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If you're close to retirement, transferring money from a LIRA to seg funds probably doesn't make sense
Q: We have $320,000 in a balanced portfolio in a LIRA. Our insurance agent wants us to transfer this money to segregated funds. I don’t think this is a wise move for us as we are close to retirement age. Am I right? And when do segregated funds make sense?
— Roger
A: You are right to be skeptical. Few unbiased financial planners would recommend segregated funds under any circumstances. In almost all cases, they only make sense for the agents who collect fat commissions for selling them.
A “seg fund” is not actually a mutual fund: it’s an insurance product. That’s why they are often recommend by insurance advisors, who are often not licensed to sell other types of investments. If all you sell is hammers, every problem looks like a nail.
Seg funds come with a number of benefits that sound appealing. First, they have a maturity guarantee, which sets a minimum value for the fund after a specified period (often 10 years). In other words, if you invest your $320,000 in a seg fund with a 100% guarantee, you’d have assurance that it will be worth at least $320,000 at maturity, even if markets tank.
The funds also have a life insurance component, so if you pass away and your fund has declined in value, you’ll receive a payment that makes you whole again. Moreover, because they’re insurance products, seg funds are protected from your creditors if you declare bankruptcy. They can also be used to pass assets directly to your beneficiaries when you die, thereby avoiding probate fees.
The problem is that these benefits come at an extremely high price: many seg funds have fees well over 3% annually. When you consider what you’re getting, it’s simply not good value. Consider the maturity guarantee: the odds of a balanced portfolio showing a significantly negative return after 10 years is very low and not worth insuring. All of the other benefits of seg funds can be obtained in other, much cheaper ways, too.
—Dan Bortolotti, CFP, CIM, associate portfolio manager with PWL Capital in Toronto
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I don’t agree with the light you paint seg funds in.
While you may be right that the product is not entirely a good idea for a retiring couple, seg funds do have great benefits when used appropriately.
Also, if you claim that something is not a good value, shouldn’t you at the very least provide the math to prove your point?
If you consider the trend that we seem to hit a recession every 10 years, it should suggest that the protection seg funds provide is worth it. Your only contention on the product is based on the MER which you framed as if it takes out a considerable amount of the returns.
I agree with Dan that in the case given that Seg funds are not a suitable investment in the case above. It doesn’t seem that they need the protection offered by the Seg fund since they will be needing the funds in the near term.
Depending on their retirement goals and need for the funds, it might be wise to invest in a mutual fund (something that offers still some growth while ensuring the capital isn’t at risk). Unfornatutely, the days of 3% GICs and savings accounts are behind us so a retiree has to put their capital at risk to receive some appreciation unless they are very risk-averse or still carry debt. A Mutual Fund portfolio that offers a Series T option would allow the retiree to draw down their account while remaining investing.
An investor with a high debt load, i.e a small business owner, would benefit from the Seg fund as in the event of their death, the entire amount is available for their beneficiary. In most cases, debtors are not able to access insurance funds (since Seg is an insurance product) so it does offer the investor’s family an important feature. Suppose the partner of the saver doesn’t have any source of income, then the $320,000 would be an important source of income during retirement. Also, you can lock in capital gains with your seg insurance provider by extending your term. This is great in case you have experienced a large gain and want to ensure you have that as the new base amount.
Finally, I’ve seen people leverage to buy seg funds as a “safe bet”. Generally, leveraging to buy an investment greatly increases your risk and only should be recommended or applied in very specific situations. With that said, the idea is that you borrow using a line of credit or another product to buy a high-growth seg fund (100% principle protection). As long as you make the interest payments on the loan, you are able to experience a nearly risk-free return on investment.