Case study RRSP to RRIF account. The story of Robert and Elizabeth

Transcription

1 Case study RRSP to RRIF account The story of Robert and Elizabeth

2 Effective November 1, 2016, Fiera Capital assumed responsibility for the funds risk management overlay strategy. CI has appointed Fiera Capital to replace HRS Capital ( HRS ) following a change in business model at HRS and the transfer of the key risk management overlay managers from HRS to Fiera Capital. As a result, the team that was responsible for the G5 20 risk management overlay strategy at HRS will continue to manage the strategy at Fiera Capital. They have been responsible for the G5 20 risk management overlay strategy since November Please note that in the following document any reference to HRS Capital should be treated as a mention of Fiera Capital _E (11/16)

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4 Robert and Elizabeth Investing in an RRSP and looking to retire in the short term Robert and Elizabeth, both 60, are married and looking forward to retiring in about five years. Elizabeth is fortunate to have a company pension plan. Robert worked for a company that did not have a pension plan and has been contributing regularly to an RRSP. His RRSP, along with government benefits (Canada Pension Plan and Old Age Security) will make up the majority of his retirement income. Robert and Elizabeth realize that market growth can potentially enhance their lifestyle in retirement, and want to benefit from that opportunity. However, with the 2008 financial crisis still fresh in their minds, they are concerned that market volatility can affect their retirement. During the financial crisis, one of Robert s colleagues was only a year from retirement, but was forced to change his retirement plans and continue working for an additional four years to recover his market losses. Robert and Elizabeth need assurance that this will not happen to them.

5 Where Robert and Elizabeth stand: looking to fill their income gap Their financial advisor estimates that they will initially need an annual, combined cash flow of at least $70,000 to cover their living expenses during retirement. They also require potential for growth in order to help address inflation and provide liquidity in the event of an emergency. Elizabeth s pension, along with their combined government benefits, will provide them with $56,900 annually. They are dependent on Robert s $350,000 in RRSP assets to provide annual cash flow of $13,100 to cover their income gap. The amount to cover the income gap must be guaranteed since a significant portion of their essential expenses are to be addressed with this amount. In addition, they need to be mindful of meeting the RRIF minimum annual payment (MAP) requirements while also providing potential for growth to help supply the extra funds they may need. Annual guaranteed cash flow requirement $70,000 Less Elizabeth s employer pension benefits $28,500 Less Elizabeth and Robert s combined government benefits $28,400 Income gap (guaranteed cash flow required from Robert s RRSP) $13,100

6 The challenge Security and certainty of sustainable cash flows without sacrificing growth potential In a period of unpredictable volatility in equity markets and historically low interest rates, creating a balanced investment approach that can provide sustainable cash flow and growth potential during retirement presents a considerable challenge. Robert and Elizabeth s primary investment focus, as they transition into retirement, is certainty of cash flows. They also require growth potential in order to address the effects of inflation and fund potential discretionary expenses. Robert s RRSP savings need to: Guarantee predictable and sustainable cash flow throughout retirement, to fill his and Elizabeth s income gap. Potentially increase the guaranteed cash flow in order to mitigate the effects of inflation and fund any unexpected cash flow requirements. Provide capital appreciation potential to help keep pace with inflation, fund any unexpected cash flow requirements and leave assets to his estate. Reduce overall volatility to provide smooth investment returns prior to and during retirement, bringing him peace of mind. Meet RRIF MAP requirements without putting pressure on his retirement plan. Guarantee the same level of cash flow to Elizabeth in the event Robert passes away before her. Address sequence of return risk (the risk of receiving lower or negative returns early in a period when withdrawals are made) now that they are starting to draw from their savings and rely on this cash flow for their retirement.

7 The strategy Guaranteeing cash flow streams through mutual fund product allocation In order to guarantee cash flow and optimize Robert s portfolio performance, he and his advisor employ a retirement-focused asset allocation strategy that provides sustainable guaranteed cash flow, asset protection, growth potential and liquidity to allow him to meet RRIF MAP requirements without affecting his guaranteed cash flow. Given the couple s annual cash flow shortfall of $13,100, and assuming a 5% payout rate, they estimate that they should invest at least $262,000 to guarantee the annual cash flow necessary to cover their income gap. However, their advisor recommends a larger allocation to a guaranteed product in case living expenses are higher than anticipated, and to ensure that the MAP is higher than their annual income gap. This approach simplifies the financial planning process and provides a safety net if the couple s cash flow requirements increase. Within Robert s RRSP account, they decide to: Invest 100% ($350,000) in the five-year accumulation version of G5 20 Series, guaranteeing a minimum annual cash flow of $17,500 (5% of $350,000), and Over time, invest any excess guaranteed cash flow above the RRIF MAP into a conservative balanced mutual fund. Additionally, and to mitigate the effects of inflation, G5 20 Series has the potential to increase the cash flow at least every three years in positive market conditions. The guaranteed cash flow can increase but never decrease through an automatic locking in of a portion of fund gains. G5 20 Series exposure to equity markets also provides opportunities for capital appreciation. Although G5 20 Series can meet Robert s retirement needs and he can choose to withdraw the entire amount of the annual guaranteed cash flow, the allocation of excess guaranteed cash flows to the conservative balanced mutual fund ensures there is liquidity available to fund unforeseen expenses without affecting the couple s retirement plan or impacting the guaranteed cash flow from G5 20 Series. Furthermore, in later years of retirement, the allocation to the mutual fund can be used to help cover MAP payments that are greater than his guaranteed G5 20 Series distributions without having to redeem units of G5 20 Series.

8 The result A predictable, guaranteed outcome and growth potential In five years, when Robert and Elizabeth are ready to retire, Robert s portfolio benefits from the asset allocation and security selection of CI s fund managers and his Guaranteed Asset Value is $356,653 1 as a portion of the fund s gains are locked in. G5 20 Series also has contributed to this growth through the retention of an independent portfolio manager to solely focus on minimizing the volatility of the equity portion of the portfolio, addressing Robert and Elizabeth s wariness in participating in the markets and not jeopardizing the value of their investments in the key years leading up to retirement. Cash flow during first year of retirement Annual cash flow requirement $70,000 Less Elizabeth s company pension benefits $28,500 Less Elizabeth and Robert s combined government benefits $28,400 G5 20 Series guaranteed cash flow from Robert s RRIF $17,833 Annual cash flow exceeding income gap $4,733 Results are based on historical returns. See next page for additional details. Robert s allocation to G5 20 Series provides him with guaranteed annual cash flow of at least $17,833 for 20 years, as opposed to his initial estimate of $17,500, as a portion of the fund s gains are locked in. Robert s guaranteed cash flow cannot fall below this level for the duration of the fund s lifespa n, and has the opportunity to increase in positive markets. At age 65, he converts his RRSP to a RRIF and begins drawing his guaranteed distributions. Five years into retirement, when Robert is 70, equity markets 2 experience a significant decline, equivalent to the 2008 financial crisis. G5 20 Series dynamic risk management strategy protects Robert s portfolio as it shields his investment from the full effect of the market decline. And his guaranteed cash flow remains unaffected by the downturn. G5 20 Series allows Robert s portfolio to participate in the growth of equity markets and provides protection from market corrections. Robert passes away from an illness at age 79. His wife is the beneficiary of his RRIF and other assets. Elizabeth continues to receive the same level of guaranteed cash flow for the remaining years until the G5 20 Series fund reaches its end date. 1 This is the Guaranteed Asset Value. 2 Equity markets as represented by equal allocations to the S&P/TSX Composite Index, S&P 500 Index (C$) and MSCI EAFE Index (C$).

9 Robert s RRSP/RRIF account G5 20 Series Analysis 500,000 Distribution Phase 400,000 Market Value ($) 300, , , Years G5 20 Fund Conservative Balanced Mutual Fund Equity Index Investing GIC Annual Cash Flow 30,000 Value ($) 20,000 10, Years G5 20 Guaranteed Cash Flow Redemption from Conservative Balanced Mutual Fund to fund RRIF MAP GAV Increase The rate of return scenario has been modelled on rolling historical returns from 1990 to 2014 for G5 20 Fund. Equity Index Investing returns reflect the historical returns of the S&P/TSX Composite Index for Canadian returns, S&P 500 Index for U.S. returns and MSCI EAFE Index for international returns, with an equal weight given to each. Income returns reflect the historical returns of the DEX Universe Bond Index. The hypothetical rates of return in the illustration for Conservative Balanced Mutual Fund and G5 20 Fund are compounded annual returns net of applicable MER over the illustration period. The G5 20 Fund returns are also net of a Risk Management Overlay. GIC returns are based on historical 1, 3 and 5-year rates from the Bank of Canada from 2001 to 2014 with an equal weight given to each.

10 The table below shows dollar values for G5 20 Fund, Conservative Balanced Mutual Fund, GIC and Equity Index Investing from the chart on the previous page. During the first 13 years of retirement, Robert s RRIF MAP is lower than his G5 20 Fund s guaranteed annual cash flow. Therefore, he withdraws the MAP, and invests the difference into the conservative balanced mutual fund and allows it to continue to grow. In the latter years of retirement, Robert s MAP is greater than his G5 20 Fund s guaranteed cash flow as a result of the increasing MAP factor and strong fund performance. He receives his guaranteed G5 20 Fund distributions and supplements the difference to meet the MAP by redeeming units from his conservative balanced mutual fund. Product allocation to a conservative balanced mutual fund ensures that the guaranteed cash flow stream from his G5 20 Fund remains fully intact. In addition, if unexpected expenses were to arise, Robert can redeem units from the conservative balanced mutual fund, rather than from his G5 20 Fund, ensuring his guaranteed cash flow remains intact. Year Age Rate of Return G5 20 Fund Cash Flow Market Value GAV Cash Flow Conservative Balanced Mutual Fund RRSP to RRIF Account GIC Market Value Total Market Value MAP Factor MAP Total Cash Flow Cash Flow Market Value Equity Index Investing Cash Flow Initial Investment $350,000 $350,000 $0 $0 $350, % $0 $0 $0 $350,000 $0 $350, % $0 $379,191 $350,000 $0 $0 $379, % $0 $0 $0 $354,217 $0 $416, % $0 $388,172 $350,000 $0 $0 $388, % $0 $0 $0 $358,773 $0 $391, % $0 $363,306 $356,653 $0 $0 $363, % $0 $0 $0 $370,613 $0 $333, % $0 $332,224 $356,653 $0 $0 $332, % $0 $0 $0 $382,102 $0 $266, % $0 $336,830 $356,653 $0 $0 $336, % $0 $0 $0 $391,029 $0 $298, % $17,833 $333,757 $356,653 $0 $4,359 $338, % $13,473 $17,833 $17,833 $381,471 $17,833 $301, % $17,833 $341,661 $356,653 $0 $8,210 $349, % $14,088 $17,833 $17,833 $371,764 $17,833 $311, % $17,833 $363,861 $360,257 $0 $11,324 $375, % $15,212 $17,833 $17,833 $364,989 $17,833 $346, % $18,013 $339,535 $360,257 $0 $12,153 $351, % $17,054 $18,013 $18,013 $358,451 $18,013 $310, % $18,013 $286,159 $360,257 $0 $12,513 $298, % $16,747 $18,013 $18,013 $349,572 $18,013 $195, % $18,013 $283,478 $360,257 $0 $16,078 $299, % $14,934 $18,013 $18,013 $336,067 $18,013 $208, % $18,013 $281,689 $360,257 $0 $19,704 $301, % $15,817 $18,013 $18,013 $322,520 $18,013 $205, % $18,013 $266,808 $360,257 $0 $21,665 $288, % $16,275 $18,013 $18,013 $309,055 $18,013 $171, % $18,013 $259,141 $360,257 $0 $25,163 $284, % $15,953 $18,013 $18,013 $294,926 $18,013 $168, % $18,013 $267,333 $360,257 $0 $28,730 $296, % $16,120 $18,013 $18,013 $280,466 $18,013 $193, % $18,013 $259,230 $360,257 $0 $31,726 $290, % $17,231 $18,013 $18,013 $266,061 $18,013 $196, % $18,013 $228,224 $360,257 $0 $30,937 $259, % $17,399 $18,013 $18,013 $256,829 $18,013 $145, % $18,013 $248,813 $360,257 $0 $36,869 $285, % $15,990 $18,013 $18,013 $246,777 $18,013 $149, % $18,013 $242,141 $360,257 $157 $38,808 $280, % $18,169 $18,169 $18,013 $234,530 $18,013 $134, % $18,013 $271,397 $360,257 $474 $42,350 $313, % $18,486 $18,486 $18,013 $221,480 $18,013 $150, % $18,013 $247,304 $360,257 $3,385 $44,063 $291, % $21,398 $21,398 $18,013 $208,185 $18,013 $138, % $18,013 $272,806 $360,257 $2,616 $43,383 $316, % $20,629 $20,629 $18,013 $196,364 $18,013 $142, % $18,013 $287,908 $360,257 $5,322 $45,148 $333, % $23,335 $23,335 $18,013 $184,525 $18,013 $148, % $18,013 $299,780 $360,257 $7,666 $41,135 $340, % $25,679 $25,679 $18,013 $171,214 $18,013 $155, % $18,013 $306,188 $360,257 $9,533 $37,311 $343, % $27,546 $27,546 $18,013 $155,409 $18,013 $166,538 Total $359,717 $29,151 $359,717 $359,717 Market Value Over the 25 years, the G5 20 Fund mitigated sequence return risk and outperformed the GIC and Equity Index Investing strategies.

11 Summary Despite market volatility, Robert s cash flow is never in doubt After 25 years, the G5 20 Series fund reaches its end date. What have Robert and Elizabeth received from the original $350,000 investment? They have received from G5 20 Series $359,717 in guaranteed cash flow, representing an increase of 3% based on the original investment, and received the fund s residual value of $306,188. They also received $29,151 in cash flow from their conservative balanced mutual fund, and were left with a residual value of $37,311. Best of all, Robert and Elizabeth were able to live with peace of mind during their retirement. Initial investment G5 20 Series Conservative Balanced Mutual Fund Initial investment $350,000 $0 Cash flow Residual value $359,717 (guaranteed cash flow of 5% increased by 3% based on original investment) $306,188 (after receiving 20 years of guaranteed cash flow) $29,151 $37,311 Using a historical return scenario with a significant market downturn occuring in Year 10 as illustrated in the CI Guaranteed Cash Flow Series calculator at G5 20 Series also offers additional benefits: Flexibility to lock in current market gains by switching to new G5 20 Series tranches. Potential to transfer all of G5 20 Series benefits, including the guaranteed cash flow, to a beneficiary. Key product features cannot be changed and fees cannot be increased without consent from the fund s unitholders.

12 An ideal and flexible solution for retirement accounts Retire in less than 5 years Let s assume that Robert were to retire in three years, instead of in five years. Investing in a balanced mutual fund for three years and then switching to G5 20i Fund, the immediate payout version, would expose him to market fluctuations; if markets experience a downturn, the value of his mutual fund would decrease, reducing his guaranteed cash flow once he switches to G5 20i. The solution is to invest in G5 20 Series five-year accumulation fund, while putting aside two years of living expenses in a conservative mutual fund. This way, Robert can lock in a guaranteed annual cash flow amount (which can only increase but never decrease) that he will start receiving in five years, regardless of what the market does, while allowing for upside participation. When he retires in three years, he will draw income from the conservative mutual fund for two years, after which he will start receiving guaranteed annual cash flow from his G5 20 Series fund. This approach can be tailored to any time frame that is less than five years. Retire in more than 5 years Alternatively, let s assume Robert were to retire in seven years, instead of in five years. Investing in a balanced mutual fund for two years and then switching to G5 20 Series would expose him to a potential market downturn during the first two years, which would reduce his guaranteed cash flow once he switches to G5 20 Series. The solution is to invest in G5 20 Series five-year accumulation fund, and reinvest the first two years of guaranteed cash flows into a conservative mutual fund. This creates a cash reserve that can be used later in retirement if need be, while G5 20 Series provides Robert with sustainable and predictable income once he retires. Instead of worrying about potential negative market performance for two years, investing in G5 20 Series gives Robert peace of mind, knowing his cash flow is guaranteed, and can never decrease. Finally, with the availability of an immediate cash flow version of the fund, Robert can immediately access guaranteed cash flows through a fund switch if he decides to retire earlier.

13 brings together CI s leading portfolio managers. This document is intended for advisor use only and is not a sales communication. All charts and illustrations in this document are for illustrative purposes only. They are not intended to illustrate the performance of any portfolio. This document is not intended to provide individual financial, investment, tax, legal or accounting advice nor shall the information herein be considered as investment advice or as a recommendation to enter into any transaction. Professional advice should be obtained prior to acting on the basis of this information. All numbers in this case study have been rounded. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Except as described below, mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Bank of Montreal guarantees that at least the original amount you paid for the fund unit will be paid back to you over a 20-year period in equal monthly instalments. This guarantee does not apply to units redeemed before the end of that period. You will receive the net asset value per unit for any unit redeemed early. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. BMO Financial Group and Bank of Montreal are marketing names (also referred to as trade names or brand names) used by Bank of Montreal. BMO, BMO Financial Group, BMO (M-bar roundel symbol) Financial Group, Bank of Montreal and BMO Capital Markets are trademarks owned by Bank of Montreal. CI Investments, the CI Investments design, CI Guaranteed Retirement Cash Flow Series, G5 20 Series, Cambridge, Harbour Advisors and Harbour Funds are registered trademarks of CI Investments Inc. Signature Funds, Signature Global Asset Management and G5 20 Series design are trademarks of CI Investments Inc. Cambridge Global Asset Management is a business name of CI Investments Inc. used in connection with its subsidiary, CI Global Investments Inc. Certain portfolio managers of Cambridge Global Asset Management are registered with CI Investments Inc. Published March Queen Street East, Twentieth Floor, Toronto, Ontario M5C 3G7 I Head Office / Toronto Calgary Montreal Vancouver Client Services English: French: _E (03/16)