S T A G E 4 Consider your options and make choices How can I transform my savings into retirement income? Now that you have analyzed your retirement needs and where your income will come from, you must decide how you will access your retirement savings. This section will describe your options, each with its own advantages and disadvantages. Determine what will work best for you in your personal situation, taking into account your need for both fixed and variable income sources. Consider: How will the following products combine to globally fit your needs?
The Registered Income Fund (RRIF) The Registered Income Fund (RRIF) might be described as the continuation of the Registered Savings Plan (RRSP). It was designed to help participants convert their accumulated retirement savings into retirement income. Remember, however, that only funds coming directly from an RRSP can be transferred to a RRIF, and the transfer must occur by the end of the calendar year in which you turn 69 at the latest. You must also start drawing income from your RRIF no later than the following calendar year. Instead of making contributions, as you did with your RRSP, with your RRIF you will be making withdrawals. You can withdraw any amount you want, subject to a yearly minimum. It is up to you to make sure the money lasts throughout your retirement. To determine your minimum withdrawal amount, calculate the difference between 90 and your age at the time of transfer. Sample minimum withdrawal calculation for a RRIF planholder at age 65 Age Age prescribed by RRIF formula 90 Your Age Prescribed minimum (1/25)* Value of RRIF at beginning of year Minimum withdrawal 65 90 25 4% $100,000 $4,000 *Applies only to a RRIF where the planholder is below age 71, after which the minimum withdrawal is calculated using prescribed factors. If you are 65, as in the above example, the formula is: (1/90 65), which amounts to a withdrawal equal to 1/25th or 4% of the fair market value of the RRIF at the beginning of the year. You may also decide to use the age of your spouse or common-law partner to calculate the minimum withdrawal if your spouse is younger and you want to reduce your minimum monthly payment.this is a one-time, irreversible decision. Advantages: Funds invested in RRIFs, like those invested in RRSPs, are tax-sheltered until they are withdrawn. You maintain control over your principal and have the ability to make investment decisions. You decide how much to take out monthly or annually, without being subject to a maximum. The amount can differ from one year to the next, depending on your changing needs. RRIFs provide protection against inflation as you can withdraw larger amounts according to the expenses you incur. You can convert your RRIFs into an annuity at any time to achieve greater security. A RRIF can be converted back to an RRSP if you are under the age of 69 and you do not need to generate revenue from your RRIF. In the event of death, the benefits will continue to be paid to the beneficiary who, if under the age of 69, also has the option of converting the RRIF back into an RRSP. Disadvantages: You must withdraw a minimum amount every year, based on the balance in your account and your age. Only funds from an RRSP can be transferred to a RRIF. As there is no guaranteed income, you have more responsibilities because you must manage the funds at your disposal wisely. You must have the required knowledge and the time to manage your investments. You are at the mercy of the markets; low yields can reduce your income.
The Life Income Fund (LIF)/Locked-in Income Fund (LRIF) The Life Income Fund (LIF)/Locked-in Income Fund (LRIF) is a retirement income fund similar to a RRIF into which you deposit locked-in funds accumulated in RRSPs, funds transferred from a pension plan or a locked-in Account (LIRA). The LIF/LRIF has certain restrictions designed to guarantee you a lifetime income. Thus, amounts you withdraw from a LIF/LRIF every year are not only subject to an annual minimum, but also a set maximum. You can convert your locked-in assets into a LIF/LRIF any time up to a certain age, which differs from province to province. In some provinces, LIFs/LRIFs must be converted into an annuity by the end of the calendar year in which you turn 80, but this rule depends once again on the province of residence. Advantages: Funds invested in LIFs/LRIFs, like those invested in RRSPs, are tax-sheltered until they are withdrawn. You maintain control over your principal and have the ability to make investment decisions. LIFs/LRIFs guarantee you a lifetime income. LIFs/LRIFs also accept transfers of locked-in funds. LIFs/LRIFs provide protection against inflation as you can withdraw larger amounts according to the expenses you incur. In the event of death, the benefits will continue to be paid to your beneficiary who, depending on his or her age and the laws governing the plan, can then transfer the LIF into a RRSP, LIRA, RRIF, LIF, LRIF (Locked-in Income Fund) or an annuity. Disadvantages: There is a maximum yearly amount you can withdraw. You cannot cash out a LIF/LRIF. You must have the required knowledge and the time to manage your investments. You are at the mercy of the markets; low yields could reduce the benefit amount. Annuities An annuity is a contract between you and an insurance company to provide you with a periodic payment in exchange for a lump sum taken from your RRSP, Locked-in RRSP,LIRA,RRIF,LIF (or LRIF) or non-registered savings. The payment amount from the annuity is largely dependent on the following criteria: Age generally, the older you are, the larger the payments Gender because women are expected to live longer than men, payments for women tend to be smaller Amount of capital used to buy the annuity the more capital, the larger the payments Interest rates at the time you buy higher interest means higher payments There are two basic types: Lifetime Annuities and Term Certain Annuities. Lifetime Annuities Single Life Annuity: This is a basic lifetime annuity which provides you with income for the rest of your life. This income is based primarily on your life expectancy and the prevailing interest rates at the time of purchase. For instance, if you are 65, your income would be lower than if you were 69, because you would be receiving income for a longer period of time. Women and men of the same age receive different amounts because, according to statistics, women have a longer life expectancy. If interest rates are low at the time of the transaction, your income would be affected for the rest of your life. Joint and Last Survivor Annuity: This is a particular form of life annuity which provides you with income payments for as long as both you or your spouse live. This type of annuity is generally obligatory, unless waived by the spouse, for money being transferred from a registered pension plan. Deferred Annuity: This is a life annuity which does not start paying income right away.this type of annuity is suitable for investors who don't need income right away but wish to take advantage of a high interest rate environment to ensure higher payments when they do start receiving income.
Term Certain Annuities A term certain annuity guarantees you a certain number of benefit payments until your 90th birthday (or the 90th birthday of your spouse if younger and you have opted for this calculation method). A Term Certain annuity can only be purchased using RRSP funds or non-registered funds. If you purchase a term certain annuity with non-registered funds, you can opt for a benefit period of five or more years. A term certain annuity guarantees you an income for a specific period of time, at the end of which the benefit payments cease. Therefore, you could theoretically outlive your annuity. If you die before the term certain annuity expires, the remaining benefits should be paid to your beneficiary or assignee. Disbursement Option Table Type of Plan Where Your Money is Invested Plan Type Income Option Conversion criteria Registered Income Fund (RRIF) Life Income Fund (LIF)** Locked-in Income Fund (LRIF)*** Lifetime Annuity Term Certain Annuity Registered Savings Plan (RRSP) Funds must be converted to cash, used to purchase an annuity, or transferred to a RRIF by the end of the calendar year in which you turn 69. Registered Pension Plan (RPP) Funds must be converted to a LIRA, LIF or LRIF, or a lifetime annuity by the end of the calendar year in which you turn 69. Advantages: Only product with a guaranteed lifetime payment In the event of death, payments may continue to be made to your spouse or beneficiary. No management is required by the purchaser. Benefits remain the same and never fluctuate according to changes in interest rates and the stock markets. Disadvantages: The interest rate in effect at the time of purchase will influence the amount of income. A low interest rate will not be in your favour. The term certain annuity is not very flexible. The benefit is restricted by the terms of the contract, which cannot be changed. The contract has no cash surrender value. A lack of flexibility prevents you from adjusting the contract to your changing needs. Locked-in Account (LIRA) or Locked-in RRSP RRSP funds must be converted to a LIF, LRIF, or a lifetime annuity by the end of the calendar year in which you turn 69. Deferred Profit Sharing Plan (DPSP) Funds must be converted to cash, used to purchase an annuity, or transferred to a RRIF by the end of the calendar year in which you turn 69. Allowed at any time* Not an option* Not an option An option if funds are first transferred to an RRSP Non-Registered Savings Funds have no restrictions on withdrawing or investing. Funds do not have to be used to provide a retirement income. Not an option Not an option An option at age 55* An option at age 55* Not an option Not an option Not an option Allowed at any time* Allowed at any time Not an option Not an option Allowed at any time An option at age 55* Allowed at any time* Allowed at any time Allowed at any time Allowed at any time Not an option Not an option Allowed at any time* Allowed at any time * Plan provisions and pension legislation may vary. ** Available in all provinces except Prince Edward Island. *** Available only in Alberta, Manitoba, Ontario, Newfoundland and Labrador. How to read the table: Example: If you have retirement savings in a RPP, you can transfer from the RPP to a LRIF at anytime and you can transfer to a LIF or, in most cases, purchase a Lifetime Annuity at age 55. It is not an option to transfer retirement savings from your RPP to a RRIF or a Term Certain Annuity.
A Case Study to Clarify Three people, the same amount in their group RRSPs, three different strategies. These three cases will give you an idea of the choices available to you for transforming your savings into income when you retire.liz,peter and Martin are 60 years old and have decided to retire. Having consulted their advisors, they converted their $100,000 group RRSPs as follows: Liz has always managed her own investments to maintain perfect control, and wants to continue to do so during her retirement. She converts her group RRSP into a RRIF, hoping to receive stable periodic income for the next 20 years. Peter wants to maintain control over a part of his savings to ensure some flexibility, and withdraw lifetime-guaranteed stable income from the other portion, just to be safe. Peter converts $50,000 of his group RRSP into a RRIF and $50,000 into a lifetime annuity guaranteed for 15 years. He would like to receive a stable monthly income of $400 from his RRIF. Martin wants regular stable income that's guaranteed, so he converts his entire group RRSP into a lifetime annuity. If he dies before his spouse, she will receive his annuity. Here are the results for each of the three pensioners: Liz Peter Martin Selected retirement income option Monthly income RRIF Fixed period 20 years Capital invested $100,000 $50,000 $50,000 $100,000 $707/month for 20 years, after which the RRIF will be depleted. RRIF Fixed payment $400/month $400/month for 16 years and one month, after which the RRIF will be depleted. Lifetime annuity guaranteed 15 years $315/month for life. Joint and last survivor annuity $628/month. Notes: All income shown is before taxes. For illustration purposes, the interest rate is 6% compounded annually. Periodic payouts are rounded to the nearest dollar. Investing at If you choose to transfer your retirement savings to a registered vehicle other than an annuity, much like when you were accumulating funds for retirement, you will be responsible for investing your savings. Depending on your age, retirement can last for more than 25 years and, as such, it is important that your investment choices reflect your personal situation and tolerance for risk. We have developed a questionnaire specifically for participants investing at retirement, a copy of which is included with this kit.
Summary of Stage 4 LIFs, LRIFs, RRIFs, RRSPs and Annuities so many choices, each with its own advantages and disadvantages. You must carefully consider your choices so that you meet your needs and have enough income to last throughout your retirement. If you select a product other than an annuity, you will continue to be responsible for managing your retirement funds into retirement. 00392E44 (06-05) TM Trademark owned by Desjardins Financial Security Life Assurance Company