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Guaranteed Retirement Income is the New Black

Most Canadians no longer enjoy employer-sponsored pension plans. In fact, according to Statistics Canada, only 27 per cent of employed Canadians in the private sector have access to them. And that small minority isn't exactly feeling safe these days. The recent market meltdown has placed pensions under severe strain, leaving workers and retirees at companies like General Motors, Nortel and Air Canada anxious about their once-secure fate.

Instead, the overwhelming majority of working Canadians are counting on CPP, OAS and RRSPs for income in retirement. That accounts for the dread many feel, especially those not likely to see their RRSP rebound before they stop working. As for government plans, many wonder if they'll even be around. In a recent survey, nearly one quarter of Canadians entering retirement and almost 40% of those still working worry they will not be able to benefit from a government plan when they retire.1

In effect, the global financial crisis has created the equivalent of a major wardrobe malfunction for retirees and those dreaming of hanging up the cleats someday. That's why there's been a critical shift in thinking about retirement income lately. More investors are trying to recapture the security of a traditional pension by seeking out guaranteed income for some portion of their retirement portfolio.

Professor Moshe Milevsky—a professor at York University and Canadian financial industry expert—refers to the search for guaranteed income as "product allocation." Unlike asset allocation, product allocation makes a distinction between investment products that are guaranteed by promises versus those that move with the ups and downs of the stock market. For example, an investor in an RRSP doesn't enjoy the same implicit guarantee as someone in a traditional pension. Their asset allocation might be the same, but their product allocation is markedly different.

With the risk of a prolonged market decline early in one's retirement too significant to ignore, investors are opening up to solutions like a guaranteed minimum withdrawal benefit (GMWB). Recently introduced to Canada, the GMWB offers a steady, sustainable and potentially increasing income stream that is guaranteed for a set period, or even for life.

A GMWB, traditional pension, RRSP, CPP and OAS can all be potential sources of retirement income that work in harmony. The idea is not to choose one at the exclusion others. Instead, if having some degree of income security is important to you, work with an advisor to determine the best mix ideally suited to your needs. That kind of retirement income planning never goes out of style!

1National Bank Financial Group Retirement Survey Presentation (Summer 2008)

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