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Beyond OAS and CPP Pensions: How to Boost Your Retirement Income and Pay ZERO Additional Taxes

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Unfortunately, your pension payments are subject to taxation, leaving many retirees with a lot less than they expected when they finally hang up the skates. While some Canadians opt to dig into the principal of their nest egg to cover the difference between their expenses and monthly pension payments, doing so leaves one at risk of running out of retirement at some point down the road — a common fear many retirees share.

Delaying one’s receipt of pension payments is an obvious solution that your financial advisor is likely to recommend. Not only will one stand to receive a higher monthly amount by opting in later on, but one would also be able to remain in the workforce to further grow their nest egg.

However, delaying pension payments isn’t a plausible scenario for many prospective Canadian retirees. Some are either unable (or unwilling), given their unique set of circumstances. Further, the alternative option of reducing one’s budget substantially to finance a more frugal retirement, leaving little excess cash to spoil the grandkids, is also highly undesirable.

Many Canadian retirees who’ve opted to receive their pension payments (either OAS or CPP) sooner rather than later will need to construct a passive-income stream of their own to retire in comfort. Fortunately, those who’ve regularly contributed (and invested) with their Tax-Free Savings Accounts (TFSAs) over the years can create a diversified passive-income stream that will be completely free from the insidious effects of taxation. Best of all, by spending just the dividends, distributions, or interest, and not the principal, one nearly eliminates the risk of running out of money in retirement.

It’s the job of the retiree to formulate their own budget to obtain the desired yield from their TFSA. While the “4% rule” is followed by many, one must not rule out the possibility of averaging much higher yields to get their retirement budget in the perfect spot.

While extremely high yielders get a bad rap for their lower degree of safety and stability, I’d argue that it’s far more conservative to have your income stream average a 6% yield with enough financial wiggle room such that you won’t be enticed to spend your principal, rather than settling for a 4% yield and cracking open your TFSA nest egg by spending a bit of principal every few months or so.

As I’ve explained in many prior pieces, it is possible to score safe 7% yields without risking your shirt. Consider BMO High Dividend Covered Call ETF, a diversified basket of high-quality, high-yielding securities that are hand-picked not only because of the sheer size of their yields, but due to other favourable characteristics, such as dividend stability, dividend growth, capital appreciation potential, and even value.

These securities, which include many high-yield blue-chips, married with a systematic “covered-call” options-writing strategy, allows one to obtain a 7% yield that’s “safer” than almost any other security with a comparably sized yield.

The colossal distribution and the lower beta (currently at 0.9) serve to greatly reduce volatility for retirees while supplying them with a higher degree of income, with minimal risk of a distribution reduction.

While such covered call ETFs are not guaranteed to beat the market (they’ll lose relative to non-covered-call ETFs in a bull market), they give retirees a way to get more income without substantially increasing their risk profile.

With BMO High Dividend Covered Call ETF in your TFSA and your pensions flowing in, you’ll be able to retire comfortably and sustainably — the ultimate goal that retirees should shoot for.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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