In a perfect world, there would be a retirement product that would
guarantee you an income for life even if stock markets plunged into a
Great Depression-like sinkhole. In a perfect world, that same retirement product would also give you the potential to grow your money if the markets surged. And that ideal retirement product would keep your escape hatch open, so you could withdraw your money whenever you chose.

Guess what? In this not-so-perfect world, several companies are now offering what looks at first glance like a reasonable facsimile of this perfect product. Manulife was first out of the gate with what it calls GIF Select with IncomePlus. Since then two other insurers have also marched out their own guaranteed-income-for-life products. Industrial Alliance has Ecoflextra and Sun Life has SunWise Elite Plus. More are expected to follow.

Guaranteed income products appear to have all the angles covered. They protect you from the worst that could happen, yet they still offer you a chance to enjoy the best. “They’re popular because they combine fear and hope in one package,” says Jim Otar, a financial researcher in Thornhill, Ont., and founder of retirementoptimizer.com. Driven by fear and hope, Canadian investors have already poured more than $4 billion into the Manulife product. Investor Economics, a financial services consultant, predicts that guaranteed-income-for-life products will attract more than $50 billion from investors within three years.

So should you jump in? After carefully analyzing these products and talking to some of the sharpest folks in the financial research field, we’ve come to a surprising conclusion. We don’t think you should rush into these products — at least not right now.

We recommend waiting because these products are almost certainly going to get better over the next few years. While the current versions claim to protect you from all the risks that might threaten a comfortable retirement, they still leave something to be desired. You end up paying a lot of money to protect yourself from some risks only to leave yourself open to another risk you never considered.

How do they work?
 Make no mistake about it, these products are complicated. Many a buyer has made it only to page five of a 92-page information folder before giving up. So let us explain the essentials in just a few paragraphs.

The products begin with a regular mutual fund, such as the Trimark Global Balanced Fund or the CI Harbour Fund. When you buy your guaranteed investment, you typically pick from a long list of funds that spans everything from money market funds to all-in-one portfolio funds.

But here’s where things get tricky. You don’t actually buy that fund when you buy a guaranteed product. Instead, you buy a contract that goes up and down in value based upon whichever underlying fund you’ve chosen. That contract is commonly called a segregated fund or seg fund. You take this roundabout route because insurance contracts such as seg funds are able to offer you benefits that pure mutual funds can’t. For instance, they can protect your money from creditors, bypass probate in estate settlements, and give you guarantees — such as a guaranteed income for life. The income guarantee — formally known as the guaranteed minimum withdrawal benefit, or GMWB — is what attracts many people to these products. The guarantee assures you that no matter what the markets do, you will get at least 5% of the money you put into these products back each year from the time you turn 65 until you die. In other words, the guarantee covers off your worst case scenario. It assures you that you’ll receive regular payments for life, no matter how long you live.

The seductive aspect of all this is that you also have a chance to grow the monthly income you will receive. Every three years, if the markets have performed well, you get the chance to “reset” the amount of monthly income you will receive to a higher level. But this only happens if the markets have done so well that your underlying fund is worth more than it was three years ago, even after three years’ worth of withdrawals.

One final feature deserves mention. If you buy one of these products before you’re ready to retire, you usually get a 5% bonus every year for up to 15 years during the period before you start drawing an income. During this period you can get resets too.