Retirement: Pick your income option

If you think things were simpler in the old days, guess what? You’re right!Planning your retirement income is a case in point. A decade or so ago, you had only two income options for your RRSP:

• Purchase a life annuity
• Convert it to a registered retirement income fund (RRIF).

The government, in its benevolence, prevented Canadians from frittering away their retirement savings by imposing stringent regulations on what you could do with your locked-in money.

LIF, LRIF options added
The hue and cry over this financial straitjacket led to the introduction of life income funds (LIFs) in the 1990s and, later, life retirement income funds (LRIFs).

These funds met the demand of a growing number of Canadians who found themselves with locked-in RRSPs when they received lump-sum payments from employer pension plans. The recession of the early 1990s plus a steady trend toward earlier retirement created large pools of this locked-in private money.

LIFs have minimum annual withdrawals, just like RRIFs. Unlike RRIFs, there’s a limit on how much you can take out annually. And, until recently, the capital remaininin a LIF had to be converted to an annuity at age 80, except in New Brunswick.

In Ontario (LIFs and LRIFs tend to fall under provincial jurisdiction), for example, the minimum and maximum annual withdrawals at age 71 are 7.38 per cent and 8.45 per cent of the plan’s market value on January 1.

LRIFs can last lifetime
LRIFs are currently available in Saskatchewan, Alberta, Manitoba, Ontario and Newfoundland. The major difference is that you don’t have to convert your remaining LRIF assets to an annuity at age 80. An LRIF can last for your lifetime – or until you exhaust the capital in the plan.

So, in Ontario, for example, your maximum annual withdrawal after year one is either the federal government’s RRIF minimum or the rate of return on your plan in the previous year. Other provinces use different formulas.

Staying with Ontario, let’s suppose your LRIF investments earned a solid return of 12.5 per cent last year. The market value of your LRIF on January 1 of this year was $100,000.

A 67-year-old LRIF holder in Ontario could withdraw up to $12,500 in 2001. But suppose your LRIF investments only broke even in 2000. Then, the most you could take out would be the federally mandated minimum withdrawal, $4,348.

Wild income swings
Clearly, this formula creates the potential for wild swings in annual income. It might also encourage retirees to take unsuitable risks with their LRIF money in the hope of generating higher profits, plus increasing their annual withdrawal limits.

Reader Joan Coxhead of Belwood, Ontario, raises the issue of whether a LIF or an LRIF offers more income potential over time. She and her husband Ray want to draw as much money as possible from their locked-in plans.

Frustrated by the lack of guidance from both pension trustee and financial adviser, she did her own research on the Internet. She found a web site called Independent Financial Online Marketing, which provided Retirement Calculators. 

Plug in your numbers
Plugging in her own numbers, she concluded they’d be better off choosing a LIF, which guaranteed them an average annual maximum withdrawal of 8.84 per cent between age 63 and age 80. Realistically, you probably couldn’t do much better over the long term without taking on an unreasonable level of risk.

As well, recent changes now give LIF holders in Alberta, Saskatchewan, Manitoba, Ontario and Newfoundland the option of converting to an LRIF later (by age 80). So you can, in effect, have your cake and eat it too.

This increased flexibility is good news for people with locked-in retirement savings. Just make sure you carefully assess all your options before making a decision.