Planning for the golden years

RRSP savings jar. (Fotolia.com)

RRSP savings jar. (Fotolia.com)

Doug Riding, Special to QMI Agency

, Last Updated: 4:56 PM ET

If you are saving for retirement in an RRSP, at some point in time you are going to have to make a decision on how you are going to start the income from that account.

Even if you don't need to draw income from this retirement plan, you will eventually be forced to deregister some or all of the funds by the time you reach age 71. At that time, you will be able to take all of the money out in cash (not generally recommended as the tax consequences can be very high), roll the funds to a Registered Retirement Income Fund (RRIF), where a percentage of the account must be withdrawn each year, or you can convert the proceeds from your RRSP into a registered annuity.

An RRIF is very similar to an RRSP in that you maintain control over the account and can continue to make the decisions on how the funds are invested. There is a minimum amount that has to come out each year, but you can also take out large lump sums of capital in any given year and you can increase that at any time.

Conversely, an annuity involves giving up your funds (or a portion of your funds) to an insurance company in exchange for a guaranteed income stream for a fixed period of time. If you choose a life annuity, it will provide that cash flow for as long as you live, no matter what age that turns out to be. If you choose a joint and last-survivor life annuity, it will provide income for the life of the surviving spouse long after the first spouse passes away.

The decision between a RRIF and a registered annuity will be based on a number of factors, both empirical and emotional. The very real fear of a potential loss of their savings is what drives many investors to annuities, as is the fear of outliving one's money and the stress making ongoing investment decisions.

Deciding if an annuity or a RRIF is best for you will also come down to whether you plan to leave an estate, your health and your family's longevity.

Ultimately, you may find that a combination of the two programs will best suit your needs. An annuity to cover your fixed annual expenses and a RRIF to provide the funds for the unexpected and the variable expenses you encounter in retirement.

Get the opinion of your financial adviser to see which plan or combination works best for you.


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