By: Kevin-Barry Henry, #1 Bestselling Author
Many of my clients are nearing or in their retirement years. Perhaps you, dear reader are one of them, and if so thank you! Often when discussing retirement income, if you are like many of my clients (and most Canadians), you may be looking for:
- Guaranteed supplemental retirement income
- Ways to guarantee principal so you don’t lose any of your hard-earned money
A guaranteed income certificate (GIC) may be your choice and it can work well. The problem is that GIC revenue is interest income and is taxed at your marginal tax rate. In today’s low interest rate environment (although that may be changing…), you are lucky to earn 1.5% before tax.
An alternative idea that some of my clients have implemented is to take your lump sum of cash used to invest in a GIC and purchase a life annuity. This pays you a regular income for the rest of your life. You then use a portion of that preferentially taxed annuity income to purchase a permanent life insurance contract. This will replace the money used to purchase the annuity when you pass away. That way, you are spending the money on yourself now and your family or beneficiaries will get most or all of it back when you pass away! This strategy will typically produce a pre-tax rate of return between 3-5% and is guaranteed for life.
It really is a useful tool for now, and for later. Let’s look at some benefits:
Benefits of the Retirement Income Enhancer
- Higher amount of net spendable income
- Income guaranteed for life
- Preferential tax treatment on the annuity income
- Capital replaced at death and paid directly to your heirs
- Beneficiaries can be changed at any time
- No probate fees on the life insurance death benefit
Let’s take a look at an example:
Here’s an Example:
Male, 65, non-smoker, regular health
Non-Registered Funds GIC rate= 1.5%
Marginal Tax rate= 40%
| Current GIC Investment | Annuity + Life Insurance | |
| Capital | $250,000 | $250,000 |
| Income | $3,750 | $14,513 |
| Taxable Portion | $3,750 | $1,693 |
| Tax | $1,500 | $677 |
| After-Tax Net Income | $2,250 | $13,836 |
| Life Insurance Premium | $7,640 | |
| Net Income | $2,250 | $6,196 |
That’s an increase of 175% or $3,946/year and your beneficiaries will still inherit $250,000 tax-free no matter how long you draw your (increased) income!
Here’s Another Example:
Female, 65, non-smoker, regular health
Non-Registered Funds GIC rate= 1.5%
Marginal Tax rate= 40%
| Current GIC Investment | Annuity + Life Insurance | |
| Capital | $250,000 | $250,000 |
| Income | $3,750 | $13,452 |
| Taxable Portion | $3,750 | $2,174 |
| Tax | $1,500 | $870 |
| After-Tax Net Income | $2,250 | $12,582 |
| Life Insurance Premium | $6,785 | |
| Net Income | $2,250 | $5,797 |
That’s an increase of 158% or $3,547/year and your beneficiaries will still inherit $250,000 tax-free!
All it takes is a little planning and you’ve not only increased your present income and lowered your income tax, your family and beneficiaries will inherit the full $250,000 tax-free! If you keep the GIC instead, not only will get less income, pay more income tax but your family and beneficiaries only inherit what is left that you did not spend. It really is no contest.
This strategy may not be for everyone, so make sure you talk to an advisor. If you are interested in talking about this strategy or any other idea you may be thinking about, I would love to hear from you and you can reach me at kbh@kbhenry.ca or you can book a free 15 minute call with me here: BOOK FREE CALL WITH KB
I hope to hear from you.
With Gratitude,
KB.
THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.