We all know that in the year you turn 71 you will have until December 31 to convert your RRSP into a RRIF or an annuity. Which do you choose?

First, let’s recap the basics.

RRIF option

The year after you set up your RRIF you will have to start withdrawing a mandatory minimum amount. At age 71 the minimum is 5.28% of your balance on January 1. That percentage increases as you get older. Of course, you can withdraw more than the minimum and there is no maximum withdrawal amount for a regular RRIF. For this comparison we’ll use the minimum amount.

You will continue to decide where to invest your RRIF assets and your investments will continue to grow on a tax-sheltered basis, but the amount you withdraw is taxed at your marginal tax rate.

On your death, the remaining assets are generally transferred to the surviving spouse, tax free, or goes to your estate and is taxed.

Annuity option

An annuity is a specialized financial product provided by an insurance company. In exchange for a lump sum investment from your RRSP you receive regular retirement income for the rest of your life.

Once you choose to purchase an annuity there is no access to your capital. You basically are giving it up for a guaranteed income that never decreases. It creates a personal pension plan for those without pension plans.

Annuity income is based on several factors:

  • The purchase amount.
  • The type of annuity purchased.
  • Current interest rates.
  • Age and gender of the annuitant (and survivor for a joint annuity).
  • The selected payment guarantee.
  • Expense and mortality experience of the insurance company.

Comparison between a RRIF and an annuity

Evan and Rebecca, childhood sweethearts, have been married for fifty years. They are both 71 years old. If they choose the RRIF option for Evan, Rebecca will be designated the successor annuitant, which means she will continue to receive the original payment set up after Evan’s death.

Evan’s twin sister, Evelyn, is single and on her death the remaining RRIF balance goes to her estate.

Related: What you need to know about converting an RRSP to a RRIF

The following chart shows a RRIF containing a sum of $500,000 at the beginning of the year following set-up. We’ll assume an average annual rate of return of 4% and the minimum payment is withdrawn monthly.

 

Year

Age

Jan 1

 

Balance

 

%

Monthly

min w/d

2017 71 500,000  5.28 $2,200.00
2018 72 492,544  5.40 $2,216.42
2019 73 484,584  5.53 $2,233.16
2020 74 476,098  5.67 $2,249.58
2021 75 467,068  5.82 $2,265.25
2022 76 457,480  5.98 $2,279.75
2023 77 447,327  6.17 $2,300.00
2024 78 436,516  6.36 $2,313.50
2025 79 425,104  6.58 $2,331.00
2026 80 413.017  6.82 $2,347.33
2027 81 400,244  7.08 $2,361.41
2028 82 386,783  7.38 $2,378.75
2029 83 372,568  7.71 $2,393.75
2030 84 357,596  8.08 2,407.83
2031 85 341,851  8.51 2,424.25
2032 86 325,269  8.99 2,436.83
2033 87 307,869  9.55 2,450.08
2034 88 289,606 10.21 2,464.08
2035 89 270,439 10.99 2,476.75
2036 90 250,346 11.92 2,486.75
2037 91 229,325 13.06 2,495.83
2038 92 207,350 14.49 2,503.75
2039 93 184,397 16.34 2,510.92
2040 94 160,438 18.79 2,512.16
—— —– ———- ——- ———–
2041 95 135,503 20.00 2,258.42
2042 96 112,738 20.00 1,879.00
2043 97   93,798 20.00 1,563.33
2044 98   78,040 20.00 1,300.66
2045 99   64,930 20.00 1,082.16

The chart shows the percentage, as well as the monthly withdrawal, increases every year until age 95. After that age the payments start to decrease quite a bit. This decrease will obviously be a concern to those who believe their longevity will be much greater than average.

One of the reasons why annuities were not popular was the fear that once you handed over all your life savings you’d be hit by a bus after leaving the office. The industry addressed this fear by introducing Term Certain annuities which provide guaranteed income for a specified period of time.

These annuity figures were provided (with my thanks), by Steve Krupicz from Manulife.

Let’s look at a joint-life annuity purchased with the same $500,000 at age 71. At Evan’s death, Rebecca will continue to receive the same monthly payment.

This is what Evan (and Rebecca) could receive:

  • A three year guaranteed income period would pay out $2,275 per month.
  • A fifteen year guaranteed income period would pay out $2,163.02 per month.

On the other hand, a 15-year guaranteed income period annuity would pay Evelyn $2,493.92 per month but there would be no residual funds to her heirs if she dies after that term has expired.

Final thoughts

Clearly, the income from the RRIF is higher for someone who may be considering a joint and survivor life annuity and, for most years, the opposite is true for a single annuitant.

However, your RRIF investments will likely not have a linear 4% return every year. What if your investments should drop by 8%? 15%? Or even 30% or more? Either your minimum payment (your income) will decrease, or you will take out a greater percentage thereby reducing your capital more.

The advantage of an annuity is the payment is guaranteed month after month until you (or your joint annuitant spouse) dies. This is especially beneficial if your spouse is considerably younger than you are.

Yes, some of you like the greater flexibility of a RRIF in terms of gaining access to your capital and leaving a sum to your heirs.

It therefore can make sense to combine the two options.

I suggest you try to cover your basic retirement expenses with an annuity combined with your CPP, OAS, and any other pension income you may be receiving to give you a guaranteed income stream for life. This allows your RRIF to provide you with investment growth opportunities and easier access to your money for your more enjoyable lifestyle expenses.

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5 Comments

  1. rhonda caplan on June 10, 2016 at 12:04 pm

    I was led to understand that the annuities charge a hefty management fees.
    Are there any annuities you would recommend with lower fees?
    What is the average Management fee for an annuity.
    Do they need to be sold by an insurance company, or can my financial adviser sell one to me.?
    Any input would be helpful.
    Love your blog.
    I know my FA knows when I have read it, because I send him A LOT of questions.

    • boomer on June 10, 2016 at 6:40 pm

      Thank you Rhonda for your kind words.
      You can purchase an annuity from a licensed insurance agent or broker or a financial advisor who is licensed to sell insurance.
      You get the highest income with a basic annuity that covers only you. Any options you add will lower the amount of the payments.
      I will enquire about management fees and let you know.

      • boomer on June 11, 2016 at 4:21 pm

        From Steve Krupicz at Manulife:
        “There are no explicit fees charged for an annuity. The annuitant pays a premium and we provide an income in return. We do not charge any fees against that income. So, to use the joint annuity with a 3-year guarantee as an example, the income of $2,275 goes totally to the annuitant. There is no larger amount against which we assess some sort of fee and there are no fees the insurance company charges against this monthly amount.”

  2. Sam on June 12, 2016 at 8:05 am

    If one has an existing RRIF and wants to transfer some of the RRIF funds to an annuity? If yes what kind of fees will be charged without penalty?
    Thanks a bunch.
    Sam

    • boomer on June 12, 2016 at 11:54 am

      @Sam: You will have to check with your RRIF holder to see if there are any transfer fees. If so, perhaps you can negotiate with the insurance company to reimburse you.

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