With the decline in interest rates over the past 20 years, conservative retirees have become more and more open-minded to looking beyond traditional guaranteed investment certificates (GIC) investments.
GICs have long been a preferred investment for risk-averse investors who want to earn as much interest as possible, without taking any risk with to the money they invest.
However as interest rates have declined, the biggest risk these investors face is the erosion of their life savings as their income needs force them to withdraw both the capital they have invested plus the interest earned just to meet their rising expenses.
The annual interest on $200,000 in GICs a decade ago would have been approximately $12,000, assuming the 6 per cent rates available at that time. However, even investors willing to lock into a five year GIC today at a top rate of 2.25 per cent will only earn $4,500 interest on that same $200,000.
Assuming even a modest marginal tax rate of 20 per cent and that investor is left with just $3,600 annually to help meet his or her growing income needs, which are far greater today than they were 10 years ago when you consider the impact of inflation.
So what is today’s mature investor to do?
Income annuities provide a guaranteed income for life in exchange for an investor willing to part with the money invested. This can be a good strategy for a conservative investor who’s primary concern is ensuring they will never outlive their income and assets. However, as people mature, they may be very reluctant to turn over their life savings to an insurance company in exchange for that guaranteed income for life. Although they can build in guarantees that could ensure some of the money they invest could be left to their heirs after they die, the more guarantees they build into the contract, the lower the income they receive.
Some investors may be willing to consider an investment into the financial markets where rates of return have traditionally been much higher than the interest paid on GICs. However, making a leap into the stock markets can be very concerning to someone who has been a very conservative investor all their life; especially as they get older.
As a result of these factors, some insurance companies have recently designed new products tailored primarily for these types of investors, especially for those that have reached age 80.
Some have launched a new series of segregated funds designed for elderly clients who are focused on estate planning.
These estate protection funds, which are available to clients between the ages of 80 and 90, feature a 100 per cent death benefit guarantee. The product caters to clients who are focused on protecting their legacy while also providing a flexible investment that can cater to their changing income needs.
With almost $800 billion expected to be transferred between generations by 2024, the generation holding the wealth today generally needs to ensure the money is available if they need it, but also consider themselves custodians of wealth they wish to preserve for their children and grandchildren.
Segregated funds are a popular option within older demographics given the estate planning benefits of the products, such as the ability for beneficiaries to receive their inheritance quickly and confidentially, while avoiding probate.
Segregated funds, which are investment funds managed by life insurance companies, have long been a preferred investment for many mature Canadians. One of the key features that appeals to our aging population is the ability to name beneficiaries, ensuring the assets go directly to whom the owner wants, without cost or delay, after they die. In contrast, most other investments, including GICs, do not have this feature and will be tied up in an estate while an executor navigates through Ontario’s probate process.
This will result in additional expenses, including the estate administration tax, being paid by the estate and will result in delays before assets can eventually be transferred to heirs.
With insurance companies experiencing significant demand for segregated funds from people over the age of 80 and with almost half of retirees expected to live well into their 80s, some of the benefits and features of segregated funds are more attractive for elderly clients, whether that’s the guarantee, or whether it’s the estate features.
While many younger retirees have used segregated funds for their features, the 100 per cent death benefit guarantee for people aged 80 to 90 makes the new estate protection funds more appealing for that age group.
If you or someone you know could benefit from segregated funds, speak with an investment advisor who is licensed to provide advice on these types of investments. The rates of return are not guaranteed and investors should read each funds information folder to learn more. Segregated funds have fees that can be explained by an advisor.
Shawn Pankow is a Certified Financial Planning Professional with Pankow Financial Solutions in Smiths Falls.
First appeared in the April issue of Hometown News