When people retire, they are frequently advised to put their money into a term deposit or a guaranteed investment certificate and live off the interest. At first glance, this may seem to be a wise decision because the income from the interest initially appears to be sufficient to meet their needs. Over the years, however, the income received decreases in real value because of the effects of inflation and the taxes paid on interest income.
"Counteract the effects of Taxes"
One alternative that can counteract the effects of taxes and outstrip inflation is a Systematic Withdrawal Plan. Available through many mutual fund companies, Systematic Withdrawal Plans are extremely flexible and can provide an opportunity for you invested capital to grow while you withdraw an income at the same time.
For example, suppose you had invested $100,000 on September 1, 1981 in Trimark Fund, at inception, and decided to withdraw a regular of $825 a month beginning October 1, 1981. By December 31st, 1982 you would have withdrawn $12,375 and your account would have grown to $122,827, assuming you reinvested all distributions. And over twelve years later, on March 31, 1994, you would have withdrawn $123,750 and still have $426,655 left in you account.
"Systematic withdrawal plans are flexible. You are not locked into a fixed payment schedule"
On the other hand, suppose you had chosen to invest your $100,000 in a security earning 10 percent interest and had withdrawn $825 a month. Your investment would still be worth $100,000 after 15 withdrawals, but your $12,375 in payments from the plan would have been taxed at your highest marginal rate. And today, your plan would only be worth about $93,000.
Systematic Withdrawal Plans in the right mutual funds, therefore, have two significant advantages over other investments: a rate of return that usually exceeds traditional interest-bearing investments over the long term, as well as favorable tax treatment.
You get better tax treatment from Revenue Canada because your income consists of more than just interest which is fully taxable. With a Systematic Withdrawal Plan, it consists of interest, dividends, capital gains and return of your initial investment.
To open a Systematic Withdrawal Plan such as Trimark's, you need only deposit $5,000 in one of the Trimark family of mutual funds. Then, you choose how much you should withdraw from your account on a monthly, bi-monthly, quarterly, semi-annual or annual basis. This amount will be transferred to you bank, trust company or credit union account, or to any person you choose to designate as recipient.
If you withdrawals from your account exceed the total return of the fund, the money needed to meet your request payment will be deducted from you original capital investment. But since Systematic Withdrawal Plans are flexible, you are not locked in to a fixed payment schedule. You can increase or decrease your payments to suit your specific needs as they change.
As an investor, you should be aware that the plan's value will increase or decrease, depending on the value of the investments in the Fund.
Many well managed funds have earned an average annual return of 15 percent over the long term. Some have earned even greater returns during periods of strong economic growth. It is this consistency and ability to outperform that have led thousands of Canadians to put their money into mutual funds. Mutual funds have proven time and again that they are the perfect vehicle for providing investors with a solid income while allowing their original investment to grow.
Talk to us about setting up a Systematic Withdrawal Plan. It could be your passport to a more secure future.
* * *
Have a question regarding this article? Use our feedback form to send us a note.
© , Fiscal Agents Money Management Newsletter