With today’s low interest rates and no increase in sight until 2014 or beyond, there aren’t a lot of guaranteed income options for seniors to pick from. $100,000 invested in a 5 year GIC at 2.70% only earns $2,700 gross a year, so someone in a 30% tax bracket would only have $1,890 net after tax. Many people either in or entering retirement are in a quandary as to what to invest in, especially with market volatility due to the current global uncertainty. So where do seniors find safe investments?
Recent work I’ve done with two family farms with parents over age 80 who are selling significant amounts of land has highlighted some of these issues. At that age there are a limited number of investment options that are safe, offer a decent rate of return, are tax efficient, and able to bypass probate.
There are now segregated funds options available for this age group that provide a death benefit guarantee based on the greater of current market value or invested principal, net of any withdrawals. These are ideal for estate conservation or equalization purposes, as payouts bypass probate and go directly to named beneficiaries.
There are a number of other segregated fund options offering from 75% or 100% guarantee of the invested principal on a certain date or upon death of the investor. Some products enhance future income with a guaranteed annual bonus each year that no withdrawals are made. These also take advantage of any market increases by automatically increasing the value of the pension and death benefit on a regular basis, usually every three years. When needed, these products can be switched to provide guaranteed lifetime income, with the potential for continued market value increase resets as a hedge against future inflation.
Some offer a pension style investment that provides a greater payout the longer one delays taking income. Registered plans must be converted to a RRIF by the end of the year the person reaches age 71. Unregistered plans can be held until age 100 but most don’t allow deposits after age 80. For a couple, these can be set up with payments based on one life, or continuing to a spouse after the first death.
Annuities can provide significantly enhanced income with minimal or no tax loss compared to GICs. They can be set up many different ways with different payouts, principal protection and term periods for different income requirements. Annuities too can be set up to continue paying to a spouse after the death of the primary annuitant. For estate preservation in addition to income, an insured annuity will pay out the original principal amount to your beneficiaries upon your death. The ideal age range for annuities is between 65 and 75, but they work well for older ages as well.
For seniors considering reverse mortgages to leverage their home equity for retirement income, first take the time to check other options available with less fees and much more flexibility.
If you can’t survive on today's low GIC rates, check out what a licensed life insurance professional can offer. Payouts that are private transactions and bypass probate on death, plus the potential for creditor protection are just a few of the benefits.
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