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Cash Flow and Capital Preservation

I have had a number of inquiries regarding a previous article where I mentioned investing to create a tax efficient cash flow, and, possibly preventing or reducing government claw backs while increasing monthly income. Cash flow and capital preservation are concerns for many investors; in many cases, Guaranteed Investment Certificates at 4.40-4.65% do not generate enough monthly income to keep up with the cost of goods and an indication of this cost is readily visible every time you fill up with gas.

A number of fund companies now offer T-series funds which provide a tax efficient income, generally from 5-8% p.a. on a monthly basis. T-funds are available as individual mutual funds or as a portfolio of mutual funds that are diversified over various asset classes. Series T units are available in almost every asset class to suit the individual investor—International, Canadian Equity, American Growth, Dividend Value, Global Dividend, and Income or Balanced portfolios.

Yield portfolios appeal to investors looking for the stability of fixed-income investments, combined with a steady income stream. The fixed-income portion of the portfolio provides capital preservation, the equity portion delivers a mix of income-producing equities; the funds carefully selected to complement one another. Balanced portfolios appeal to investors looking for moderate growth combined with the stability of fixed income returns.

The equity portion delivers exposure to current market trends, such as emerging markets. The type of asset diversification is dependent upon the client’s risk tolerance, time horizon and objectives. Last week I met with a client that switched from 100% investing in GICs to investing a portion of the matured GICs that came up last year into a balanced portfolio; the client was very pleased with the monthly income and the growth of the principal—total return of the new investment was approximately 2-2 1⁄2 times the GIC rate for last year.

Of course, the largest difference in the investments is the guarantee vs no guarantee; GICs are guaranteed by CDIC to $100,000. per institution per investor and the balanced portfolios are backed by the assets the fund is invested in. That is why it is so important to talk to your advisor and ensure you are investing within your comfort zone. Just when you thought it was safe to retire, GIC rates dropped to 10+ year lows, the government changed the tax rules for income trusts, or, you have been diligent in paying off your mortgage, but now find that you are ‘house rich and cash poor’.

Investing for income has always been popular; for years dividend funds were touted as not only a source of income, but a more tax efficient stream than interest income. Return of capital funds, such as the ones above, take the tax efficiency one step further and almost reduce the tax implications altogether. Some people may say why bother, you pay the tax in the end.

That is true, but you don’t pay more tax than you would have, and you are able to enjoy the benefit of an increased cash flow per month, as well as not having to worry that your income will creep over the line that will trigger a claw back of government benefits. This really means that you are getting the full benefits you earned during your lifetime and you are not penalized for having saved money for your future.

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