During our working lives, we all get used to budgeting, or at least planning how to spend and save our income. The period prior to retirement may be the first time we have to plan our income to meet our expenses.
With Canadians living longer and more active lives, retirement has become a longer and more expensive proposition than ever before. Planning retirement income is likely the single most important step in a successful retirement program. The rules are complex, but with the help of a qualified Canfin Financial Advisor, determining your retirement needs, goals and options can be an easier process.

FIRST THINGS FIRST - DETERMINING YOUR INCOME NEEDS

Before you begin thinking about the financial details, ask yourself "How do I want to live in retirement?” Your retirement lifestyle will be a key determinant in the options that you choose. If you plan to travel the world or leave Canada for a warmer climate every winter, your income requirements will be higher than if you wish to enjoy the quiet cottage life here at home.

YOU DO HAVE OPTIONS

The maturity options you choose at age 69 or sooner, provide you with retirement income in varying amounts over different periods of time, with tax being deferred until you actually receive the income from these options. Selecting the right combinations of these options is a key step to building the right package for your retirement needs.

Registered Retirement Income Funds (RRIFs)

Most Canadians will select a RRIF as their retirement income option because its similarity to an RRSP makes the transition a comfortable one. In fact, a RRIF is often viewed as an RRSP in reverse. Rather than making annual contributions, you are required to make minimum annual withdrawals related to a percentage of the previous year’s plan asset value.

RRIFs have become an attractive maturity option because they provide income flexibility - you can withdraw as much or as little from your RRIF as desired (subject to a specified minimum based on age), and you are taxed only on the money that is withdrawn.

A RRIF also allows for investment flexibility - a large range of investments qualify as investments for a self-directed RRIF. These may include shares in Canadian companies, mutual funds, government and corporate bonds, money market instruments, mortgages or a combination of any of these.

RRIFs are also a popular retirement income option because of the level of control the plan holder maintains over their assets - Much like a self-directed RRSP, a self-directed RRIF allows you make the investment decisions, with a trustee looking after the administrative details of the plan. Investing within a self-directed RRIF, does however, require some knowledge of the various capital markets, as well as knowledge of which investments qualify and which do not. Your financial advisor can assist you by ensuring that the proper asset mix is selected to suit your individual needs and circumstances.

Unlike an annuity, RRIFs treat men and women equally, as payments depend on the amount of money invested, the investments chosen, and the payment schedule, not on your gender. In addition, RRIFs are Estate friendly - assets can be passed to your surviving spouse without exposure to tax, if your spouse is designated as the beneficiary.

Life Income Funds (LIFs)

LIFs can be viewed as hybrid RRIFs for funds from locked-in RRSPs. Unlike a regular RRSP, a locked-in RRSP (a plan into which vested company pension benefits are transferred), is subject to provincial Pension Acts and pension legislation in each province, so rules governing them vary by province.

Despite these provincial differences, LIFs generally allow for tax deferral and provide, much like a RRIF, the flexibility of choosing investment. Also like a RRIF, the LIF has a minimum payment each year, but these yearly withdrawals can be any amount up to a maximum, giving the plan holder the flexibility to meet future income needs as they occur.

The maximum annual payment is enforced to retain assets of the LIF because a LIF must be converted into an annuity by the year of your 80th birthday, thereby providing lifetime income. There is no income flexibility after this occurs.

Annuities

The security and peace of mind that comes from receiving permanent income during retirement may be what is most important to you. Annuities allow the retiree to make a decision today that guarantees an income stream for a specified period or for life.

It is, however, important to understand that you give up future control of your capital when you decide to purchase an annuity, since annuities provide you with a stream of regular income payments in exchange for your capital.

When you use the proceeds from your RRSP to purchase and annuity, tax is deferred until income payments from the annuity are received. All annuities provide you with a guaranteed stream of income. What is variable is the time period over which you receive the payments.

RRIFS VS. ANNUITIES

All retirement income options are not created equal. The two most popular options, RRIFs and annuities, should be carefully evaluated against each other and against your goals before any decisions are made.

When deciding what combination of maturity options best suits your personal situation, consider whether the combination will provide you with the flexibility needed in your retirement years, and the ability to change you mind should your situation change. In many cases, there is an opportunity to change from one maturity option to another, if your retirement options are properly structured.

For assistance in choosing the right maturity options for your registered assets, talk with your Canfin Financial Advisor today.