An Annuity, LIF, or RRIF? Which Is Right for You? 

Making the right investment decisions to fund your retirement can be a formidable task, but it doesn’t need to be.

It’s a tough call for any retiree focused on investment planning: Should you convert your registered retirement savings plan (RRSP) to an annuity once you reach the age of 71? Or would it be more beneficial to choose a registered retirement income fund (RRIF) or a life income fund (LIF)?
 
The short answer is it depends on your personal financial picture and desires, your risk tolerance, and how much flexibility you want accessing your funds.
 
Converting an RRSP is the easy part. The difficulty comes in deciding how to proceed. But take heart: you’re not alone if you find this topic confusing. Most people do.
 
The best way to choose the right option is to take a long-term view of your situation, work closely with a financial advisor, and determine a suitable plan that ensures your savings will last and provide you with what you need to live comfortably.
 
Another important point to remember: investment planning for retirement is not a “set-it-and-forget-it” proposition. You need to revisit your investment plan at least once every year to ensure you’re deriving the most value, and if necessary, make changes that will improve your returns.

Understanding What Your Options Are

Whether you choose an annuity, LIF, or RRIF, all three offer investment planning upsides and potential pitfalls. However, the argument for annuities isn’t a strong one presently. That’s because of the low-interest rate environment we’ve been in since the Great Recession gripped the world in the late 2000s. However, there are other factors that you must consider.
 
Let’s start with an overview of what the primary differences are between each one of these investment vehicles:

• Annuity. There are varying types of annuities to choose from, but like anything else you purchase, the more features you add, the more the product will cost. There are single life annuities, joint annuities, last survivor annuities, fixed-term annuities, and more. In general, people who are worried about running out of money over the course of their retirement tend to buy a life annuity from an insurance company because it provides guaranteed payouts for the balance of their lives. But there’s a catch. On one hand, there are minimum monthly payouts that you have to take which are determined by several factors including current interest rates, and once you’re locked into an annuity, you can’t use the funds to invest in other financial instruments. Also, if you die earlier than expected, you cannot bequeath the funds to a beneficiary. On the other hand, financial market volatility won’t impact an annuity, and they’re a good option if you have a low-risk tolerance.

• RRIF. Think of a registered retirement income fund like an envelope in which you can place a broad range of investments. RRIFs can also provide a guaranteed income for life, and there are minimum monthly payouts, but the amounts are based on your age. Typically, those payouts start out small and increase as you grow older. RRIFs also provide you with more flexibility in that you can adjust the investments to fit your inflationary goals, risk tolerance, and so on. The balance from this investment can be given to a named beneficiary after you die. You can also opt to convert a RRIF to an annuity at a later date if you wish.

• LIF. A life income fund is basically a RRIF for funds that were originally held in a locked-in RRSP or a registered pension plan, and these savings continue to grow tax-free until you withdraw them. In a certain sense, a LIF works much like an RRSP but in reverse. It will provide you with a guaranteed income, and it too is flexible on how you control and invest your funds. For instance, you can use the money in a LIF to invest in mutual funds, segregated funds or GICs, and you can name a beneficiary to receive the balance from this investment after you die.

What If You Don’t Have an RRSP to Convert?

Not everyone has an RRSP, and not everyone needs one. For some people, they avoid investing in an RRSP for the same reason many people are steering clear of purchasing an annuity: the interest rate is too low to make it worth their while. Others, such as people with low marginal tax rates, may find using a tax-free savings account (TFSA) to be of greater benefit. Simply put, the lower your tax rate is, the lower the tax savings you will realize.
 
There is no one-size-fits-all investment planning blueprint for retirement. Even if you feel you’re late to the retirement savings game, to make an informed decision on how you should proceed with your retirement plan requires honest reflection and contemplation on what you can realistically achieve, and a trustworthy and experienced partner to advise you.
 
Are you seeking an experienced financial advisor to help you and your business succeed? Talk to one of our professional, certified insurance and investment advisors. We have the expertise to help. Call us toll-free at 1-800-595-2150.
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