Recently I have been receiving many questions on how to generate an income for life.
I would like to expand on this and discuss a few options for generating “guaranteed” income for life. Many clients invest in GICs with the idea of eventually generating an income for life. Unfortunately in low interest-rate environments GICs do not keep up with inflation. I referred to this strategy as “bankruptcy in slow motion.”
GICs are a great tool for protecting capital but not necessarily the best solution for generating a guaranteed income for life. Below are a few options that should be considered if you want to guarantee that you will not outlive your income.
Principle protected Annuities
Many insurance companies in Canada offer annuities. One annuity to consider is known as principal protected annuity.
These will guarantee that you will receive the full value of your capital if you should die before receiving all of it.
However, if you receive all your capital through withdrawals the insurance company is committed to keep paying you your income for life. These annuities can be purchased on a single life basis guaranteeing income for one person or on a joint life basis guaranteeing income for both you and your spouse. Annuities work extremely well in a non-registered environment as they are extremely tax efficient.
The strategy is designed for individuals whose sole focus is income and the protection thereof.
Guaranteed lifetime withdrawal benefit (GLWB)
The GLWB benefit is available through segregated funds offered by life insurance companies. Simply put they guarantee a certain amount of income for the life of an individual or couple and depending on the performance of the portfolio the capital could remain intact or even grow.
Clearly if the portfolio is not matching the income withdrawal then the capital will decline over time.
This strategy works well for individuals who require income and might want to have access to the capital down the road. If used in a registered account income will obviously be fully taxed, but in non-registered accounts only growth will be taxed, therefore income can be reasonably tax efficient. There are a number of investment choices to suite your risk profile when you purchase a GLWB product. These structures can also offer capital guarantees on death depending on which option you choose.
A suggestion is to review all your income streams and calculate what percentage of it is guaranteed for life. If none of your current income is guaranteed for life you should perhaps consider putting some guarantees in place.
Call or e-mail me if you have any questions.
Written by Stuart Kirk, CIM. Stuart Kirk is a Retirement Planning Specialist with Precision Wealth Management Ltd. The opinions expressed are those of the author and may not necessarily reflect those of Precision Wealth Management Ltd. For comments or questions Stuart can be reached at stuart@precisionwealth.ca or 250-954-0247.