BY: FAZAAD BACCHUS
This is the last of a three-part series where we discussed the challenges facing Canadians as it relates to their retirement planning. As mentioned before when someone is in retirement and especially if they do not have any part-time income, it is most important to preserve their money to make sure that do not outlive their nest egg.
To recap, we talked about many options a person has at retirement.
1. Cashing in their Registered Retirement Savings Plan
2. Converting their Registered Savings Plan into a Registered Retirement Income Fund
3. Converting their Locked in Retirement Plan into a Life Income Plan
4. Splitting their Locked in Retirement Plan to a 50% Registered Retirement Plan and 50% in Locked in Retirement Plan
5. Purchasing an immediate or payout annuity
Today I would like us to focus on an option which is a favourite of mine. Guaranteed Lifetime Withdrawal Benefit (GLWB). In most of your previous options, the income was never a guarantee and you could run out of money with the exception of the annuity. However, as we saw with the annuity, while you may live a long life and receive most of the payout, chances are if you died too soon there may not be much left to pass on to your heirs.
The principle behind the Guaranteed Lifetime Withdrawal solution is to ensure that you will have a lifetime income and still pass on the remainder of your investments to your heirs.
This is the way it works, let’s say that a person retires and has $200,000 of total savings. Let’s imagine that this savings is made up $125,000 RRSP, $50,000 TFSA and $25,000 in chequing. Should this person wish they could deposit all of their portfolios in a GLWB and have a maximum income for life.
But what if this person needs some money for travel or medical emergency at any time in the future, they will have to break their contract by making excess withdrawals. A good plan would be to sit down with your financial advisor and calculate how much money you will need for your monthly expenses, then deduct any CPP and pension benefits you will be receiving. Now based on the difference you can now decide how much money you will invest in the GLWB solution. A person should never deposit all their savings in a GLWB.
Having made your deposit and affected your contract the company can start to pay you the following month a guaranteed income for life. If you think about it, if you have a guaranteed CPP, a guaranteed OAS and a guaranteed GLWB, you should never run out money. What happens to your money (deposit) while you are receiving a GLWB. Well that money is being invested by your financial advisor so that it can continue to grow. If for some reason, and it has happened where your money is greater than when you started out, the company will increase your GLWB.
And what happens if you were to pass away too soon, is all your money lost? The answer is no! Your deposit is now passed on to your beneficiaries many times without having to go through probate.
I know it may sound complex, but it can work for you, just make sure the advisor is doing the right thing.