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Segregated Funds Help With Risk Tolerence
Different types of investment products offer trade-offs in terms of risk.Those that are considered conservative (less risky), such as GICs' and bonds, generally won't offer significant market gains, but the chance of losing significant value in the investment during market downturns is low. Products that have more risk, such as mutual funds with a strong equity component, may expose you to more market volatility, but you may also have a better opportunity to achieve investment growth if markets perform well.
So how do we find investments that offer lower risk, but still have a decent return, so you can plan for retitrement and properly sleep at night.
Consider when you would like to retire. If you are 40 years old and plan to retire at age 70, you may be able to take on more risk than someone at age 60 that plans to retire at 65.This is because, if your investments lose money because of market volatility, you have more time to recover your losses.
Ask yourself how comfortable you are if markets fall. When you see your statement and the value is lower than it was last year, are you concerned? Do you think markets will improve so you leave it be or is it time to consider other investments?
Knowing when you wish to retire and being honest with yourself about your comfort level when it comes to market fluctuations are important, and good places to start in determining your tolerance for investment risk. Your advisor can further assist you. He or she will have access to tools and resources that will help you discover the type of investor you are.
There are many options and products available for your investment style that can offer the returns with less risk.
For example, some segregated fund products, or contracts, offer a broad selection of segregated funds with varying equity exposure. You choose the funds that appeal to you based on the equity exposure you're comfortable with. Newer versions of these products that are emerging today are very flexible in their structure, enabling you to capture the benefit of potentially rising interest raes. These rates, along with other factors, help determine your future income when you retire -- higher rates can mean higher future income. With this type of product, you should also feel comfortable with some of the associated risk of market and interest rate uncertainty, in exchange for greater income potential.
If you want less risk, you'll want to look at products that are considered low risk. There are, for example, segregated fund products that provide a single fixed-income fund as the underlying investment. Fixed-income funds are considered conservative, so these segregated fund products can be an ideal complement to government sources of retirement income.
Advantages of segregated funds
Both low and higher risk segregated fund products offer additional features that make them good choices for retirement income and will appeal to any type of investor, regardless of risk tolerance:
A choice in when and how to start drawing income: The definition of retirement today isn't what it used to be. Not everyone wants to stop working completely ag age 65. Some may want, or need, to delay retirement or continue working part-time. The segregated fund products described in this article offer varying degrees of flexibility in terms of when and how income can be drawn from the investment. Some offer the option to take partial income, which would help to support you if you want to work part-time in retirement. The key benefits are that you have choice and flexibility.
Two concerns people have is dying too soon or living too long. Running out of money in retirement is a real concern.
Let's take a look at advantages of segregated funds.
Access to your money: In case of emergency, segregated fund contracts often allow you to access the market value in the investment. While fees may apply, this feature is very helpful if the need for cash arises.
Death benefit guarantee: These products ensure that, at death, your beneficiaries are guaranteed to receive the market value of the investment or the death benefit guarantee -- whichever is greater. The death benefit guarantees usually equal to 75 per cent of all deposits, reduced proportionally for any withdrawals you may have taken. The benefit here is that there is some type of protection for your beneficiaries.
Maturity guarantee: When your contract reaches maturity, these products guarantee you the greater of the investment's market value or the maturity guarantee, again usually equal to 75 per cent of all deposits, reduced proportionally for withdrawls. This feature provides a layer of protection not found in many other types of investment products.
It's important to understand that there is no such thing as a completely risk-free investment that will be able to generate a maximum return on your money. If you want growth potential so that you can prepare for retirement and achieve your goals, you need to be willing to shoulder some risk -- how much depends on you.
However with some segregated fund products the life insurance company shoulders some of the risk. Some offer lifetime guaranteed-income as well as potential for higher income if markets do well.
Talk to me, Phil Edney, for more information about the various segregated fund products and options available.
Risk does not have to be a dirty word.
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