You’ve saved the money, now what?

    

Download this issue (PDF, 3 pages, 141KB)

You’ve saved the money, now what?
Retirement income options

When it comes to retirement, saving enough money is only half the battle. Equally important is planning ahead and taking the steps necessary to turn that money into a steady income that will provide you with the retirement you have planned.

There are a number of options available so that you find the right income product that fits your investment profile and retirement lifestyle.

First, let’s look at potential retirement income sources:

  • Personal savings (non-registered) – includes the balance in your bank account, the stocks you purchased from a brokerage firm, and other holdings such as Canada Savings Bonds.
  • Registered savings vehicles – includes RRSPs, deferred profit sharing plans (DPSP), and any money in tax-sheltered vehicles.
  • Employer pension plans – Defined Contribution (DC) or Defined Benefit (DB). For DC Plans, cash contributions are invested and then used for retirement income. However, there are no guarantees on the amount of income that you will receive at retirement. DB Plans usually provide a guaranteed benefit at retirement (often based on years of service and pre-retirement pay).
  • Government benefits – includes Canada Pension Plan (CPP)/Quebec Pension Plan (QPP), Old Age Security (OAS), and Guaranteed Income Supplement (GIS).  For more information about these government sources, review our October issue of At a glance entitled How much do I need for retirement and how do I get there?
  • Part-time work in retirement.

With the exception of your personal savings, government benefits and part-time work in retirement, you must take active steps to convert the other income sources named above into retirement income, and there are set timelines. For example, any money you have in a registered savings plan such as an RRSP must be converted into a retirement income product by December 31 in the year that you turn 71 years old.

The earliest CPP or QPP payments can begin is age 60, but it will be reduced by 6% for each year you start your pension before age 65. This means someone who starts to collect their CPP or QPP payments at age 60 would receive about $7,634/year, if entitled to the annual maximum of $10,905, versus how much if they waited until 65.  (Source:http://www.hrsdc.gc.ca/eng/isp/pub/factsheets/rates.shtml)

OAS payments of about $6200/year (maximum, indexed to cost of living) don’t start until age 65. A Guaranteed Income Supplement (GIS) may also be available to you, if you are a low-income senior. For more information on whether you qualify for the GIS, visit the Canadian government website at www.hrsdc.gc.ca/eng/isp/pub/oas/gismain.shtml.

Registered income options

There are a variety of products you can use to turn your savings into retirement income.

Registered Retirement Income Fund (RRIF)
One option for people who hold RRSPs, DPSPs or non-locked-in money under a pension plan is to convert that money into income through a RRIF.  Locked-in money that originated from a pension plan cannot be transferred into a RRIF, as a RRIF is only available for money that could have been taken in cash.

A RRIF is basically the opposite of an RRSP. Instead of making set contributions each month, you make set withdrawals each month. The minimum annual withdrawal amount that you are required to make is set by the Income Tax Act. When withdrawing, you are only taxed on the money you take out – the money that remains in the fund continues to grow tax free.

The government determines the minimum withdrawal amount using your balance on January 1 of each year, and a percentage using your age and/or your spouse’s age.

With a RRIF, you choose the investments but there are no guarantees the money will last.

Life Income Fund (LIF) and Locked-in Retirement Income Funds (LRIF)
These products provide income from money that was originally in an employer-sponsored pension plan. If you have money from a locked-in RRSP, Locked-In Retirement Account (LIRA)  or pension plan, you can choose to put your assets into a LIF or, if available, LRIF. Locked-in assets are usually assets that have been stored in an employer pension plan, to which you no longer belong (i.e. if you left your job before receiving pension benefits).

LIFs are available in every pension jurisdiction, except Prince Edward Island where there is no pension legislation. The tax-sheltered money invested in a LIF can provide regular income and is held in an account similar to an RRSP. You make all of the investment decisions and a LIF can be held for life, or it can be converted to an annuity. Like a RRIF, there are minimum withdrawal requirements based on your age, but there are also maximum withdrawal limits. Withdrawals are taxable as income. Pension jurisdictions regulate the maximum annual withdrawal amount.

LRIFs are only available in Manitoba and Newfoundland.

Prescribed Retirement Income Fund (PRIF)
PRIFs are identical to regular Registered Retirement Income Funds (RRIFs), with the exception that a PRIF is creditor-protected, meaning creditors cannot access PRIF funds in the event of insolvency or bankruptcy, and, like Locked-in Retirement Income Funds (LRIFs), you can only transfer locked-in retirement funds into a PRIF.  PRIFs do not have a maximum annual withdrawal amount. PRIFs are currently only available in Manitoba and Saskatchewan.

Annuities
Does guaranteed income for life sound like an attractive proposition? If so, you could consider using your savings (registered or non-registered) to purchase an annuity.

Annuities can provide you with monthly payments for the rest of your life, at a set term or a set number of payments. There are no tax implications at the time of purchase. If you purchase an annuity using your registered savings, then your payments are fully taxed. If you purchase an annuity using your non-registered savings, only a portion of the annuity (the interest) is taxable.

Pros and Cons 
When you are figuring out how to turn your registered savings into retirement income, your main options are RRIFs, LRIFs, LIFs and annuities. There are a few differences to consider between the RRIF (and RRIF-like products) and annuities.

  RRIF/LIF/LRIF/PRIF Annuities
    Advantages
  • Extremely flexible – can take income as needed (subject to minimum withdrawal limits for LIFs, LRIFs, RRIFs, PRIFs and maximum limits for LIFs and LRIFs).
  • Potential for solid investment growth through a diversified investment strategy.
  • Can convert to an annuity at any time if greater security is desired later in life.
  • Savings and investment income remain tax-sheltered until withdrawn.
  • Potential for capital to be left to the estate or named beneficiary.
  • All payments are guaranteed by insurer.
  • Joint annuity is convenient way to guarantee financial security of a spouse.
  • No money management issues - investment risk lies with the insurance company.
  • Savings are not taxed at time of purchase but payments are taxed as you receive them (subject to the rules discussed in the Annuities section).

 
    Disadvantages
  • Need time and knowledge to manage your investments.
  • You assume all market risk – poor returns could mean less retirement income.
  • Can leave nothing for your estate, as most annuity payments end upon death and with no residual value, unless the annuity is for a guaranteed period in which case there will be a death benefit paid out for designated beneficiary or estate.
  • No flexibility in varying income from year to year.
  • Contract is final – can’t convert back to a more flexible arrangement at a later date.

 

For years, you’ve saved and invested for your retirement.  Now is the right time for you to learn more about your retirement income options and take the necessary steps to establish a retirement income plan that works for you.

Questions?  
Simply call Sun Life Financial’s Customer Solutions Centre at 1-866-224-3906, Option 1, any business day from 8 a.m. to 8 p.m. ET., or consult with your financial advisor to discuss your retirement plan, and determine which options suit your needs to realize your vision of retirement for you.



If you have a general question or suggestion about this newsletter, please send an e-mail to grsmarcom@sunlife.com or write to my money At a Glance Newsletter, Group Retirement Services Marketing, Sun Life Financial, 225 King Street West, Toronto, ON M5V 3C5.

This bulletin has been created exclusively for you. It addresses issues to help you with your financial planning and investments, and cannot be reproduced in whole or in part without the express permission of Sun Life Financial.

Back to top

Group Retirement Services are provided by Sun Life Assurance Company of Canada,
a member of the Sun Life Financial group of companies.