It is sad to hear the stories or thousands of people who have lost significant portions of their investments in the recent market downturn and now their retirement plans have to be altered. Lowering your living standard expectations or having to work a few more years is not fun. Could this situation have been avoided? Perhaps. It is mere common sense to avoid being heavily invested in the stock market when your retirement is close. But the question we want to look at is not what could have been done then, but rather what can be done now.

Many investors who are close to retirement are taking their money out of the market in panic. In theory, this is the worst thing to do. Past experience shows us that in the investment world exceptionally bad years are usually followed by exceptionally good years. If you can afford to wait, your investments will most likely eventually recover. But what if the downturn continues? What if recovery takes longer than expected? What if you can’t wait and need to start using your savings now?

It is understandable if your gut instinct tells you to run away and cut your losses. If you can’t afford this uncertainty, GIC’s or annuities are the way to go. The problem with guaranteed investment products is their low return. In most cases you will barely keep up with inflation. And if the stock market recovers in just a couple of years, you will kick yourself for panicking now and losing the opportunity. Tough call.

Wouldn’t it be wonderful if there was an investment vehicle that would fully protect you from the downside, yet allow you to fully enjoy the upside of the market? Sounds impossible? Let’s see. Variable Annuities or Guaranteed Minimum Withdrawal Benefit (GMWB) products have been known and successfully used around the world for many years. But they didn’t come to Canada until recently. In the last couple of years they have quickly become a large segment of the Canadian investment market and more and more investors choose to keep their money in accounts of this type, especially those who are retired or plan to retire soon. And there are some good reasons why.

Let’s look at how GMWB products work. When you open an account, your deposit turns into so-called Guaranteed Withdrawal Balance (GWB). If you have reached a certain age, this translates into guaranteed income for life, much like with a regular annuity. No matter how badly the market performs, you are guaranteed to have this income for as long as you live. But when the market performs well, your GWB is “re-set” upwards based on the growth in the investment fund you have chosen. And when the market goes down again, your income stays level. This way, you are protected from the downside, but still benefit from the upside! If you are serious about your retirement planning, a GMWB account should be a part of your portfolio.

Nikolay Sisan is a Certified Financial Planner and freelance writer in Vancouver.