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Generating income Thumbnail

Generating income

When building retirement income strategies for your clients, keep in mind how certain product features can address your clients’ needs and concerns, depending on their specific situation. The table below provides an overview of how each income product category is positioned to accommodate specific client goals. 


Income solutions 

Sources of guaranteed lifetime income 

Sources of nonguaranteed lifetime income 

Investor retirement need/concern 

Guaranteed Minimum Withdrawal Benefit (GMWB)

Mutual funds and traditional segregated fund contracts3 

GIA

Liquidity: Ability to withdraw additional money when needed1 

High 

High 

High 

Guaranteed lifetime income provides guaranteed income for life

Yes

NO

NO

Product complexity: The need for ongoing investment decisions and/or the complexity of product features 

High 

Med 

Med 

Income flexibility: Choice of when to begin or defer taking income 

Med5

High 

Med 

Inflation protection: Features that can potentially help the investment keep pace with inflation 

Med 

High 

Low 


For illustration purposes only. This is a brief summary of various products and their features and benefits. Refer to product-specific materials for more details. The low, medium and high scoring is a qualitative ranking of each product’s ability to meet a specific need or concern when compared to the other products. 

1 Fees may apply.
2 Exceeding the withdrawal thresholds may have a negative impact on future income payments. Age restrictions and other conditions may apply.
3 Includes Systematic Withdrawal Plans (SWPs) from these categories.  class="disclaimer"
4 GIA refers to insurance company Guaranteed Interest Accounts.
5 Some products may provide greater flexibility.

Did you know? 

Products that offer dollar-for-dollar reduction to guarantees – like the Payout Benefit Guarantee available through Manulife Ideal Signature Select – provide strategies for you to help protect more of your clients’ money. When clients take scheduled retirement income payments from registered plans, the guarantee is reduced to reflect the withdrawal. Most companies reduce the guarantee proportionally. In down markets, this means that guarantees may be reduced by an amount greater than the withdrawal. We reduce the Payout Benefit Guarantee on a dollar-for-dollar basis. This means that we reduce the guarantee by an amount equal to the scheduled retirement income payment – no more, no less. 

Did you know? 

A GIA qualifies for deposit protection on investments up to $100,000. Assuris, which protects Canadian insurance policyholders, provides additional protection. 



Risks and goals in retirement 

With Canadians facing many challenges as they transition into retirement, the traditional financial planning and investment strategies such as asset allocation may no longer be enough to protect assets and ensure a sustainable retirement income stream, especially during volatile market conditions. Below are some of the potential risks that retirees may face. 

Inflation risk 

Inflation over the long term can significantly erode buying power. For example, in the table below you can see that in 30 years, the buying power would be reduced by nearly 60 per cent, assuming a 3 per cent inflation rate. 

Effects of inflation on $1,000 

Number of years  0% ($)  1% ($)  2% ($)  3% ($)  4% ($) 

1,000 

990 

980 

970 

962 

10 

1,000 

905 

820 

739 

676 

20 

1,000 

820 

673 

545 

456 

30 

1,000 

742 

552 

402 

308 


Market volatility 

During retirement, an investor’s rate of withdrawal and the order or sequence that they earn their market returns can have a dramatic impact on their portfolio’s ability to last. For example, if an investor experiences poor market returns early in retirement, this may have a dramatic impact on how much income they can continue to receive or how long it will last. 

During retirement, an investor’s rate of withdrawal and the order or sequence that they earn their market returns can have a dramatic impact on their portfolio’s ability to last. For example, if an investor experiences poor market returns early in retirement, this may have a dramatic impact on how much income they can continue to receive or how long it will last.

Longevity risk 

Compared to previous generations, both male and female Canadians can expect to live longer lives and could spend as much time in retirement as they did working. 

The probability of a healthy 65-year-old living until… 

Age  Single female (%)  Single male (%)  At least one of a male and female couple who are the same age (%) 

70 

96 

95 

99 

80 

82 

77 

96 

90 

47 

38 

67 

95 

25 

17 

37 


Source: 2012 IAM Basic ANB Tables, Society of Actuaries. For illustration purposes only. 

Question icon

Did you know? 

You can now offer Guaranteed Interest Accounts (GIAs) and the Daily Interest Account (DIA) to your clients within GIF Select InvestmentPlus and MPIP Segregated Pools. 

Faced with market volatility, investors are looking for both reassurance and flexibility. Offering GIA's and the DIA will allow your clients more options to diversify their portfolios while managing risk. 


Why the sequence of returns matters 

Sequence of returns means the risk of receiving lower or negative returns early in a period when withdrawals are made from the underlying investments. The order or the sequence of investment returns is a primary concern for those individuals who are retired and living off the income and capital of their investments. 

During the accumulation phase, regardless of whether a portfolio experiences poor or strong returns early on, the market value will be the same in the end. 

Accumulation phase 

Starting value for Portfolio A and Portfolio B = $200,000 Annual income withdrawal = None 



Portfolio A Poor early returns 

Portfolio B Strong early returns 

Age 

Annual return (%) 

Year-end value ($) 

Annual return (%) 

Year-end value ($) 

40 

– 

200,000 

– 

200,000 

41 

-5.3 

189,400 

15.3 

230,600 

42 

-2.1 

185,423 

-3.7 

222,068 

43 

-7.3 

171,887 

14.0 

253,157 

44 

-15.2 

145,760 

8.9 

275,688 

45 

9.4 

159,461 

16.0 

319,798 

46 

2.7 

163,767 

15.2 

368,408 

47 

10.6 

181,126 

16.2 

428,090 

48 

-9.8 

163,376 

13.5 

485,882 

49 

-8.0 

150,306 

0.4 

487,825 

50 

10.2 

165,637 

12.9 

550,755 

51 

6.9 

177,066 

13.4 

624,556 

52 

-5.5 

167,327 

9.5 

683,889 

53 

2.1 

170,841 

13.5 

776,214 

54 

2.4 

174,941 

6.0 

822,787 

55 

9.2 

191,036 

-1.5 

810,445 

56 

-1.5 

188,170 

9.2 

885,006 

57 

6.0 

199,461 

2.4 

906,246 

58 

13.5 

226,388 

2.1 

925,277 

59 

9.5 

247,895 

-5.5 

874,387 

60 

13.4 

281,112 

6.9 

934,720 

61 

12.9 

317,376 

10.2 

1,030,061 

62 

0.4 

318,645 

-8.0 

947,656 

63 

13.5 

361,663 

-9.8 

854,786 

64 

16.2 

420,252 

10.6 

945,393 

65 

15.2 

484,130 

2.7 

970,919 

66 

16.0 

561,591 

9.4 

1,062,185 

67 

8.9 

611,573 

-15.2 

900,733 

68 

14.0 

697,193 

-7.3 

834,980 

69 

-3.7 

671,397 

-2.1 

817,445 

70 

15.3 

774,120 

-5.3 

774,120 

Avg. 

4.6 

774,120 

4.6 

774,120 




No Difference 



A portfolio that experiences poor early returns can run out of money during retirement, whereas a portfolio experiencing strong early returns can last for many more years and maintain a high market value. This illustrates how the Sequence of Returns in those crucial first years can produce two very different outcomes. 

In the chart below we look at two portfolios. Portfolio A has poor early returns and runs out of money within 17 years. Portfolio B experiences strong early returns, has 13 more years of withdrawals and still has a positive market value at age 95. 

Retirement phase 

Starting value for Portfolio A and Portfolio B = $500,000 Annual income withdrawals = $20,000 (4% of first-year value) adjusted thereafter for inflation. Inflation rate = 3% 



Portfolio A 

Poor early returns 


Portfolio B 

Strong early returns


Age 

Annual return (%) 

Withdrawal ($) 

Year-end value ($) 

Annual return (%) 

Withdrawal ($) 

Year-end value ($) 

65 

– 

– 

500,000 

– 

– 

500,000 

66 

-5.3 

20,000 

454,560 

15.3 

20,000 

553,440 

67 

-2.1 

20,600 

424,847 

-3.7 

20,600 

513,125 

68 

-7.3 

21,218 

374,164 

14.0 

21,218 

560,774 

69 

-15.2 

21,855 

298,758 

8.9 

21,855 

586,883 

70 

9.4 

22,510 

302,216 

16.0 

22,510 

654,673 

▼ 

▼ 

▼ 

80 

9.2 

30,252 

58,386 

-1.5 

30,252 

1,245,891 

81 

-1.5 

31,159 

26,818 

9.2 

31,159 

1,326,487 

82 

6.0 

26,818 

2.4 

32,094 

1,325,458 

83 

13.5 

2.1 

33,057 

1,319,542 

84 

9.5 

-5.5 

34,049 

1,214,791 

85 

13.4 

6.9 

35,070 

1,261,122 

▼ 

▼ 

▼ 

90 

15.2 

2.7 

40,656 

1,111,520 

91 

16.0 

9.4 

41,876 

1,170,191 

92 

8.9 

-15.2 

43,132 

955,746 

93 

14.0 

-7.3 

44,426 

844,794 

94 

-3.7 

-2.1 

45,759 

782,256 

95 

15.3 

-5.3 

47,131 

696,163 

Avg. 

4.6 

429,956 

4.6 

951,508 

696,163 





Big Difference 

Total income generated by portfolio during retirement =  $429,956 
$951,508 

Difference in withdrawals 

$521,552 

Difference in end value 

$696,163 

Total difference 

$1,217,715 



For illustration purposes only. Returns for Portfolio A are hypothetical returns, and not indicative of future performance. It does not include any fees or Management Expense Ratios (MERs). For Portfolio B, the returns are reversed. The sequence of returns has an average compounded annualized return of 4.6 per cent over the respective periods. The accumulation portfolios assume a starting value of $200,000 at age 40 with no annual withdrawals. The retirement portfolios assume a starting value of $500,000 at age 65 as well as a four per cent first-year withdrawal, thereafter adjusted for three per cent inflation annually. 

Cash wedge strategy 

Market volatility can be both an investor’s friend and foe. For the long-term investor, a stumbling market presents an opportunity to buy stocks at reduced prices. But this doesn't work for an investor with immediate cash needs, such as retirees drawing an income. If the market drops early in their retirement, it can make a significant dent in their retirement income. 

The cash wedge strategy is designed to help mitigate the impact of volatility on your client’s retirement income. It’s a way of organizing their wealth so that the assets they draw income from — a cash wedge representing one, two, or three years of income — is invested in stable-short term investments. The remaining money can be invested in funds selected to capture the growth potential that's associated with market-based investing, with any gains realized used to replenish their income source — your cash wedge. 

How does the cash wedge strategy work? 

Typical asset allocation for a balance-oriented investor 

Typical asset allocation for a balance-oriented investor

The cash wedge strategy works by taking advantage of the nature of various investment classes to help deliver predictable retirement income. It helps establish a “buy low/sell high” process that could result in higher returns, and also helps to avoid selling market-based securities at the wrong time. Your client remains in control, taking gains where and when appropriate. 

The cash wedge: Keep one to three years of retirement income in a stable, accessible investment option that is less sensitive to market ups and downs. This is the cash wedge. The wedge should have minimal or no exposure to market volatility.

Fixed income: Keep another portion of your client’s portfolio in low volatility funds, to create another stable wedge to the portfolio. This will be used to replenish the cash wedge.

Equity: Invest in funds that match your client’s investor profile and can tap into the growth opportunities of the market. This portion of the portfolio is more focussed on growth, and any gains realized can be moved to replenish the other wedges in the portfolio. 


Did you know?

GIAs have the potential to help with creditor protection during the investor’s lifetime, as well as after death when the death benefit passes directly to a named beneficiary outside the estate. It is very important to consult with a legal advisor to discuss the rules surrounding eligibility for creditor protection. 


Tax treatment of investment income 

Income from investments is included in taxable income at different rates. Active management of income-generating investments can significantly affect the way income is taxed and may help reduce clawbacks. 

Chart 1: Consider the after-tax income on $10,000 

Source of income  Inclusion rate (%)  Income reported on tax return ($)  Tax payable ($)  After-tax income ($) (MTR 40%) 

Eligible dividends 

138 

13,800 

2,500 

7,500 

GIC/bond/RRIF/salary 

100 

10,000 

4,000 

6,000 

Capital gains 

50 

5,000 

2,000 

8,000 

Mutual/Segregated fund withdrawals 

2.5 

250 

100 

9,900 

Series T mutual fund 

– 

– 

10,000 

The above chart illustrates how $10,000 of income, from different sources, is reported on a tax return and how much is remaining after tax. 

Dividends 

Dividends received from Canadian corporations receive preferential tax treatment through the application of the dividend tax credit. However, dividend income is the least income-friendly since only the grossed-up amount is reflected on the tax return, which is used to determine eligibility for many income-tested benefits such as Old Age Security (OAS). Dividends paid by public corporations qualify as ‘eligible dividends’ and are included at 138 per cent. Non-eligible dividends are included at 115 per cent.

For illustration purposes, an effective tax rate of 25 per cent is assumed in the above chart – although it will vary by province. 

Mutual/Segregated fund withdrawals 

From an income-inclusion perspective, receiving income in this manner is income friendly since only a small portion of the income stream is taxable as a capital gain; the balance will be non-taxable Return of Capital (ROC). Chart 1 assumes $200,000 invested, five per cent annual rate of return ($10,000) and mutual/segregated fund withdrawals of $10,000. It represents results for year one and does not consider year-end distributions or allocations. 

Series T mutual fund 

Series T funds are a special class of mutual fund designed to help create a tax-efficient income stream from investments in non‑registered accounts, while allowing the deferral of capital gains taxes until a later point. ROC levels will fluctuate based on the level of income earned and distributed by the fund, as well as availability of the original capital. Illustration assumes 100 per cent ROC and no year-end distributions.

Note 

For more information about tax topics like investment taxation visit the Tax Planning section in Viewpoints on the Manulife Investment Management website.


Withdrawal from investment funds – how to calculate the tax 

At the time of each withdrawal, there is a sale of units to fund the withdrawal. This sale will trigger a capital gain or loss. To determine the amount of the capital gain or loss, one must look at the Adjusted Cost Base (ACB) and the growth/loss (Fair Market Value − ACB). 

This diagram illustrates how to calculate the capital gain and the return of capital. In this example, the growth represents 1/21 ($10,000/$210,000) or 4.76% of the total Fair Market Value (FMV) and the return of capital represents 20/21 ($200,000/$210,000) or 95.24% of the FMV. Therefore, 1/21 (or 4.76 cents) of each dollar realized because of a redemption will be considered a capital gain (of which only 50% is taxable) and 20/21 (or 95.24 cents) of each dollar will be considered a return of capital (which is not taxable but reduces the ACB). The calculations will depend on the growth/loss and ACB at the time of withdrawal.


This diagram illustrates how to calculate the capital gain and the return of capital. In this example, the growth represents 1/21 ($10,000/$210,000) or 4.76% of the total Fair Market Value (FMV) and the return of capital represents 20/21 ($200,000/$210,000) or 95.24% of the FMV. Therefore, 1/21 (or 4.76 cents) of each dollar realized because of a redemption will be considered a capital gain (of which only 50% is taxable) and 20/21 (or 95.24 cents) of each dollar will be considered a return of capital (which is not taxable but reduces the ACB). The calculations will depend on the growth/loss and ACB at the time of withdrawal. 

Guaranteed payment phase 

For a product with a guaranteed lifetime income benefit, payments will continue when the FMV is $0 but there is a positive benefit base. The taxation of these payments is not certain at this time. Please consult your tax advisor for further information.