==== a FLIGHTS plan © - TARGET Variable Annuity Funds. ==== by Tom Connolly
The people who sell variable annuities have a convincing and polished presentation. They stress the guarantee and allege that it is simple: it all appears marvellous. It's not! If you are being lured by a financial planner, print out these ideas and look into the small print judiciously. Do a FLIGHTS plan before you invest.
- F - FEES - The fees can be in the range of 2.25%. With interest rates so low, as I write, 10 year Canada bonds are 3.75%, how much can you really expect to safely earn, after fees, on your money with this product. Over a couple of decades, with annual fees in excess of two per cent, plan to bestow over a third of your capital to the folks who sold you this product. They need you more than you need them. BEWARE!
- L - LIQUIDITY - Can you get out of it once you sign? Can you obtain your capital back? All of it? Anytime? Can you access extra cash should an emergency arise? What are the penalties (withdrawal changes) for getting your own money back? You lose the guarantee if you redeem.
- I - INCOME - Does their guarantee extend to income, or are they just promising your money back? Do they covenant to pay any interest on your money? They do not guarantee an increasing income, do they? Do they even mention yield? I like to know how much income my investment provides. I need spendable income in retirement. Eating into capital is not sustainable! How often do they provide you with a statement and what information is shown? Ask for a sample.
- G - GROWTH - They promise ‘potential' growth, right, but do not guarantee it. And remember, if there is potential for gain, there is potential for loss. Good luck. There is a huge performance gap between the best and the worse of these plans. Some firms promise to lock-in the highest month-end value: that's not necessarily the highest value. In their pursuit of you, financial planners will make promises. Remember, if there is a written contract, any oral promises made, which are not in the contract, are NOT binding. A substantial amount of your money is invested in bonds to cover the guarantee: ask how much of your money will actually be left to invest in growth opportunities?
- H - HEALTH - Will your principal fluctuate? You want to believe it: 2008 proved that. Will you be able to sleep at night? Are you happy with just getting your money back and only the potential for more? Are risky assets included in the portfolio? What happens to your money if you die early? Is your money protected from creditors? Investigate the details regarding estate transition.
- T - TAXES - They'll talk about tax-advantaged income, but how much of what they call ‘income' is really just return of your capital? Interest is fully taxable.
- S - SAFETY - Their plan is not covered by deposit insurance (CDIC). So, check if the insurance company providing the guarantee is rated AAA by DBRS, S & P or Fitch? Is it just the one company providing the guarantee? What is your money invested in? Are non-dividend paying stocks included in the portfolio? How do you get income from them? It's been a while, but Canadian insurance companies have been know to go broke. Manulife's stock price fell precipitously (to below $10) in early 2009 because they did not set aside enough for ‘the guarantee' of these products and the company had to bulk up reserves by billions of dollars.
Want a guarantee? Put your money in a GIC or buy a government of Canada bond: they actually pay income, and they guarantee, your income. Want a growing income? Purchase dividend stocks with a good record of increasing payments. You can't get both? Some of each, perhaps… I obtained the idea for this paper from a column in the Report on Business of August 1 2009: Me and My Money by Tony Martin. ‘Keep it simple, age with ease' was the title. The 63 year old subject of the column sold his dividend stocks (his broker seems to have traded his account and failed to hold for dividend growth) and ‘bought'* a guaranteed variable annuity (IA Clarington Target CLICK funds). Oh my! * One does not buy variable annuities. I expect a lot of people will fall for this product because their appetite for risk has declined dramatically. SUMMARY: Your give them your money. They do not promise to pay interest on it. Instead, they'll charge you an annual fee over 2%. And then, in a few years, they'll give you your money back…periodically. There's potential for more, but no guarantee. You will pay a lot for potential and just to get your own money back.
- “Staying on Target” was the title of a column in Forbes magazine of December 6 2010. The sub-title said “Target-date funds are risky and high maintenance…”