Retirement Planning

RRIF (Registered 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. 

RRIF Planning Strategies

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 are?

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 your RRIF.

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.