RBC MANAGED PAYOUT SOLUTIONS. Generating sustainable cash flow

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1 RBC MANAGED PAYOUT SOLUTIONS Generating sustainable cash flow

2 RBC Managed Payout Solutions In an environment where the number of defined benefit employer pension plans is declining and the likelihood of shrinking government pension benefits is on the rise, RBC Managed Payout Solutions offer a consistent level of tax-efficient cash flow while managing the impact of markets on your invested capital. Generating sustainable cash flow Investing for cash flow 1 is different than saving for a longterm goal. Saving for a future goal places the emphasis on portfolio volatility and investment time horizon. When cash flow from your investments becomes a priority, the emphasis shifts to tax efficiency and sustainability of distributions. This is especially true as today s Canadians are expected to live longer, potentially enjoying 20 to 30 years in retirement. 2 1 Cash flow should not be confused with mutual fund rates of return. Cash flow payments are not guaranteed and may be adjusted depending on future market conditions. Cash flow may include interest, dividends, capital gains or a return of capital distribution. 2 Source: Statistics Canada Table RBC Managed Payout Solutions deliver Professional Management RBC Global Asset Management manages over $400 billion 3 and is the trusted choice of millions of investors. Sustainable Cash Flow Distributions are reviewed annually and adjusted, if necessary, to provide sustainable and predictable cash flow. Choice of Payout Rates Choice of payout rates of 5%, 6% or 7%. RBC Managed Payout Solutions Tax Efficiency Diversification of cash flow sources results in higher after-tax cash flow relative to investments that pay only interest income. Liquidity You have access to your money should unexpected needs arise. Growth Potential Equity exposure increases the potential for capital appreciation and helps keep pace with inflation over the long term. 3 As of December 31,

3 RBC Managed Payout Solutions RBC Managed Payout Solutions built to deliver tax-efficient distributions with: Regular monthly cash flow The use of return of capital 4 to stabilize monthly distributions in a tax-efficient manner An annual review process that adjusts distributions to mitigate the impact of markets on invested capital Professional portfolio management, ongoing monitoring and consistent rebalancing How tax efficiency is achieved RBC Managed Payout Solutions operate under the belief that it s just as important to consider how much cash flow you keep as it is to focus on what your portfolio earns. Generating tax-efficient cash flow is about more than just the rate of return. Different types of investment solutions generate different types of cash flow. Interest income is taxed at your marginal tax rate while dividends and capital gains receive more favourable tax treatment. RBC Managed Payout Solutions include an allocation to Canadian and U.S. equities with an emphasis on those that pay dividends. Dividends from Canadian companies contribute to more tax-efficient distributions relative to receiving interest income alone. The fact that return of capital is not taxed in the year it is distributed serves to further enhance tax efficiency. Tax-efficient distributions: keeping more of your pre-tax cash flow The tax efficiency of distributions has a substantial impact on the level of cash flow available to you. Payments from guaranteed income solutions are typically taxed as interest income. This type of income is taxed at your highest marginal tax rate. Diversifying your sources of cash flow can help reduce your tax liability today and increase the amount available to you on an after-tax basis. 4 Return of capital (ROC) is a tax term used to describe distributions in excess of a fund s earnings (income, dividends, and capital gains). For tax purposes, ROC represents a return to the investor of a portion of their own invested capital. RBC Managed Payout Solutions offer a consistent level of tax-efficient cash flow while managing the impact of markets on your invested capital. After-tax cash flow How your cash flow is generated can have a significant impact on after-tax cash flow $1,000 $750 $500 $250 0 $740 Net after-tax cash flow on $1,000 of investment income $848 Interest Canadian dividends* $870 Capital gains $1,000 Return of capital Source: RBC Global Asset Management Inc. For illustrative purposes only. Assumes a marginal tax rate of 40%. ROC distributions are not taxable in the year they are received, but do lower your adjusted cost base, which could lead to a higher capital gain or a smaller capital loss when the investment is eventually sold. Please note that tax rates are unique to the circumstances of each individual and province they live in. Diversification helps increase after-tax cash flow $5,000 $4,000 $3,000 $2,000 $1,000 $0 $5,000 $4,156 RBC Managed Payout Solution 38.5% more than Interest Income Source: RBC Global Asset Management Inc. $5,000 $3,000 Interest Income Pre-tax cash flow After-tax cash flow Assumes tax rate of 40% and a 5% pre-tax distribution on a portfolio of $100,000. RBC Managed Payout Solution after-tax cash flow determined using average distribution breakdown from August 2004 to December 31 of 28% interest, 12% dividend, 17% income, 43% return of capital.

4 How return of capital works and how it benefits investors Return of capital (ROC) is a payout from an investment that represents the return of the investor s capital to them by way of a distribution. ROC is used to help generate predictable, monthly cash flows in a tax-efficient manner. The benefits of ROC are: Tax efficiency Since ROC is not income, it is not taxable. This is particularly valuable for investors with higher retirement income collecting Old Age Security (OAS). Lower reported income can help reduce the likelihood of OAS clawbacks. Since the amount received as ROC is only taxed when the investment is ultimately sold, receiving ROC as a component of distributions is an excellent way to potentially increase control over the level and timing of taxation depending on your individual situation. Month-to-month cash flow stability ROC is used to smooth out your distributions, providing consistent monthly cash flow, even as the income streams from your underlying investments change. How return of capital works Income earned (interest, dividends, capital gains) Return of capital payments* (from initial invested capital) Consistent monthly cash flow Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec * Distributions are classified at year-end, and the total amount of return of capital distributed throughout the year is allocated evenly across all monthly distributions. Cash distributions in excess of earnings reduce the asset base of the fund and can hinder the fund s ability to meet its investment objectives. Payout rates are not guaranteed and may be adjusted based on market conditions. Return of capital helps smooth monthly distributions and contributes to the tax efficiency of RBC Managed Payout Solutions.

5 RBC Managed Payout Solutions How distributions are managed in RBC Managed Payout Solutions Market conditions are constantly changing. To help preserve your wealth, RBC Global Asset Management reviews distributions annually to assess the impact of market fluctuations on your investment and determine whether changes to distribution levels are required. Prudent adjustments are then made to mitigate the risk of capital erosion. An example of how distributions are managed using RBC Managed Payout Solution (Series A) NAV per unit ($) A Dec. 31, 2016 NAV Per Unit: $ Fixed Monthly Distribution = $ Payout Rate = 5.0% Jan. Feb. Mar. Apr. May June NAV per unit + monthly distributions received B Dec. 31, NAV Per Unit = $ Payout Rate at the end of = 5.06% New 2018 Fixed Monthly Distribution = $ Payout Rate = 5.0% July Aug. Sep. NAV per unit Oct. Nov. Dec. C What happens in 2018? The net asset value (NAV) per unit of RBC Managed Payout Solution is slightly lower at the end of the year than it was at the beginning, so the payout rate at year end was higher at 5.06% than the target payout rate of 5%. As a result, the 2018 fixed monthly distribution amount will decrease to $ to align the distribution to the target payout rate. If the NAV per unit had increased over the course of the year, as it did in 2016, the fixed monthly distribution amount would have been higher for the coming year to align the payout rate with the target payout rate of 5%. Overall economic benefit in It s important to include the value of monthly distributions paid when evaluating the total value received by investors who hold RBC Managed Payout Solutions. Adding this amount to the NAV per unit throughout the year, as represented by the darker line, shows the total economic benefit received in. For illustrative purposes only. Payout rates are not guaranteed and may be adjusted annually based on market conditions and to manage the impact on invested capital over time. Professional money management from a leading Canadian asset manager Experienced, time-tested money management is a hallmark of great investment solutions. RBC Global Asset Management is Canada s largest private money manager with over $400 billion in funds under management. With over 30 years of asset allocation experience, we help to preserve and grow the wealth of Canadians through a comprehensive lineup of investment solutions from RBC Funds, PH&N Funds and BlueBay Funds. The regular review and adjustment of distributions helps manage the risk of sizeable fluctuations in cash flow from one year to the next.

6 Delivering tax-efficient cash flow The broad asset class diversification within RBC Managed Payout Solutions strikes a balance between growth potential and cash flow. While including equities increases the growth potential of the portfolio, the focus on dividend-paying equities, particularly in Canada, contributes to a steady stream of tax-efficient distributions. This can be an important benefit relative to solutions that offer principal guarantees. Delivering sustainable cash flow Since inception, RBC Managed Payout Solution, which has a payout rate of 5% per year, has distributed 5% per year even in periods of market decline such as the bear market of The chart below looks at how $100,000 invested over a 10-year period would have fared through to December. An investor would have received distributions totalling $47,262 while preserving $90,965 of their initial capital. The cumulative cash flow and market value add up to $138,227 exceeding the initial investment by $38,227. RBC Managed Payout Solution Series A Market Value + Cumulative Cash Flow Market Value Adjusted Cost Base Monthly Cash Flow $150,000 Investment $125,000 $100,000 $138,227 $90,965 $75,000 $75,094 $429 $378 $388 $398 $393 $398 $393 $398 $378 $383 Annual Distribution Amount ($) ,144 4,539 4,660 4,781 4,720 4,781 4,720 4,781 4,539 4,599 Return of Capital ($) 2,976 2,516 2,459 3,250 2,806 2,585 1,342 1,116 3,054 2,800 Adjusted Cost Base ($) 97,024 94,508 92,048 88,798 85,992 83,407 82,065 80,948 77,894 75,094 Market Value ($) 87,688 94,326 96,248 94,527 95,128 94,282 95,722 90,429 92,121 90,965 Cumulative Distributions ($) 5,144 9,682 14,342 19,123 23,843 28,623 33,343 38,124 42,663 47,262 Cash distributions in excess of earnings reduce the asset base of the Fund and can hinder the Fund s ability to meet its investment objectives. Three different RBC Managed Payout Solutions offerings are available to meet your cash flow goals, with payout rates of 5%, 6% or 7% depending on your individual needs. 5

7 RBC Managed Payout Solutions Choose the solution that s right for you RBC Managed Payout Solutions can help you get your cash flow plan underway with two simple questions: Asset Mix * How much cash flow do you need? How comfortable are you with changes in the value of your investment? 45% 55% 45% RBC Managed Payout Solutions: Use tactical asset allocation to take advantage of short-term market opportunities while helping to position you for long-term success. Combine a strategy to provide monthly payouts with an actively managed investment, converting your savings into a regular paycheque. Offer higher after-tax distributions by investing in multiple asset classes and emphasizing tax-efficient cash flow sources. Provide cash flow payout levels of 5%, 6% or 7%. 5 Equity exposure 35% 25% 25% 75% 35% 65% RBC Managed Payout Solution RBC Managed Payout Solution Enhanced 5% 6% 7% Payout rate* RBC Managed Payout Solution Enhanced Plus Fixed income Equities * Strategic asset mix. Allocations may be tactically adjusted based on the views of the RBC GAM Investment Strategy Committee and the RBC GAM Investment Policy Committee. 5 Monthly distribution (cents/unit) = Previous year December 31 NAV per unit x Payout Rate 12 months As of December 31, 1 Year 3 Year 5 Year 10 Year Since Inception Returns for RBC Managed Payout Solution Series A 3.8% 3.4% 4.2% 4.2% 4.4% ˆInception date of the fund is August RBC Global Asset Management (RBC GAM) is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited and BlueBay Asset Management LLP, which are separate, but affiliated corporate entities. The information provided is not intended to provide specific financial, investment or income tax advice and should not be relied upon in that regard. Please consult your advisor and read the prospectus or Fund Facts document before investing. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. The indicated rates of return are the historical annual compounded total returns for the periods indicated including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. RBC Funds, BlueBay Funds and PH&N Funds are offered by RBC Global Asset Management Inc. and distributed through authorized dealers.

8 Talk to your advisor about about the right RBC Managed Payout Solutions for you or visit RBC Global Asset Management / TM Trademark(s) of Royal Bank of Canada. Used under licence. RBC Global Asset Management Inc (02/2018) 016GAM066_80830 ( )_PS_BRO_MPS_EN_V1_2 02/15/2018