Retirement Mistake No.11: Generating A Low Yield When You Need More Income
Posted In: Retirement Planning for Entrepreneurs

Increasing Your Average Yield

Given the situation in the world today, fixed-term products are getting popular again as more and more people look for ways to diversify portfolios with reliable, income-producing investments. For those who want higher rates without risk or loss of principal, there are options that offer attractive returns. One simple method of guaranteeing return, while providing the opportunity to participate in the market, blends the safety of a GIC with the growth advantages of a mutual fund.

How it works

To begin with, you can purchase a monthly or annual interest GIC. Return of principal is guaranteed at maturity as long as deposit insurance rules are observed. After that, deposit the interest into the mutual fund of your choice. By doing so, you could achieve the advantage of dollar cost averaging during the term of the GIC.

First, project the amount you’d need to invest in a compounding GIC in order to get your principal back at maturity.

Second, invest the difference in a mutual fund. At the end of the term, you have return of principal plus an income component made up of the mutual fund of your choice.

For example: Suppose you had $50,000 to invest for 5 years at 5%. You don’t want to risk the $50,000 but feel the market has potential for growth. You purchase a GIC in the amount of $39,176.31, which grows to $50,000 in five years. Then, you can invest the remaining $10,823.69 in a mutual fund. If the mutual fund averages 10% per annum over five years,  the total investment will bring you a total of $67,431.66, with an average annual yield of 6.164%.

In conclusion, during uncertain times, your best bet is to create a plan that fits your particular needs and stick with it.

Guaranteeing an Increase in Your Income

A guaranteed retirement plan

For the retiree who wants it all – no risk, high income, and low taxes – an insured annuity appeals to thousands.

Thousands of Canadians set up insured annuities each year for a guaranteed retirement plan. However, most people have yet to hear of this investment option.

How it works

An insured annuity will provide you with a guaranteed income and preserve the capital for your heirs. There are two components that make up the insured annuity – a prescribed annuity and a life insurance policy. The prescribed annuity provides a guaranteed source of income for each year of retirement, with the income made up of a combination of a return of capital investment and interest earned on that investment. Only the interest component of the annual annuity income is taxable. Since this is a prescribed annuity, the taxable amount is averaged over the life of the annuity. Both of these factors help to maximize after-tax return. The insurance provides tax-free funds to heirs on your death, replacing the capital used to fund retirement.

Insured annuities will appeal to those:

  • About age 60 or more
  • Having non-registered capital to invest
  • Prefering high, long-term guaranteed rates of return
  • Having assets in GICs, and who are insurable (healthy).

Looking for a guaranteed part of your retirement capital and estate? Take a closer look at insured annuities.

Happiness is where we find it, but rarely where we seek it. – J. Petit Senn

Happiness depends upon ourselves. – Aristotle


Published with permission from Grant Hicks



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