You are not alone in having questions about your retirement income.
If you’re like many people, you have diligently saved for your retirement for years, and now that you’re actually “retired” (or close to it!) you may be wondering how much income you will actually produce – and where it’s going to come from.
One of the most pressing issues many face in retirement is how to “de-accumulate” the thousands of dollars they’ve built up in their RRSP and investment accounts. Some of our more meticulous clients have detailed spreadsheets showing their expected cash flows, including CPP, OAS, company pensions, investment income, and so on.
The process of unlocking your own wealth can be much simpler. Within the past two years, most major mutual fund companies have launched “monthly income” funds to help clients mimic the impact of owning a pension. Created for people like you, these funds are designed to pay monthly distributions at an equivalent annual rate of, generally, 7-8%. One benefit is that clients know, with a high degree of certainty, how much money will arrive in their bank account every month – and can plan their spending accordingly. The other benefit is an income stream that is much higher than current bond and GIC rates.
For example, since 1993, Frank Russell’s Sovereign Diversified Monthly Income Fund has targeted a 7% rate of return. Investments are held in a balanced portfolio of stocks and bonds, and are diversified across asset class, managers, and investment style. However, rather than reinvest the profits, these funds are designed to pay you regular stream of monthly income. For example, on an original investment of $200,000, you would expect monthly income of $1,167.
Although not legally guaranteed (like a GIC), the mutual fund companies are able to achieve this higher than normal distribution by using a feature known as “return of capital”. Commonly used in insurance annuities, the return of capital feature is considered – in essence – you’re simply retrieving your own money. The effect, when held outside of an RRSP or RRIF, is that these distributions are usually subject to a much lower tax burden. Unlike an insurance annuity, you actually retain ownership over the capital and can sell the funds at any point.
The final benefit is that if the underlying investments can outperform the 7% target, you’ll actually see your portfolio grow in addition to receiving the distributions. If not, the funds are designed to utilize the return of capital feature to ensure that your cash payment arrives as expected.
Greg Holohan is an Investment Executive with ScotiaMcLeod who specializes in providing unique investment, insurance and retirement strategies to families in the Markham-Stouffville area. Greg can be reached at 905.479.8238 or greg_holohan@scotiamcleod.com. ScotiaMcLeod is a division of Scotia Capital Inc., member CIPF. This article is for information purposes only. When discussing life insurance products ScotiaMcLeod advisors are acting as Life Underwriters representing ScotiaMcLeod Financial Services Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. |
