As investors approach retirement, investment priorities change. Accumulation of wealth gives way to preservation and distribution of that wealth. As a result, the investment focus shifts to income-producing assets designed to deliver a predictable rate of return that you can literally “take to the bank.”
The traditional rule-of-thumb that your age should determine the percentage of your investments in fixed-income securities is no longer valid for many retirees.
While traditional debt investments — government bonds or bank GICs — continue to provide a measure of safety and security to a well-balanced retirement portfolio, they may not be relied on to generate an adequate income stream that can outpace inflation.
Investing for retirement has become more complex with a greater diversity of investment options and strategies from which to choose as you make the move to fixed income investing.
Income from investments comes in a variety of forms — dividends, return of capital, capital gains (when an asset is sold for a profit) and interest — each treated differently from a tax point of view.
Capital gains and dividend income receive preferential tax treatment and are usually taxed at a lower rate than many investors’ personal tax rate, which would apply to interest income and withdrawals from a registered retirement fund. For this reason, high net worth investors will want their portfolio of income-producing equities and investments in an unregistered account rather than a RRSP or RRIF.
The equity markets can play an important role in fixed income investing. In particular, dividend-paying common equities can provide capital appreciation and income potential.
Investors should look for companies with a long track record of regularly paying a dividend and more importantly, those that increase their dividends on an annual basis.
Dividends paid by Canadian corporations are now receiving more favourable tax treatment by the federal and many provincial tax authorities — the upshot of which can make dividend income the lowest taxed form of investment income.
Indeed, individuals with no other source of income may now receive up to $67,000 per year in eligible dividend income without incurring any taxes.
Also coming back into the picture are corporate preferred shares.
Corporate preferred shares are non-voting and not as volatile as a company’s common shares. Sometimes described as “bonds in waiting,” preferred shares are more secure investments than common stock and may pay a regular, and often attractive, dividend.
Traditional insurance annuities can be tailored to each investor’s personal circumstances.
The terms of the annuity contract may vary but all annuities are designed to provide a guaranteed retirement income for the life of the annuitant and often the spouse.
The insurance industry is now also offering principal-protected investment contracts designed to provide the potential for equity growth along with guaranteed minimum withdrawal benefits that give investors a long-term sustainable and predictable income source.
For mutual fund investors, there’s an option of investing in established funds that allows a systematic withdrawal plan (SWP). These funds allow unit holders to receive a steady income stream paid out regularly while still maintaining an equity position in the fund.
Such SWPs often enjoy tax advantages when held in a non-registered account.
Fine Tune Your
There’s more to income investing than first meets the eye. With the many investment options to consider, it’s often a fine-tuning exercise.
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Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd . This article is for information only and should not be considered as personal tax advice. This information is from sources believed to be reliable, but cannot be guaranteed to be accurate or complete. Securities offered through Raymond James Ltd., member CIPF. Insurance offered through Raymond James Financial Planning Ltd., not CIPF member. For more information feel free to call Jim at 250-594-1100, or e-mail at email@example.com. and/or visit www.jimgrant.ca.