Designing a portfolio to create retirement income

An important component of retiring comfortably is having a plan. We recommend that those people who require income from their investments devise a plan sooner rather than later. It is vital that this plan ensures that income is transferred from their investment account to their banking account.

Although investment firms still issue manual cheques, the number of transactions executed electronically is rising rapidly as investors are becoming more comfortable trusting the electronic transfer of funds from one account to another.  With electronic transfers, there is no risk of mail being lost and transactions are done in a timely manner.  A systematic withdrawal plan – often referred to as a SWIP – allows funds to be transferred on a scheduled basis as requested by the investor.

Void Cheque

In order to set up an electronic transfer between financial institutions, a financial institution may request a void cheque from the investor’s banking account to obtain the institution, transit, and account numbers.  Although the numbers themselves may be provided without a void cheque, we encourage the use of a void cheque to ensure the banking information is correctly obtained.

SWIP

SWIPs are set up to electronically transfer a predetermined amount from an investment account to a banking account.  Understanding the income currently being generated from the investments, maturity dates, and liquidity of the portfolio are key components to look at when setting up an appropriate SWIP. Often the dollar amount of a SWIP ties in to a cash flow budget.

SWIP Examples

Investors have flexibility with respect to the amount of income they would like to receive and when they would like to receive it.  The following illustrations provide an overview of how SWIPs are often used.

Example 1

Mr. Adams requires a high level of income from his portfolio. He has requested that we send him all of the income from his investment account on the first of every month.  Mr. Adams has $400,000 invested generating approximately $24,000 per year in income.  We provided Mr. Adams with an expected income report and noted that his monthly income ranges from $1,200 to $4,000; however, his average income is approximately $1,000 a month.  For the month of September he earned $1480 investment income.  This amount will automatically be transferred to his investment account on the first of October.

Example 2

Mrs. Douglas has several investments that generate income.  She has a mixture of common shares, preferred shares, convertible debentures, and bonds.  Mrs. Douglas would like to see her portfolio grow a little further before she begins pulling out all of the income generated.  She has decided to set up a SWIP that automatically transfers the investment income from the income funds to her bank account on the first of every month.  The income from the preferred shares and the bonds will stay in the investment account.  At some point in the future she may increase the SWIP to include all income.

Example 3

Mrs. James has a cash flow need of approximately $4,000 per month.  Her sources of income are from CPP, OAS, and a small pension, all of which add up to approximately $2,400 per month.  How is Mrs. James going to fund the monthly shortfall of $1,600?  The most obvious place to look is her investments which are currently generating approximately $800 per month, short of the $1,600 she requires monthly expenses.  We explained to Mrs. James how a SWIP can be set up to transfer a flat dollar amount, such as $1,600, even if this amount exceeds the monthly income generated in the account.  We established a plan that allowed for certain investments to be partially or fully liquidated over time to ensure the monthly payments could be sustained during her lifetime.  This included factoring in projected income amounts and maturity dates of her investments.  With this type of SWIP more planning is required.