Managed Money Reporter Newsletter — Issue 233, December 2006
Editors: Carl Spiess & Allan McGlade
By Allan McGlade, CFP, CLU, Senior Investment Executive
Last month, we wrote about the transition to retirement that many baby boomers are and will be facing in the coming years. We have been reviewing the many investment options that we have available to help our clients with this transition. Manulife GIF Select featuring IncomePlus is the first product of its kind in Canada that helps investors who are transitioning into retirement and looking for guaranteed income AND to stay invested in the market for growth.
This transition period - roughly the 5 to 10 years prior to and after retirement - is a particularly sensitive time for your portfolio. Manulife identifies this as the retirement risk zone. The risk is the possibility of a significant downturn in the market like we saw in 2001 and 2002, erasing a portion of your hard earned capital right at the time when you need it the most. Not only would you reduce your base for income, but making withdrawals while your asset value is declining will compound the problem and deplete your capital even more quickly, significantly jeopardizing the ability of your assets to support your retirement plans. Manulife's GIF Select with IncomePlus addresses this risk by allowing investors to stay invested in the equity markets, well into retirement. IncomePlus also offers a guaranteed bonus leading up to retirement and guarantees the return of your capital during the withdrawal phase. So how does it work?
GIF Select with IncomePlus is a segregated fund, which is very similar to a mutual fund - you invest according to your objectives and choose from a group of brand name funds. Once you start withdrawing from the account, Manulife guarantees that you will receive no worse than your principal back over a 20-year period. In other words they will guarantee you 5% of the value every year at the time you start withdrawing. They will also reset the value of the account every three years, to a maximum of 10 resets. If the value at the time of reset is greater than your initial investment, the guarantee amount is reset to the higher value and the withdrawal period is set at another 20 years withdrawal period and your available income is 5% of the new value.
Plus, during the first 10 years of the contract, if no withdrawals are made (most likely you're still early in your transition into retirement), GIF Select with IncomePlus offers a 5% non-compounding bonus per year, which may increase the total amount of guaranteed payments you can receive.
If you are approaching retirement or are already retired and largely invested in bonds, we think this product is worth consideration. For more details visit the Manulife web site (see links below) or contact us at 416-863-7777 or 1-800-387-9273.
Please see a lighthearted version of our annual greeting card. Since we haven't had any changes to our team in the last year (and really no changes except for the addition of our part-time student Claudia in the last four years) we didn't take another photo this year. Rather, we've got a caricature of the team! (Hover over the caricature to see last year's picture.)
In lieu of client gifts, a significant contribution has been made to the 2006 United Way Campaign as thanks to all our clients for their business. All the best to you and yours for the holiday season!
In the past few weeks we have been fortunate enough to congratulate many clients whose assets have reached personal investment milestones. In this rising market, it is very rewarding for us to contact clients as their accounts reach a quarter, a half, three-quarters of a million dollars or more! (FYI, 1.5 million qualifies a client for our Heritage program.) Over time, and with regular contributions and careful investment management, even small accounts grow into large ones.
Overall, our client assets have now reached the $750 million dollar mark (see chart, below), which at three-quarters of a billion dollars, is also a milestone. We thank all our clients for being a part of this growth.
The 12th annual investment awards were recently presented in Toronto. A wide variety of fund companies, investment firms and others were recognized for their excellence. AGF wound up with the largest number of awards, including "Advisor's Choice", and Sceptre took home "Fund Manager of the Year". Mackenzie, whose website we have featured recently in our site of the month, took the new "IFIC Education Award". Importantly, all of the winning funds are among those available to you through ScotiaMcLeod.
ScotiaMcLeod's RRSP statements calculate your plan growth and also show your average cost. Both measures are not enough to actually evaluate how your account is doing (and both actually underreport your performance), so we can provide more details if requested.
Calculating investment performance or account growth is actually a bit more complicated than you might initially think. For example, if you invested $10,000 ten years ago, and it fluctuated yearly but grew to $30,000 over 10 years, that would be 200% total growth or around a 12% annual growth rate, which is certainly impressive. Now if in the last year, you invested another $90,000, and it didn't grow at all in the one year, you would now see on your statement that you put in $100,000 over 10 years, and it is worth $120,000, and it would appear like an unimpressive plan growth of $20,000 over 10 years or 20% total growth or only 1.8% a year. But not all the money was invested for the full 10 years, so we need to look at the "time weighted" not "dollar weighted" returns to get a full picture of true investment performance.
Please contact us if you would like a detailed performance review of your account.
Speaking of fund dividends and average cost, please note that many funds pay out dividends in the month of December, representing interest, dividends and capital gains that the funds received over the year. The effect of the dividend is that the share price drops, and you receive the exact number of new shares at the lower price making up for the entire drop in value. (It is a good idea to hold off on new fund purchases in non-registered accounts until later in December, so your new purchase is not into a fund that is about to have a large taxable distribution.)
So the bottom line is that there is no need to be concerned when you see fund prices dropping in December, In most cases, it will be due to a dividend on the fund.
The Individual Finance and Insurance Decisions Centre (IFID - not the same as last month's link, IFIC) is a non-profit corporation dedicated to generating advanced research and consulting work at the intersection of wealth management, personal finance and insurance. Their current research report on retirement asset allocation and income rates is very interesting, and recommended for any investment advisor, even if it is a bit too detailed for the novice investor. Carl will admit though, that he enjoyed the detail and occasional bits of humour in their recent working paper, but most people would likely find it a bit too technical.
ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.
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The Spiess McGlade Team is a personal trade name of Carl Spiess and Allan McGlade.