Retirement Income Funds)
Deciding how you will turn your RRSP savings into retirement income is
one of the most important financial decisions you will ever
make. In the year you turn 71, you
must mature your RRSP and choose one of these options:
You can take all your savings in cash. This is not generally a good
idea because you will be hit with a huge tax bill. All your
investments will be taxed in the same year, rather than being
sheltered wile you take out only the amount your need.
You can purchase a life annuity or fixed-term annuity, which guarantees
a set monthly income. An annuity can be a good option if interest rates are
high when you retire. However, annuities give you no control
over your investments. Your income is set when you buy the
annuity so unless it’s indexed to inflation, your payouts
will buy less and less as time passes. And an annuity cannot
generally pass on to your heirs.
You can roll your RRSP over into a Registered Retirement Income Fund (RRIF). A RRIF has many advantages, including flexible investment choices and
the ability to pass on the amount in your plan as an inheritance.
But a RRIF does not guarantee you a set income for life. If
your investments decrease in value, you will have less to
draw from in the future.
You can also combine retirement income options. For example, by purchasing
an annuity with some of your rrsp money and moving the rest
into a RRIF. That way, you can benefit from a steady stream of guaranteed income and
all the advantages of a RRIF. Consider working with a financial
planner to work out a strategy that will best meet your needs.
Rebalance your portfolio when you retire
You will now be drawing an income from your savings rather than receiving
a paycheque. Make sure a portion of your portfolio is earning
enough short-term income to meet your needs.
Avoid taking a short-term view
Your retirement could last a lot longer that you think. Today’s 65 year-old
will likely live another 18 years. The investment in your
RRIF must generate sufficient growth to provide an income
for as long as you need it.
Is you spouse younger than you
Consider tying your RRIF withdrawal schedule to your spouse’s age instead
of your own. This can work in your favour if you would prefer
to lower the annual amount you are required to withdraw from
Buy a Life Income Fund
If you have a locked-in RRSP or pension plan savings, you cannot purchase
a RRIF. Instead, you can buy a similar Life Income Fund (LIF)
or Locked-in Retirement Income Fund (LRIF). LIF’s
and LRIF’s offer you the same investment flexibility as RRIF’s;
however, there are additional restrictions on these plans.
Set up a systematic withdrawal plan (SWP) for your non-registered investments
A SWP can help you supplement your RRIF income while keeping your investments
well diversified and offering tax benefits.
Talk to a financial planner about which option is appropriate for you
This commentary is not intended
to provide financial planning, legal, accounting or other
advice in individual circumstances. Seek professional assistance
before acting upon information included herein.