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Pensions

A RRIF, an annuity, or a blend? Josef's story Add to ...

Josef has $500,000 in his Registered Retirement Savings Plan (RRSP). Almost age 69, he knows he has to makes some big decisions in the next couple of years. By age 71, he has to close his RRSP and move the money to a RRIF, or buy an annuity, or he can look at a combination of the two.

He decides to look into all three options:

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Option 1: Put all his money into a RRIF, investing in conservative mutual funds

This chart shows what will happen if Josef takes out the minimum each year from his RRIF, to age 100. It assumes his money grows 5% a year. It does not include taxes on his income or inflation.

Age

Plan value at
start of year

Income
earned

Annual
withdrawal

69

$500,000.00

$25,000.00

$23,800.00

70

501,200.00

25,060.00

25,060.00

71

501,200.00

25,060.00

36,988.56

72

489,271.44

24,463.57

36,597.50

73

477,137.51

23,856.88

36,214.74

74

464,779.65

23,238.98

35,834.51

75

452,184.12

22,609.21

35,496.45

80

384,909.16

19,245.46

33,679.55

85

308,891.83

15,444.59

31,908.53

90

221,585.15

11,079.26

30,179.90

95

120,247.67

6,012.38

24,049.53

100

53,354.54

2,667.73

10,670.91

 

The result: Josef’s total income from the RRIF to age 100 will equal $935,874.24. If he dies earlier, say at age 80, he will have received close to $400,000. His estate will get the balance of about $385,000.

Option 2: Use all his savings to buy a life annuity

If Josef chooses this option, he’ll have a yearly income of about $20,200 for life. This income is indexed to grow 2% a year to counter the effects of inflation. It’s guaranteed for 15 years, so his estate will still receive some of his savings if he dies before 15 years have passed.

The result: If the annuity pays $20,200 a year for life, and if he lives to age 100, Josef will have received $626,200. If he lives only to age 80, he will have received just $222,200. Since he has guaranteed his payments for four more years, his estate will get a lump sum to cover off those unused payments.

Option 3: Split his savings between a life annuity and a RRIF

Josef could choose to put half of his savings in a life annuity and half in a RRIF. He will receive about $10,000 a year for life from a life annuity. His income is indexed to grow 2% a year for inflation. It’s guaranteed for 15 years.

With the other half of his savings, Josef could put $250,000 in a RRIF, investing in conservative mutual funds. This chart shows what will happen if he lives to age 100, taking out the minimum each year. It assumes his money will grow 5% a year. It does not include taxes on his income or inflation. 

Age

Plan value at
start of year

Income
earned

Annual
payment

69

$250,000

$12,500.00

$11,900.00

70

250,600

12,530.00

12,530.00

71

250,600

12,530.00

18,494.00

72

244,636

12,232.00

18,299.00

73

238,569

11,928.00

18,107.00

74

232,390

11,619.00

17,917.00

75

226,092

11,305.00

17,748.00

80

192,455

9,623.00

16,840.00

85

154,446

7,722.00

15,954.00

90

110,793

5,540.00

15,090.00

95

60,124

3,006.00

12,025.00

100

26,677

1,334.00

5,335.00

 

The result: If Josef lives to be 100, his annuity will have paid him $310,000. His RRIF will have paid $467,937, if his investments grow in the way he expects. By age 100, his combined income would be $777,937.

If Josef dies sooner (at age 80), he will have received close to $310,000 from both sources. His estate will get the balance of about $184,625.

Josef decides: Josef’s results point toward option one. If he makes 5% a year investing, it provides the most investment income, and the most money for his estate. But, there’s no guarantee. In the end, Josef decides that option three – the RRIF/annuity blend – offers the best balance of safety and growth for him.

Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca

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