Managed Money Reporter Newsletter — Issue 184, June 2002

Editors: Carl Spiess & Allan McGlade

Featured Articles

Transitioning Your Investment Accounts At Retirement - Part 2

Last month we detailed a tax efficient way to generate income from your non-registered investments.  This month, we review an under-utilized method for generating income from your RRSP or RRIF investments.

Generating Income From Your Registered Accounts 

There comes a time when you will want, or will be required, to start making withdrawals from your registered account. In other words it is time for your registered account to start funding your retirement living needs. If you are fortunate enough to have a generous pension plan or sufficient non registered investments you likely have the luxury of waiting until age 69 at which time CCRA forces a conversion to either a RRIF or an annuity. In this situation a RRIF usually makes sense because the payments start out small and rise over time providing the opportunity to continue sheltering a significant portion of the assets from taxation. (Of course you always have the option of taking the balance of the account in cash. For small accounts this may make sense, but for larger accounts the tax hit incurred by collapsing an RRSP negates the cash option as a strategy.)

If you are self-employed, or work for an organization that has given you the flexibility to decide what to do with your retirement assets by providing a group RRSP program or a money purchase pension plan in lieu of a defined benefit plan, an annuity for a portion, or all, of your retirement assets may warrant consideration. 

What Is An Annuity? 

An annuity is like a mortgage payment in reverse. Instead of borrowing money, you are lending money to an insurance company. In return for this simple, one-time payment the insurance company will make regular income payments to you that contain both interest and principal. But unlike a mortgage that ends after a specific period, the annuity payments continue for the rest of your life and if appropriate, for the life of your spouse should he or she outlive you.

Annuities are best suited for people who: 

  • require a dependable stream of income for life, 
  • are not interested in making on-going investment decisions and want to simplify their lives,
  • don't want to worry about outliving their income, and/or
  • want to diversify their portfolio and income streams

The last point is worth considering if you retire without a company pension plan. To our mind it makes sense to purchase an annuity that along with the government programs (CPP & OAS) will form a base income that is guaranteed for life. The remaining assets can then be held in a RRIF to provide financial flexibility in the event of an unforeseen expense. 

Two common misconceptions about annuities are that they are inflexible and once the annuitant dies (even if it is very early into the annuity payments) the capital is non-refundable. On the first point, annuities can be structured on a single life basis or on a joint basis. If the annuity is joint you can elect to have the payments remain the same to your surviving spouse or reduce by a set percentage. It is also possible to index an annuity so your payments increase each year to offset the effects of inflation. So as you can see an annuity can be quite flexible. On the issue of premature death, virtually all annuities have a minimum 5 year guarantee, and this choice will provide the highest income stream to the annuitant, and also guarantee that at least 60 months of payments will be made.  It is not uncommon for an annuity to be set up with a guarantee period of anywhere from 10 to 25 years. In the event of your death prior to the end of the guarantee period your estate or beneficiaries would continue to receive payments for the remainder of the guarantee period. It should be noted that a longer guarantee will reduce the amount of the annuity payments as the insurance company must set aside a higher amount of your capital to provide for the additional guaranteed payments. 

A concern we sometimes hear is that since annuity payments are based on prevailing interest rates, and with current low rates interest rates, annuities may be unattractive at this time. We beg to differ: while short term interest rates are low, long interest rates, which annuities are based on, are the same today as they have been for the past couple of years.  Long rates may actually come down even further over time. Even if they don't, we don't see them moving up any time soon. So holding off to catch a higher rate may well prove fruitless and you might be missing out on a steady cash flow in the meantime.

For those that really like to plan ahead, an option worth mentioning is the deferred annuity.  You can lock in the rates and guarantee period right now, but set the exact date when you want the payments to begin, thus deferring your income in a tax effective manner until required.

All in all, we think that an annuity is worth investigating when planning for an income stream in retirement. Should you be in the position of retiring shortly or required to convert your registered accounts we will be happy to include an annuity quote from one the eight insurance companies we deal with.  Click here to get a best rate annuity quote for your RSP or RRIF account.

Note, in last month's article on generating income from your non-registered investments, we suggested the use of a T-SWP from Fidelity or Mackenzie.  Another option worth mentioning is the Clarington Canadian Income fund. This highly tax effective fund, which was established in late 1996, currently distributes .08 cents a unit monthly for a yield in excess of 10%. (Yield and prices of course subject to change).  Please contact us for more information on how this fund may fit in your non-registered account.

AIC Advantage vs. AIC Advantage II   (4 Stars Or 2?)

We generally review the Morningstar/Bellcharts ranking of our client fund holdings, and often advise if significant fund holdings have ratings of only 1 or 2 stars. Those lower ranked funds are generally under performers, and warrant further attention. Funds with rankings of 3, 4 or 5 stars are clearly desirable to have in your portfolio.

AIC Advantage fund has been followed by us for years, and is has been ranked with 4 stars for quite some time, largely due to its terrific 10 year record.  AIC Advantage II, an almost identical clone of AIC Advantage, was introduced just over 5 years ago.  It has recently been bouncing between a 3 and 2 star rating, and has only 2 stars at the end of May 2002.  Advantage II has a returns within .1% of the original fund over 5 years, and a better (less negative) 1 year return, but a much lower rating.  The star rating system is a useful tool, but since the prospects for both funds are virtually identical, it is not the only measure we use in evaluating the funds you hold.

See the current performance numbers here --> AIC Advantage Performance Numbers

Please contact us for a complementary Bellcharts review of your existing funds, and/or an asset allocation review of the overall balance in your portfolio.

Ontario Savings Bonds

OSBs are on sale again, and June 21st is the last day.  If you have large un-invested cash balances, or positions in Money Market or T-Bill funds, this is a way to improve your returns.

Contact us to make an investment in OSB's in your account, or to review other guaranteed investments like GICs, bonds or other options.

Fund News - AGF International Value

Well, the news is in, and the replacements for Brandes Investment Partners at AGF have been announced.  Our clients who hold the fund have already been mailed information, with our recommendations.  For more details, visit the links below:

Mutual Fund Reporter Recommended Website of the Month 

In keeping with our annuity article above, the relevant question is what is your life expectancy? Or more bluntly, When Will I Die?  We have compiled a list of useful sites that perform this calculation for you, under our Tools page.  If you don't like the first answer you get, try another calculator for a second opinion.


Contact Us

T.  416.863.RRSP (7777)
F.  416.863.7479

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