The Five Fundamentals of Investing for income
Most of my clients are looking for real estate as a home first and foremost. I do however like to encourage a little long term financial thinking into the mix and a common suggestion for that is buying a home with a suite that they may rent out or not as it allows a safety net making you mortgage payments easily even if some unforseen challenge arises. It also allows for long term stability and possibly having that extra income to make life easy later on. That is a common way to do it but there are many more for people with the right skills and business sense. For more on the broader principles of building wealth, the following is a post written for this blog by Emmanuel Lint of Investors Group here in Nanaimo.
Why are you building wealth? Most of the time is because you realize that at some point you will no longer work and will need to tap into your investments to create an income.
That is most likely to occur after you retire but, depending on your unique financial needs, it could come earlier – so here are five fundamentals for getting the most from your investments.
1. Be realistic about whether or not your current investments will deliver an adequate level of income In retirement, your income will usually consist of amounts you’ll receive from the Canada Pension Plan, Old Age Security (CPP/OAS), private pension plan(s) and perhaps work income, plus draws from your investments. If you think your retirement expenses will be such that the income produced from your investments will be inadequate, you should revisit your portfolio and savings strategies now.
2. Verify that your income will last as long as you need it The level of income you draw from your investments should not completely deplete your savings while you still need them. The investments you choose will depend on your investment style and income needs.
3. As your expenses increase with inflation, your income needs will also change A portfolio that consists solely of fixed income investments, such as GICs, is unlikely to produce long-term growth above inflation. Growth in income comes from growth in assets. That’s why investing for income during a long retirement usually means including investments in diversified equity markets, depending on your comfort level with market risk.
4. Assess your need for income stability and how to achieve it Be mindful of the impact that constant withdrawals can have on your investments. If you need a high level of income stability, look at investments that deliver regular distributions – fixed income, real property, dividend paying securities – or products that provide a guaranteed monthly income, such as annuities.
5. Consider the tax impact on the income you draw Income from investments held within a TFSA are tax-free, while income from your other registered assets is fully taxable. For your other accounts, the tax on interest is generally higher than income from dividends or capital gains. The amount of your taxable retirement income may also trigger clawbacks of your OAS benefits. Look at investment structures that can provide more tax-advantaged income for non-registered accounts.
Planning to ensure you retirement income needs will be met can be complex. A professional advisor can supply the expertise and vision you need to meet those needs.This column is provided by Emmanuel Lint, Certified Financial Planner at Investors Group in Nanaimo. It presents general information only and is not a solicitation to buy or sell any investments.
Emmanuel can be contacted at 250-729-0904 or by email at Emmanuel.firstname.lastname@example.org