Which is Better: A RRIF or an Annuity? - Empire Life

Which is better: a RRIF or an annuity
Which is better:
a RRIF or an annuity
Question:
I’ve just turned 71 and have received notice that I must
convert my RRSP into a RRIF or annuity by the end of this
year. What are my options Which one is right for me
Answer:
The Canada Revenue Agency (CRA), requires that you
cash in or convert your retirement savings into an income
stream by the end of the year in which you turn 71.
There are three ways to do this:
1. You can withdraw your retirement income from your RRSP in cash. The problem with this option is that the
full amount of the withdrawal will be added to your income for this year, and you must pay tax on it. Because
the amount of the withdrawal will likely be substantial, it will mean that most of your savings will be taxed at the
highest rate.
2. You can use your funds to purchase a registered annuity from an insurance company. Annuities are ideal if you
want to cover your fixed expenses, if you’re concerned about outliving your retirement capital, or if you don’t
want to make on-going investment decisions.
3. You can transfer your funds to a registered retirement income fund (RRIF). RRIFs are a popular choice because
they allow investors to continue to manage their investments.
Which Pays More
Whether RRIFs or annuities will pay you more in the long run depends on a number of factors including your age,
interest rates, and the rate of return generated by your RRIF.
Other factors to consider are:
• Your health (including that of your spouse)
• If preservation of capital for your children is a concern
• How involved you and your spouse want to be in the management of your investments
You should also prioritize your financial goals and evaluate your risk tolerance.
What Are My Goals
• Maximize income
• Delay receipt of money for as long as possible
• Capital appreciation
• Indexed income to offset inflation

Which is better: a RRIF or an annuity
What is my Risk Tolerance
If you’re risk averse and are only interested in guaranteed investments (such as GICs), then a life annuity is probably
your best bet. In a low interest rate environment, inclusion of the capital repayments dramatically increases your
monthly or annual income. As a result, registered annuities will almost invariably give you a higher retirement income
than a RRIF, without any fear of running out of money. Annuities work best if you are over age 60.
If you are a risk taker RRIFs may be more attractive when you are able to obtain higher rates of return. The only way to
achieve higher rates of return is by investing in stocks or equity funds, which is why your risk tolerance comes in to play.
If you feel a balanced approach using a mix of 50% guaranteed investments and 50% equities is a good
compromise, then you might want to consider using a life annuity for the guaranteed portion and a RRIF for the
equity portion. If the annuity income is sufficient to meet your basic needs, this approach allows you to be more
aggressive in your investments.
Table A below compares the amount of income you could expect to receive from a registered annuity as of January
2012, and RRIFs at various rates of return. It also includes a balanced approach by combining a Joint & Last Life Annuity
for $50,000 and a RRIF for $50,000 assuming a 6% annual rate of return.
Table A:
Estimated Annual Income Produced by $100,000 of Registered Funds at Age 71**
Annuities 1 RRIFs 2 Combination 3
Annuity / RRIF
Age Male Life - 10 Female Life - 10 Joint Life - 10 RRIF @ 4% RRIF @ 6% RRIF @ 8%
@ 6%
72 $7,843 $7,167 $6,347 $7,672 $7,818 $7,964 $7,042
75 $7,843 $7,167 $6,347 $7,140 $7,704 $8,301 $6,985
80 $7,843 $7,167 $6,347 $6,333 $7,517 $8,894 $6,892
85 $7,843 $7,167 $6,347 $5,591 $7,300 $9,484 $6,783
90 $7,843 $7,167 $6,347 $4,899 $7,036 $10,038 $6,651
95 $7,843 $7,167 $6,347 $4,153 $6,562 $10,281 $6,414
99 $7,843 $7,167 $6,347 $1,991 $3,396 $5,734 $4,831
Total $219,604 $200,676 $177,716 $151,261 $193,419 $251,448 $184,436
** Assumes a purchase date of January, 2012 and income payable annually starting January, 2013.
1
Annuity rates in effect as at January, 2012. Based on a Single Life and Joint Life Annuity for male and female, both age 71, with a 10-year guarantee period.
2
RRIFs based on minimum income payments required by law. Assumes 4%, 6%, and 8% annual rate of return.
3
Annuity / RRIF combination is based on a $50,000 Joint & Last Survivor Annuity for male and female at age 71, and a $50,000 RRIF at a 6% assumed annual
rate of return.
The Age Factor
The younger you are, the longer your retirement income needs to last. When planning your retirement, you’ll have to
ensure you don’t use up your capital too quickly — you don’t want your income to expire before you do! Many financial
planners point out that running out of money is one of the greatest dangers facing seniors today.
Annuity income is also affected by your age and any minimum payment guarantees. The longer the annuity has to run,
the smaller the amount of each monthly or annual payment. This is the reason Joint & Last Survivor annuities pay less
than annuities on only one life. It is also the reason life annuities are less attractive for younger people. However, one
of the great advantages for retirees is that the insurance company providing the annuity will base its calculations on the
average length of time you’re expected to live, whereas with a RRIF you’ll have to ensure your RRIF income will last for
the maximum period you might live. Table B shows estimates of the potential amount of annual income for Single and
Joint & Last Survivor annuities for male and female at age 71.
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Which is better: a RRIF or an annuity
Table B:
$100,000 Registered Life Annuity
Minimum
Guarantee Period † None 10 Years 18 Years
Estimated Annual Income Estimated Annual Income Estimated Annual Income
Male, age 71 $8,850 $7,843 $6,192
Female, age 71 $7,688 $7,167 $6,025
Joint & Last Survivor,
both age 71
$6,460 $6,347 $5,804
†
In a single life annuity, where the beneficiary is not the spouse or common-law partner, if the annuitant dies within the Minimum Guarantee Period, the income
payments for the balance of the guarantee period are commuted and paid to the beneficiary in a lump sum. However, if the beneficiary is the spouse or commonlaw
partner the annuity payments continue to that person for the balance of the remaining guaranteed period. Single and Joint & Last Survivor Annuity Rates are as
of January, 2012.
The Growth Factor
Table C shows the impact that different rates of return can have on both your income and the amount of capital that
will be left for your family. Keep in mind that almost half of the value remaining in the RRIF at your death may be lost
in taxes if you don’t have a surviving spouse as beneficiary.
Table C:
Age
Effect of Interest Rates on Capital and Income in a RRIF
4% Interest 6% Interest 8% Interest
Capital
Estimated
Income
Capital
Estimated
Income
Capital
Estimated
Income
72 $103,955 $7,779 $105,932 $7,929 $107,909 $7,964
75 $92,609 $7,321 $99,925 $7,974 $107,666 $8,301
80 $74,249 $6,531 $88,128 $7,965 $104,267 $8,894
85 $56,307 $5,803 $73,519 $7,947 $95,513 $9,484
90 $38,543 $5,122 $55,360 $7,924 $78,977 $10,038
95 $20,766 $3,738 $32,812 $6,648 $51,406 $10,281
99 $9,955 $900 $16,978 $1,981 $28,671 $5,734
Total $151,261 $193,419 $251,448
Which is Better for Me
One of the most frequently asked questions in retirement planning is “Which is better for me, a registered annuity or
a RRIF”. Aside from the amount of income you would receive from each, Table D provides a brief summary of other
factors you might want to consider when making your decision.
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Which is better: a RRIF or an annuity
Table D:
Which is Better for Me — A RRIF or an Annuity
RRIFs
Annuities
The Basics
Advantages
Disadvantages
A RRIF is basically an extension of an RRSP, with
some important differences:
• Once you have converted an RRSP to a RRIF, you
cannot make further contributions.
• You must make withdrawals, subject to prescribed
minimums, every year for the rest of your life or
until all the funds in your RRIF are withdrawn.
• Income payments from a RRIF, including any
additional unscheduled withdrawals are taxable
income in the year received.
• You retain personal control of your investments.
• You can change the amount of your income.
• You can make lump sum withdrawals at any time.
• You may outlive your RRIF income.
• Your capital may diminish more quickly than
planned because of lump sum withdrawals or
poor investment performance.
• Your RRIF requires continuing investment
management decisions.
An annuity can provide set income payments for life
or over a specific term:
• In the case of an annuity, you are purchasing
a contract. In exchange for a one-time deposit,
you receive set guaranteed income payments
over a fixed period of time or your lifetime with
or without a minimum guarantee period.
• The amount of income you receive depends on
a variety of factors such as the deposit amount,
current interest rates, age and the type of annuity
you choose.
• The full amount of the annuity payments are
taxable income in the year received.
• A life annuity guarantees that you cannot outlive
your income.
• Neither you nor your spouse are required to make
any investment or management decisions — the
insurance company assumes the investment risk.
• You can spend every income payment without
worry because your future income is guaranteed.
• Most annuities cannot be surrendered or altered
after income has commenced.
• Payments cannot be adjusted to reflect
changing needs.
Seek Unbiased Advice
If you decide that a registered annuity might be a good idea, then ensure you consult someone who sells both
annuities and RRIFs, otherwise, you may get only part of the story. RRIFs are sold by most, if not all, financial institutions
but life annuities (where the income is guaranteed for your lifetime regardless of how long you live), are available only
from life insurance companies. You may feel that you’re not likely to live beyond age 90, but why take the chance
A life annuity guarantees that you cannot outlive your income. Annuities provide set income payments for life.
The information in this document is based on the facts as presented. Any differences, including factors such as assumed growth rates, age, marital status, type and/
or source of income can change the information provided in the various tables dramatically. In addition, this document may not be complete in any explanation of
applicable tax rules as they apply to your personal situation.
Past performance is no guarantee of future performance. The information in this document is for general information purposes only and is not to be construed
as providing legal, tax, financial or professional advice. The Empire Life Insurance Company assumes no responsibility for any reliance made on or misuse or
omissions of the information contained in this document. Please seek professional advice before making any decision.
A description of the key features of the individual variable insurance contract is contained in the Information Folder for the product being considered. Any amount
that is allocated to a segregated fund is invested at the risk of the contract owner and may increase or decrease in value.
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ENG-02/13