I read an article in our local paper this morning. A survey was recently done and it indicated that there were many retirees that felt that one of their biggest concerns was making their money last their lifetime. One of the major impacts on 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 of retirement. With low interest rates and a very bumpy stock market, how does one make their money last?
Let's take a look at the pros and cons of RRIFs vs Annuities.
Registered Retirement Income Fund (RRIF)
A RRIF is one tool that your RRSPs can use to draw out income. You have to switch your RRSP over to a RRIF not later than the year you turn 71. You can do that at any time prior to Age 71 but no later. Your choices for investments in RRIFs are wide ranging from GICs to Mutual Funds as well as other investments. A RRIF will require you to make ongoing decision regarding the investments with the RRIF.
You also appoint your Beneficiary on this type of product. 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 RRSPs move into a RRIF there is a minimum income requirement that the retiree has to receive. If the retiree is under age 71 the calculation is 1 divided by (90-AGE) Example: Person is 63 so 1/(90-63) = 1/27 = 4% (rounded). This particular 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 only the minimum or you can withdraw as much as you like. You are taxed on your income that you withdraw. The rest remains tax sheltered.
Related article: Minimum income rules for RRIFs
The best way to describe a Payout Annuity is that it resembles a pension plan. The retiree puts their RRSP money into a Payout Annuity and the Financial Institution (usually a life insurance company) provides a guaranteed income for life. This product guarantees you will not run out of money in your lifetime. You can set up a Payout Annuity to pay for life or to Age 90 if you like. Your investment is no longer subject to interest rate or market volatility however it is also not available for ad hoc withdrawals or, for that matter, any other changes. You can have single annuity based on one life (annuitant) or a joint annuity based on two people on a plan (example: Husband and Wife). Beneficiaries can also be appointed on the Payout Annuities.
Related article: Everything you need to know about life annuities
Which is better?
RRIFs vs annuities is a growing debate. 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 remove any flexibility but give you long term protection that you won’t outlive your money. Each person needs to sit down with their Advisor and discuss thoroughly the differences between the two and determine which one or a combination of both suits their specific situation. If impossible to evaluate this decision properly without actual numbers. I have included three examples:
1. Male Age 65: $100,000 earning 3%.
- Minimum Payment on the RRIF = $4,289.89/yr (changes yearly)
- Level Payment RRIF to Age 80 = $8,500/yr
- Single Life Annuity = $6,557.28/yr
2. Female Age 58: $100,000 earning 3%
- Minimum Payment RRIF = $3,322.86/yr (changes yearly)
- Level RRIF to Age 80 = $6,250/yr
- Single Life Annuity – $5,080.80/yr
3. Male Age 68 and Female Age 62: $100,000
- Joint Life Annuity- $5,242.68/yr
As you can see, numbers will vary depending on age, gender, interest rates, and single or couple status. If you are wondering about RRIFs vs annuities and which is better, it's important to get some quotes from a financial advisor. It's important to shop around because not all companies offer the same rates all the time.