“Sequence of returns” most critical factor as more Canadian boomers enter “Retirement Risk Zone”
TORONTO, Oct. 3, 2006 – Manulife Investments is launching a first-of-its-kind financial product into the Canadian marketplace. IncomePlus is Canada’s first offering in the Guaranteed Minimum Withdrawal Benefit (GMWB) category designed to help baby boomers navigate the “retirement risk zone,” a period of extreme portfolio risk identified in a new research study commissioned by Manulife Investments.
“This product innovation reflects our commitment to provide our clients with the best possible solutions and investment protection when it’s needed the most,” says J. Roy Firth, Executive Vice President, Manulife Investments.
The already significant need to manage the retirement risk zone – the five to ten year period before and after retirement income begins – is increasing because of the uncertainty of market returns from year to year. This volatility places the burden to create stable retirement income squarely on the shoulders of individual investors.
“More and more Canadians are very vulnerable as they approach retirement,” notes Firth. “They find it increasingly difficult to create a monthly retirement income that is predictable, sustainable and potentially able to grow.”
In ground-breaking Canadian research entitled, “Asset Allocation and the Transition to Income: The Importance of Product Allocation in the Retirement Risk Zone,” Drs. Moshe Milevsky of York University’s Schulich School of Business and Thomas Salisbury of York’s Department of Mathematics and Statistics argue that while asset allocation is key to investment performance as investors save for retirement, product allocation will determine their success in the payout phase.
“Effective retirement planning, when money needs to be drawn down from investments, is fundamentally different than financial planning for investors still accumulating during their high income earning years,” explains Milevsky.
The critical difference is that in the accumulation phase, one lump sum grows to the same value regardless of the sequencing of returns. For example, annual returns of 7%, -13% and 27% produces the same portfolio result in three years as do annual returns of 27%, 7% and -13%.
However, mathematical models created by Milevsky and Salisbury demonstrate that this is not the case during the payout phase, and the ramifications are enormous.
In the payout phase, the keys to success become:
- Product Allocation: the right mix of products providing various sources of investment return and cash flow that can protect a portfolio against negative adverse returns in the retirement risk zone.
- Downside protection, as a large downturn in your investment portfolio at the wrong time could cause you to run out of income.
- The sequence of investment returns.
Immunity from the “Sequence of Returns”
The research explains the impact of the sequence of returns an investor might earn and clearly demonstrates that simply achieving “average annual return” goals is not nearly enough to ensure a comfortable retirement. The timing of when various returns occur in a portfolio creates enormous differences in outcomes in the retirement risk zone. Milevsky notes, “If a portfolio experiences negative returns early on it may never recover – the damage is done.”
Compounding the problem of sequence of returns is that many investors react to a fall in the markets by moving more of their portfolio into bonds and other fixed income investments. “This can actually make matters worse,” says Milevsky, because by doing so investors lose potential capital appreciation and inflation protection.
The solution is a new product category known as a Guaranteed Minimum Withdrawal Benefit (GMWB) – that will provide protection from the sequence of returns by providing guaranteed monthly payments independent of where an investor retires in the market cycle. It also provides the potential for increasing monthly income while allowing the investor to maintain flexibility and control.
These types of products, introduced in the United States more than four years ago, have experienced significant market success. Until now, Canadian investors were unable to take advantage of them.
“We are very proud to be the first to offer Canadian investors this important investment solution and revolutionize retirement planning for investors,” adds Mr. Firth. “As awareness of the impact of the retirement risk zone grows, we expect to see enormous demand for IncomePlus.”
Purchasing the product up to 10 years before guaranteed income withdrawals begin, investors can lock in a minimum income bonus of up to 50 per cent, regardless of how the market performs.
“The impact of the sequence of returns changes everything,” explains Firth. IncomePlus gives investors the confidence and peace of mind to remain invested while resets allow them to lock in their gains as well as potentially grow their income and extend how long they receive guaranteed payments.
IncomePlus includes a wide range of funds managed by some of the top fund managers in Canada including: AIM Trimark Investments, CI Funds, Fidelity Investments, MFC Global Investment Management, and Mackenzie Mutual Funds.
IncomePlus will be offered by Manulife Investments through a GIF Select contract and is scheduled to be available for sale October 23rd.
About Manulife Investments
Manulife Investments is the brand name describing certain Canadian subsidiaries and operating divisions of Manulife Financial Corporation that offer personal wealth management products and services in Canada. As one of Canada’s leading integrated financial services providers, Manulife Investments offers a variety of products and services including segregated funds, mutual funds, annuities and guaranteed investment contracts.
About Manulife Financial
Manulife Financial is a leading Canadian-based financial services group serving millions of customers in 19 countries and territories worldwide. Operating as Manulife Financial in Canada and Asia, and primarily through John Hancock in the United States, the Company offers clients a diverse range of financial protection products and wealth management services through its extensive network of employees, agents and distribution partners. Funds under management by Manulife Financial and its subsidiaries were Cdn$370 billion (US$332 billion) as at June 30, 2006.
Manulife Financial Corporation trades as ‘MFC’ on the TSX, NYSE and PSE, and under ‘0945’ on the SEHK. Manulife Financial can be found on the Internet at www.manulife.com.