Retirement Income Solutions Alternative to the GLWB

This presentation contains scenarios with many assumptions on rates of return. No rate of return assumption can predict what may actually happen to a client’s market value. Subject to any applicable Death, Maturity and Guaranteed Minimum Withdrawal Benefit guarantees, any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value. The purpose of the scenarios is to illustrate and compare different investment strategies to generate retirement income.

Retirement Income Clients are looking for: Principal risks Income for life Possibility to increase income (growth potential) Guarantees Principal risks Longevity Inflation Market risk

Options to address what the client wants. “Bundled” approach Guaranteed Life Withdrawal Benefit (GLWB) “Build-your-own” combination Life annuity + seg fund portfolio Adapt combination to meet each client’s needs. Same rules for everybody. Your clients have a choice!

GLWB Option Combination of life annuity features and seg funds bundled in one product Lifetime income Growth potential through resets every 3 years only. In order for reset or “step-up” to occur, market value of GLWB portfolio must be higher than the Guaranteed Withdrawal Benefit Base (GWB base). How likely? A very popular product for retirement income is the Guaranteed Life Withdrawal Benefit available from various insurance companies. The GWB base is a notional capital amount based on the original invested capital. Resets are not guaranteed. Therefore, it’s important to think about how likely it is for the market value to be higher than the Guaranteed withdrawal benefit base considering the fact that withdrawals are made. The total net return has to be more than the withdrawals over a 3-year period.

GLWB Option Typically, the guaranteed annual income amount is now 4% of the GWB base if started at age 65, for one individual. Companies offer the GLWB before age 65 but for a reduced income (i.e. 3.5% of the GWB base at age 60). Growth can be achieved through resets every 3 years. Resets are applied if the market value of the investment is higher than the GWB base.

GLWB Option For market value to remain equal to GWB base, net annual rate of return must be equal to the rate of withdrawal – in this case, 4%. If the MER (including the GLWB fee) is 3.0% to 3.5%, this translates into an 7.0% to 7.5% gross annual return necessary to keep market value equal to GWB base. At that rate, market value only remains equal to GWB base: no growth to income. Therefore, protection against inflation is not guaranteed. Many of the GLWB products limit exposure to equity so that a balanced fund, in most cases, is the most aggressive option available. That balanced fund would have to generate a gross annual return of 7.0% to 7.5% to achieve a 4% net return and maintain the market value at the original value. The annual return would need to be higher to benefit from the resets every 3 years to grow the guaranteed income.

Build your own Combo Use a life annuity to cover the guaranteed income for life portion (available before age 65 if needed). Possible to add a guarantee period for estate planning purposes. Balance of portfolio invested in one or a mix of seg funds suitable to client’s objectives. There are alternatives to using the GLWB to generate retirement income and address the principal risks of longevity, inflation and market risk. If the annuity is registered, there are no minimum withdrawals such as with a RRIF. If the money for the life annuity comes from a locked-in registered account (i.e. locked-in RRSP or LIRA), there are no minimum or maximum withdrawals that apply to the life annuity such as is the case with an Life Income Fund (LIF).

Build your own combo Portfolio Life annuity Segregated funds The first step is to determine how much money is needed to generate the lifetime guaranteed income the client is comfortable with. Any remaining money goes into seg funds and can be used as the client wishes. Maximum flexibility. Maximum flexibility to: increase monthly income; make lump sum withdrawal; accumulate for estate. Guaranteed lifetime income

Scenario A Male turns 65 on Dec. 1st, 2013. Invested premium on Dec. 31st, 2013: $400,000 Net annual return on seg fund (in GLWB and Combo illustrations): 4.00% GLWB annual income: 4.00% of GWB base = $16,000 ($1,333.33 monthly) Let’s compare the two solutions with a scenario. The scenarios are meant to better understand the potential and risks of each retirement income solutions.

GLWB In this scenario: Lifetime monthly income of $1,333.33. No increase in income since market value never exceeds GWB base. In this scenario, since the annual net rate of return is the same as the rate of withdrawal, the market value remains the same and as a result, there are no resets applicable so the lifetime guaranteed income stays the same.

Life Annuity Guarantee Period Build your own Combo Life Annuity Guarantee Period Premium Life Annuity* Seg Funds No guarantee period $234,924.47 $165,075.53 10-year guarantee period $242,666.09 $157,333.91 20-year guarantee period $267,944.18 $132,055.82 25-year guarantee period $286,855.08 $113,144.92 By building your own combination, you can usually guarantee the same lifetime income at a lower cost with the use of a life annuity. That part of the combo is not flexible. The balance is invested in seg funds which offers maximum flexibility and has no impact on the life annuity. It is possible to add guaranteed period on life annuities for estate planning purposes. The longer the guarantee, the higher the cost. Annuity premium calculated based on : Male, DOB of December 1st, 1949 Issue date of Dec. 31st, 2014 Start of monthly payments on Jan.28th 2015 3.6% interest rate *Interest rate on life annuity: 3.60%. Premium required to generate a lifetime monthly income of $1,333.33 for a 65-year-old male.

Life annuity with 20-year guarantee period Build your own combo Portfolio $400,000 Life annuity with 20-year guarantee period $267,944.18 Segregated funds $132,055.82 So, by using the life annuity with a 20-year guarantee period, here’s the breakdown of the portfolio. For a client that can’t tolerate market risk, he could use the total amount of his portfolio to generate a lifetime guaranteed income that is higher than what the GLWB would give. Any unused money could then be reinvested in a GIC inside a TFSA. Maximum flexibility to: increase monthly income; make lump sum withdrawal; accumulate for estate. Guaranteed lifetime income of $1,333.33 per month

Build your own Combo In this scenario: Client can increase total income by 3.0% every year until age 95. Client can increase total income by 2.0% every year and have approximately $143,000 left in the seg fund portfolio at age 100. While the GLWB did not offer any growth of the lifetime income amount, because of the flexibility of an ordinary seg fund contract, the client can increase the amount of income to cover the increase in the cost of living and these increases will not affect the guaranteed income for life generated by the annuity. Of course, the larger the withdrawals, the sooner the seg funds will be depleted and the client will be left with the life annuity that provides the initial guaranteed lifetime income. But there is a much better chance that the client can increase his total annual income by using the “combo” approach because of the flexibility that comes with this strategy vs GLWB. Source: Excel Worksheet “ Alternative au GMWB” in Marc André’s folders.

Income Comparison for Scenario Annual net rate of return on seg funds: 4.00% Age On Jan. 1st Total Monthly Income GLWB Combo 2.0% increase 3.0% increase 65 $1,333.33 68 $1,414.94 $1,456.97 71 $1,501.55 $1,592.07 74 $1,593.45 $1,739.69 77 $1,690.98 $1,901.01 80 $1,794.49 $2,077.28 83 $1,904.32 $2,269.91 86 $2,020.88 $2,480.39 89 $2,144.58 $2,710.39 Thanks to the flexibility of the “combo approach”, the client in this scenario is able to increase his income at the pace of his choosing.

What happens in the same scenario if the annual rate of return is 6 Let’s look at another scenario.

Income Comparison for Scenario Annual net rate of return on seg funds: 6.00% Age On Jan. 1st Total Monthly Income GLWB Combo* 2.5% increase 3.0% increase 65 $1,333.33 68 $1,419.07 $1,435.85 $1,456.97 71 $1,509.42 $1,546.25 $1,592.07 74 $1,605.53 $1,665.15 $1,739.69 77 $1,707.76 $1,793.18 $1,901.01 80 $1,816.49 $1,931.06 $2,077.28 83 $1,932.15 $2,079.54 $2,269.91 86 $2,055.18 $2,239.44 $2,480.39 89 $2,186.03 $2,411.63 $2,710.39 GLWB: Because the net annual rate of return in this scenario is higher than the withdrawal rate, the GWB base reset is applied every three years, thus increasing the lifetime guaranteed income from the GLWB. Combo: Assuming the same rate of return applies in the seg funds, it is possible to increase even more the income provided and still have money left in the seg funds at age 100. GLWB: Monthly withdrawals at end of month. Source: Excel Worksheet “ Alternative au GMWB” in Marc André’s folders. *With a 2.5% increase in income, the market value of the seg fund portfolio at age 100 is approximately $390,000. With the 3% increase in income, the market value of the seg fund portfolio at age 100 is approximately $211,000.

What happens in the same scenario if the annual rate of return is 3 How about a scenario where the net rate of return is below the withdrawal rate?

Income Comparison for Scenario Annual rate of return on seg funds: 3 Age On Jan. 1st Total Monthly Income GLWB Combo* 2.0% increase 65 $1,333.33 68 $1,414.94 71 $1,501.55 74 $1,593.45 77 $1,690.98 80 $1,794.49 83 $1,904.32 86 $2,020.88 89 $2,144.58 GLWB: Obviously, in this situation, their will be no increase in the income coming from the GLWB because the market value will never be higher than the GWB base. Combo: With the combo approach, based on this rate of return, it is still possible to increase the total income annually by 2%, until beyond age 100. *The market value of the seg fund portfolio at age 100 is approximately $34,000.

Let’s assume that the annual rate of return for the first 3 years is 6 Let’s assume that the annual rate of return for the first 3 years is 6.00%. For the following years, the rate of return is 3.00%.

GLWB Market value after 3 years is higher than the GWB base. Reset results in higher lifetime guaranteed income: $1,419.07 (6.43% higher than initial income amount). The advantage of the GLWB is shown here where a reset applies after the first 3 years, thus increasing the lifetime guaranteed income, even if the rate of return is far less for the future years. After its first increase, the income won’t increase again in this scenario but it will not diminish either.

Build your own Combo Client can increase total income by 2.5% every year for the first 3 years to bring monthly income to $1,435.85. Withdraw lump-sum ($20,160.75) to buy life annuity.* Both life annuity monthly income total $1,435.85 guaranteed for life. Even with the lower return on the seg funds (i.e. 3% annually), client could still increase total income by 2% each year until age 99. While the “combo” approach takes more manipulating, the net result again in this scenario is better. The annual income can continue to increase even after the first 3 years. Annuity premium calculated based on : DOB of December 1st, 1949 Issue date of Dec.31st, 2017 Start of monthly payments on Jan.28th, 2018 *Interest rate on life annuity to generate $102.52 per month: 3.60%. Includes 17-year guarantee period to coincide with the end of the guarantee period on the first life annuity.

2.5% increase first 3 years; 2% increase subsequently Income Comparison for Scenario Annual rate of return on seg funds: 6.00% first 3 years; 3.00% following years Age On Jan. 1st Total Monthly Income GLWB Combo 2.5% increase first 3 years; 2% increase subsequently 65 $1,333.33 68 $1,419.07 $1,435.85 71 $1,523.74 74 $1,617.00 77 $1,715.97 80 $1,821.01 83 $1,932.47 86 $2,050.75 89 $2,176.27 Remember, if the client doesn’t need or want to increase his income, he doesn’t have to. With the combo approach, the client is free to manage to income increases as he wishes. At age 99, FMV of seg funds approximately $14,000.

“Build-your-own” Combo Retirement Income GLWB “Build-your-own” Combo Guaranteed income for life Yes Increasing income Only if market value is higher than the GWB base amount. Reset available every 3 years only. At the discretion of the client, anytime, for any amount, until no money left in seg funds. Impact on guaranteed lifetime income if excess withdrawal is made No Asset allocation of seg funds In most cases, limits to equity exposure. No restrictions As a summary, when it comes to retirement income, you and your client should consider the elements in the table to determine which strategy is best-suited for the client. When it comes to simplicity, it’s true that the “Build-your-own” combo approach takes more manipulating. However, GLWB contracts can be quite complex whereas the combination of a life annuity and seg funds tends to be easier to understand.

What about pre-retirement?

GLWB Most contracts offer a bonus (3.5% to 5% of GWB base) for years when no withdrawals are made. The bonus is added to the GWB base, not the market value. Any withdrawals made before the lifetime withdrawal phase will lower the GWB base, thus lowering the eventual lifetime guaranteed income. To benefit from the increase in the GWB base, client must remain in GLWB contract during the lifetime withdrawal phase. If client cancels the GLWB contract, he leaves with the market value, not the GWB base. Resets still apply every 3 years if market value is higher than current GWB base. While the focus of this presentation is retirement income, we wanted to quickly address pre-retirement accumulation since it is one of the selling features of the GLWB.

Some clients prefer guarantees. Some clients prefer flexibility. What do your clients prefer? It’s important for your clients to realize they have options when it comes to retirement income. There is no “one size fits all” product so it’s important to determine what are your clients’ priorities and preferences and to select a product and strategy that matches those priorities and preferences.

Advantages of building your own combo to generate retirement income Flexibility without affecting guaranteed income from life annuity. Increase your total income as you wish; Make lump sum withdrawal if needed (i.e. emergency); Save for beneficiaries. Maximum flexibility in asset allocation strategy for seg funds.

Questions

Sales Manager, Pensions and Investments Justin Belliveau Sales Manager, Pensions and Investments Assumption Life P.O. Box 160, 770 Main Street Moncton NB   E1C 8L1 (506) 869-9751 1-800-455-7337 Justin.belliveau@assumption.ca