What I learned from Brian Costello at a seminar about 20 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
The number one fear among Canadian retirees is outliving their money and being a burden to their loved ones.
Here are some ways you can avoid that from happening.
1.) Annuities
Life Annuity: This is simply exchanging a lump sum of money to an Insurance Company for a monthly income benefit. For example, a 65-year-old female could turn $250,000 into $1153/month for as long as she lives. You can add guarantees, such as a 5 to 25-year guarantee that ensures your estate, or loved ones, receive the monthly payment for the length of your guaranteed period after your death. A 65-year-old female has a high likelihood of living to age 90 and if son the average rate of return on that annuity would be 2.75%/year. This is a risk-free option.
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. A 65-year old couple could exchange $250,000 of savings and get a life-long income of $986/month for as long as the last one 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 10 or 20 years. The purpose of these types of annuities could be for funding the early years of retirement, where you want to spend more money.
Pro 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 a risk-free income stream.
Prescribed Rate Annuity: These annuities are only available with non-registered assets (non RRSP, RRIF or TFSA). With this type of annuity, the taxes are spread out over the life expectancy of the annuitant. This allows for a small amount of the annuity being taxable each year. For example, a 65-year old couple could get an annual income of $11,562 from their $250,000 deposit, but only $1983/year would be taxable. At a 25% marginal tax rate, that is $495/year in taxes. This is one of the best tax-efficient sources of income any retired couple could receive.
2. Cashable Annuity
These are a great structure to create a kind of “Defined Pension” for yourself. Again these are set up through an Insurance company. You can deposit a lump sum upfront and/or make 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 equities, and is subject to market fluctuations, however you lock in a guaranteed income from day one of the contract. For example, A 65-year-old couple would have a guaranteed income of $7788 from day one. If your market value increases, you benefit from a higher level of income, and that income is reset and recalculated each year on the anniversary date of your purchase. When you decide to take an income, you will receive a monthly benefit ranging between 4-6% of your current market value. You are guaranteed to receive that set amount of income for life.
These annuities are deferrable for as long as you want with non-registered and TFSA money but would be limited to RRIF rules with RRSP money.
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.
You can use this strategy with RRSPs, RRIFs, TFSAs, and non-registered accounts.
Pro Tip: You can use both a term-certain annuity in conjunction with a cashable annuity.
3.) Insured Annuity
For the retiree who wants it all. No risk, high income and low taxes an insured annuity appeal 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 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.
4.) 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,” 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.
5.) 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 about 1.5% 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:
$250,000 GIC will pay interest of $3750 per year. If you are in a 25% tax bracket you will also pay $937.50 in taxes. So you get $2812.50. So your tax-adjusted rate of return is just 1.14%. If you are concerned about market volatility, and you should be, then keeping one or two year's worth of income in GIC's can still be a good idea.
Conclusion
The goal of retirement income planning is to have an adequate amount of income that can support your lifestyle for as long as you live. 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 and sustainability.
If you are in or close to retirement and you are not confident with your current plan or advisor then meet with us and get an unbiased retirement income plan, book a 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?
We can meet either at our office or via conference call/FaceTime. We can work with you regardless of where you live in Alberta.
Click here! to learn more about our flat-fee planning services.
Willis J Langford BA, MA, CFP
Nancy Langford CRS
Retirement Income, Investment & Tax Planning
We can determine a sustainable income for you so that you don't overspend and become a burden to someone else or underspend and become the wealthiest person in the graveyard?
