Converting your retirement income into savings

1
To GMWB or Not to GMWB?
2
What is a Guaranteed Minimum Withdrawal Benefit
(GMWB) Product?

• An individual variable annuity product that
  guarantees a stream of income payments to an
  owner or annuitant, regardless of the Contract
  account value
• Special Product features could include
• Bonus (5)
• Resets (automatic triennial reset or optional)

3
GMWBs are Seg Fund Products

• Benefits of Segregated Funds
• Guarantees on Death and Maturity
• Resets of Guarantees to capture market gains
• Estate and Probate bypass
• Potential for Creditor Protection on
  Non-Registered policies
• Deposit Protection through Assuris
• Taxation flows through Capital Gains/Losses each
  year

4
GMWB History in Canada
October 2008 Empire Life Class Plus Manulife
IncomePlus for life enhancement
April 2007 Sun Life Sunwise Elite Plus
December 2007 I.A. Ecoflextra
?
March 2008 Sun Life Sunwise Elite Plus for life
November 2008 Transamerica Five for Life
October 2007 Manulife IncomePlus Desjardins
Helios

• October 2006 Manulife IncomePlus
• 5 bonus for 10 years
• GWA (20 years)

5
Who will benefit from a GMWB?

• Pre-retirees
• 55-64 age group largest segmentprime savers
• meets accumulation needs
• Annual bonuses (provided no withdrawals are made
  during that calendar year)
• Post-retirees
• More saved, more to lose (first boomers hitting
  65 in 2011-2014)
• Want higher returns than GICs but with minimum
  downside risk
• Want to continue the control and flexibility of
  their investments and manage the payout of their
  wealth
• Dont want their nest egg to run out

Source insurance-canada.ca, May 8, 2007
6
Retirement Challenges

• Longevity Risk
• Market Risk
• Inflation Risk

7
Retirement Challenge 1

• Longevity Risk outliving retirement savings

Living longer
Retiring early
Source Canadian Employees Retirement Planning
and Savings, LIMRA, 2008
8
Retirement Challenge 2

• Market Risk Capital protection

Strong Early Return
Poor Early Return
Age
Rate of Return
Account Value
Account Value
Rate of Return
65
500,000
500,000
66
-27.00
340,000
27.00
610,000
67
-17.00
257,200
25.00
737,500
68
-2.00
227,056
23.00
882,125
69
9.00
222,491
9.00
936,516
70
23.00
248,664
-2.00
892,786
71
25.00
285,830
-17.00
716,012
72
27.00
338,004
-27.00
497,689
73
-27.00
221,743
27.00
607,065
74
-17.00
159,047
25.00
733,831
75
-2.00
130,866
23.00
877,612
76
9.00
117,644
9.00
931,598
77
23.00
119,702
-2.00
887,966
78
25.00
124,627
-17.00
712,011
79
27.00
133,276
-27.00
494,768
80
-27.00
72,292
27.00
603,356
81
-17.00
35,002
25.00
729,195
82
-2.00
9,302
23.00
871,910
83
9.00
0
9.00
925,381
9
Retirement Challenge 3

• Inflation Risk Impact on an income stream
• 1990s and 2000s, inflation rate ranged between 1
  to 3, compared to 10 in the 1980s.
• Reducing the rate to 3 means that it would take
  24 years for prices to double.
• Basket of Goods include food, shelter, furniture,
  clothing, transportation, and recreation.
• Source Bank of Canada, Inflation Calculator, as
  of October 7, 2008

• Source Canadianeconomy.gc.ca, as of May 04,
  2007

10
Will retirees maintain their standard of living
throughout retirement?
n1,500
Source Canadian Employees Retirement Planning
and Savings, LIMRA, 2008
11
How Will a GMWB Benefit Investors?

• Offers predictable / sustainable / guaranteed
  income
• (mitigates longevity and market risk)
• Income may potentially increase through resets
  and/or bonuses
• (mitigates inflation risk)
• Death Benefit Guarantee (DBG) of net deposits

12
Key Terms

• Income Base
• Bonus Base
• Income Base Bonus
• Guaranteed Withdrawals
• Lifetime Withdrawal Amount (LWA)
• Maximum Withdrawal Allowance
• Excess Withdrawals
• Guaranteed Payment Phase

13
Excess Withdrawals

• Occur when total withdrawals in a calendar year
  exceed the 5 guaranteed withdrawal allowance
• Result in an immediate downward adjustments to
  the Income Base to become the lesser of the
  Income Base or the market value after all
  transactions have been processed
• Result in possible lower income amount

14
Guaranteed Payment Phase

• Occurs when the market value is 0, but the
  Income Base still has a positive value
• The Contract will not terminate and payments will
  be made until

Maximum Withdrawal Allowance
Lifetime Withdrawal Amount

• On the death of the Annuitant.

• Income Base equals 0
• On the death of the Annuitant or
• The Contract reaches the Maturity Date.

15
Case Study 1
Income Now

• Richard age 65
• On June 1, 2008, deposited 400,000
• Wants to receive income immediately

16
Case Study 1(A) Down Market Scenario
450
Richard is guaranteed to receive 20,000 (5 of
400,000) for life
Thousands
400

350
300
250
200
150
100
50
0
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
Age
Withdrawals
Income Base (EOY)
Market value of Class Plus (EOY)
Note Market performance is based on hypothetical
rates of return after fees. For illustration
purposes, the Annual Fund Fee Rate is assumed to
be 0.75.
17
Case Study 1 (B) Up Market Scenario
Year 19
1,200
949K
Year 13
1,100
LWA47K
Thousands
826K
Year 16
Year 10
1,000
LWA41K
743K
664K
900
LWA41K
LWA33K
Year 7
800
512K
700
Year 4
Year 1
LWA25K
600
418K
380K
LWA21K
LWA20K
500
400
300
200
100
0
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
Age
Income Base (EOY)
LWA
Resets
Market value of Class Plus (EOY)
The chart values are based on year end values of
the Income Base after deducting withdrawals and
Annual Fund Fee Rate. For illustration purposes,
the Annual Fund Fee Rate is assumed to be 0.75.
The market value is based on a blend of 80
SP/TSX and 20 DEX Universe Bond Index, as at
December 31, 1988 to December 31, 2007.
18
Case Study 2
Income Later

• Sarah age 50
• On March 1, 2008, deposited 250,000
• Looking to retire in 15 years, after which she
  wants to receive a steady stream of retirement
  income.

19
Case Study 2 (A) Down Market Scenario
Age 65 LWA 21,875
500
438
250,000 X 5 12,500
425
413
400
450
Thousands
388
375
363
400
350
338
325
313
350
300
288
275
263
300
250
200
150
100
52
50
0
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
Age
Income Base Bonus
Market value of Class Plus (EOY)
Income Base (EOY)
Note The chart values are based on year end
values of the Income Base after deducting the
Annual Fund Fee Rate. For illustration purposes,
the Annual Fund Fee Rate is assumed to be 0.75.
20
Case Study 2 (B) Up Market Scenario
Year 19
End of bonus period
1,600
Reset
At age 65, Sarah's Income Base 1,044,032
Thousands
1,400
LWA57,428
LWA 52,202
Year 16
Year 13
1,200
No Reset
ResetBonus
1,000
Year 10
800
ResetBonus
Year 7
600
ResetBonus
Year 4
Year 1
ResetBonus
262,500
400
200
0
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
Age
LWA
Income Base (EOY)
Income Base Bonus
Reset
Market value of Class Plus (EOY)
The chart values are based on year end values of
the Income Base after deducting withdrawals and
Annual Fund Fee Rate. For illustration purposes,
the Annual Fund Fee Rate is assumed to be 0.75.
The market value is based on a blend of 80
SP/TSX and 20 DEX Universe Bond Index, as at
December 31, 1988 to December 31, 2007.
21
Scenario 3 Effect of RRIF Minimums on the LWA

• John age 72 has 100,000 in a RRIF Account
• Considering whether to
• Invest in GMWB Fund only (100,000) or
• GMWB Fund (60,000) and Regular Fund (40,000)

22
Scenario 3 - Minimum RRIF
Regular Fund 40,000 GMWB Fund 60,000
GMWB Fund 100,000
Regular Fund RRIF minimum amount 2,992
Note same rule applies for the Maximum
Withdrawal Allowance
23
Scenario 4 Effect of LIF/LRIF Maximum on the LWA
LWA lower than LIF/LRIF Maximum
LWA higher than LIF/LRIF Maximum
Note same rule applies for the Maximum
Withdrawal Allowance
24
Successor Annuitant

• The policy will continue on, without payment of
  the Death Benefit Guarantee
• A Reset is performed if Market Value is higher
  than
• Income Base and Bonus Base
• Death Benefit Guarantee will be performed if S/A
  is less than 80 years of age
• Guaranteed withdrawals will be recalculated
• If S/A is younger than 65 Maximum Withdrawal
  Allowance
• If S/A is older than 65 LWA
• S/A may be eligible to receive the Income Base
  Bonus if the Contract is within the accumulation
  period and she does not take out withdrawals

25
GMWB Fee

• The fee you pay for the GMWB benefits
• Annual Fund Fee Rate is Fund specific and ranges
  between 0.25 to 0.75
• Calculated using the Income Base, the Annual Fund
  Fee Rate, and fund weighting, recognizing the
  risk of the policy
• Withdrawn out of the market value of Fund Units
  based on proportional weighting of the funds
• Does not reduce the Income Base, DBG, or the MBG
• Waived during the Guaranteed Payment Phase

26
Target Client

• Appealing to those without corporate pension
  plans
• Age 50 and up (to benefit from resets and
  bonuses)
• Age 65 Lifetime Withdrawal Amount coincides with
  normal retirement age
• Conservative investors who require additional
  growth over GICs
• Growth-oriented investors seeking to protect
  accumulated assets
• Investors with pension plans who want to
  supplement that income with a similar sustainable
  income

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Who GMWBs are not for

• Investors interested in long term capital
  appreciation
• Investors with higher immediate income needs than
  available through GWA/LWA
• Investors without additional assets to meet
  emergency needs

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Alternate Income Strategies

• Scenario 100,000 deposit, high immediate
  income, low priority estate needs
• Consider a Life Annuity
• 65-year old male, single, 10-year guarantee
• 7,930.20 annual income - GMWB guarantees only
  5 of Income Base (5,000)
• Or, 64,933.92 will buy a life annuity paying
  5,000 for life
• Invest the remaining 35,066.08 in segregated
  funds _at_ 5 to provide estate values (253,405 _at_
  age 84) and/or inflation protection (SWP)
• Rates As of Dec. 10/08

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Alternate Income Strategies

• Scenario 100,000 deposit, medium immediate
  income, high priority estate needs
• Consider an Insured Annuity Strategy
• Provides a guaranteed income at less tax for life
  and preserves or increases the original capital
  for heirs. A prescribed annuity provides the
  income. A life insurance policy pays a tax-free
  benefit on death, preserving the capital.

30
Alternate Income Strategies

• Scenario 100,000 deposit, medium future income,
  high priority estate needs
• Consider an Insured Retirement Strategy
• Provides a supplemental source of tax-free cash
  during retirement. The cash can be structured as
  a lump-sum or series of income-style payments. A
  custom-designed, permanent life insurance policy
  is used, first to accumulate cash on a
  tax-deferred basis and second, as collateral for
  a bank line of credit to provide the cash
  desired.

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To GMWB or Not to GMWB?