Retirement planning has changed dramatically over the past few years. The recent world market volatility has felt too much like a broken CNE roller coaster ride – a mixture of thrills and nausea.

But no matter how frightened investors are of the ride, they’re always ready to buy another ticket in anticipation. Hopefully, with history as their guide and the advance knowledge that twists and turns will inevitably occur again, they’ll be wiser and will fasten their seatbelts even tighter this go ’round.

Investors can learn from their recent experiences, and advisors can help by applying new economic and investment theories such as the product allocation theory. Part of that theory looks at ways investors can use advanced products, such as variable annuities, to help plan for a secure and predictable future income.

The product allocation theory, brainchild of Professor Moshe Milevsky of the Schulich School of business at York University, introduces a new concept to the war-torn asset allocation theory, which determines what percentage of a portfolio should be in varying asset types.

The common thinking of the past three decades has been that a well-diversified portfolio will protect against market uncertainty and volatility. Usually, as one gets older, allocations become more conservative; moving from an equity concentration to fixed income or bonds. Unfortunately, when all assets decrease in value simultaneously, the theory doesn’t function as expected, leaving the perplexed investor with a significant drop in asset value.

In the product allocation model, it isn’t the asset mix that’s critical, but rather the different products that make up the portfolio. Products used in such a model can include Canada Pension, employer pension plans, systematic withdrawal plans, immediate fixed annuities and variable annuities. Each of these products has its own virtues, advantages and disadvantages, but together they can be merged to develop a portfolio that’s bulletproof to unexpected asset devaluation.

Properly constructed, a portfolio utilizing the product allocation model will provide a predictable and sustainable income for the life of a client. The model protects against market volatility, inflation erosion, outliving capital and the uncertainty of the sequence of returns on a portfolio.

Variable annuities (VAs), most commonly packaged in Canada as guaranteed minimum withdrawal products (GMWBs) are a mainstay of retirement planning south of the 49th. VAs offer the guaranteed income payouts of a traditional annuity, but clients can also potentially participate in the upside performance of an underlying segregated fund.

During the accumulation stage, the variable annuity provides a guaranteed 5% to 7% bonus applicable to the amount deposited for each year before withdrawal, and this amount is used for calculation of the lifetime annuity. In the event of market gains, the plan provides for a reset of the values; but if the market slips, the values are not reset and the income is not affected by the value reduction.

When the bull market reappears and investors again expect double-digit returns, annuity products that promise conservative ROI will fall out of favour. So while the volatility of the market is still fresh in clients’ minds, it’s time to talk about annuity products.

The variable annuity provides the upside exposure, with a measurable downside risk, and they’re more flexible then regular annuities. Further, unlike traditional annuities, the clients can select the investments and have access to their funds. As such, they present a compelling argument for being a component of a product allocation plan.

The product allocation theory and the variable annuity contracts have become very popular as a result of people seeking security and peace of mind in their investment portfolios. So if your clients like to ride the roller coaster, then let them buy themselves a ticket, but make sure they also have a good seatbelt. Product allocation is a good place to affix the harness.