- by Monica J. Weissmann, CFP, CIM, MEE
Drawing Your Personal Retirement Income Blueprint
Income after six ...ty ... Nobody wants to think about "that"! "That" may be age – sixty or sixty five.
The truth is that Millions of Baby Boomers today are in search of a reasonable monthly income generated from their investments. Planning for a happy retirement means to ensure it is comfortable (no change or minimal change in lifestyle) and since income will be generated from pensions (some government, other private) and personal investment assets the choice might not be easy. Therefore, taking the time to sketch an "Income Blueprint" (the word "Retirement" may or not make sense for everybody), will go a long way and set your mind at peace allowing for many good night sleeps.
Income Blueprint is a hot topic in the media – there are chock full of articles about all sorts of investment products described with the words "income" or "guarantee" which sound very secure and pension-like. But one needs to understand much more, the whole story ("the truth, only the truth and the whole truth") about the investment product before awarding the trust and buying it.
There are hundreds (way too many!) investment products that Baby Boomers could choose from in order to accomplish their financial goals. They could build their own portfolio using equities, balanced and fixed income mutual funds or ETFs, stocks, bonds, preferred shares and GICs.
A practical consideration in selecting the suitable product is the impact of tax on the income generated.. After all, what is really important is how much money will remain in your pocket after the due tax is paid, not how much is the percentage of the performance. Interest paid by bonds is considered income and is attracting the highest tax (your marginal tax rate). Bond income may be paid semi-annually (usually this is the case) or monthly (this is rather the exception). Dividends paid by foreign stocks are considered income and the tax will be the highest (your marginal tax rate) exactly like the bonds. If the stocks are Canadian, then there is a tax credit which reduces the tax payable on this income. The dividends are paid quarterly (most of the times), sometimes monthly and sometimes annually. Some ETFs are paying dividends which are considered income. Dividends paid by real estate income trusts (REITs), royalty trusts, business income trusts and closed end funds, are most of the times considered interest income, and have all different taxation rules. Capital Gains are paid on the growth of the equity investments and are taxed the least of all asset classes in regular investment accounts.
Another important criteria is the frequency of the payment, which is optimized when it is satisfying your needs (monthly or quarterly, if that matters). Due to the fact that all these sources of income are paying with different frequencies, and are taxed differently, it is possible to design portfolios which are generating income in a tax efficient way for YOU and which is paid the way YOU need. "One size fits all" never really works!
There are also some types of investments that are offered by insurance companies, which are indeed providing guarantees for either the capital invested or for the income which will be generated by the capital invested. They are called Segregated Funds and are a special type of mutual funds, wrapped inside an insurance contract. Segregated Funds do deserve special consideration when building a Retirement Income Blueprint (RIB). They can be purchased only through professionals licensed for insurance.
Even if you are a do-it-yourself investor, I'd argue you will be better off by having a consultation with a professional to discuss the different combinations and criteria to structure the ideal Retirement Income Portfolio for YOU. It may not be for a retirement purpose, but for an additional income allowing to live life to the full.
There are things we never find the time to deal with. There is always a tomorrow. Until there isn't. Tomorrow has become today, now, right now, here and not there and then.
