Peter Boys, Boys Financial Services

Finding Income in Today’s Low Interest World

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A quick scan of current five-year GIC rates shows most are below 2%. After factoring inflation at 4% and the interest income fully taxable, it makes sticking your money under the mattress somewhat appealing! What are the alternatives for investors or seniors looking for secure income today?

Annuities verses GICs: A 68 year old couple investing $300,000 into an annuity today would receive a net annual income of $16,868 vs. $3,420 for a five year GIC. One big advantage of annuities is that they can be customized with many options and guarantees, such as ensuring that if both died in less than 10 years, the original principal is refunded minus what was paid out. Annuities also trigger less tax because the interest income that GICs produce is fully taxed.

One major consideration is that with GICs, your invested principal is available to reinvest after maturity. With the annuity, the invested principal is exchanged for a guaranteed lifetime income stream, hence the reason not to put all of your money in an annuity! If you want the principal you invested in an annuity paid to your heirs on your death, a life insurance policy will do this, ideally a joint and last to die policy for lower premium cost.

The need to consider longevity risk: Today we’re living longer, so out of 10 healthy 68 year old people, at least one will live to age 95, which highlights the risk of outliving our money. In a couple of generations we have moved from leaving money behind when we die to living too long and facing the possibility of financial poverty in old age. This risk increased the last couple of years because of the collapse of returns on government bonds and the steady fall in returns from other core assets such as blue chip stocks. The response to these factors means that many Canadians are now being forced to delay their retirement or find part time work to supplement their meager CPP and OAS pensions. Some are even forced to take out reverse mortgages, with their high set up costs and ongoing fees. If you are considering this, please talk to a trusted financial advisor about less costly alternatives. Once again, life insurance may be a way to replace retirement capital or property mortgaged and the proceeds used for income to conserve one’s estate for heirs.

Blue chip dividend paying stocks: For seniors with large retirement portfolios there are specialty investment houses which offer active management with this investment class. These offer several plusses including low fees, ease of liquidity and transparency of process.

Rental property can be residential or commercial, my personal preference is for commercial property with locked-in long-term lease rates. Residential can be riskier, especially if not managed by a professional property management company. I have had several clients recently who have been burned by tenants leaving in the night with unpaid utility bills and damaged property.

Segregated funds with guarantees: There are a wide range of options and guarantees including guaranteed income for life. Naming family members as beneficiaries may offer some creditor protection. One big plus is speedy estate settlement, as payouts bypass probate and are private. If properly structured, funds can pass directly to a successor annuitant of the original contract.

The bottom line is, if you are earning little or nothing in your GICs or savings accounts, please check with a trusted advisor for better alternatives.
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