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Sometimes it’s best to have both
If you have clients who are nearing retirement and planning to convert their RRSPs, they’re probably asking whether they should choose Annuities or RRIFs. The fact is they may be better off with both.
Both provide a stream of retirement income while keeping the remaining funds sheltered from taxes. But each has properties that can make it better for certain expenses or specific stages of retirement.
A RRIF, for example, offers a choice of investments and flexible income payments so the client can take more or less according to their needs. With an Annuity they’re limited to regular monthly payments, and assured of a guaranteed income with no investment management required.
So while RRIFs are the most popular option, Annuities can also play a key role in your client’s retirement income plan – either now or later if their circumstances change. For instance, a new retiree might begin with a RRIF to generate flexible income, then later use it to buy an Annuity that guarantees a level income for the rest of their life.
Let’s look at two scenarios:
Scenario #1: RRIF and Annuity now – for different expenses
- At age 65, Janet uses some of her RRSP to buy an Annuity. She uses the fixed Annuity income to pay for essentials like housing, food and bills. This gives her peace of mind knowing regular payments will always be there for the basics, just like a pension.
- At the same time, Janet converts the rest of her RRSP to a RRIF. She uses the flexible RRIF income to cover extras like vacations, renovations and emergencies. While a RRIF requires minimum withdrawals, there is no maximum, so she can take out lump sums as needed.
- Note: If Janet has a pension, it could replace the Annuity. Or better yet, she could coordinate a fixed pension with an Annuity that is indexed for inflation. Then she’ll be assured that the regular payments will be enough to cover her essential expenses over the long term.
Scenario #2: RRIF now, Annuity later – for different goals
- At age 65, Tom converts his entire RRSP to a RRIF – He wants to begin his retirement with flexible RRIF payments because he’s not sure what his expenses will be, how his health will hold out, and what his spouse and children might need. And with several years left for his capital to grow, he’s still willing to take investment risks to keep up with inflation.
- At age 78, Tom switches the remainder of his RRIF account to an Annuity – A RRIF can be switched to an Annuity at any time. Which is good, because Tom is ready for a secure regular income. He knows his expenses now. In fact, he and his wife have made assisted living arrangements and want to know they can always afford it. What’s more, with fewer years left for investment growth, Tom no longer wants to manage his portfolio. He’d rather have monthly payments that stay the same no matter how interest rates and world markets rise or fall. Plus he wants peace of mind knowing that he and his wife will never outlive their payments.
- Note: Because Annuity payments are based on the market interest rate at time of purchase, some believe that this type of switch should be timed for when rates are high. This is less of a concern for older clients as the interest rate is less significant due to the shorter time horizon.
Whether your clients prefer the RRIF’s flexibility or the Annuity’s security, take the time to help them explore retirement income plans that use both. For more information on how RRIFs and Annuities can benefit your clients and your business, please visit http://www.sunlife.ca/advisor.
December 2002
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