Tuesday, February 17, 2015

Money diminishing for life

The television ad promised "money for life." It showed a very happy and a very relaxed retiree enjoying the benefits of having money for life. It sounded too good to be true but I contacted Sun Life Financial anyway. I thought this was probably just a fancy ad for the Sun Life annuity products. and it was -- sorta.

I learned that if I gave Sun Life Financial $100,000, they would provide my wife and me with a monthly income of $435.12 for a guarantee period of 15 years. If either one of us lived longer, we'd continue to benefit. If we died before the 15 years had passed, the remaining money would be paid to our estate. I believe this is an income for life annuity with a guaranteed period certain benefit.

$435.12 per month is $5221.44 a year. This is only 5.221 percent per year on our 100 grand and no inflation protection. Is this good? Maybe -- but I strongly suspect it isn't. It all depends upon how long my wife and I live. I have a bad heart. Everyone will be surprised if I am still here in 15 years. But my wife's grandmother lived into her 90s and my wife shows every sign of doing the same.

Let's consider the effect of inflation on this "money for life." If the next 15 years are like the past 15, then inflation will average 1.91 percent. Historically, this is a rather low rate of inflation. We have gotten off easy these past few years. Still, in just 15 years, my "money for life" would be greatly diminished in value, delivering something in the neighbourhood of 30 percent less buying power.

If my wife lives to 90, another two decades plus, her "money for life" annuity would be slashed in buying power by something approaching almost 50 percent. At age 95 my wife would still be getting a monthly cheque for only $435.12. Does this sound like a good deal? It sure does, for Sun Life.

But I shouldn't be too quick to knock annuities. There is something to be said for having some guaranteed income, even if it is shrinking in buying power every year. My pension is shrinking. It is not completely protected from the ravishes of inflation. But that pension is a wonderful thing to have despite its shortcomings.

Interestingly, I own stock in Sun Life Financial. My investment is up 84% in just a few years. In other words, if I had put $100,000 in Sun Life Financial back when I made my original investment, today I'd have $184,000 in stock. And even better, Sun Life pays a very nice dividend. My initial $100,000 would have purchased 4727 shares and today I'd be enjoying an annual dividend of $6806.88.

This not to say one should never buy an annuity. Annuities have their place in your financial plans but they are not the only investment vehicle to consider. Even the Sun Life representative said as much. He'd put some of our portfolio into an annuity -- he suggested we should have a guaranteed income greater than our expected expenses -- and he suggested putting the remainder of our portfolio into other investments, equities and bonds, while keeping an eye on the tax treatment.

My visit with the Sun Life fellow was educational but it didn't convince me to rush into "Money for Life." Interest rates are down and may drop more. I'll take my chances and hope that by the time my wife and I hit the must-convert-age that interest rates will have recovered somewhat. Higher interest rates translate into higher monthly annuities payments.

When I hit the must convert to a RIF or annuity wall, I hope to know more about investing and the tax treatment of investments. Right now, I believe my wife and I will be ready to add an annuity into our financial plan at that time.

And, I'm keeping the Sun Life rep's card. I liked him.


This add is in response to the second comment following this post. I agree with the writer that we all have fixed expenses and variable expenses. I track both categories using an Excel spreadsheet. To keep my expense records accurate, I charge everything using  a card that rewards me with a full one percent rebate based on the total amount charged.

I charge all food, telephone, clothing, all car expenses except for insurance and much much more. I easily charge more than $20,000 annually and collect more than $200 in rebates. (We charged a new furnace and a new central air unit a few months ago. The rebate helped ease the pain of that unexpected purchase.) By charging almost everything, I have a monthly record supplied by the credit card company that tracks in detail most of our expenses.

Now, let me make this quite clear. I do NOT enjoy a 6.8% yield on my Sun Life stock. What I was attempting to do was compare apples and apples. When I retired, I got some quotes from banks and insurance companies concerning annuities. I was not impressed.  I was told a hundred thousand dollars would deliver maybe $5,500 per year and that payment would remain stuck at $5,500 until both my wife and I died.

Instead, I put my wife and my money in the market. Today our investments have grown by 60% and that is after we have removed tens of thousands of dollars from our portfolio in order to live in retirement. One stock I purchased for us was Sun Life. Here is a screen grab of our investment.

Click on the above in order to enlarge and read.

I paid only $21.50 for a stock that paid a dividend of 36-cents this past December. A hundred thousand dollar investment made in Sun Life itself sometime after my retirement would be delivering about $1675 every three months. This is about $558 per month or $6700 annually. The icing on the cake is the capital gain. The stock has gained almost 85% since purchase. Click on the above screen grab to enlarge and read.

And it is not the only winner in my portfolio. The past few years have been an amazing time to be in the market. When my wife and I get a little closer to the 71 years of age milestone, we will again consider annuities. Maybe, just maybe, the government will have, by then, changed the withdrawal rules and we may then just allow our portfolio to continue chugging away until we both have died. Our estate can take care of the expense of liquidating our registered retirement savings.

Click on the above in order to enlarge and read.

As for high dividend paying stocks, there are a few out there that I like for long term holds. For instance, Dream Office Real Estate Office Trust (D.UN). It has been knocked down a little by recent news, the head of the REIT moved on, the holdings in the West are being questioned as the price of oil plummets. With the price not, in my estimation, accurately reflecting its value, the dividend payment calculates out at an inflated value: 8.53% today.

Both my wife and I own units of D.UN. Her tax free savings account has grown by a full 25% since she opened the plan. Today that account delivers more than $1400 annually. It would take a massive correction to put her plan at risk of falling into the red and the cushion is growing.


  1. Annuities are best for non registered accounts. I am happy to explain why and where annuities make sense.... Is is likely NOT an annuity, this is most likely a GMWB.

    The best way (and easiest way) I have ever seen annuities explained and how they work....here we go: imagine you and four buddies go golfing in Las Vegas (one of my favourite places to golf...guaranteed weather (without the expensive MER��)) and agree to put $100,000 in the kitty and collect your money back next year. You show up again the following year except one of your foursome has passed... The remaining 3 guys split $400k pr about $133,333 each. That is the advantage (and disadvantage) of annuities... You get the benefit (assuming you are not the dead guy) of morbidity plus a little interest obviously. The older you are...the more likely people in your cohort will die and therefore the better the morbidity advantage. Because essentially there is very little interest (fixed income investment) most of the income is ROC (return of capital) and therefore benefits of a better tax position.

    1. Thanks for the reply and the detailed, yet clear, explanation concerning annuities. I had to google GMWB. I discovered a Guaranteed Minimum Withdrawal Benefit is a financial product providing a guaranteed income, for example in retirement. The GMWB payment can increase to reflect investment gains made by the underlying portfolio. There may be bonus features as well. Here is a link to a posted explanation: http://www.getsmarteraboutmoney.ca/en/managing-your-money/investing/complex-investments/Pages/Guaranteed-minimum-withdrawal-benefit-products.aspx#.VR7mZOEj6A8

    2. Have a look at their outrageous MERs. Most GMWBs guarantee payment for life, but if you really do the numbers, I would be embarrassed if I was not able to outperform them

  2. I will also offer this...

    Again in my opinion..we all have fixed expenses and variable expenses.... Your "guaranteed income (company pension, CPP, OAS if they offer more income than required the rest of your money should be discretionary... And therefore locking into a product that imposes limits seems silly to me... Did you ask your "buddy" from Sun Life what happens is I decide I want to take more than that guaranteed income??? The answer is if markets are up and your capital is worth more than the withdrawal base (every company calls it something different) than you affect those guarantees... Did your buddy forget that part?
    I 100% agree with your analysis... If a Sun Life dividends are in fact paying as much as you say a 6.8% yield you'd be absolutely crazy to not buy it... Are you sure on that math?

    Buying a stock that yields 6,8% is an amazing yield and exactly what we recommend to our clients..l if you can leave of the cash flows from your investments, why wouldn't you?

    1. Again, thanks for the comment. I started this blog not to spread my knowledge but to learn from those I may meet on the Internet. To address your concerns about my yield claim, please go to the add at the end of my original post. I needed some screen grabs to illustrate my position.


  3. did you ever get a cost on those MERS?

    1. At the urging of readers, I looked into the MER component of some of the suggested investments. I did not find one answer but many. The one thing they all seemed to have in common was that for me, a single walk-in-off-the-street retired investor, the fees were too high. Sunlife has a page online looking at fees. Here is a link: https://www.sunlife.ca/Canada/ataglance/Library/Investments+-+Investing+Information/Fund+management+fees?vgnLocale=en_CA#fees

    2. also I checked and as of yesterday Sunlife stock has a yield of 3.73%

  4. You will be paying in excess of 3% for the guarantees on GMWB.... Simply way too high. I could build the same product ( well better due to lower fees) for 2% at most. I did the analysis on this product for a client that had a portfolio approaching $500,000. His cost were about 3.5% and now we have him around 1.9%. On the kind of money, you are talking about $8000/yr in savings. Plus of course he had DSC fees which is totally ridiculous. Even after he paid those it was still better for him to get out.

    The government did in fact reduce withdrawal rates for RRIFs in this year budget.

    I know you have done a great job managing your money... In my estimation (base on this blog) a better job than I see most advisor's do sadly... You have also admitted to your mistakes and admitted that you are not a pro, but have done well for sure...so congrats... It is not always easy to post winners and losers for everyone to judge...keep up the good work.... But remember too many cooks in the kitchen can spoil the soup. All your cooks (unless I am missing something) are invested in Canadian Equity...not much in fixed income, cash, US Equity International Equity... I did hear REITs so there is do some diversification...
    I know your health is not perfect... I would suggest you help you wife understand an exceptable rate of return on your portfolio and that be your legacy to her... Never accept less than X% on your portfolio and never let the advisor have more than X% equity exposure, make sure he is held accountable (shows rates of return) and make sure costs are reasonable (IMO never over 2.2% all in).
    Make sure you understand the advisor's investment philosophy (for myself #1 has to be protection of capital) and that it is compatible with hers.

    I would also help her understand what her fixed expenses are... A $/mth. How will that income be paid out?
    Gvt benefits (CPP (Max ~$1000/mth), OAS ($550/mth), pension (enter survivor benefit) and let her know whether they are all indexed or not? Then show her if there is a gap or surplus? If gap, help her see how your nest egg will protect her forever...if surplus talk to each other and agree what the goals are for those funds... Help her understand the financial legacy you want to leave.

    This is the real Rome of a financial advisor in my opinion... Than he/she should be held accountable for performance of portfolio (assuming he also manages the money) and should help find ways to reduce tax, make your dreams reality, help adjust to changes (and their impact on overall plan), help reduce estate distribution, and any other decisions that require a trusted sounding board... That is what I would expect from someone I entrust to help my family financially.