Why would Dave go from a RRIF to annuity?
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 switches 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 is 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 percent, while its mandatory minimum withdrawal was 7.38 percent. As the payout was higher than the profit, the difference had to come from the capital. And as the minimum withdrawal rate keeps increasing, until it levels out at twenty percent, 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 an RRIF. Are you one?
I do not understand the issue with capital erosion! Just because you have to withdraw more money from the RIF than you need does not mean you have to spend it. It can be reinvested.