Retirement stability for gen X

In the face of market volatility, disappearing pensions and low interest rates, generation Xers can look to guaranteed income products for secure retirements.

Members of that 30-to-49-year-old cohort are getting serious about retirement needs earlier than boomers did, says Susan St. Amand, president of Sirius Financial Services in Ottawa, Ont. They’re contending with large mortgages, trying to save for kids’ educations and worried about outliving their savings, say observers. There are ways to help.

Are annuities worth it?

Annuities can provide a base income, says Julia Chung, practice leader and founder of JYC Financial in White Rock, B.C.

In particular, adds St. Amand, life annuities could become popular with gen-Xers who see their parents living longer, and want to ensure their own incomes will last to the end.

Firms have designed products that guarantee principal while offering earning potential. One product mixes aspects of deferred annuities with a mutual fund to compensate for the current low return on fixed-income investments. It has two phases: five years of accumulation and 20 years of payments. You make a deposit, and the money is invested in a mutual fund for five years.

If it gains, the payout rises. If not, your initial investment is protected, and you get the principal back in monthly installments over two decades. Such products “guarantee you’ll be no worse off than had you had it in cash, but if there’s growth, you get to keep it,” explains Jason Pereira, financial consultant at Bennett March and IPC Investment Corp. in Toronto.

But you should only buy five years before retirement, he says. For a gen-Xer to commit now is to potentially forfeit decades of investment earnings. “Losing a couple of percentage points every year for a feeling of security, over the course of 20 years, is huge.” Another drawback: guaranteed income tends to cost more than many mutual funds or pure fixed-income portfolios.

Insurers offer variations on this product. There are segregated funds that guarantee return of principal and have the option to convert investments to annuities. And some annuities recalculate payouts every three years to account for investment gains.

As interest rates rise, so should the value of the policies. But if rates don’t rise soon, you gain little or nothing while committing for the long term. If you’re open to investing in the market, “you can make better money somewhere else and then put it into an immediate annuity closer to retirement,” says Chung.

Insured retirement plans

While it may be too soon for an annuity-style product, the time is right for gen X to buy insured retirement plans, Chung says.

These plans work when you overfund the cash surrender value of a whole life policy to access returns from the investment component. “A lot of them have had a 5% to 7% regular return. You don’t get the volatility that scares people,” she says.

They’re particularly useful for clients without dependants. Such people pay lower premiums, so they have more cash available to over fund the policy, says St. Amand.

Gen-Xers who are 20 to 25 years away from retirement are best positioned to take advantage of these policies, says Chung, because they require years of consistent contributions. But you may find it difficult to make steady payments as years pass and unexpected life events occur, she says.

Missing an instalment could provoke the insurer to re-underwrite, she adds. Worse, some products could revoke the ability to over fund the policy if you miss payments.

Universal life policies have more contribution flexibility. You can also actively manage their investments. But Chung says many policies are complicated. She adds some insurers raised their UL premiums in the wake of the financial crisis, and as a result, net returns have dropped.

Insurers and interest rates

Insurers suffered when interest rates, and the market, dropped, leaving them holding the bag on products with guaranteed minimum withdrawals, says Pereira. Nowadays, “the benefits aren’t as good as they used to be, and the costs are higher,” he says.

But guaranteed minimum withdrawal benefit policies were popular, proving there’s wide appetite for guaranteed income, says Pereira. “Everybody is trying to find something that will be the next GMWB and bring in the billions of dollars that product was bringing in, but no one has got it yet,” he says. Even if interest rates rise dramatically, Chung says the glory days of high returns and low costs won’t be back. “Being bitten, the insurance companies are still not going to go for it.”

New guaranteed income products are designed with the goal of sharing both interest rate risk and potential upside with the investor, says Steve Parker, AVP of guaranteed investment products at Manulife.

“You don’t lock into your rates today, but if you believe interest rates are going to rise,” then you have the potential to gain.

You’ll be ok

Gen-Xers are resilient and self-reliant, says St. Amand.

Chung agrees. They feel they can’t count on government benefits like OAS supporting them, as boomers have.

If gen-Xers are worried about retirement security, the best strategy is to manage their portfolios more conservatively, says Pereira. But if a conservative portfolio’s low returns make it difficult to fund retirement plans, you can then decide to take on slightly more risk or increase savings. Otherwise, you may have to re-imagine retirement. If you’re risk-averse, Pereira offers a five- to 10-year view of the markets.

“If you’re in a well-managed, broadly diversified portfolio, there hasn’t been a single five-year period on record when someone didn’t at least break even.”