With the decline in interest rates over the past 20 years, conservative retirees have become more and more open-minded to looking beyond traditional GIC investments.
GICs, or Guaranteed Investment Certificates, have long been a preferred investment for risk-adverse investors who want to earn as much interest as possible, without taking any risk with to the money they invest.
However, as interest rates have declined, particularly in the past decade, the biggest risk these investors face is the erosion of their life savings as their income needs force them to withdraw both the capital they have invested plus the interest earned just to meet their growing expenses.
While the cost of living is always rising, the interest earned on GICs has continued to decline. In fact, the annual interest on $200,000 in GICs prior to the 2008-09 financial crisis would have been approximately $12,000, assuming the 6% rates available at that time. However, even investors willing to lock into a Five Year GIC today at a top rate of 1.6%, will only earn $3,200 interest on that same $200,000.
So what is today’s mature investor to do?
Some investors may be willing to consider an investment into the financial markets where rates of return have traditionally been much higher than the interest paid on GICs. However, making a leap into the stock markets can be very concerning to someone who has been a very conservative investor all their life; especially as they get older.
As a result of these factors, some insurance companies have recently designed new products tailored primarily for these types of investors, especially for those that have reached age 80. Some have launched a new series of segregated funds designed for elderly clients who are focused on estate planning.
These estate protection funds, which are available to clients between the ages of 80 and 90, feature a 100% death benefit guarantee. The product caters to clients who are focused on protecting their legacy while also providing a flexible investment that can cater to their changing income needs.
Segregated funds are a popular option within older demographics given the estate planning benefits of the products, such as the ability for beneficiaries to receive their inheritance quickly and confidentially, while avoiding probate.
Segregated funds, which are investment funds managed by life insurance companies, have long been a preferred investment for many mature Canadians. One of the key features that appeals to our aging population is the ability to name beneficiaries, ensuring the assets go directly to whom the owner wants, without cost or delay, after they die. In contrast, most other investments, including GICs, do not have this feature and will be tied up in an estate while an executor navigates through Ontario’s probate process.
This will result in additional expenses, including the estate administration tax, being paid by the estate and will result in delays before assets can eventually be transferred to heirs.
While many younger retirees have used segregated funds for their features, the 100% death benefit guarantee for people aged 80-90 makes the new estate protection funds more appealing for that age group.
If you or someone you know could benefit from segregated funds, speak with an investment advisor who is licensed to provide advice on these types of investments. The rates of return are not guaranteed and investors should read the fund facts documents to learn more. Segregated funds have fees that can be explained by a licensed advisor.