Few advisers would suggest you put all your unsheltered savings in investments that earn interest. Why? There are two reasons:
- The tax rate on interest is much higher than the tax on dividends and capital gains.
- Your money will grow much more slowly if you choose products that earn interest. In most cases, you will do better if you create a mix of income investments.
Diversify: That’s one of the main rules of investing.
How do I build a diversified income portfolio?
1. Choose a mix of products yourself, or with an adviser’s help: The asset mix you choose depends on how much income you need, when you need it, and how comfortable you are with different levels of risk. Income products include GICs, Canada Savings Bonds and a range of mutual funds, stocks and bonds.
2. Buy one or more funds that mix it up for you: Money market funds and fixed income mutual funds have expert money managers who choose the underlying investments. Their choices will diversify your investments across a range of money market products, bonds, and preferred shares.
Five factors to consider
- Is it guaranteed?
- How high is the risk of losing money?
- How much do you expect to make?
- When can you receive income?
- What taxes will you have to pay?
Building an income portfolio for retirement: Suhata's story
After she retires at age 69, Suhata will need $40,000 a year to live on and pay her taxes. She will get that income from three sources:
- Her government pension.
- Her Registered Retirement Income Fund (RRIF).
- An unsheltered investment account
Suhata plans to invest her unsheltered savings for stable income, and draw on it to fill in any gaps each year. To learn what she does with her money, read .
Remember: Few advisers would recommend putting all your unsheltered savings in products that earn interest
The challenge is to diversify so you can balance income and growth, risk and safety. At the same time, you need to manage tax concerns.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.