blog11nov2007

Hot Off the Web
In “’Finsurance’ has room to improve” Financial Post’s Chevreau discusses Guaranteed Minimum Withdrawal Benefit (GMWB) products from Manulife’s Income Plus, Sun Life’s Sun Wise Elite Plus and Desjardin’s Helios. He quotes various advisors whose perspectives are diametrically opposite on these products. Some like them because they provide “growth potential, tax efficiency…and guaranteed income”. The income guarantees range from 5% to 7% per year, but the higher number comes with time limitation of 14 years. The tax efficiency comes from structuring these as having a significant capital return component. Some are looking at these products as alternatives to annuities. At the other end of the spectrum are those who (correctly) argue that, while these products have potential, but the annual costs in the range of close to 3.5% to 3.85%, with the right to increase cost of guarantees, brings the total cost at around 4% which is the equity risk premium in Canada in the 1990s (i.e. fees take away all the upside potential), making GMWBs mostly “emotional sell” to conservative investors.
Richard Croft in Financial Post’s “Withdrawal-stage portfolio a hot topic” elaborates further on the decummulation phase portfolio during retirement and identifies four requirementsfor it: (1) last a lifetime, (2) provide growth, (3) generate good cash flow, and (4) tax efficiency. He recommends using covered call as an income booster to a portfolio of “(10-15%) cash, (20%) preferred shares, (20%) government bonds (including some global exposure for diversification), (5-10%) income trusts and (40%) dividend paying shares.” Not a bad mix, though some may argue that a little extra foreign exposure would help diversification (though that may already be implicitly included in the 40% equity portion).
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