In the case of seg funds, the only things you will be guaranteed are:
- Losses of over $200,000 in taxes/severence & benefits
- A lower income than with your GM pension
- Up-front costs of $15,000 to $20,000!
- Fees and costs of over $8000 per year!
- A limited choice of investments
- A long term commitment of over 20 years
- A guarantee only as good as the company offering it...like GM!
There are some benefits too, but in general these are small compared to what you will risk.
- You can draw 5.0% per year, but on a vastly reduced amount of money and this will not be the same as you would receive from a GM pension.
- If you die, your family will receive the full value of what you invested, less any amounts you have withdrawn
- You can continue to draw money at the 5.0% rate for life if you are over age 65 or for 20 years if you are under age 65, but think about this, draw 5.0% for 20 years - isn't that just 100% of my money 20*5=100 - how good is that?
- Assets are guaranteed to have certain values over time and withdrawal limits can be raised if you do not take money out for a number of years.
- Assets can be protected from creditors - but soon so will RRSP assets not in seg funds.
the only guarantees
Lately many GM employees have been convinced to take a lump sum and invest the balance after the taxes are paid and the severance is gone into a variety of investments, but beware: When you invest, you take on the investment risk, nobody else does - there is no free lunch even with segregated mutual funds, (seg funds) or guaranteed funds or any other type of investment.
Unless you use other money you may already have, savings, lines of credit, RRSP and such, you will not be able to match the GM pension, plus you may lose your benefits, severance pay and car voucher.
In general the LIRA option can be a very costly event so be very careful. Here’s a list of questions to ask to ensure you get full information. Get whomever you deal with to answer these and sign the form to ensure full disclosure and protection for you and your family.
Losses of over $200,000 in taxes/severence & benefits
As already stated, you could lose your severance package (at least $125,000) plus the car voucher ($35,000) plus benefits value of about $1500 per year until age 65 (roughly $20,000) plus you will pay taxes on the non eligible amount of least $75,000 to $150,000.
Total cost: At least $245,000!
A lower income than with your GM pension
Why a lower pension? Because you start with a lower amount and a lower payout level.
Even if your total lump sum would not be taxed, (which it will) and let's say the sum is $500,000, at only 5.0% per year you can only withdrawal $25,000 per year or only $2083 per month, not the over $3300 a GM pension would have offered. If you draw more you will run out of money, it's fairly simple math. To draw $39,600 a year from the amount you would be left with would not last more than 15 years at a 5.0% rate.
Up-front costs of $15,000 to $20,000!
Up front costs and commission can be as high as $20,000 and yes you pay them, they come from your money, don’t ever think that banks or investment brokers work for free...there is no free lunch. You better than most now understand this.
Ask about sales commissions and costs, after all you are paying them.
Fees and costs of over $8000 per year!
Buried in each type of investment is an annual fee, these can run higher than 3.0% and they are drawn from your money every year- ask about this cost too.
A limited choice of investments
If you were to look at doing a seg fund, you will have a very limited number of choices for which to invest: Meaning you can only invest in the funds they allow, not necessarily what you might want to do or need to do.
They control the investment choice not you.
A long term commitment of over 20 years
Once the option of a seg fund is chosen, you are locked into that product for at least 20 years to ensure the payouts and death benefit guarantees.
This means that in the event of a market decline such as in 2008, you would be forced to accept the lower payout level and be locked into the contract either for 20 years or for life to ensure that you do not lose the income originally promised.
A guarantee only as good as the company offering it...like GM!
Anytime you look to have some else guaranteed something, the guarantee is only as solid as the person or company offering the guarantee. For example, when you started at GM, you were promised and guaranteed a pension from GM for life, now you are asking yourself how good that guaranteed will be.
The same is true for investment products and seg funds. Sure they state there is a guarantee, but how solid is that guarantee?
Even though they may state that it is 100% guaranteed, this may not be the case. In the event of a life insurance company failure, the guarantees will allow you to retain up to $60,000 or 85% for the promised guarantee amounts, whichever is higher. This is much more complex than you might think, so here's an example.