Income, Income, Income
The Advocate, Wednesday February 2, 1994
With interest rates less than 5% these days, how does one cope? Even with inflation running at an all-time low of less than 4 per cent, what about taxation? Five per cent interest is subject to full taxation at your top tax bracket.
At the average of a 41% marginal tax bracket, you would only realize an after-tax return of less than 3 per cent.
With a principal of $100,000, your spendable income would only be $3,000 or $250 a month. If your income needs are higher, you either need more capital or a better return. To encroach on your capital to get more income is a dangerous downward spiral.
Another option is to formalize the depletion of capital with an annuity. Extreme caution needs to be exercised with this option. Electing a lifetime income without any options could disinherit your children. When you die, your assets also die with you.
A RRIF would be the best way to receive income from a RRSP. It is flexible to meet your needs. You can still retain control over your asset mix instead of giving all your capital to a life insurance company in place of a monthly inccome with no growth potential.
If your home if fully paid for, you can consider a reverse mortgage. In future articles I will discuss how this works.
Your best option is a professionally managed portfolio of investments in a mutual fund from which a monthly income can be drawn - a systematic withdrawal plan (SWP). Most of this income comes to you tax-free because of the way it is set up.
I have two excellent articles on this subject that explains how it works.
This option is only available through mutual funds. One of the best examples of this I have is with the Templeton Growth Fund.
Twelve per cent withdrawn per year or $1000 a month from an original $100,000 invested January 1, 1964 would be worth $2,236,209.02 December 31, 1992. The cumulative cheques would have amounted to $348,000 over this example of a 29 year SWP. That is a profit of $2,484,209.02. Although this may be hard to believe, it is a documented fact.
I have several SWPs set up through my mutual fund holdings. They are sent directly to my bank via electronic deposit where other computers electronically withdraw my monthly bills.
This helps simplify my life. The real beauty of this is, although I am receiving much of my income tax free, my assets are also growing.
The first example I used of encroaching on your principal has not happened. In fact, as my assets continue to grow, I look forward to taking out lump sums for travel in the future without effecting my income.
I have just come across an excellent booklet titled, "How to Provide Retirement Income - and Gain Greater Control Over Your Financial Future." I can obtain a copy for anyone interested.
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