Why would Dave, a 72 year old retiree from Qualicum Bay switch his RRIF to an annuity?
Retirement income planning tells us that the primary aim of most of our investing is to provide income for when we can no longer earn it.
To maximize this future income we try to maximize the growth of our investments while minimizing any risks. Dave looked for a secure stable income that he cannot outlive. But when he switch from accumulating investments to drawing on them he discovered that the income from most is both erratic and temporary.
Interest rates and dividend levels change, GICs and bonds mature and force us to seek other investments. With annuities, it told Dave that a joint life annuity will address his wife's and his income needs for as long as either of them are alive, which is just one of the reasons Dave switched his RRIF to an annuity.
A few of the others are:
- capital erosion
- better return
- level income
- investment edge
Here is Daves thinking behind each reason:
Capital erosion – Last year Daves RRIF earnings averaged only 5.69 per cent, while its mandatory minimum withdrawal was 7.38 per cent. As the payout was higher than the profit, the difference had to come from capital. And as the minimum withdrawal rate keeps increasing, until it levels out at twenty per cent, the capital erosion will keep increasing.The capital will eventually be completely exhausted, eaten up in its final years by the fees of the RRIF trustee.
Level income – Dave wanted a level monthly income for life.
Mortality – Dave or his wife can easily outlive a level RRIF income, but they can't outlive the income from a joint life annuity.
Simplification – Accumulating investments accumulate paper. There's a great quantity of data about them: certificates, statements, records, etc., and it is a chore just to keep track of them all.
Insurance – The purpose of most life insurance is to provide a lifelong income for one's widow. A joint life annuity does exactly that.
Permanence – A life annuity is permanent.
There are a lot of seniors like Dave with RRIFs that haven't thought of the advantages that an annuity has over a RRIF. Are you one ?