Tuesday, January 18, 2011

BMO’s New Lifetime Cash Flow Product

BMO has a new Lifetime Cash Flow Product that seems suited especially for investors who are looking for safety and don’t understand inflation.

Jon Chevreau gave a clear overview of this new product and you can find all the details at the bottom of BMO’s managed programs page. A quick summary: make a lump sum contribution at age 55 and collect 6% per year for the rest of your life starting at age 65. When you die, if there is anything left after these payments and the yearly 2.75% MER, it goes to your estate.

Suppose that Jim is 55 years old and has a lump sum of $200,000. He can get $1000 per month starting at age 65 guaranteed for the rest of his life. This sounds appealing until we consider inflation. Recently, inflation has been around 2% per year. The average since 1916 has been about 3% per year. So a bad period would be around 4% per year.

The purchasing power of Jim’s $1000 per month of income would be hit by 10 years of inflation before he starts to collect. Here is the purchasing power of Jim’s first payment at the three different inflation levels:

2%: $820
3%: $744
4%: $676

If Jim makes it to age 85, the purchasing power of these payments will be eroded much further:

2%: $552
3%: $412
4%: $308

These are not runaway inflation scenarios. Even if inflation stays at 2%, Jim’s payments shrink uncomfortably. The attractiveness of BMO’s new offering depends on investors not thinking about inflation.


  1. This product appears similar to Manulife Income Plus and other GMWB products. The cost does appear to be lower but I haven't looked into the BMO product in any depth.

  2. Strange it would be locked in ten years before paying out anything. Seems to challenge people's desire for immediate gratification, but I guess all investing does that to a degree.

    In a way, the fee structure is less of a concern for a product like this, since the returns are pre-set and disclosed. Fees on an equity-based mutual fund are less transparent, it seems to me.

  3. @CC: All these products seem to suffer from the same problem: no inflation protection.

    #Gene: If the pay out were better, I'd agree that the fee structure isn't much of a concern, but since the guaranteed pay out is quite low, the bank is likely to get quite a bit in fees. I suspect that investors would be better off to wait until they retire and buy a CPI-indexed annuity.

  4. Ah, yes, thanks for clearing that up for me. I hadn't read closely enough to see that if there is anything left at the time of death, the estate receives. I thought there was no residual value at the end of life.

    So the fees do matter a lot more than I thought.

    I think you're right. An annual 6%, non-indexed, 10-year-delayed payout is weak.

  5. I've been chomping on the bit to get Mr. Yews email address since i read that article in the star. I thought it was a cleverly disguised advertisement.

    Is this just not another spin on an annuity? I have to imagine a bunch of bankers running out of ideas create these products out of thin air.

    Then they market them is the "next generation" in investments, and people fall for this nonsense.

    If you have a 10 year lock in period, if you simply ladder GIC's every year over the next 10 years chances are you could average out at least a 6% return.

    Add a well performing mutual fund on the side and you have made your own annuity / home made principle protected fund with some possibility of bonus upside performance with the fund.

    Now you have you" own "lifetime cash flow" product.

    These flavor of the month products simply separate people from their money. I would have liked to have seen their fee's disclosed in the article as well?

  6. @Paul: I think the important difference between this product and an annuity is the 10-year waiting period. This makes the 6% pay-out seem much better than it really is. So, from a marketing point of view, this product looks better than an annuity.