Generating Retirement Income from Investments

By Darren Fong

Often clients ask us about the best way to generate income at retirement from their investments. There are many ways to achieve retirement income from investments, so our answer is always client specific. Our view is investors should focus on asset allocation of their investments to meet their specific objectives considering their personal risk tolerance and time horizon. We help our clients generate retirement income from investments through a mix of different assets to create a diversified income stream. There are also a number of account types that this can be achieved from (ex. RIF, TFSA and non-registered accounts).

Some assets investors should consider are:

Bonds – Heading into retirement, most investors should have some capital allocated to bonds. The bond universe is huge. We like to add corporate bonds as they provide a bit better return than government bonds so will have more resilience if interest rates go higher. There is no rule as to how much should be allocated to bonds. An allocation to bonds really depends on the individual client and what their risk tolerance is.

Stocks – Some stocks pay dividends while others do not. Investors should not get hung up on if a stock pays a dividend or not. It is the total return that matters. If a stock does not pay a dividend, then trimming the position is necessary to “create” cash flow. There are many stocks that would fit a good dividend paying stock for retirement such as financials, telecom companies and infrastructure companies. Stocks that do not pay dividends should still be considered. The decision for a company to pay a dividend or not is a capital allocation decision that should be made by the company in the best interest of shareholders. There are excellent non-dividend paying companies in all sectors across the market.

Real Estate Investment Trusts (REITs) –REITs are another common income producing asset that should be considered. REITS are very attractive for investors because they give the investor everything they would want in physical real estate without the headache of dealing with tenants, collecting rent and other landlord related duties. REITs can be bought in all registered accounts as well as non-registered accounts and have been a successful way to create income as well as overall gains in investment portfolios.

Preferred Shares – Preferred shares are a relatively unknown security that is typically thought to be for high net worth investors however anyone can buy preferred shares in the open market. Preferred shares share a lot of the same similarities as bonds, however are lower on the balance sheet (are unrated equity) and pay dividends instead of interest income. There are two main types of preferred shares: perpetual which means they technically don’t have a maturity date however can be recalled every 5 years by the company, and re-set rate which means that the dividend rate changes every 5 years to a spread plus the 5 year government bond yield. Preferred shares are an excellent way to generate tax efficient income that gives you more like a bond type of volatility that common equity.

Generating retirement income from investments needs a tailored approach to your specific needs.

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