Maintaining your income and outliving your income are two of the biggest concerns for people in retirement or who are about to retire. Investing in the markets can be emotional and can erode your retirement income faster than expected. We are going through a large dip in the market, the second one in 12 years, and it is not known when the markets will rebound. For young investors, this is not as large of an issue, as they have years to regain any losses; however, for those in retirement or who are about to retire, every year counts. In this low interest rate environment, utilizing Guaranteed Income Certificates (GICs) alone is not enough and adding more investments to your portfolio may not yield the expected results. The good thing is, there are some other options available to secure your money in retirement.
Guaranteed Minimum Withdrawal Bonus (GMWB)
With a guaranteed minimum withdrawal bonus, your investments will generate a guaranteed income for life regardless of the market conditions. A GMWB is an investment product within a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or Tax-Free Savings Account (TFSA) that provides that guaranteed income. With each account mentioned above, you still invest the money in the market according to your risk tolerance.
With a RRSP and TFSA, your initial deposit predicts your monthly income in retirement. As your investment account grows over time, so too does your guaranteed income. If your investment account goes down over time, your income base will still increase until you are ready to retire based on the income bonus base.
In the case of a RRIF, your initial deposit sets your guaranteed income in life. If the markets go up, you have the option of withdrawing the additional funds without disrupting your guaranteed income level. If markets go down, your income level is still guaranteed, based on the initial deposit, for life.
Annuities
Similar to GMWBs, annuities give you guaranteed income for life. With an annuity, you are purchasing guaranteed income for life with your initial deposit from an RRSP, TFSA or non-registered account. The amount of income you will receive will depend on the initial deposit amount, your age, interest rates, and the guarantee periods. Guarantee periods ensure payments are provided to your beneficiary for a set period of time in the event that you pass away unexpectedly. You can also name a successor (secondary) owner, so upon your passing, the annuity will continue to pay out until their passing. This is a great way to ensure guaranteed income to a spouse, or even a child or grandchild at a reduced rate.
In these current market conditions, having guaranteed income leading up to or throughout retirement can relieve a lot of stress. Knowing that there will always be a predictable income stream can ensure that your retirement is everything you want it to be. Talk to your financial advisor about these options to see if they are the right fit for you.