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 The
Money Management Newsletter: GICs
and Fixed Income
The lifetime term deposit
By Martin Kosterman - Retirement Planning
Money Management Newsletter - Nov 1992
A practical alternative to GICs, T-Bills and Mortgage
Backed Securities. With the recent volatility in interest rates, one of
the questions we are being asked by our clients is, "what do I invest
my money in to produce a retirement income that will maintain my standard
of living?"
Living expenses have not gone down, in fact government related services
and utilities have gone up. Specifically, there are significant increases
in ICBC rates and property taxes. Where is the extra money to come from?
The problem is that while interest earned is unpredictable, expenses are
increasing.
As we see it, the senior living on an income provided
mostly from fixed term investment has three choices:
1. Substantially lower their lifestyle and continue to spend only their
investment interest while preserving the capital.
2. Start to spend capital as well as interest each month to supplement
the shortfall. This may be in their RRIF or their taxable capital outside
their RRIF.
3. Look at an overall planning strategy with a portion of the capital
being invested into what we call the Lifetime Term deposit.
The willingness of the senior to view part of his/her capital as long
term capital, with a purpose specifically dedicated to providing income
to live off will help the senior accept that to protect his or her income
stream, a long term commitment with that capital must be made.
On the portion of funds that are to be invested in the lifetime term deposit,
the following example demonstrates how effective it is as an income generator.
FEATURES OF THE LIFETIME TERM DEPOSIT
| Example: 75 year old male, Non-smoker |
|---|
| Lifetime Term Deposit | 7.5% 5 Year GIC Fixed Income | | Amount Invested: | $100,000 | $100,000 |
| Monthly | Annually | Monthly | Annually | | Income | $625 | $7,500 | $1,192 | $14,304 | | Tax Payable (48%) | 300 | 3,600 | 197 | 2,364 | | Net After-Tax Income | 325 | 3,900 | 995 | 2,364 | | Capital Replacement | 428 | 5,136 | | | | Net Income | 325 | 3,900 | 567 | 6,804 | | Pre-Tax Equivalent | 7.5% | 12.6% | | | | After-Tax Yield | 3.9% | 6.8% | | |
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