Gail Bebee is the author of No Hype – The Straight Goods on Investing Your Money. She can be reached at gbebee@gailbebee.com and her website is www.gailbebee.com. This is part 10 of a 12-part series for people that are new to investing on their own.
Most of us contribute money to our registered retirement savings plans (RRSP) for years and years without giving much thought to what happens when it's time to take the money out.
When you collapse your RRSP, what you do with the money is one of the more critical decisions you will make about your retirement finances. So, it pays to fully investigate the options available well in advance of when you'll plan to take action. Don't wait until you are forced to make a decision because you need the money or turn 71, the age at which you must collapse your RRSP. You could make a hasty decision you'll later regret. Furthermore, you may need time to make changes in your RRSP holdings to implement your desired plan.
Don't wait until you are forced to make a decision because you need the money or turn 71, the age at which you must collapse your RRSP. You could make a hasty decision you'll later regret.
Many people take the path of least resistance: they roll the investments in their RRSP into a registered retirement income fund (RRIF) at the same financial institution, and arrange for the regular withdrawals required by the government. But, what if the investments in your RRIF perform poorly or you live longer than you planned for and you run out of money? What happens if inflation destroys the purchasing power of your RRIF withdrawals? What if you are no longer able to manage your finances? Fortunately, you can transfer these risks elsewhere by buying an annuity with your RRSP proceeds or other savings.
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An annuity is an insurance contract. You pay a specific sum of money to an insurance company and, in return, receive regular income payments for a specified time period.
To address the risks identified above, you'll want a life annuity, which is one that provides payments for the rest of your life, and one that adjusts the payments for inflation. The inflation adjustment is usually a percentage of the annual change in the Consumer Price Index (CPI). An annuity which does not cap these annual increases provides the best inflation protection.
Annuities are available in a variety of options. For example, you can buy a life annuity with a guaranteed payment for a specified minimum time period whether or not the annuitant is, or the annuitants are, alive. A joint-and-last-survivor life annuity pays as long as one of the two joint annuitants (such as a husband or wife) is alive. The cost of such features reduces the monthly payment you receive.
