Retirement and Your Finances

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If retirement is looming for you, here’s help with two of the decisions that will most affect how much money is available to you in your retirement years.

Should You Convert Your RRSPs to RRIFs or Annuities?

As any RRSPs (Registered Retirement Savings Plans) you hold have to be shut down by December 31st of the year you turn 71, what to do with the money invested in your RRSPs becomes a burning question.

You basically have three choices; cashing your RRSPs out, converting them to RRIFs (Registered Retirement Income Funds), or converting them to annuities.

Most people decide that the first choice isn’t even an option because all the money you take out of RRSPs immediately becomes taxable income – which could shoot your income tax bill skyward.

But if you’re going to convert them instead, should the money go into RRIFs or annuities?

The really important thing to consider when making the choice is your own tolerance for risk.

RRIFs may provide you with a good income in your retirement – or not. The stock market is a volatile place and how well your RRIF performs will depend on the investments within it.

Life annuities, on the other hand, are purchased financial instruments that provide you with a guaranteed regular income for the rest of your life. But that income will never change; it can’t be adjusted to fit your changing needs.

Both RRIFs and annuities have advantages and disadvantages that you should explore with an unbiased advisor.  Some blend of the two may provide you with enough income to meet your needs and still let you sleep well at night.

When Should You Start Drawing CPP?

You can start drawing your CPP (Canada Pension Plan) retirement pension when you turn 60, although you’ll receive a reduced rate. Or you can wait to take it until age 65 or later and receive a larger pension. Which should you do?

The math says that the answer to this is that under the new CPP rules which increase the penalty for taking the CPP early and increase the incentive for putting it off, the hypothetical average boomer will get the maximum payout by waiting until age 70.

If you take your CPP as soon as you turn 60 in 2013, for instance, your retirement pension will be reduced by 32.4% – a penalty which increases to 33.6% in 2014, 34.8% in 2015 and 36% in 2016.

But if you take your pension after age 65, your monthly payment amount will increase by 0.7 percent for each month that you delay receiving it up to age 70 (8.4% per year).

So an individual who starts taking CPP at age 70 will receive 42% more than if they had taken it at 65.

But math is not the only thing that matters. As Jim Yih points out, there are three phases of retirement, the go-go phase, the slow-go phase and the no-go phase, and most people are going to need and want to spend a lot more income in the go-go phase, when they’re travelling, golfing, and walking more than in either of the other two phases – a strong argument for starting to draw CPP as soon as possible.

This doesn’t mean that everyone should ignore the math and take their pension early. But it does mean that everyone should consider their personal situation when they’re looking at the numbers.

More Help Making Financial Decisions

Hopefully the above has given you some useful points to think about in terms of making the most of your money pre- and post-retirement. You might also want to use personal finance software such as Quicken to help you manage your finances so you can lead a balanced financial life today and in the future – CARP members now save 20%.