Variable Annuities

Geoff Cook - CFP, CHAIP

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Stock Market volatility and low interest rates stressing out your retirement income?

Guaranteed Variable Annuities provide a guaranteed floor of growth (prior to withdrawals) of 5% per year, and a guaranteed floor of income in the withdrawal phase of retirement. The guaranteed floor of income in retirement is 5% annually starting at age 65, and increases the later you decide to start your withdrawals, guaranteed for life.

We believe a variable annuity strategy is most suitable for investors who are concerned about market volatility, are approximately 10-15 years away (or less) from requiring income and want to insure, or guarantee a base level of growth and income on retirement capital. A variable annuity strategy addresses the retirement risk zone when market volatility can have a significant negative impact on retirement income.

The retirement risk zone is just before and just after retirement when investments are being converted to income.

Variable annuities differ from traditional annuities in that the guaranteed withdrawal base (invested amount plus 5% annual bonuses) will increase if the market value of the underlying portfolio is greater that the guaranteed withdrawal base on each third anniversary of the investment. An increasing guaranteed withdrawal base will result in a higher guaranteed income stream in the withdrawal phase.

In other words portfolio gains are locked in every three years.

The guaranteed income for life is based on the guaranteed withdrawal base, and not the market value of the underlying portfolio. This eliminates uncertainty in determining potential retirement income.

In contrast to a traditional annuity, remaining capital with a variable annuity will pass on death to the beneficiary of the account and not to the insurance company. Variable annuities are an excellent strategy for guaranteeing a floor of growth prior to retirement, and a guaranteed floor of income in retirement for life.

A guaranteed variable annuity strategy allows individual investors to replicate the security of a defined benefit pension plan. A variable annuity is a risk management strategy offering additional diversification away from traditional asset classes.

Since the day variable annuities were introduced in Canada the products have gone through constant changes leading to less beneficial products for investors. This is largely because of a difficult investing environment for Life Insurance companies. We believe one day these products will be adjusted down to the point where they are no longer attractive.

To view a recorded presentation of how variable annuities work click here

When dealing in financial matters, you are urged to consult an advisor for legal, tax or investment advice. Every effort has been made to present information in a clear, exacting manner. However neither the publisher nor the authors can be held responsible for any losses incurred due to the actions of any individual as the result of this post or any errors or omissions contained herein.

Infinite Financial places mutual fund transactions through Banwell Financial Inc. and Life Insurance transactions through Bridgeforce. To learn more about these relationships - click here

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