Health knowledge made personal
Join this community!
› Share page:
Go
Search posts:

Income Strategies for Retirement – baker’s dozen

Posted Aug 19 2012 9:51am

silver change Sue and Pat could be retired already, or starting to plan their retirement.

They’re calling to arrange time we can meet about their retirement needs.  First on their agenda is how we can create a safe income.  And what questions do you suppose they have in mind?   If they’re like many people today they may be wondering:  Is it safe to retire?   Are we going to run out of money?  What choices are at hand?  Do we have to work longer?   How can we avoid risks that would take away our dreams, desires, or future security?

As much as Sue and Pat want to discuss investment strategies, you may appreciate how such strategies properly arise out of having a certified financial plan including a thorough investor profile.  This offers the foundation and purpose of investments to fit their needs and comfort. The certified plan can illustrate how their resources can create the income they need – as well as showing any gap or surplus life may bring along the way.

Once we have such planning in hand we can move ahead with specific investment strategies. These could include four or five of the following.   …and I share these with you to help inspire a few insights, while also helping you build the questions you would raise with a current advisor.

GICs.   Most people are aware of GICs.  And we know the income is guaranteed.  Problem is, GICs today pay less than ever.  GIC owners today could be eating up their investment and find their income is disappearing by their 70s or 80s.  To make this risk more obvious I might ask Sue and Pat, “is it more conservative to have more money or less money when we’re 80?”   People generally want to agree it’s safer to have more money.  So today our search for life-sustaining income cannot be satisfied just with GICs.  A GIC today is a Guaranteed Income Compromise that could leave seniors in poverty when they outlive their money.

Life pay-out annuities.  Little has been heard of these lately due to interest rates falling since the 1990s.  A life annuity is like a pension for life, guaranteed to continue paying, and possibly at much higher rates than GICs.  If your strategy is to start building a life annuity ladder, perhaps from your late 60s to your early 80s, it’s possible to create a high income ….and if it’s non-registered you may enjoy low tax rates and some freedom from OAS clawbacks.  We can consider whether you want the annuity income indexed for inflation, or whether other parts of your income strategy will satisfy the need to match inflation.

Company and government pensions.  I include this simply in order to note that many pension plans are under-funded.  Under-funding may range from 15% to 50%.  Even several good years in stock markets can leave pension plans under-funded and unable to pay what they’ve promised to retirees.  While CPP and OAS appear reasonably secure for the next 50+ years, your financial plan might consider the possibility of a 20% haircut on pension amounts you’ve assumed for your future.

What if you already have part of your income nicely secured?  Your income strategies may aim to boost current or future income from your other investments.

Dividends.  Whether you own specific entities in the stock market, or you prefer trusting a team of CAs & CFAs guiding mutual or segregated funds, your first goal may be to get “dividends”.   I’ve never known a time when dividends weren’t important to financial wellbeing.   In my personal study I’ve traced some companies back 50 to 100 years to learn how safe they were, and how their dividends were sustained or changed over that period of time.   A fund that focuses on dividends will own companies with strong earnings, prudent management, and a capacity to increase dividends on a regular basis.  If you’re a golfer, a dividend is like having a 100 yard advantage on each hole.  If you’re flying, it’s like being in first-class.  If you’re filling up at the pump, it’s like getting 30-50% more gas efficiency.  And while stock markets fall on occasion, the dividend stream of a well chosen dividend fund may sustain a stable and growing income as the years proceed.

Other equity funds.  Some say the only way to keep pace with inflation is in the stock market.  This is more compelling if we include the dividend yield as mentioned above.  Most people who are 60+ don’t like “roller coasters” …and would avoid the stomach churning of two or three bad years in the stock market.   An aggressive investor may not be troubled, but many want the growth of stock market equities, with less risk.   Your advisor should have ways to quantify the actual risk of the funds you would own, and thus manage that risk as a portion of your total investment assets.

Bonds and bond funds.  An underlying crisis in bonds is their low coupon or interest rate today, and the lost market value that hits them when interest rates rise.  We could discuss corporate and foreign bonds to increase returns, in line with acceptable risk levels.  Bonds may be best suited to the income you plan to withdraw over the next three years – what I call an “income reservoir” – where other investments could better support income you’ll withdraw 7-20+ years hence.

Income funds.  Some funds are pre-arranged for an acceptable level of risk among income investors.  Other funds may focus on one or a combination of equities, real estate,  infrastructure etc, to provide guaranteed income at 5%, 6%, 8% or another amount.  (Discuss too if the fund’s earnings will be enough to keep it paying you as long as you require.)   Such funds, well chosen, should support far higher income over time as compared to the GICs we mentioned at the start.  So if you agree that more money is safer than less money, you may feel that a combination of dividend and income funds could be your key to ongoing prosperity.

Real estate.   Not everyone wants to be involved in renting properties.   If you do, we can include this in your overall planning.  But if you’re unsuited to managing tenants & rental properties, then there are a couple of strong funds providing broad exposure to residential/commercial real estate.  To support rising income – with low risk compared to stock markets – real estate offers another key to securing life income.

Long Term Care Insurance.  Might health expenses become our largest expenditure someday?  Well not for everyone, but a good half of us someday will be living either in a care centre, or be bringing care into our homes.   Have you looked at these kinds of costs?  Have you considered how these costs may rise when baby-boomers (or their parents) increasingly need such service?  LTCI can reimburse some of your health costs, or even more easily just pay you a direct tax-free income!  If arranged early enough, the multiplier effect of monthly deposits to future monthly benefits will be very significant.  This protects adult children from spending their retirement savings on health care of their parents.  And for ourselves it can pay a continuing income to match costs of living how and where we wish, where the support and care lets us continue to enjoy life on our own terms.

Principle residence.   Too many expected their home could be a retirement plan.  When all the baby-boomers decide to downsize homes at the same time, will it not poke the bubble a little bit?  And condo living might become a little more expensive at that time?  So downsizing may be a mediocre source of income.  However there are ways to unlock value of the home where you’re living.  I don’t like reverse mortgages, but a HELOC (home equity line of credit) can enhance income (tax-free) for a number of years.   A similar principle can be used with other assets such as your cottage or the cash value of sizable life insurance policies.

Continuing business interests.  Various structures of business ownership can continue to support ongoing income, and in many cases offering some tax advantages.  We could explore this further with the specifics of your own situation.

Lotteries.   Children.   I’ve read that 11% of baby-boomers say the lottery is their #1 vehicle for retirement security.   Some whose savings run out will be forced to rely on their children, yet we should consider that those children in their 50s and above have probably been saving for their own retirement – not that of their parents.

The whole story here points to the vitality of developing and owning your certified financial plan.  This aligns personal values and resources with the investment opportunities you will use to create income so you can enjoy life fully throughout the years ahead.

Brian Weatherdon, BA, MA, CFP, CLU, CPCA, MDRT.

Sovereign Wealth Management Inc.  905-637-3500 x 223

Brian Weatherdon of Sovereign Wealth Management Inc. is a financial advisor representing Freedom 55 Financial, a division of London Life Insurance Company and a range of financial companies. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors. The views expressed are those of the author alone and not necessarily of the issuer of any financial products for which the author may act as a distributor.

Post a comment
Write a comment:

Related Searches