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Retirement savings

Brighter life
January 07, 2014

How do I pay myself when I retire?

When you’re employed, your employer is responsible for paying you the money you earn. But what happens when you retire and you have to pay yourself?

It’s a good idea to start planning your retirement income well before you get that gold watch. Consider when you plan to retire, what you want to do in retirement and how much you think you’ll need to do it. This could be a good time to consult a qualified financial professional for advice on your own unique situation.

What are my income options during retirement?

After age 71, you can no longer hold registered retirement savings plans (RRSPs) or registered pension plans (RPPs). Instead, if you’d like to avoid a big tax payout, you can transfer those retirement assets to other financial retirement products. Keeping in mind that the rules for retirement income vehicles vary among Canadian provinces, here’s a quick look at your options:

1. Annuities

You purchase an annuity with a lump sum and receive in return a guaranteed regular payment. The amount of the income is based on a number of factors, including your age, gender and the type of annuity you choose. It is sold by an insurance company. Once you retire, your annuity will pay you a guaranteed amount at regular times for life or an agreed-upon period, providing you with an assured income stream.

  • Defer tax. Funds from registered plans used to purchase an annuity are not taxed at that time. But when you start receiving payments from your annuity, each payment you receive is considered taxable income.
  • Security. Annuity payments are not affected by changes in the market or interest rates and are guaranteed. If you buy a joint life annuity, payments will continue to be made to your spouse after you die. Also, if you choose a guarantee option, when both you and your spouse die, payments will continue to your beneficiary until the end of the guaranteed period.
  • No management required. Monthly payments stay the same, no matter how much interest rates change or world markets rise or fall, so you don’t need to personally manage an annuity.

This annuity calculator will give you an estimate of your guaranteed retirement income with an annuity.

2. Registered retirement income fund (RRIF) and prescribed retirement income fund (PRIF)

A RRIF is an account in which you invest and manage money that you previously held in an RRSP, an RPP, another RRIF or a deferred profit-sharing plan. Each year, you will be required to withdraw a minimum, set amount that the government determines and your company calculates, based on your age and the amount in your RRIF in that year. There is no maximum withdrawal amount.

A prescribed registered retirement income fund (PRRIF) is sold solely in Saskatchewan and Manitoba. It’s used primarily to invest locked-in pension funds (such as from a company pension), although it may accept non-locked-in funds (such as from a regular RRSP) as well.

In both an RRIF and PRRIF:

  • Shelter from tax. Your money is tax-sheltered until you take it out. Your regular payments, however, are taxable as income.
  • Management required. Investment return is not guaranteed. Since you manage the account, what you get from it depends on what you put in and how you invest it.
  • Flexibility. You can take income as needed along with your scheduled payments, as long as you withdraw the minimum amount per year. You can hold your account for life, or convert it into an annuity.

3. Life income fund (LIF)

A LIF is an investment account in which you manage money that had been in a locked-in account such as a company pension plan. You can hold many types of investments in a LIF, such as guaranteed investment certificates, mutual funds or segregated funds.

There's a minimum and maximum amount that you can withdraw from the plan every year — the minimum is set by the Income Tax Act and the maximum is regulated by federal and provincial pension legislation. LIFs are not available in P.E.I.

  • Shelter from tax. Investments are tax-sheltered, but withdrawals are taxed as income.
  • Security. Investment return is not guaranteed. Since you manage the account, what you get from it depends on what you put in and how you invest it.
  • Management required. You have control over the investment decisions in your account, so you take on the risks involved.
  • Flexibility. You are allowed to take out what you need, within the legislated minimum and maximum. In most provinces, you can hold onto your account for life, or convert it into an annuity. In New Brunswick, LIF funds must be used up by age 90.

4. Restricted life income fund (RLIF)

RLIFs were created to accept locked-in assets from federally regulated LIFs, locked-in registered savings plans, registered pension plans (RPPs), locked-in RRSPs or restricted locked-in retirement savings plans (RLSPs). They are identical to LIFs except that the funds held in an RLIF are ones that were unable to be unlocked and transferred to an RRSP or RRIF. While “locked-in” generally means you can’t take money out until retirement, owners who are 55 or older have a one-time option to unlock up to 50% of the assets in their RLIF in the 60 days after transferring funds into an RLIF. They can then transfer those unlocked funds to a locked-in or non-locked-in RSP or an RRIF. Because the tax implications of these actions can be significant, it’s wise to consult a tax specialist first.

5. Locked-in retirement income fund (LRIF)

Similar to LIFs in that funds can be withdrawn within an annually set maximum and minimum, LRIFs are an option only if you have pension money governed by Manitoba or Newfoundland and Labrador legislation.

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