Your retirement income The road ahead€¦ · usually an insurance or trust compa-ny, which then guarantees you steady taxable income over a fixed period of time, for the rest of

Your retirement incomeThe road ahead

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Rule one: keep your options open

Until this moment, you’ve stuck to a financial plan that let you exploreopportunity as you found it. Now,you’ve reached another crossroad. And another decision.

You must convert your RegisteredRetirement Savings Plan (RRSP) intoeither a Registered Retirement IncomeFund (RRIF) or an annuity by the end ofthe year in which you turn 71.

Control over your investment strategyhas paid off and perhaps you’re notready to rest on your laurels quite yet.Consider our Portfolio RRIF. Secure yetflexible, it opens the road to newopportunities.

Just because you’re changing gears, you don’t have to give up control.

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If you are like most investors, your RRSPprobably makes up a significant portionof your overall wealth.

You have four ways to approach takingyour money out of your RRSP:

Q collapse your RRSP and take theproceeds in cash;

Q transfer amounts you haveaccumulated in your RRSP to a RRIF;

Q use the proceeds of your RRSP to purchase an annuity; or

Q consider a combination of the three previous options.

Let’s review these retirement incomeoptions.

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Making choices to stay in control

A RRIF keeps you in the driver’s seat.

Since all withdrawals from an RRSP are taxed as income at your marginalrate, cashing in a substantial amount ofyour plan means that you’ll lose abouthalf of this amount to taxes. Naturally,most people prefer to consider theother choices. The great majoritychoose RRIFs.

RRIFs resemble RRSPs in that you canhave a “regular” RRIF or a self-directedRRIF. A regular RRIF will limit yourchoice of investment vehicles to savingsaccounts, term deposits or investmentfunds. A self-directed RRIF, on the otherhand, gives you access to a far broaderrange of investments. Our PortfolioRRIF is a self-directed plan that addsanother dimension to the equation –the professional advice that ourInvestment Advisors provide.

With an annuity, you must also make a choice: a straight life annuity, a jointlife annuity, a life annuity with guaran-teed periods, or a fixed-term annuity to age 90.

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Here’s the basic difference between a RRIF and an annuity:

Q Buying an annuity transfers ownershipof the wealth you have accumulatedin your RRSP to a financial institution,usually an insurance or trust compa-ny, which then guarantees you steadytaxable income over a fixed period oftime, for the rest of your life, or untilsuch time as both you and yourspouse have passed away. Thisincome is eligible for the PensionIncome Credit, as of age 65.

Q With a RRIF, you stay in the driver’sseat. You maintain ownership of yourcapital for the rest of your life, as wellas control over how it is invested.While you must make a minimumannual withdrawal from your RRIF,there is no maximum limit other thanthe plan’s total capital, so you manageyour withdrawals at your own pace.While taxable, these withdrawals are eligible for the Pension IncomeCredit, as of age 65. Meanwhile, tax-sheltered compounding continues tomaximize your investment returns.

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annuity RRIF

Do I retain ownership of my savings? No Yes

Can my capital continue to grow No Yesto my benefit?

Can I continue to make my own No Yes*investments as I did with my self-directed RRSP?

Can my annual income grow Yes to counter the effects or Yesof inflation? No**

Can I determine my annual income No Yesmyself and change it as required, e.g. by making unplanned withdrawals?

Can I leave my retirement savings Yes Yesto my spouse or heirs, or provide orthem with an income after I die? No**

Will my income be eligible for the Yes Yespension income credit as of age 65?

Can I change my mind and choose No Yesthe other option (a RRIF if I have an annuity, and vice versa)?

RRIFs and annuities – a comparison

* If you choose a self-directed RRIF** Depending on the type of annuity

TIP:While a guaranteed income streamremains appropriate for some, regis-tered annuities are less attractive thesedays because interest rates are low.When interest rates are high, theamount of monthly income availablefor each $1,000 of capital transferred to an insurance or trust company willbe higher. But the opposite is equallytrue, and that’s why you should avoidpurchasing an annuity when interestrates are low and expected to rise. Youcan open a RRIF now, and then use itsaccumulated capital to purchase anannuity at a more opportune time inthe future. Another approach would beto use part of your RRSP to purchase anannuity in order to guarantee a baselevel of income, and transfer the rest to a RRIF.

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How to choose your incomevehicle

Retirement planning is complex becauseyour needs will inevitably evolve.

Although you face some difficultchoices, you don’t need to make all thedecisions alone. Ask your InvestmentAdvisor or accountant to help you decidebetween a RRIF and an annuity. Broadly, here is what they’ll probably say:

Q If you want your capital to continuegrowing in a tax-deferred environment,and don’t mind, for the short term,drawing an annual income less thanor equal to the return on yourinvestments, a RRIF is the retirementincome vehicle for you. Because youhave control over the amount youwithdraw, you can choose not tobegin depleting your capital rightaway. A RRIF leaves you free toarrange your future income accordingto your evolving needs, and possiblyprovide a more enduring legacy foryour heirs.

Q If you want an annual income greaterthan the return on your capital, anddon’t mind dipping into this capital,you might consider an annuity. Youexchange ownership of your capital(and all future investment returns) for a contract that guarantees amonthly income for life, or for a fixed period. Your annuity payments will bedetermined by how much retirementcapital you have amassed, and bysuch factors as interest rates pre-vailing when you buy the annuity,and your life expectancy. Women, for example, generally receive lowerannuity payments for the sameamount of savings because they livelonger. Similarly, you may be able to obtain larger annuity payments if your health is poor.

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In short, purchasing an annuity is a bet on how long you will live. Take the example of a straight life annuity,which offers the guarantee of a fixedmonthly amount paid until your death.Should you die shortly after the date of purchase, you would forfeit all yourassets to the institution issuing theannuity and leave your heirs nothing.On the other hand, the longer you live,the greater your chance of getting backall your capital plus interest earned, and perhaps even more, in the form ofannuity payments. In the end, rememberthat choosing an annuity is generallyirreversible. By selecting a RRIF, you canbuy an annuity some time down theroad, should that be advantageous.

Dreams... Responsibilities...Inflation

Inflation can have a devastating effecton purchasing power and this must be considered when evaluating yourfuture financial needs.

Today’s low inflation rates make it easy to forget that the average annualinflation rate over the last 40 years isjust over 4%. The graph on the nextpage shows the rapid fall in purchasingpower for an annual income of $40,000at a more conservative inflation rate of3%. It’s not a pretty picture.

Don’t confuse predictability withsecurity. When it comes to retirementincome, an annuity is predictable,assuring the same income each year.But the security a RRIF can provide isthe potential for you to increase your

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0 5 10 15 20 25 30 35

$5,000

$0

$10,000

$1 5,000

$20,000

$25,000

$30,000

$35,000

$40,000

Declining purchasing power of a $40,000 annual income(assuming a 3% inflation rate)

income every year to protect againstinflation and maintain the same standardof living from one year to the next.

With our exclusive Copernicus software,your Investment Advisor can crunch the numbers to give you an inflation-adjusted estimate of the income your retirement savings can provide,which will give you an idea of thelifestyle you can afford during retire-ment. With the guesswork gone, thechoice between a RRIF and an annuitybecomes much clearer. Should youchoose a RRIF, your Investment Advisorwould then use these tools and otherresources available to help youdetermine the asset mix and choice of investments best-suited to yourpersonal financial strategy.

number of years

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The PortfolioRRIF

Our Portfolio RRIF gives you precisely the same control over investment choices as you had with your Portfolio RRSP (also a self-directed plan). And the transition is seamless.

“Regular” RRIFs are available only assavings accounts, term deposits orinvestment funds. However, a PortfolioRRIF gives you the freedom to choosepractically any type of investment, fromfixed-income securities to individualstocks or mutual funds, mixing themtogether in the proportions that suityour personal situation.

Bottom line, you have the potential forgenerating higher returns and reducingrisk by diversifying into a wider range of investment vehicles, many of whichcarry an unlimited governmentguarantee.

A Portfolio RRIF also helps you manageyour affairs with confidence and claritybecause you’ll receive a single statement

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Minimum = Market value of the RRIF at January 1withdrawal 90 minus your age at January 1

Example:If, on January 1 of this year, you were 65 and had a RRIF worth $200,000, your minimum withdrawal for this year would be:

$200,000 = $8,00090 - 65

listing all transactions made with yourretirement savings. Consolidating yourinvestment account statements is a bighelp when calculating your annualreturn and filing your taxes. At the sametime, your Investment Advisor can helpstructure a portfolio providing a steadystream of income.

Bringing it all back home

A RRIF is designed to produce an incomefrom your retirement savings, and youare required make at least a minimumwithdrawal from the plan every year.

For all RRIFs opened after 1992, thefollowing formulas are used to calculatethat required minimum withdrawal*:

Up to age 70:

* In the case of RRIFs opened prior to 1993, the minimum withdrawal rates are slightly lower for ages 71 to 77.

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There is no annual maximumwithdrawal. You decide how much you need, remembering of course tomaintain sufficient assets to ensureadequate income for as long as youneed it.

Your age Min. annualat withdrawal

January 1 (% of RRIF assets)

7 1 7.38 %72 7.48 %73 7. 59 %74 7. 7 1 %75 7.85 %76 7.99 %7 7 8. 1 5 %78 8. 33 %79 8. 53 %80 8. 75 %81 8.99 %82 9. 27 %83 9. 58 %

Your age Min. annualat withdrawal

January 1 (% of RRIF assets)

84 9. 93 %85 10. 33 %86 10. 79 %87 1 1. 33 %88 1 1.96 %89 1 2. 7 1 %90 1 3. 62 %9 1 14. 7 3 %92 16. 1 2 %93 1 7. 92 %94

and older 20. 00 %

As of age 71:

TIP:

You can also base the minimumwithdrawal on your spouse’s age. That way, you can save taxes if he orshe is younger than you. If you don’trequire a more substantial income, you can withdraw as little as possiblefrom your plan and thereby keep your money compounding in a tax-deferredenvironment. Note that this is a one-timeelection that must be made when yourRRIF is opened.

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Questions and answers

Q When must I convert my RRSP into a RRIF?Your RRSP must be converted to aRRIF or annuity at the latest by theend of the year in which you turn 71.

Q Can I convert my RRSP before then?Yes. But remember a RRIF requiresminimum annual withdrawals which are taxable. Unless youabsolutely need the income on aregular basis, it may be better towithdraw small lump sums from your RRSP as required, and then open a RRIF when you need to beginwithdrawing regular amounts.

Q Can I have both a RRIF and an RRSP?Yes, until the end of the year you turn 71. You then enjoy the combinedbenefits of both. Still, given the abovecautionary note, carefully considersuch a decision.

Q What happens if I neglect to convertmy RRSP?Your RRSP savings could be automati-cally de-registered and subject to tax.

Q Can I still contribute to my RRSP in my 71st year?Yes, provided that you had qualifyingearned income in your 70th year (RRSP contribution room is calculatedbased on the previous year’s earnedincome) or accumulated unused RRSPcontribution room. Past that point, ifyour spouse is younger than you, you may continue making spousal RRSPcontributions to his or her plan untilyour spouse reaches age 71, onceagain provided that you have quali-fying earned income or unused contribution room.

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Q How often will I receive paymentsfrom my RRIF?As often as you like (annually, semi-annually, quarterly or monthly),provided you make your minimumannual withdrawal. You may alsomake unscheduled withdrawalswhenever you need.

Q Are my RRIF withdrawals subject to withholding tax?Withholding tax is applied only toamounts withdrawn in excess of the minimum. However, the totalamount withdrawn each year must be declared as income and is therefore taxable.

Q Can I have more than one RRIF?Yes, but our Portfolio RRIF is soflexible there is no advantage to multiple plans.

Q Will I outlive my savings?That’s a harsh prospect, and one thatwe will do our best to protect youagainst. Our role is to review yourgoals and needs with you, and to help create a carefully structuredinvestment portfolio and withdrawalschedule. With our Copernicussoftware, we have the tool to giveyou accurate cash-flow projectionsbased on realistic assumptions.However, since you have completediscretion over the amount andfrequency of your withdrawals, this is something that is ultimately yourresponsibility, and under your control.

Q I like the advantages of your PortfolioRRIF, but I’d prefer a “hands-off”approach to managing myinvestments....Your Investment Advisor handlesmost of the work involved inmanaging your retirement savings.Nonetheless, should you prefer todelegate all your decision-making tosomeone else, ask about our optionaldiscretionary portfolio managementservices or our suite of managedproducts.

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Now it’s time to make the most of thegood times ahead. Call your InvestmentAdvisor.

Using our Copernicus software, access to the finest economic research, and adash of common sense, he or she willhelp you find the best path to a securefinancial future.

You’ve matured and so has your RRSP.

Moving forward

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Your retirement income The road ahead€¦ · usually an insurance or trust compa-ny, which then guarantees you steady taxable income over a fixed period of time, for the rest of