RRIF vs. Annuity: Which should you choose in retirement?
Recently, I saw a survey indicating that many retirees felt that one of their biggest concerns was making their money last their lifetime. One of the major impacts of retirement has been the fact that we are living much longer now than we did 30 years ago.
In some cases, your retirement life could be almost as long as your work life. The average retirement age is around 63 years of age. If you live to the age of 90, that means you will potentially live 27 years or more after you retire.
With interest rates quickly moving and a very bumpy stock market, how does one make their money last? Let’s take a look at the differences between RRIFs and Annuities.
Registered Retirement Income Fund (RRIF)
A RRIF is a tax-sheltered investment account that’s designed to pay you retirement income. It is made up of retirement savings from a Registered Retirement Savings Plan (RRSP). You have to switch your RRSP over to an RRIF not later than the year you turn 71, although the Canada Revenue Agency will allow you to convert earlier than that.
Your choices for investments in RRIFs are wide-ranging, from GICs to mutual funds to stocks and ETFs and other investments. As time goes by, you’ll be required to make ongoing decisions regarding the investments with the RRIF.
You also appoint a Beneficiary for your RRIF account. If married, you appoint your spouse so that upon your death, the RRIF rolls over to your spouse with no tax implications. Your spouse then takes over the RRIF and receives income from that RRIF.
Related article: Designating beneficiaries for RRSPs and RRIFs
When an RRSP is converted to a RRIF, there is an annual minimum income that the retiree must receive. If the retiree is under age 71, the calculation is: 1/(90-AGE).
Example for a 63-year-old annuitant: 1/(90-63) = 1/27 = 4% (rounded). This person has to take out a minimum of 4% of their account. If the retiree is older than 71, the calculation is based on your age and a certain percentage of your account.
You can request to receive only the minimum payment, or you can withdraw as much as you like. The Canada Revenue Agency will tax you on all of the income you withdraw. The balance remaining in the RRIF remains tax-sheltered.
RRIF Pros
- Plenty of flexibility
- Tax-sheltered growth
- Can be rolled over to the spouse at the death
- You can draw additional payments at any time
- You can split RRIF income with spouse
RRIF Cons
- Your retirement income is subject to market performance
- Must pay income tax on RRIF payments
- Your investment could run out before you die
Related article: Minimum income rules for RRIFs
Payout Life Annuity
Life annuities are kind of like pension plans issued by life insurance companies. The retiree puts their RRSP money into a Payout Annuity, and the financial institution (usually a life insurance company) provides guaranteed annuity payments for life. product guarantees you will not run out of money in your lifetime. Payout Annuity can be set to pay annuity income for life or to Age 90.
Your investment is no longer subject to interest rate or market volatility however, it is also not available for extra lump sum withdrawals or, for that matter, any other changes. You can have a single life annuity based on one person (annuitant) or a joint life annuity based on two people on a plan, e.g., a married couple. Like RRIFs, beneficiaries can also be appointed on payout annuities.
Annuity Pros
- Receive a regular income payment
- Generally lower risk than a stock market investment
- May produce stronger returns than managing your own RRIF
Annuity Cons
- High fees (Administration and maintenance fees)
- Money is locked for the long-term
- No access to additional funds in an emergency
Related article: Everything you need to know about life annuities
Which is better, RRIFs or annuities?
RRIFs vs. annuities is an oft-debated topic. Both the RRIF and the annuity have their usefulness in a retirement plan. RRIFs give you plenty of flexibility and options but still expose you to various risks. Payout annuities lack flexibility but give you long-term protection that you won’t outlive your money.
Each person needs to sit down with their Advisor and thoroughly discuss the differences between RRIFs and annuities and determine which one or a combination of both suits their specific situation. Note that it’s impossible to evaluate this decision properly without actual numbers. Here is a table with some examples:
| Age | Single Life Annuity (Male) | Joint Life Annuity (100% survior) | Annuity to Age 90 | Minimum RRIF | Level RRIF |
|---|---|---|---|---|---|
| 65 | $524.50 | $455.40 | $442.06 | $335.93 | $500.00 |
| 66 | $524.50 | $455.40 | $442.06 | $349.67 | $500.00 |
| 67 | $524.50 | $455.40 | $442.06 | $363.98 | $500.00 |
| 68 | $524.50 | $455.40 | $442.06 | $378.90 | $500.00 |
| 69 | $524.50 | $455.40 | $442.06 | $394.44 | $500.00 |
| 70 | $524.50 | $455.40 | $442.06 | $410.65 | $500.00 |
| 71 | $524.50 | $455.40 | $442.06 | $428.91 | $500.00 |
| 72 | $524.50 | $455.40 | $442.06 | $432.62 | $500.00 |
| 73 | $524.50 | $455.40 | $442.06 | $436.39 | $500.00 |
| 74 | $524.50 | $455.40 | $442.06 | $440.14 | $500.00 |
| 75 | $524.50 | $455.40 | $442.06 | $443.77 | $500.00 |
| 80 | $524.50 | $455.40 | $442.06 | $447.18 | $500.00 |
| 85 | $524.50 | $455.40 | $442.06 | $451.74 | $500.00 |
| 90 | $524.50 | $455.40 | $442.06 | $455.02 | $500.00 |
| 100 | $524.50 | $455.40 | $442.06 | $459.10 | $500.00 |
RRIFs vs. Annuities: The bottom line
As you can see, the numbers will vary depending on age, gender, interest rates, and marital status. If you are wondering which option is better for you, get some quotes from a financial advisor. The numbers can change quickly, especially with changing interest rates. It’s important to shop around because not all companies offer the same rates all the time.
Comments
You can also do a combination of the 2 options so that you can benefit from the flexibility and investment potential of a RRIF and the lifelong income of a life annuity.
Do RRIF minimum withdrawal percentages apply to annuities?
There are some additional bits of information to remember, if I remember correctly. Yes, you get taxed on RRIFs, but the same as other tax – i.e. you are still able to use federal and provincial personal tax exemptions on the first (approximately, this year, 15k), which means your first 15k is not taxed, and the federal tax rate for under 50k(ish) is only 15%. (each province is different as to rate and calculations of course). So actually taking out your RRSP before you must, under $15k per year can actually save you 15% of federal tax payable, assuming you have no other taxable income (i.e. if you are living on savings unregistered). You can take that money and put it into something safe and, although smaller earning potential, you’ve already saved the tax on that 15k. Spreadsheet it out – it makes a difference, especially with the ridiculously underperforming markets today.
The CONS for annuity don’t list “Must pay income tax on Annuity Payment” — is this not the case or are the payouts from annuity tax-free? (I didn’t think so)
One of the other important factors to consider is that annuities, unlike RRIF’s cannot be passed on to your heirs (except for your spouse in the case of a joint annuity). So, if this is important to you, consider how much of your retirement savings you want to migrate to such a solution.
The other consideration is that many annuity providers have gradually reduced the period of time over which they are willing to amortize.
I presume in your table that that’s the monthly payout per $100,000, correct?
Are annuity payments taxable the same as RRIF w.d? Is it best timing when interest rates are high? thanks
RRIF: What if you don’t have a spouse? Can you name your kids as a beneficiary.?
Hi, are the 5 columns (alternatives) based on the same starting investment? If so, what is the amount?
“annuity to age 90” column shows $442.06 for 100 y.o. Is that correct?
The figures are useless without knowing the starting investment amount. Also the rrif amount will be dependent upon investment returns.
Why are we using life expectancies of 90 years in our equations? It is nowhere near that for Canadians. Even people being born today are unlikely to live to anywhere near that age and it is significantly less for others. Sure, some will .. but the numbers are meant to be estimates at the best of times for the average person and not for outliers.
Why not base it on the most likely outcome and revise it on a regular basis if need be? i.e. every 10 years.
FYI, in 2016, the proportion of Canadians aged 90 and older was 1.6% of the total population. While this doesn’t tell you the number of Canadians that live until this age, one can safely assume that the number is quite small.
Ronster, life expectancy changes as we age, often it actually increases (to a certain extent). Take a look at the mortality table produced by Canadian Institute of Actuaries in 2014. It is widely accepted and used as a reasonable guideline for life expectancies in Canada.
An individual’s life expectancy changes as we reach certain milestones, typically extending a few years.
You can find the CPM2014 table here on the FP Canada Assumptions Guidelines on page 4.
https://www.fpcanada.ca/docs/default-source/standards/2022-pag—english.pdf?sfvrsn=dfd63b83_11
I think, you can add whole life insurance in this comparison, an see what happens 😉
The table above does not seem to set out the payment frequency nor the amount invested in an annuity to generate the funds. I assume that it is monthly and based on $100,000 investment increments. This is a significant oversight for any data table or graphical information and not helpful for those whom Mr. Wallace is seeking to inform.
The table is not well explained, so it’s meaningless. Sorry to say, but this is typical of what you’ll find with insurance salesmen.
The table needs some explanations…I don’t understand how these numbers are calculated?