The story of Robert and Elizabeth

Case study
The stor y of Robert and Elizabeth – registered account
FOR ADVISOR USE ONLY
Robert and Elizabeth: The situation
Robert and Elizabeth, both 60, are married and looking forward to retiring in about five years. Elizabeth is a
member of a defined contribution pension plan sponsored by her employer. Robert has a registered retirement
savings plan which, along with government benefits (Canada Pension Plan and Old Age Security) will make up
the majority of his retirement income. With the 2008 financial crisis still fresh in their minds, they are concerned
that market volatility can affect their retirement. During the financial crisis one of Robert’s colleagues was only
a year from retirement, but he was forced to change his retirement plans and continue working for an additional
four years to recover his market losses. Even then, his retirement plans were scaled back to cope with a reduced
income. Robert and Elizabeth need assurance that this will not happen to them.
Their advisor estimates that they will initially need an annual income of at least $70,000 to cover their living expenses during
retirement but also need potential for growth in order to help fund their lifestyle, address inflation and provide liquidity in the event
of an emergency. Elizabeth’s pension and their government benefits will provide them with $57,250 annually. Robert’s $300,000
RRSP assets must make up at least the income gap of $12,750 while meeting the registered retirement income fund’s (RRIF)
minimum annual payment (MAP) requirements and provide potential for growth to help provide the additional funds they desire.
The challenge
In a period of unpredictable volatility in equity markets and historically low interest rates, creating a balanced investment
approach that can provide sustainable cash flow and growth potential during retirement presents a considerable challenge.
Many asset allocation strategies only consider a portfolio’s risk-return trade-off in terms of returns but they do not consider
a portfolio’s ability to generate sustainable cash flow and maximize the terminal value of a retiree’s portfolio. In addition,
regulatory requirements such as the MAP from a RRIF put additional pressure on the ability of a retiree’s portfolio to generate
positive returns since the MAP factor increases over time and may require a greater amount to be withdrawn from the account
every year.
Robert needs a solution that provides:
•
•
•
•
•
Predictable, sustainable, guaranteed cash flow during retirement to help fill his and Elizabeth’s income gap.
Potential for capital appreciation to help keep pace with inflation and fund any unexpected cash flow requirements.
Reduced overall volatility to provide smooth investment returns prior to and during retirement to ensure
a residual value.
Ability to meet RRIF’s MAP requirements without putting pressure on his retirement plan.
The same level of cash flow to Elizabeth in the event he passes away before her.
The strategy
In order to optimize Robert’s portfolio performance, he and his advisor employ a retirement focused asset allocation strategy
that provides sustainable guaranteed cash flow, asset protection, growth potential and liquidity to allow him to meet RRIF MAP
requirements without affecting his guaranteed cash flow. They invest 85% ($255,000) of his RRSP into CI’s G5|20 Series and the
remaining 15% ($45,000) is allocated to a conservative balanced mutual fund within the same account. The allocation to G5|20
Series guarantees a minimum annual cash flow to cover Robert and Elizabeth’s income requirements while maintaining exposure
to equity markets. The allocation to the conservative balanced mutual fund ensures there is liquidity available to help meet
legislated RRIF MAP minimum withdrawals when required and fund unforeseen expenses without affecting his retirement plan.
The result
During the five-year accumulation phase, Robert’s portfolio benefits from the asset allocation and security selection of CI’s fund
managers and his RRSP grows to over $386,0001. His allocation to G5|20 Series is valued at $325,000, which provides him with a
guaranteed annual distribution of at least $16,250 for 20 years. This is more than his initial estimate but welcome since his cash
flow requirements are greater than he had originally planned for. At age 65, he converts his RRSP to a RRIF and begins drawing his
guaranteed distribution at age 66.
When Robert is 67, in Year 7, equity markets2 suffer a significant decline. This is illustrated in the chart. G5|20 Series’ dynamic
hedging strategy protects Robert’s portfolio as it shields him from the full effect of the decline. His allocation to G5|20 Series
drops by less than a third of the market decline. And his guaranteed cash flow remains unaffected by such a downturn. G5|20
allows Robert’s portfolio to participate in the growth of equity markets and provides protection from market corrections. The same
investment and cash flow drawn from a GIC portfolio would have depleted Robert’s entire portfolio over the same period3.
G5|20 Series protects Robert’s investment from market downturns
$450,000
Market Value
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
RRIF
$50,000
Equity Market
GIC
$0
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Years
The return for G5|20 is the historical return scenario with a significant market downturn occurring in Year 7 as illustrated in the CI Guaranteed Retirement
Cash Flow Series calculator at www.ci.com/G520 for the G5|20 allocation. The return for the conservative balanced mutual fund uses the same return as
G5|20 without the dynamic hedging strategy.
2
Equity markets as represented by equal allocations to the S&P/TSX Composite Index, S&P 500 Index (C$) and EAFE Index (C$).
3
Using a 2% annual compound rate of return.
1
Withdrawals
The G5|20 Series strategy allows Robert to meet or exceed MAP
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Years
In the first five years of retirement, Robert’s MAP is less than the G5|20 Series guaranteed distribution so he withdraws his
distribution and allows his conservative balanced mutual fund to continue to grow. From age 71, Robert’s MAP is greater than his
G5|20 Series distribution as a result of the increasing MAP factor and good fund performance. He receives his guaranteed G5|20
Series distribution of $16,250 and supplements the difference by redeeming units from his conservative balanced mutual fund.
At age 77, Robert develops an illness that limits his mobility. Over the next two years, he redeems $100,000 from his allocation
to G5|20, which is over 40% of the value of the fund at that time, to pay for medical expenses related to his illness. Despite the
redemption, his annual cash flow distribution is reduced by only $2,800 and he still continues to receive more than his income
gap requirement.
Robert passes away from his illness at age 79. He leaves his entire estate to his wife. Elizabeth continues to receive the same
level of guaranteed cash flow for the remaining six years until the G5|20 Series fund reaches its end date.
continued
Summary
After 25 years the G5|20 Series fund reaches its end date. What have Robert and Elizabeth received from the original $300,000
investment? They have received from G5|20 Series $300,800 in cash flow, redeemed $100,000 to cover medical expenses and
the fund’s residual value is $170,700. G5|20 Series has provided Robert with a compound annualized return over the 25 years of
5.8%, net of an applicable MER. Best of all, Robert and Elizabeth were able to retire with peace of mind.
Total investment
G5|20 Series
Mutual fund
Allocation
$255,000
$45,000
Cash flow
$300,800
$95,600
Redemptions
$100,000
$0
Residual value
$170,700
$2,700
FOR ADVISOR USE ONLY
This document is intended for advisor use only and is not a sales communication. All charts and illustrations in this document are for illustrative purposes
only. They are not intended to illustrate the performance of any portfolio. All numbers in this case study have been rounded.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus
before investing. Except as described below, mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
Bank of Montreal guarantees that, following the five-year Accumulation Phase of the fund, an amount equal to the greater of the net asset value per unit
or the original amount you paid for the unit will be paid back to you over a 20-year period in equal monthly instalments. This guarantee does not apply
to units redeemed before the end of that period. You will receive the net asset value per unit for any unit redeemed early. Mutual fund securities are not
covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.
BMO Financial Group and Bank of Montreal are marketing names (also referred to as trade names or brand names) used by Bank of Montreal. “BMO”,
“BMO Financial Group”, “BMO (M-bar roundel symbol) Financial Group”, “Bank of Montreal” and “BMO Capital Markets” are trademarks owned by Bank
of Montreal.
CI Investments and the CI Investments design are registered trademarks of CI Investments Inc. G5|20 Series, the G5|20 Series design and CI Guaranteed
Retirement Cash Flow Series are trademarks of CI Investments Inc.
®
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