RRSP or LIF?

Q – A co-worker has just retired. He received an early retirement supplement as a lump sum of $37,000 instead of monthly payments up to age 65 of $375 monthly (total of $45,000). The $37,000 he deposited into his RRSP and then immediately changed it to a RRIF.  He is 56. Should he have just received the monthly payments of $375 instead of taking the lump sum? Since he has a RRIF now, I do not believe that he is any further ahead, because he has to take a certain amount from his RRIF each year. Should he have just kept his RRSP until he is 69? Is there still compound interest from a RRIF? When it is my turn I think I will take the lump sum and deposit it into my RRSP and let it grow for 10 years without making any withdrawals. What do you think? – I.L.

A – Let’s do a little math here. If he had put the $37,000 into an RRSP and left it to compound at a modest 6%, it would be worth $62,510 at age 65 (nine years). At 6%, that would yield $3,750 per year, or $312 a month plus change. At 7%, the original amount would grow to $68,023, yielding $4,761 a year (at 6%), or $397 a month. Such is the power of a percentage point.P>

It would certainly appear that your friend would have been better off keeping the RRSP and allowing the capital to compound. However, perhaps he needed the income. The $37,000 in the RRIF will produce $2,220 a year ($185 a month) at 6% until he has to encroach on the capital. That won’t be until age 71 B until then the minimum annual withdrawal does not exceed 5%.

He did not have to make the RRIF conversion, of course. He could have kept the RRSP until age 69. As for compound interest in a RRIF, certainly you can earn it. A self-directed RRIF can invest in just about everything an RRSP can.

That said, it’s hard to judge whether he did the right thing without knowing his complete financial picture. We all have to make our own decisions on that basis. – G.P.