Strategies for the New Retirement Bill Johnstone

Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money. Jonathan Clements

Agenda What realities are retirees and pre-retirees facing today? What we know: accumulation versus decumulation Building portfolios for the new retirement

What are the realities facing pre-retired and retired investors today?

Market realities are defining the new retirement Interest rates are at historically low levels Negative real rates of return affect portfolio sustainability Source: Bloomberg

Market realities are defining the new retirement Is this bull run sustainable? Retirees dont have the flexibility to wait out a 15-year cycle

Market realities are defining the new retirement Clients want the long-term performance of equities but need to be insulated from volatility, especially as they draw down their savings. Source: Bloomberg

Boomers: a harsh new retirement reality Working in retirement is a common expectation 15% plan to never stop working (among those not yet retired) 55% of those not yet retired agreed that "not having enough money saved to retire comfortably" would delay retirement 28% will be carrying debt into retirement Source: Scotiabank, The Retirement Landscape - A Focus on the Baby Boomer, 2014

What does the average retirement look like? the harsh math Estimated annual cash flow in retirement = $46,000 Expected length of retirement = 20 years Expected cash flow required: $46,000 X 20 = $920,000 Expected retirement savings = $385,000 $535,000 shortfall Source: Ipsos Reid, 2012

Expected sources of retirement income For the average Canadian retiree, government plans represent a significant portion of their annual cash flow requirements Source: Ipsos Reid, Sun Life Canadian Unretirement Index, 2013

Retirement realities: client perception is reality Canadians entering retirement are aware of what they are faced with leading up to and in retirement Source: BMO Wealth Institute, Retirement Income: Can we have our cake and eat it too, 2013

Canadians less confident in retirement Canadians are concerned about generating enough retirement income to cover basic living expenses through retirement Source: Ipsos Reid, Sun Life Canadian Unretirement Index, 2012

Social and macro realities are defining the new retirement Todays retirement realities 1.Employer and government plans are pulling back 2.Life expectancy of Canadians is longer 3.Inflation remains a real issue 4.More Canadians are working longer

What we know: accumulation versus decumulation

Shifting investment strategies to match client needs For illustrative purposes only. Not indicative of any portfolio performance. Average annualized returns Asset allocation Staying invested Reverse dollar cost averaging effect Portfolio sustainability Sustainable withdrawal rate

Portfolios need to look different in the decumulation phase Contribute to the all-in retirement risk: INCOME RISK From performance to strategy

How are retirement portfolios constructed today? Method Implementation rate Strategic allocation with a tactical overlay54% Strategic allocation11% Risk budgeting8% Other8% Tactical allocation7% Style neutral6% Mean variance optimization3% Liability-driven investing2% Source: Cerulli Associates in partnership with Summit Media, the Financial Planning Association, 2011 Advisors are still employing portfolio strategies geared towards the accumulation phase of the investment life cycle

If advisors are constructing portfolios for retirement income, what are they using? Source: Cerulli Associates in partnership with Summit Media, the Financial Planning Association, 2011

Retirement cash flow: importance of managing volatility What works in the accumulation phase needs to revisited: Reverse dollar cost averaging affects portfolio sustainability Year Unit price Withdrawal amount Units sold Beginning$10-- 1 -$50K-5,000 2$6-$50K-8,333 3$7-$50K-7,143 4$9-$50K-5,556 5$10-$50K-5,000 Initial unit value$10.00 Average unit price$8.40 Total units sold -31,032 Year Unit price Withdrawal amount Units sold Beginning$10-- 1 -$50K-5,000 2$12-$50K-4,167 3$13-$50K-3,846 4$9-$50K-5,556 5$10-$50K-5,000 Initial unit value$10.00 Average unit price$10.80 Total units sold -23,569 The above is designed to demonstrate the mathematical principle behind reverse dollar cost averaging. The illustrations are hypothetical to serve as a projection of the investment results of any particular investment.

Retirees investment goals Research consistently reaffirms three primary needs concerning retirement planning: Predictability guaranteed consistent cash flow Sustainability low risk of outliving assets Liquidity financial flexibility Additionally, many wish to leave assets to their estate. Traditional strategies are falling short.

Building portfolios for the new retirement

Shifting investment objectives BMO Wealth Institute: I prefer a guaranteed retirement income stream each month, even if I have to give up the potential for future growth of my money. Those in agreement to this statement: 65% of retirees 69% of pre-retirees (retiring in next five years) Source: BMO Wealth Institute, Retirement Income: Can we have our cake and eat it too, 2013.

Retirement income portfolios: guaranteed outcomes are key Investors are looking for liquidity Almost a third of investors will give up control of a portion of their portfolio to establish guaranteed cash flow Source: BMO Wealth Institute, Retirement Income: Can we have our cake and eat it too, 2013

Bringing the pension investment approach to your clients Drawing on institutional insights: liability-driven investing (asset liability matching) Assets managed based on the liabilities they fund: Cash flow needs to span a long time horizon Length of time horizon is uncertain (i.e., investors lifespan is unknown) Spending liabilities may increase due to inflation and other unforeseen events (i.e., medical expenses, family needs)

Managing income risk by adopting a pension plan approach Guaranteeing cash flow to cover the spending gap requires retirement cash flow forecasting Government & Employer plans, Annuities, GICs, Bonds, GMWBs, G5|20 Series

Retirement conflict: need versus risk Traditionally, retirees compromise goals with risk tolerance Aspirations Priorities and desires Obligations and needs High risk Moderate risk Low risk High Low High Low Financial goals Investment characteristics From the Behavioural Biases of Individuals, Michael Pompian, CFA

Retirement matching: needs and products Aspirations Priorities and desires Obligations and needs Matching needs with products: High risk Stocks, REITs Moderate risk SWPs, T-Class, dividend mutual funds, blue chips Guaranteed cash flow Government plans, employer plans, GICs, annuities, GMWB, guaranteed mutual funds High Low Financial goals Investment characteristics

Portfolio sustainability risk: the new efficient frontier Traditional portfolio approach with a modified application: Risk = portfolio sustainability and cash flow requirements

Practical application: putting guaranteed income asset class to work

Practical application Product allocation addresses income risk in retirement Combining investment products: Mutual funds (SWPs) Guaranteed income: annuities/GMWBs/G5|20 series Government/employer plans Product allocation guideline: product-specific risk increases dramatically if the allocation exceeds 60% Source: Xioung, James, Thomas Idzork and Peng Chen, February 2010 Allocation to Deferred Variable Annuities with GMWB for Life, Journal of Financial Planning

Considering guaranteed income as an asset class for retirement portfolios Guaranteed income within a portfolio helps improve retirement income levels without causing income risk levels to rise. Combined portfolios those with income protection and traditional diversified mutual funds experienced: Lower average negative income returns Higher total income withdrawals. Adding guaranteed income protection resulted in increased total retirement income and decreased income risk. Source: Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit, Ibbotson Associates, January 2010

The situation: savings shortfall Average Joe Savings (RRSP): $385,000 Selling of residential home (open):$405,000 Total investable assets:$790,000 Investment requirements: Growth of assets to make up the savings shortfall without affecting a guaranteed income stream

The situation: cash flow requirements Average Joe:

The solution: allocation to guaranteed income asset class Registered assets: $385,000 Non-registered assets: $405,000 Guaranteed income Mutual funds Allocating assets to secure that monthly paycheque

The solution: product allocation Registered assets: $385,000 - Invested five years prior to retirement, age 60 $308,000: CI G5|20 Fund $77,000: Signature High Income Fund Non-registered assets: $405,000 - Invested at retirement, age 65 $192,500: CI G5|20i Fund $82,500: Select 40i60e Managed Portfolio Corporate Class

The solution: guaranteed income through retirement Outcome = guaranteed, sustainable income with growth opportunities Registered assetsNon-registered assets Total amount invested Guaranteed income (G5|20 Series) Mutual funds $385,000 $308,000 $77,000 $405,000 $192,500 $82,500 Total cash flow received $793,657 (MAP requirement) $85,411 Residual value (after 20 years)$403,787$603,430* * $251,128 of guaranteed cash flow, characterized as tax-efficient ROC, was generated from G5|20i in the Open account. It was in excess of the clients annual cash requirement and reinvested into Select 40i60e Managed Portfolio Corporate Class in the Open account. Annual cash flow requirement: $32,000 (net government support) Total cash requirement: $32,000 x 20 years = $640,000 Total cash requirement adjusted for inflation (2%): $793,066

The solution: guaranteed income through retirement Years Cash flow generated from all invested assets

The solution: residual value Consistent participation in the markets contributes to the growth of the assets: legacy and liquidity requirements have been satisfied

Meeting the investment goals of the retiree An investment strategy that meets the goal of securing retirement income while mitigating the risks of the decumulation phase

Summary Mutual fund SWPs Generally give opportunities for growth at the risk of large investment losses and income shortfalls Annuities Forgo legacy requirements and distribute the highest, consistent incomes GMWBs Somewhat address both income need and wealth preservation Mixes of mutual funds and guaranteed income products address shortfall factors and provide a flexible retirement decumulation strategy.

In conclusion Canadians are not saving or planning adequately for retirement Advocate and educate clients on the need for retirement planning Every Canadian needs to: Develop a written, documented retirement plan Implement flexibility into the plan Recognize the dynamic consumption and savings equation between today and retirement.

Thank you FOR ADVISOR USE ONLY NOT FOR DISTRIBUTION TO CLIENTS Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise indicated and except for returns for periods less than one year, the indicated rates of return are the historical annual compounded total returns including changes in security value. All performance data assume reinvestment of all distributions or dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. CI Investments and the CI Investments design and are registered trademarks of CI Investments Inc. Portfolio Select Series, Signature Funds, G5|20 Series, and the G5|20 Series design are trademarks of CI Investments Inc. This communication is published by CI as a general source of information and is not intended to provide personal legal, accounting, investment or tax advice. Facts and data provided by CI and other sources are believed to be reliable when posted; however, CI cannot guarantee that they are accurate or complete or that they will be current at all times. CI and its affiliates will not be responsible in any manner for direct, indirect, special or consequential damages howsoever caused, arising out of the use of this presentation.

Appendix: Standard performance data Fund nameYear-to-date1 month3 month6 month1 year3 year5 year10 year Since inception Inception date CI G5 20 2038 Q3 Fund Class A5.21.12.42.710.9N/A 10.07/31/2013 CI G5| 20i 2034 Q2 Fund Class A0.8 N/A 0.85/13/2014 Select 40i60e Managed Portfolio Corporate Class A Shares6.61.52.63.915.211.49.0N/A4.011/27/2006 Signature High Income Fund Class A9.71.62.96.515.811.212.08.69.9 12/18/1996 Source: CI Investments, as at August 31, 2014

Documents

Strategies for the New Retirement Bill Johnstone