How do we help our clients prepare for income in retirement? In today’s low-rate environment, this continues to be a challenge.

Thirty years ago, we could easily have expected to achieve annual income of seven percent on a laddered government bond portfolio. For $1 million of savings, $70,000 could support many retirees. Fast forward to today and a yield of around 1.3 percent would be more aligned to expectations for a similar portfolio: $13,000 would hardly provide adequate income.

Most low-risk, fixed income investments yield low rates, often amounting to negative returns after considering inflation. Yet, they may still have a place within many portfolios as they can help to preserve capital, provide downside protection and diversify due to their negative correlation with equities. Other fixed income investments may generate highly respectable income, such as emerging market or high-yield debt products; however, these come with greater risks. Of course, these options depend on specific individual needs, including desired capital preservation, income generation, diversification and time horizon.

Aren’t Interest Rates Expected to Rise?

While there has been talk of looming interest rate hikes by the Bank of Canada for 2022 as a result of more persistent inflation, we suggest that many headwinds are likely to keep rates from significantly increasing, including lower productivity growth, aging demographics and increasing income inequality. Monetary policy is likely to continue playing an important role. Let’s not forget that governments are grappling with higher debt-to-GDP ratios as a result of significant pandemic stimulus and need to service this debt — with any increase in interest rates, the cost of carrying this debt also rises.

Finding Income, Beyond Fixed Income

So — where to for income investors? In some cases we’ve had to readjust the longstanding assumptions we’ve made about asset allocation — the traditional balance between equities and fixed income to achieve portfolio diversification. Diversification remains important, but we can take a deeper approach — considering risk factors such as value, growth, capitalization size and region, that help to manage volatility, when looking to deliver potentially higher returns.

When we look to equities to support the generation of a reliable stream of income, the use of quality, dividend-paying equities has been a good strategy. In many cases, well-established, stable dividend-paying businesses have continued to grow their dividends. With many corporations posting strong earnings, various Canadian companies announced increasing dividend payouts in the latter part of 2021. Some analysts expect this to continue as dividend growth has lagged the earnings surge.* Historically, dividends have consistently and significantly contributed to total returns (chart above), helping to offset declines during market volatility. As an added benefit, for Canadian investors, dividends and capital gains are taxed at a lower rate than ordinary and interest income.

We may also consider other investment vehicles as we look to generate income depending on individual circumstances, such as preferred shares, managed equity investments targeted to income generation or alternative strategies. As liquidity becomes a focus for many clients in retirement, these are just some of the many considerations. We continue to position portfolios to meet these changing needs while adapting for factors like interest rates, and others, in the ever-changing investing landscape.


The views expressed are those of Wes Ashton, Director of Growth Strategy and Portfolio Manager, and not necessarily those of Harbourfront Wealth Management Inc., a member of the Canadian Investor Protection Fund.

Harbourfront Wealth Management was one of Wealth Professional Magazines 5 Star Brokerages for 2022. Wealth Professional is a free online information resource for all Canadian advice and planning professionals. This is not a paid award Harbourfront Wealth Management is not a sponsor.

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