An annuity can provide guaranteed retirement income – for your life and the life of your spouse or common-law partner.
Ready to turn your retirement savings into income? You’re in the right place. In addition to the Canadian Pension Plan (CPP)/Quebec Pension Plan (QPP), and the Old Age Security (OAS), most Canadians turn their retirement savings into income using two common options: a Registered Retirement Income Fund (RRIF) and a payout annuity.
Although they’re often compared, a RRIF and a payout annuity are fundamentally different. A RRIF is a registered retirement income account that holds investments. They’re created when you convert your Registered Retirement Savings Plan (RRSP) or when you transfer another RRIF. Your money continues to potentially grow tax-deferred until you withdraw it. A payout annuity is an insurance product that converts registered or non-registered savings into a stream of guaranteed income.
Key takeaways
- Most Canadians split their retirement income into two buckets: guaranteed payments to help cover essential expenses and flexible funds for extras and unexpected costs
- RRIFs provides flexible income with growth potential, and lets you adjust withdrawals, but may need more active management of your investments and you need to calculate your annual withdrawals
- Payout annuities provide guaranteed steady stream of income payments with less to manage but you generally can’t access the money you used to purchase it.
What’s a RRIF?
A RRIF is a registered retirement income account that may provide income during retirement. You can open a RRIF by transferring savings from registered sources - like a Registered Retirement Savings Plan (RRSP), or another RRIF you own – and your money may continue to grow tax-deferred until you make withdrawals.
Starting the year after you open your RRIF, you’re required to make a minimum annual withdrawal. The minimum withdrawal amount is calculated using a prescribed percentage factor that’s determined by your age at the beginning of the year. This percentage is then applied to your RRIF balance at the start of the year to calculate your minimum withdrawal amount. You can withdraw more than the minimum at any time. Keep in mind that all withdrawals are taxed as regular income.
Key benefits
- Growth potential: Your money stays invested and can grow tax-deferred throughout retirement.
- Flexibility: You can adjust withdrawals year to year based on changing needs (above required minimums).
- Access: Your RRIF account allows you to access the remaining account value subject to the terms of the investments held in the account.
- Control: You decide how much to invest and withdraw, choosing from a range of qualified investments like stocks, bonds and mutual funds.
What to expect over time
- Depletion risk: You may outlive your RRIF savings. If you invest in market-based products, market fluctuations can reduce your balance. At the same time, minimum withdrawal rates increase as you age, meaning you may need to take more money out each year. Combined, these factors – potential market losses plus increasing mandatory withdrawals – can deplete your RRIF throughout later years.
- Ongoing decisions required: As you control how your money is invested in a RRIF (for example you may invest in guaranteed investment certificates (GICs), mutual funds, segregated fund contracts and/or purchase payout annuities), you’ll need to actively manage your investments throughout your retirement. This requires comfort with investment decision and staying informed about market performance.
What’s a payout annuity?
A payout annuity is an insurance product that converts a lump sum amount (either registered or non-registered) into guaranteed income payments. You can choose a life annuity that provides income for as long as you live, or a term-certain annuity for a fixed number of years. You can also add features like guarantee periods, protection against inflation, and payment frequency.
Key benefits
- Guaranteed income: For life annuities – as long as you live. For term-certain annuities, for a set number of years.
- Reliable income: Your payment amount is set at purchase and is protected from market volatility.
- Simplicity: Once purchased, there are no investment decisions to make or withdrawal calculations to manage.
- Funding flexibility: Purchase with registered or non-registered savings, including money from your RRIF.
What to expect over time
- Limited liquidity: Once you purchase a payout annuity, you generally can’t access your money. You’re exchanging the ability to make withdrawals for the certainty of guaranteed income. This means less flexibility if unexpected expenses arise.
- No growth potential: Your payments are established when the annuity is purchased. While this provides greater income certainty, it also means you won’t benefit from strong market returns that may increase your wealth.
Should you choose a RRIF, payout annuity, or both?
You don’t have to pick one or the other. Many Canadians use both – holding various investment products in their RRIF to support their retirement lifestyles and using a payout annuity to help cover your essential needs like housing, food, and utilities with guaranteed income.
Here are three key questions to consider when determining the right combination for your retirement.
1. How much guaranteed income do you already have?
You may already have some income lined up for retirement like a defined benefit pension plan or government benefits (like the Canadian pension plan (CPP), Quebec pension plan (QPP), and Old Age Security (OAS)). These payments can provide a base of income in retirement.
Start by listing all your guaranteed income sources and estimating what you’ll receive monthly from each. Your workplace can provide your pension estimate, and you can check your Service Canada account for CPP/QPP and OAS projections.
Understanding your existing income sources can help determine how much additional retirement income you may need. Government benefits, workplace pensions, and other guaranteed income sources may already cover some expenses, while other retirement savings solutions can help address remaining income needs and provide additional flexibility.
For example:
- If existing income sources cover your essential expenses: A RRIF may be better suited to provide income for your discretionary spendings and growth potential
- If there’s a gap: Consider how to bridge it – a payout annuity can potentially cover some or all of the shortfall
2. What does your retirement spending look like?
Beyond your current essential costs, consider how your lifestyle costs may change. As an example healthcare needs may grow with age. You may eventually need home care, long-term care support, or increased medical expenses not covered by provincial plans.
If these future expenses feel uncertain, guaranteed income from a payout annuity can cover your baseline needs while RRIF funds remain available for variable healthcare expenses, lifestyle choices or other unexpected costs.
3. How hands-on do you want to be with your retirement income?
More active management with a RRIF: You get to regularly review your investments, decide when to rebalance your portfolio, and respond to market ups and downs. You’ll also calculate your withdrawals each year beyond the required minimum. This works well if you enjoy staying engaged with your finances and making strategic decisions.
If you’d like fewer investment decisions over time: A payout annuity may help turn part of your RRIF into predictable income.
The middle ground: Some people find their comfort level changes over time. You may enjoy active management earlier on but may prefer less involvement over time. A combination of both options can work well – use your RRIF while you want to stay engaged and gradually convert portions to an annuity as you’re ready to step back from active decision-making.
Ready to explore what combination works for you?
When you work with a Sun Life advisor, you can:
- Get an estimate of how much guaranteed income you’ll receive from all your retirement income sources
- Model different RRIF vs. annuity combinations based on your own numbers
- Build a flexible plan that adjusts as your retirement evolves
More resources
How to keep more of your retirement income and pay less tax
Want to turn your savings into as much retirement income as you can? Try looking at your retirement income through a tax lens.
Decumulation: turning retirement savings into retirement income
Want to make sure your retirement income lasts as long as you need it? You need a careful decumulation plan. It can also help you pay less tax and give you peace of mind.
This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.