“Traditionally, as we get older we reduce risk, typically going from equities to lower risk assets like bonds or even cash. While that reduces market risk, it introduces significant longevity risk because you have a greater risk of outliving your savings,” Savage says. “Enter segregated funds. They provide guarantees like a death benefit and maturity guarantees that can give people the comfort they need to stay invested in some riskier assets, knowing that they aren’t going to lose their principal and ensuring they can leave a legacy.”
Savage stresses the importance of those guarantees and life benefits as well as seg funds’ capacity to accumulate in the leadup to retirement. He notes, though, that these products are not a panacea. They don’t provide guarantees of retirement income. He suggests that advisors may want to use these products in line with a life annuity purchased for clients in their retirement, to provide a guaranteed source of monthly income that can work together with CPP, OAS, and any needed asset drawdowns to support a client in retirement.
In using insurance products like seg funds and annuities to provide longevity protection advisors need to be clear and open with their clients about what can and can’t be done through these products. Savage believes that their uses need to start from the question of what they’re afraid of in retirement. These products can suit different priorities, be they the maintenance of adequate cash flow, leaving a legacy for their loved ones, or living a certain lifestyle.
The guarantees that come with seg funds and annuities can form the core that addresses those more fundamental needs. That core then frees up clients’ risk appetites for additional market growth exposure, which can be essential if those clients want to beat, or at least keep pace with, inflation over a multi-decade retirement.
As the needs of Canadian retirees have evolved, firms have adapted their product sets to match. Savage explains that Manulife has re-entered the payout annuity space in the past few years and increased the guarantee option for their segregated fund platform, moving from a 75 per cent guarantee on death and 75 per cent guarantee on maturity model, to 100 per cent guarantees on both death and 75 per cent guarantees on maturity. From an asset allocation perspective, Savage notes that there have been more calls for passive investments and indexing to help manage fees associated with those products.