Spend your retirement savings by using a RRIF 

You give your company notice that "you are hanging up the skates for good."

Congratulations! Retirement at last. 

Through your hard work and savings, you've built up a nice RRSP nest egg. But you've heard something called a RRIF and that you have to get one or else the government takes all your money and taxes all of it. 

Thankfully, this is not true. 

It is true that RRIFs are likely the most misunderstood of all of the government registered plans. All financial institutions have racks full of fancy glossy brochures attempting to describe how RRIFs work but I find the various explanations overly complicated. 

Here's my take on RRIFs. 

Most of us are familiar with RRSPs. An RRSP is a savings plan. You contribute and get a contribution receipt and a tax credit. Your investments in a RRSP or RRIF are not taxed until the money is withdrawn. 

A RRIF is an automatic withdrawal plan where you must withdraw at least a certain minimum amount per year. You can withdraw more if you need it. How much do you have to withdraw? Well, the government tells you exactly how much you must withdraw per year. The amount is based on your age. The older we get, the more we have to withdraw. 

[Editor's note: If you need a copy of a chart that shows you how much money you must withdraw per year, I can email you one along with a short explanation of how it works. Email me at glenns@belmontvillagefinancial.com for a copy. For new readers of this blog this is a no obligation deal. When we respond to an inquiry or request from a new reader, the original email and email address will not be retained and we will not contact you without your permission.] 

The important distinction between RRSPs and RRIFs is that you put money into a RRSP but a RRIF is designed to pay out your own money automatically over many years.

Most importantly, RRIF balances will gradually decline over the years as both principle and accrued earnings is gradually paid out to you. The account balance gradually heads toward zero. 

Yes indeed, RRIFs are designed to go to zero as they pay out not only the accrued interest but also some of your original capital in order to make the minimum payment required under the RRIF rules. 

Example: You are age 71 and the minimum RRIF payment required is 7.38% of what's in your account. If you start with a $100,000 RRIF, you have to receive (the government says so) a cheque for $7,380 (.0738 x $100,000). If for example you are earning 2.0% from a term deposit then you are running short.[1]

Remember, you have to withdraw a total of 7.38%. If you are earning only 2% on your investment where are you going to get the other 5.38%?

You guessed it. The other 5.38% comes from your account and the next statement will show a balance in your account well below the $100,000 you started with.

The lesson here is that you are getting paid with some of your own money. If your investments are not earning more money than what you are pulling out; your account balance will drop. 

Ok then RRIFs are a bad thing? 

No, not at all. I think the RRIF gets a bad rap because many investors don't like to see a statement showing a declining balance so it does take a bit of a mental adjustment to think in RRIF terms. Think of a RRIF in terms of a mortgage. Instead of paying the bank principle and interest to pay off a mortgage, you are now receiving principle and interest. RRIFs are designed to pay you a regular income which you will likely need in retirement. Sure, your principle might be returned back to you, but you can always invest it back into a regular (non-RRIF) account. 

Can I avoid getting a RRIF? 

No. If you’ve got a RRSP and you are 71, you must convert all of your RRSPs to RRIFs by the end of the year you turn age 71. Your financial advisor will help you do this. The process is straightforward. 

Recap: RRIFs are designed to go to zero because all of your money and earnings will eventually be paid back to you or your surviving beneficiary or estate. RRIF withdrawal rates go up each year as they are based on your age. Earning a higher rate of return will slow down the decline. RRSPs are designed to be savings plans; RRIFs are withdrawal plans. 

Need more information about how RRIFs work?  Converting RRSPs into RRIFs? Give me a shout at glenns@belmontvillagefinancial.com or call me directly at 519.744.3020. 

[1] For illustrative purposes only. In reality, the RRIF payment usually comes out after a year it was set up so the 2% in interest would be added to the principle and then the 7.38% would then be withdrawn. In many cases if you have multiple term deposits in a client held RRIF, the financial institution may take out the RRIF payment from just one of the investments. The calculations are somewhat complex but computers are good for this sort of stuff.