Terry Zavitz

Terry Zavitz

Is a RRIF or an annuity a better option?  As with most personal finance situations, it is unique to each individual.

By the end of the year you turn age 71 there is a requirement that you convert your RRSP to either an annuity, Registered Retirement Income Fund (RRIF), or a combination of both. 

An annuity provides a guaranteed income for life. The length of the payout is based on your life only, or the last of the lives of you and your spouse; called a joint last to die.  The payment may be indexed and there may be a guarantee period such that a death before a certain period of time, say 10 or 15 years, would result in a payment to the beneficiary(ies) or the estate for the remaining period of time in the guarantee. The more benefits offered, example, payments to the last death and/or guarantees, the lower the income payment.  Upon your death, or the last death of both spouses if a joint last to die, there are no benefits payable to your estate other than the remaining amount of a guarantee period, if one is included. 

With a RRIF you can choose the amount of income you take, subject to a yearly minimum based on your age, and you choose the investment options.  If you have a defined contribution pension plan, the options are basically the same but the acronym LIF (Life Income Fund) is used instead of RRIF. Benefits are not guaranteed, and taking too large of an income and/or not achieving anticipated investment returns can result in a depletion of the funds earlier than expected.  Upon death, the remaining funds, if any, pass to your spouse and/or estate or other named beneficiary(ies).

Is a RRIF or an annuity a better option?  As with most personal finance situations, it is unique to each individual.  If you prefer guarantees, or plan on living a long life, then an annuity is better. Studies have shown that unless you can generate in excess of 3% per year with a RRIF at age 65, an annuity is often the better choice, assuming you (or you and your spouse) live at least to life expectancy or beyond.  If you like the idea of potentially getting larger returns, with remaining money at death going to your estate and/or beneficiary(ies), then a RRIF may be preferred. 

There are a few points to consider:

1.  You are not obligated to take one or the other. You can combine the options so that your fixed expenses are covered by guaranteed income streams. Income streams can include, government benefits like OAS and CPP, pension benefits, and annuity income; with discretionary expenses covered through RRIF payments. 

2.  It is possible to start with a RRIF and change to an annuity later on.  The older you get, the more an annuity can make economic sense.  The payment for an annuity, taken out at age 80, requires an 8% or higher return on your RRIF to equal the annuity payment. However, the annuity will likely not provide an additional benefit at death whereas a RRIF will.

3.  The ability for a RRIF to provide enough income for life depends on the number of years you or you and your spouse live, the rate of return on the investments, and the sequencing of returns.  Unlike a savings plan with regular contributions, where the sequencing of returns does not affect the overall result when compared to a set percentage, say 7%, when withdrawing money from a RRIF, the sequencing is critical.  A low or negative return in the beginning years is more financially devastating than a higher return in the beginning years and lower thereafter, even when the overall return over the set number of years is the same. 

Choosing a RRIF, annuity, or combination of both is not an easy decision. So many factors determine which one is ultimately the best for your financial situation.  Your financial advisor will help you with the decision making.