More income, less tax, no probate fees
How come some retirees have more income and less tax?
Look at Norma, a 75-year-old retiree in Qualicum Beach. She inherited $200,000 and was looking for income and less tax. She also didn’t want to take a lot of risks.
We decided to invest half into GICs and half into an annuity. While she wanted income she thought she would want access to some capital but not all.
Here is what Norma ended up with. The annuity for $100,000 provided her with $774 per month guaranteed as long as she lives. That’s $9288 per year on $100,000 which will always be there for her.
We also put in a 10-year guarantee to her children for 10 years worth of payments. That means the payments will continue till 2013 if she dies.
The second portion we invested in a 1 year and a five-year GIC. The average return on those funds was 4% combined. We suggested investing in GICs using the barbell technique, half short term, and half long term. Because we don’t know what interest rates may do we take the averages, which in this case is 4% ( 3.4% one year and 4.6% for five years) Norma’s payout will be $4000 from the GICs which gives her a combined income of $13,288 per year on $200,000 or 6.64% approximately.
Now comes the tax. Since the GICs are fully taxable, she has $4000 of interest income. We decided to invest the GICs with Insurance companies so that we can name a beneficiary on the plan. So when Norma dies, there are no probate costs.
The taxable portion on the annuity is only $2494 per year since we used a prescribed annuity for tax efficiency. Although Norma received income of $13,288 per year she has a taxable income of only $6494 per year.
Now Norma doesn’t have to worry about market risk or a higher tax bill. She has a steady income and less tax. When Norma dies, all of the funds and or income will go directly to her children who are her beneficiaries, free of any probate fees.