Janea Bellay

There is a lot of information being advertised about guaranteed investment funds (or GIF’s). Some clients ask, “how can they do this”? “Why are companies insuring my investment”? “What are these guaranteed investment funds”? I hope I can clear up the information!

Do volatile markets give you the jitters? You’re not alone! The closer you are to retirement, the greater the risk to your savings. Your lifestyle and how long your savings last can change drastically if the value of your investments were to drop just as you are about to retire.

That’s why guaranteed investment funds are worth looking into. It is part of a new generation of investments that allow you take advantage of market upturns and protect you against the downturns.

A guaranteed investment fund is a type of investment offered by insurance companies. It allows clients to invest in low risk to high risk mutual funds (dependent upon the client`s risk tolerance) while promising that the initial investment will be available at the fund maturity (usually 10 years) or when the client dies.

There is an additional charge to have this type of guarantee. Usually when you purchase mutual funds from your financial service provider, you pay a small fee to have someone else manage your money. This can be 0.5% to 3%. To have a guarantee put on your investment, can cost you an additional 0.5% to 1%. These are known as Management Expense Ratios and come with any type of mutual fund you purchase.

But — How much are you willing to pay to know that at least your deposit is guaranteed to be there while you invest in mutual funds and take advantage of increases in the market?

In addition to the guarantee on your initial deposit there are also other features of guaranteed investment funds that are worth looking at:

1) Annual resets -

Each time the market increases, this gives you the opportunity to reset your guaranteed investment. This allows you to lock in your investment when your investment increase in value because of market increases.

For example – suppose an investor near retirement age had invested $500,000 into this fund and after a incredible bull run, his investment grows to $542,500 in a year. By resetting the guarantee at this point in time, the investor has now guaranteed that he will at the very least receive $542,500 when he decides to retire and start to receive income from his investment.

2) Bonuses -

Within some of the guaranteed investments, the insurance company offers a bonus on the initial investment for each year you leave your investment in the fund and do not withdraw any of the funds.

For example – In the Desjardins Helios contract, you can receive a 7% Annual Bonus for the first 10 years you leave your money in your investment.

3) The choice of a Lifetime Benefit or a Minimum Benefit

Within some of the guaranteed investments, there is a choice of how you want to receive your retirement income.

• Guaranteed Lifetime Withdrawal Benefit: This allows minimum withdrawals from the invested amount without having to annuitize the investment (i.e. take regular distributions). The amount that can be withdrawn is based on a percentage of the total amount invested in the annuity. In most cases, if you were to access the funds in the annuity you would have to either annuitize it, which creates regular distributions, or face fee penalties. The GLWB allows access to the invested capital, regardless of the performance of the investment, and continues to maintain and invest in the annuity. The percent of the allowable withdrawal will depend on the contract, but can be increased in most cases if the date at which the annuity payments begin is delayed.
• Guaranteed Minimum Withdrawal Benefit – Allows you the ability to protect their retirement investments against downside market risk by allowing the annuitant the right to withdraw a maximum percentage of their entire investment each year until the initial investment amount has been recouped.The best aspect of this guarantee is that it protects you against any investment losses that have been incurred without losing the benefit of upside gain. For example, suppose that Jamie’s initial investment was $100,000, but due to downturns in the economy, the investment is now only worth $85,000. Since Jamie had purchased a guaranteed minimum withdrawal benefit with a rate of 10%, she will be able to withdraw a certain percentage each year (in this case, $8,500) until the entire $100,000 is recovered.

Guaranteed Investment Funds are a good way to protect your retirement investments. You should speak with your financial advisor to determine if this is the right investment for your portfolio.