Rational Advisor

I always get concerned with products that are too popular to buy, or are being over promoted. This has almost always come back to bite the investor – think, technology funds, think Mackenzie Select Funds, think Portus! Right now, the hot and easy product to buy is the insurance based guaranteed withdrawal benefit products.

Oh, yes, you’ve seen the ads, guarantee income, guarantee principal, guarantee this and that, and all because it turns the investment world upside down. Well it does turn the investment world upside down. It turns it the wrong way up – what is not explained, is the Fees, and the likely hood of achieving returns, and the fact that the hguarantee is of income not return.

The thing is that they are an easy thing to sell when the markets aren’t doing well or are choppy – Now! They are sold based on the 5% guarantee of income, higher than a GIC and most government bonds. So, yep people who do not delve in deeper get caught by the subtle difference between guarantee of “income” and guarantee of “return”. They are not the same.

When you are putting money into these you are still exposing it to market risk. But, they call it guarantee of principal and guarantee of 5% income. The missing link is the investment period of 20 years or more. Over 20 years, any sound investment will get you your principle and provide a return greater than 5%. The word “guarantee” is not needed here.

When getting these make sure that you are reading the fine print, and understand how that 5% comes to be.

Let’s say you put that money in for 5 years and then you began to withdraw. Let’s say you put in $100,000 and after 5 years, 5% per year would mean that the portfolio should be $125,000. But, the market returns has not been that good, and say the market value is actually $90,000. At that stage the only guarantee you have is you have is if you stay with the investment for 20 years. You can’t take the $125,000 and leave, you can’t sell it and buy a cottage, and you can’t give it to your kids. You have to stay there if you want your guaranteed income, and it will always have to stay there until the market value reaches above the $125,000 value. You could stay there for the rest of your life!

People think that if they leave their money in for 15 years it will make 5% plus the market return. Noooo. This is a “notional” (not real return – see http://dictionary.reference.com/browse/notional).

You can’t take that money, and it is NOT PLUS MARKET RETURN. No, Sireee

Also for 15 years, you can buy almost anything and your principal is guaranteed!

So be aware, and don’t do the wrong thing.

Is there a case for them, sure. But for those that already have other alternatives.

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