Most people look forward to the freedom of retirement, but it may seem unsettling at first. If you think about it, you spend many years working hard and saving for the future. When you retire, the future is now! Your routine changes, your goals change and, instead of building wealth, your focus turns to drawing down wealth.

Having enough money is important to cover daily expenses and allow you to enjoy your chosen retirement lifestyle. During your working life, you likely contributed to a Registered Retirement Savings Plan (RRSP) and maybe a workplace pension plan. If you add in a Tax-Free Savings Account (TFSA), an investment account and government benefits like Canada Pension Plan and Old Age Security, hopefully you’ve got the makings of a healthy nest egg.

As you enter retirement, you’ll need to decide how to create an income stream that’ll generate regular cash flow to meet your various needs. Two common ways are the Registered Retirement Income Fund (RRIF) and the payout annuity. Let’s look each product to consider their strengths and weaknesses.

What’s a RRIF?

Assets accumulated in an RRSP must start being withdrawn no later than December 31 of the year you turn 71. Similar to an RRSP, a RRIF offers the flexibility to hold many different securities, including mutual funds, exchange-traded funds, individual stocks and bonds, GICs and more. For your convenience, you may move your RRSP holdings into a RRIF without penalty (e.g., it won’t trigger commission fees, plus your GIC terms will continue when transferring to a RRIF).

As well, any income and growth you earn in your RRIF won’t be taxed until you withdraw it, which helps you continue building wealth tax efficiently within the plan. Please note that RRIFs are vehicles solely for withdrawing assets; you cannot contribute to it like an RRSP.

Regarding withdrawals, you must take out at least a certain percentage of your RRIF assets annually, according to a Canada Revenue Agency schedule based on your age in a given year. There’s no maximum withdrawal percentage, although retirees typically benefit from withdrawing as close to the minimum as possible, to help the savings last longer. If your spouse is younger than you, consider taking your RRIF payments based on their age instead of yours, to reduce the minimum annual amount that must be withdrawn.

A potential drawback to RRIFs is that your income depends on how well your investments perform, which means a market downturn could reduce your retirement cash flow – perhaps significantly.

What’s a payout annuity?

Another option for drawing down your RRSP assets is the payout annuity. Annuities are issued as a contract by a life insurance firm. The company will invest these assets and, in return, guarantee annuity payments of a predetermined amount at predetermined intervals. With a life annuity contract, these payments are guaranteed for as long as you live, ensuring an income stream for life. Annuities also provide certain options. Instead of a “single life” annuity that’s based only on one person, you may choose a “joint life” annuity that’s based on two people (e.g., a married couple), so the annuity payments continue until the second person dies.

Life annuities are beneficial because they provide certainty of cash flow to help you avoid running out of money in your lifetime (or your spouse’s, in the case of joint life annuities). As well, unlike RRIFs there’s no concern that the amount of each annuity payment will vary depending on market conditions, so that adds to your certainty and peace of mind in retirement. As with RRIFs, you may appoint a beneficiary on your payout annuities so they can receive the remaining value of your annuity – or the guaranteed payout minimum if your contract stipulates as such – should you die before that amount has been paid.

A potential drawback of annuities is the higher associated fees relative to similar investment products, as well as the fact that your funds must stay locked in over the long term, meaning you can’t access any extra money if you need it.

Whether you opt for a RRIF or annuity depends largely on your specific circumstances, objectives and risk tolerance. Speak with an Alterna Advisor to discuss the suitability of a RRIF or annuity (or both!) for your retirement income needs.