The year you turn 71 you will have until December 31 of that year to convert your RRSP into a RRIF or annuity. Which begs the question, how do you choose?
RRIF Option: Firstly, let’s review the basics with setting up a RRIF. The year after you set up your RRIF you must start withdrawing the mandatory minimum amount, (Boomer & Echo Article) which at age 71 is 5.28% of your January 1st balance. This percentage increases as you get older. You can withdraw more than the minimum amount and there is no maximum withdrawal amount for a regular RRIF. You are still free to decide where to invest your RRIF assets, and your investments can continue to grow on a tax-deferred basis, but the pension withdrawal is taxed at your marginal tax rate. On your death, the remaining assets are generally transferred to a surviving spouse tax-free, or as taxable income to your estate.
Annuity option: Annuities are specialized financial income products offered by insurance companies that allow you to create your own personal pension plan. You invest a one-time lump sum investment from your RRSP and in return receive regular retirement income for the rest of your life. Once you choose to purchase an annuity you lose any access to that capital because you’re giving it up in exchange for a guaranteed pension income that never decreases. The income from an annuity is based on several factors: The amount of capital you invest, the type of annuity purchased, the interest rates offered by competing life companies, your age and gender (and the survivor if set up as a joint annuity), the payment guarantee you select, and the expenses and mortality experience of the insurance company.
Some people are reluctant to hand over their life savings because of the possibility of passing away soon after investing in an annuity. This can be addressed by choosing a term certain annuity which provides guaranteed income for a specified period of time, or an annuity with a minimum guaranteed term.
Final thoughts: The income from a RRIF compared to an annuity can be greater in many circumstances. However, your RRIF investments will likely not have a linear return every year. If the market value of your investments drop, either your income payment will decrease, or you will need to take out a greater percentage thereby reducing your capital more. The big advantage of an annuity is that the payment is guaranteed month after month until you or your joint annuitant spouse dies. This is especially beneficial if your spouse is considerably younger than you. A RRIF offers greater flexibility because you can still access your capital and leave funds to your heirs.
Using both options together, an annuity along with CPP, OAS and other pension income providing a guaranteed income stream for life, while your RRIF provides more flexibility, investment growth opportunities and easier access to your money for lifestyle expenses.
As with all things financial do your homework. Sit down with a trusted financial advisor and figure out the best combination of products to meet your retirement lifestyle needs. You need to consider both “pay-cheques” which cover the monthly fixed expenses in retirement and “play-cheques” which cover golf, hobbies, travel, dining out, etc.
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