Four strategies to boost your retirement income
If you are retired or close to retirement, generating income is probably one of your biggest concerns.
You count on your investment nest egg to supplement the income you receive from government sources. But in a low-interest-rate environment, your money needs to work harder.
Consider these four investment strategies that may allow you to achieve higher after-tax income.
- Choose a T-SWP for a taxefficient income stream. A tax-efficient systematic withdrawal plan (T-SWP) works with special “T-series” mutual funds, which are set up to include tax-free return of capital (ROC) in your payouts. Once all of your original capital has been returned to you, withdrawals are taken by redeeming units.
Note, however, that as you deplete ROC, the adjusted cost base of the units decreases as well. This means a higher taxable capital gain when you sell or transfer the units. T-SWPs are best suited to non-registered plans.
- Consider high-income-generating asset classes, such as real estate and infrastructure. Both commercial real estate and infrastructure investments have the potential to provide a regular and reliable income flow at a level that’s potentially higher than that available from current guaranteed investment rates. And while there is greater short-term risk associated with these sectors than with guaranteed investments — as investment prices can rise and fall with market conditions — they are generally less volatile than other types of equity investments.
In addition, these sectors offer diversification, with lower correlation to traditional asset classes.
- Invest in dividend-paying Canadian companies. To encourage Canadians to invest in their own backyard, the government offers a tax credit when you invest in dividendpaying Canadian companies.
The tax payable on dividend income is lower than on interest income and can, depending on the provincial and federal tax brackets, in certain circumstances, be as favourable as capital gains tax treatment. Keep in mind that successful companies often increase the dividends to their investors year after year. Many dividend-paying shares also have solid growth potential over the long term.
- Climb a bond ladder as interest rates rise. With interest rates in Canada expected to begin rising as early as mid-2010, you may want to consider making bond investments using a ladder strategy. This strategy allows you to take advantage of higher rates as they become available.
Here’s how it works: You start by buying roughly equal dollar amounts of bonds with a variety of maturities, each maturity date representing a different rung on the ladder. When the shortest-term security matures, reinvest the proceeds in the best-returning rung on your ladder, which usually is the top rung, with the longest maturity.
In time, the shorter-maturity, lowerpaying rungs will be gradually replaced by higher-paying, longer-maturity securities. You will have securities maturing every few months or every year, depending on how you construct your ladder. Given that longer-term yields are normally higher than short-term yields, you are reinvesting funds at higher rates, on average, over the long run. This enables you to reinvest matured securities at the highest available rate.
We can help you get your retirement savings working hard to generate the income you need in retirement.