it will run out before he dies.

  • RRIF Min = $1,230 / month
  • GMWB Min = $917 / month (can reset higher)

Scenario 1: Markets do poorly for next 6 years. RRIF minimum has dropped to $850 per month due to $88K in RRIF payment withdrawals and little growth.

Scenario 2: Markets do really well for next 6 years and after withdrawals, account has gone up to $250,000 value. GMWB reset @ 6% of $250,000 = $1,250 per month

As with all Segregated Funds:

  • The funds stay in your name and will be distributed directly to your beneficiaries bypassing probate should you pass on prematurely.
  • They are creditor protected.
  • Are only obtained through an insurance company and fall under the Insurance Act.

Please contact us at main@thomandassociates.com for more information on this innovative product.