Retail Investor .org


There is absolutely nothing new in seniors requiring more cash from their investments than what is earned. There have always been many methods available.

  • Annuities offer higher distributions because they include returns of capital. The insurance company plans its payouts to last the expected life of your cohort. So you benefit if you live longer than the average.
  • Mutual funds have structured withdrawal programs for consistent cash flow regardless of their income gains. These may be systematic withdrawal plans or 'T-class' Canadian funds.
  • Cities allow seniors to defer paying Property Tax until their house is sold, or on death. Your liability will grow over time, reducing your net worth.
  • Reverse mortgages provide a steady stream of cash while shrinking your equity in the house. Read this excellent article. It is US based but much is applicable to Canadians.
  • Selling the house in suburbia to buy a smaller, cheaper home frees up cash for spending.
  • Exchanging your strata apartment for a leasehold, frees up capital for spending.
  • When profits are realized on the sale of securities, not all the proceeds are reinvested. Some is taken for spending.
  • Treating the payments from MBS Mortgage Backed Securities as income results in the shrinking of the investment because the payments are a blend of interest and principal.
  • Insurance companies sell 'stapled' packages of multiple products. The net result is always that, in one of the products, unpaid interest is accumulating, to be paid on death.
  • Income Trusts most often distribute far more cash than they earn. In the short run they sustain their business by issuing new shares. Eventually owners will see their investments shrink.

Common to all the above is that the money being spent is reducing the nest egg. Seniors need to clearly understand the difference between 'living off the income' and living off 'capital' or 'return of capital'. Anything labeled "tax efficient" should warn investors that a return of capital is involved.

Interesting Reading: This survey of the wealth of Americans who have died recently is quite telling. This will be mainly the generation who survived WWII as young adults.