You’ve received that chunk of money; you’ve sold your business, you’ve sold your farm, you’ve inherited money.
Or maybe you’ve just accumulated this $2 million throughout your life and now you need to invest it for income.
Regardless, you’ve now got 2 million bucks, and now you need to convert that to income for your retirement.
Let’s take a look at how we would structure that.
First of all, are the assets registered or not?
Let’s look at the scenario of a strong saver, a couple who’ve been putting aside money all year and the 2 million bucks are in their RRSPs.
Each have 1 million bucks of registered assets. We do not need to factor in the tax consequences of the actual income stream.
They have 2 million bucks and will want to structure income. They’ve discovered through financial planning that if they get $100,000 a year pre-tax, that would suffice.
The amount would be anywhere from 75 to 85,000 in after tax dollars, depending on the tax rate of withdrawing of RRSPs.
In any event, the income stream does not matter in structuring a portfolio to generate income.
That means we can use bonds, we can use preferred shares, we can use private debt, we can use stocks, we can use real estate. The tax consequences for this couple is irrelevant.
We’ve got to make sure that we’re structuring a portfolio that’s generally generating income. We could take a look at some value stocks. We could take a look at dividend payers, depending on the risk tolerance of the couple, we’re going to want to make sure, absolutely sure that we’re meeting and matching their volatility needs.
We do not want to use a max growth portfolio if that’s not what they can handle, right? The objective for that client is one, to figure out their need, and then to build a portfolio based on that. In this case, tax consequences of any kind are not factored in.
Private debt is one area that we could potentially generate some real nice returns.
If interest rates move and you’re able to get 4 or 5% on bonds, that’s a good spot to get income for a conservative client.
There are some dividend paying equities that are paying 4 or 5%. You can take a look at real estate investment trusts, infrastructure, utilities, all of those companies pay very nice consistent income.
At the end of the day, you build this portfolio, you add the different income streams and you subtotal it – you want the income to be 5%.
Now, it might be tough depending on where interest rates are, but regardless, you look at that and you see if you’re able to do that using those different options.
You can add some alternatives, such as some higher paying rates which can pay 8 or 9%, and then you construct a portfolio that’s generating income for the couple.
It can still be very, very, very defensive.
You can also construct a portfolio that’s built to last them forever so that when they pass, their estate is still 2 million bucks.
Another scenario is where an entrepreneur sells his business and gets $2 million after tax dollars. All of it is in non-registered assets.
In this scenario, tax does become a factor.
The first thing we’re going to want to look at is RRSP contribution. Are there any TFSAs and can we do anything with those? Can we shelter any of that income? Can we somehow use a corporation to shelter some of that income?
If all the money is non-registered and you got $2 million and we are building that for tax purposes, you’re going to have to make sure to factor in the taxable consequence of all those investments.
Again, we will focus on dividends on the defensive side.
You can take a look at preferred shares or, depending on where interest rates are, there’s some really nice yielding preferred shares that could get you that 5% if we want to generate a $100,000 of income for this client. Income, so we can look at preferred shares.
Let’s take a look at dividend paying equities.
Some of the same utility, REITs, private limited partnerships, private REITs – all of these options are tax efficient.
You’ll generally want to stay away from the private debt. Depending on your risk tolerance, you’re going to want to stay away from anything that’s an interest-bearing certificate, for tax purposes.
That scenario is obviously different than the retiree who has all their money in registered assets.
You’re building a portfolio for 2 million of income. You need to make sure you calculate what the dividend yield, what the interest income with the return of capital is expected to be in this portfolio. You structure it, you build it, and then you send the cash flow out to the client.
We would send the cash flow out to the client on a monthly basis, and the cash flow is being fed automatically from the portfolio directly to the client’s bank account.
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