As I write this column, the equity markets continue on a roller coaster ride in 2011. Whether you own individual stocks or mutual funds, it has been a year of highs and lows.
Investors want to accumulate wealth, but when they see the value of their investments decrease on paper, the reaction may be to sell.
It is bad timing to sell at a loss due to market volatility. The psychology of investing does strange things at the peaks or troughs of market cycles.
Human emotions often influence investors to make misguided decisions. If the markets make you nervous, or if you sell out of the equity markets to retreat into the safety of GICs, be careful of what you wish for.
This is a newer breed of retirement planning.
GMWBs are designed to provide a guaranteed income stream for life, and also have additional features. In pre-retirement you can earn an income bonus each year that no withdrawal is taken, regardless of market conditions.
These bonuses are not cash deposits. They increase the basis for calculating the amount taken as retirement income in the future. You also have an opportunity to increase your income guarantee when equity markets perform better than anticipated. The longer you can wait to start the withdrawal process in retirement; the payout percentage will increase. There is a survivor pension for your spouse after your death, similar to company owned pension plans.
In the event of death, a minimum of 100 per cent of the investment (proportionally reduced for any withdrawal) would be guaranteed to be paid to the named beneficiary.
This also eliminates the risk of market volatility, when death occurs during a low point in the equity markets.
A GIC investment pays one to three per cent per year based on today’s low interest rates.
A RRIF minimal withdrawal payment at age 71 is 7.38 per cent. At age 77, the withdrawal payment is 8.15 per cent.
The RRIF minimal withdrawal payment increases each year to max out at age 94 with the mandatory withdrawal payment of 20 per cent.
When you do the math, the calculation will show you that your GIC principal decreases each year by about five to seven per cent.
A RRIF quickly depletes when the annual mandatory RRIF income increases each year, while the GIC interest income pays less than 1/2 of the revenue income required.
A GIC investment /savings strategy will guarantee you run out of money if you live long enough.
You should convert the necessary amount of retirement income into a guaranteed income for life investment strategy to ensure you do not run out of money in retirement.
If you are responsible for your own retirement, and your own personal pension, you should think and act like the large pension companies in Canada.
Pensionize your own nest egg. The No. 1 fear after you accumulate wealth is the pervasive fear of losing your accumulation of wealth. You need to build a solid financial foundation to guarantee your income stream in retirement, to ensure your money does not run out during your lifetime.
Doreen Smith is a Certified Financial Planner with Capri Wealth Management Inc. and Manulife Securities Investment Services Inc. The opinions expressed are those of the author and may not reflect those of Manulife Securities Investment Services Inc.