Income-producing securities have always been the go-to investment for retirees, but for most of history, it’s been because the post-working set needed a steady stream of revenue to pay the bills. While that’s still the case for many, it’s not the only way retirees are using company payouts these days.
Over the past couple of decades, life expectancy for Canadian men and women has gone up — we can now make it, on average, to about 80 — which means we need our investments to continue growing well into our golden years. There’s one problem: most retirees aren’t bringing in a lot of money after they stop working.
Besides the Canada Pension Plan and Old Age Security, the only other streams of income are RRIF dollars and dividend payments. If your client can cover his or her expenses using savings, then you may want to consider reinvesting those dividends instead of pulling them out, which is what has traditionally been done.
Investing in retirement is still an unusual concept for some — many clients want to be ultra-conservative with their money after they stop working — but the longer people live, the more time they have to save.
“That’s one of my biggest pet peeves,” says Allan Small, a senior investment advisor with HollisWealth. “People always seem to make the same comment that ‘I can’t afford to lose money because I’m older now,’ but they’re making a mistake by not investing in the market.”
Reinvest for higher returns
One way to keep growing a portfolio in the absence of a bi-weekly payment is to reinvest dividends back into the market. Typically, that’s done through a dividend reinvestment plan, but Small will often collect payouts for his clients and then invest them into other dividend-paying stocks, corporate bonds or preferred shares when enough cash gets accumulated.
At this point in someone’s life, it’s a good idea to do this outside of a RRIF. While the federal government lowered the minimum RRIF withdrawal in the recent budget, your client will still have to pull that money out sooner rather than later, and their marginal tax rate could be higher than the dividend tax rate.
Of course, you will have to determine which strategy mitigates the tax hit the best, but some of Small’s clients put their RRIF money into TFSAs and reinvest the dividends there.
Depending on how much money your clients have, they could also invest their funds in non-registered accounts. While they’ll have to pay tax on dividend income, it’s about half as much as they would have to pay if they pulled the money out of a RRIF.
The bigger the portfolio the better
One challenge with this strategy is coming up with enough money to make it worth it. A decade ago, it was easy to generate a yield — Government of Canada 10-year bonds were paying more than 4% a year. These days, investors have to get that income from stocks, which can be tricky as higher-yielding equities often carry more risk.
It’s stating the obvious, but the larger the portfolio, the better. If a client has $100,000 and wants to invest — or use — $10,000 a year, then you’ll have to come up with a 10% yield. If the client has a $1-million portfolio and wants $30,000 a year, then you have to generate only a 3% payout.
“This is a conversation you’ll need to have with your client,” says Small. “Unfortunately, sometimes what the investor wants doesn’t equate to the investment that person has.”
Whatever the ultimate decision, it’s important to remember that dividends don’t have to be used for day-to-day income needs anymore. They might be more valuable in the long term instead.