Hot topic: The role of mutual funds in a retirement income plan

This article has been created by Sun Life and does not necessarily reflect the points of view of Rogers Publishing.

The financial crisis of 2008 has caused some client hesitation around market-based investments. Yes, they offer good growth opportunities but what about the risks? In a volatile economy, aren’t guaranteed products a better way to go? Especially when you’re receiving income in retirement?

We asked two Sun Life Global Investments Wealth Sales Directors to share their thoughts on the role of mutual funds in a retirement income plan. Here’s what they had to say.

Chantal McNeily Director, Wealth Sales Sun Life Global Investments

Saving for a retirement nest egg is one of the most important financial decisions a client can make during their working years. But things can happen along the way that can impact the size of their nest egg such as market volatility, a family emergency, a health need or other unexpected financial obligations. What’s the right solution that will ensure clients’ invested savings last, especially if they arrive at retirement and their nest egg isn’t as large as they had anticipated? How do clients ensure their savings will last for what could be 30 years in retirement or longer?

The use of guaranteed products for a portion of a client’s savings can help to ensure they’ll never run out of money for as long as they live. It can also create an “income floor” to provide predictable, sustainable cash flow for as long as they live. By allocating a portion of their savings to a guaranteed income product such as a payout annuity, market based annuity, or a guaranteed minimum withdrawal benefit, they can ensure a portion of their cash flow will be guaranteed for life and the minimum cash they receive won’t be affected by market performance. Clients may also want to consider the effect of inflation on the cash flow they receive from these products.

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Consider a solution where 25 per cent of a client’s investable assets are allocated to a guaranteed income product. This provides protection for the assets they can’t afford to lose (their basic living needs in retirement). Think of this as insurance against longevity and market risk; no matter how long the client lives and how markets perform, the client will always receive their guaranteed minimum income. The client can then choose to invest the remaining 75 per cent of their assets into an investment portfolio that focuses on investing in income oriented securities. This could include assets such as bonds, dividend paying stocks or mutual funds that offer cash distributions, supplementing the client’s income and giving them the opportunity to participate in the market, without putting their entire portfolio at risk. Talking to clients about Money for Life – Sun Life Financial’s customized approach to financial and retirement planning* – will help you identify their needs and ultimately determine the right product allocation to help their retirement savings last as long as they live.

Ryan Cipolla Director, Wealth Sales Sun Life Global Investments

Five years after the 2008 financial crisis, some investors are still feeling hesitant about entering the market. Leading up to 2008, investors may not have been properly diversified and instead were heavily invested in traditional asset classes, such as equities. Through the 2008 financial crisis, those who were heavily exposed to equities, or even certain classes of fixed income, watched their retirement savings dissolve. As a result, many investors became averse to invest their retirement savings and in turn missed out on the subsequent rebound. So how can we try to prevent the same mistakes from happening again?

Let’s take a step back and start by ensuring product allocation. First, it’s important to consider clients’ needs for income. Using guaranteed income from an annuity, as well as income from Old Age Security and the Canada Pension Plan, can help cover clients’ basic needs for life. Additionally, clients can leave a legacy if they name a beneficiary to an annuity. Once the clients have their basics covered, they may want to consider allocating a portion of their portfolio to market-based investments such as mutual funds.

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With mutual funds, you may help clients manage opportunity risk during their accumulation years by encouraging them to stay invested for the long term. According to Statistics Canada, at least one person in a couple currently aged 65 will live to age 90. This means that some clients could be in the decumulation phase longer – and that’s really difficult to manage without some portfolio growth potential in retirement.

Systematic investing may allow clients to reduce volatility over time, as more units are bought when prices are low and fewer units are bought when prices are high. This strategy can help clients grow their portfolios leading up to retirement and depending on what types of mutual funds they invest in, the potential return on investments can help fund lifestyle activities or contribute to a legacy plan in retirement.

When helping clients plan for their retirement income, consider asset allocation in guaranteed income and market-based investments. Learning from past experiences and looking for opportunities for growth in the future may help you help clients retire with confidence.

* Only advisors who hold CFP (Certified Financial Planner), CH.F.C (Chartered Financial Consultant), F.Pl. (Financial Planner in Quebec), or equivalent designations are certified as financial planners.

FOR ADVISOR USE ONLY

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The payment of distributions is not guaranteed and may fluctuate. The payment of distributions should not be confused with a fund’s performance, rate of return, or yield. If distributions paid by the fund are greater than the performance of the fund, then your original investment will shrink. Distributions paid as a result of capital gains realized by a fund and income and dividends earned by a fund are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, then you will have to pay capital gains tax on the amount below zero.

Sun Life Global Investments is the brand name representing the operating subsidiaries of Sun Life financial which offer wealth products in Canada, including mutual funds managed by Sun Life Global Investments (Canada) Inc., life insurance and annuities issued by Sun Life Assurance Company of Canada, and GICs issued by Sun Life Financial Trust Inc.