5 Guaranteed Income Strategies to Avoid Outliving Your Money

Retirement Income Planning, Calgary

5 Guaranteed Sources of Retirement Income 

What I learned from Brian Costello at a seminar about 15 years ago - the key to financial independence is multiple streams of income. There are several ways to generate income, but only a few of those sources have guarantees. Here are 5 you may want to consider.

“Not worrying about your finances is critical to having a life that excites you, nurtures those you love, and fulfills your highest aspirations” - Bill Bachrach

1.) Insured Annuity

For the retiree who wants it all. No risk, high income and low taxes an insured annuity appeals to thousands of retirees looking for the best investment solution. 

Most people have never heard of this investment option at all, yet thousands of Canadians set up insured annuities each year for a guaranteed retirement plan.

An Insured Annuity will provide you with a guaranteed income and preserve the capital for your heirs. The Insured Annuity is made up of two components, a prescribed annuity, and a life insurance policy.  The prescribed annuity provides a guaranteed source of income for each year of retirement.  The annuity income is made up of a combination of a return of capital investment and interest earned on that investment.  Only the interest component of the annual annuity income is taxable.  Since this is a prescribed annuity, the taxable amount is averaged over the life of the annuity.  Both of these factors help to maximize after-tax return. The insurance provides tax-free funds to heirs on your death, replacing the capital used to fund retirement.

Insured Annuities will appeal to those who:

  • Are about age 65 or more
  • Have non-registered capital to invest
  • Like high, long-term guaranteed rates of return
  • Have assets in GICs, and are insurable (healthy)

If you are looking for a part of your retirement capital and estate guaranteed, then take a closer look at insured annuities.

The current strategy in the illustration above is a GIC paying 4%. Good luck trying to get 4% today.

Some considerations with this strategy:

  • You are locking in your interest rate forever
  • You will lose liquidity
  • You have to be insurable
  • Get the life insurance approval first before committing to the Annuity
  • If you already have an insurance policy in place this could make your return even more favorable.

This is a great strategy for managing risk and volatility. As licensed agents, we can help you determine if this would work for you.

2.) Preferred Retirement Strategy - Permanent Insurance Policy 

This strategy is best for someone 8 years or more from needing income. You would have to be insurable or already have life insurance. Through the use of a permanent life insurance policy, either Whole Life or Universal Life, you can build a significant “cash surrender value,” of which you can use as collateral at most banks to borrow against the policy’s CSV. You will receive this money tax-free and can use it as you see fit. Once you die, the proceeds of the policy are paid first to the bank to settle the loan and the remainder paid to your estate or beneficiary. Even the interest on the loan can be capitalized and paid later.

Tip: You have to be insurable or have insurance already in place. Before you cancel a life insurance policy, determine all of your options. For example, many Term policies have a convertibility option to a permanent insurance policy without proof of insurability.

3.) GIC’s

GIC’s are a safe investment and used to be a big part of planning and investing.  The problem today is the low-interest rate they generate. A 5-year GIC is generating less than 2% and is taxed at your highest rate. So to add insult to injury, you are not even keeping pace with inflation and then you have to pay tax on the little return you receive. Here’s an example:

$500,000 GIC will pay interest of $7500 per year. If you are in a 40% tax bracket you will also pay $3000 in taxes. So you get $4500. So your tax-adjusted rate of return is just .9% - ouch!

4.) Annuities 

Straight Annuity: Is simply giving an amount of money to the Insurance Company for a monthly income benefit. If you were to give them $100,000 they may give you $250/month for as long as you live. You win if you live for a long time. They win if you die in a short period of time. You can add guarantees, such as a 5 or 10-year guarantee that ensures your estate receives the monthly payment for 5 or 10 years after your death. The more guarantees you add to the contract the lower the monthly income will be.

Joint-Life Annuity: Basically the same as above, except that the surviving spouse will continue to receive the income for as long as he or she is alive.

Term-Certain Annuities: An annuity as above, but with a specified timeline. The annuity could be purchased and pay a certain amount of income until age 90. The purpose of these types of annuities could be for funding a grandchild education.

Tip: It’s not advisable to put all of your investments into an annuity because the investment, although fixed and guaranteed, isn’t liquid. In our low interest, low growth environment and with such volatility in the markets it’s certainly a strategy for creating an income stream

5. Cashable Annuity

These are a great structure to create a kind of “Defined Pension” for yourself. You can set them up through an Insurance company and deposit a lump sum and/or monthly contributions. You can set up this kind of pension contract anytime prior to when you want to receive a monthly income payment.

The money is invested in Segregated Funds of your choosing, from fixed income to growth and is subject to market fluctuations. When you decide to take an income, you will receive a monthly benefit ranging between 4-6% of your balance. You are guaranteed to receive that set amount of income for life.

One of the good features of these contracts is that you have access to your original investment if you so desire and it comes with a death and maturity guarantee. These products are becoming increasingly popular because of their guarantees and flexibility. They will have a higher MER then mutual funds because of the guarantees. 

You can use this strategy with registered and non-registered accounts. We have many clients utilizing GMWB’s. 

Conclusion

It's important in retirement to have a trusted advisor that you can work with for many years to come. 55% of pre-retirees will change advisors when they transition to retirement because they realize they need specialized planning with a focus on income protection.

If you are in or close to retirement and would like to meet with us to put together a retirement income plan, book time in our calendar for a meeting time.  Like many soon to be retirees, you probably have the same questions:

  1. How long will my money last?

  2. How much can I spend each year and still have confidence that I won't run out of money?

  3. When should I take CPP and OAS? 

  4. Which of my assets should I spend first to create tax-efficient income?

  5. How much should I be saving now so that I can generate the income I'll want in retirement?

Upon delivery of your plan, you may choose to work with us to implement it. If you do, the fee for the plan is refunded.

We can meet either at our office or via conference call/FaceTime. We can work with you regardless of where you live in Alberta. Get started here!

 

Willis and Nancy Langford

Retirement Income & Investment Advisors

 

LangfordFinancial.ca 

 

“Enjoy a more comfortable retirement by ensuring you have a purpose to wake up to and enough money to sleep at night.”


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