FINA200 Personal Finance ©

Lesson 10 Chapter 15 Retirement Income Planning

Lesson/Chapter sections not subject to examination:

 LO 1 Outline the steps of the retirement income planning checklist
 LO 2 Describe the process of estimating your retirement budget
 LO 4 Describe the risk factors and strategies for spending your investment portfolio

Quote:
“I won’t buy it until I can buy it twice.” – Jay-Z, American rapper, record producer and
entrepreneur

Learning Objectives
 Describe the types of retirement income conversion options

LO 3: Describe the types of retirement income conversion options

Describe types of retirement Income conversion options

 By the end of the year in which you turn age 71, you must convert your employer-
sponsored plans and personal plans to retirement income or transferred to a retirement
income vehicle
 Retirement income conversion options exist in order to:
 Provide you with a regular source of retirement income
 Spread out the tax burden associated with making withdrawals from a taxable registered
plan
 Convert your tax deferred savings to taxable income

NOTE: Explore the Canadian Retirement Income Calculator on the federal

government’s website www.canada.ca which estimates OAS, CPP and other income
sources.

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Receiving Retirement Income From Your Employer-Sponsored Retirement
Plan
Normal retirement age: the age by which employees are entitled to receive 100% of
the pension income for which they are eligible for
In many plans, the normal retirement age is 65 by which employees are entitled to
receive an unreduced pension income
Some plans use a combination of age and years of service

Defined Benefits Pension Plan (DBPP)

Based on pensionable earnings, plans accrual rate and the employee’s years of
pensionable service
At normal retirement age, an employee will be offered several options with respect to
receiving their pension income (see Exhibit 15.3 options)
Benefits are paid based on a pension formula (vs. other retirement benefits that are paid
based on the size of the investment portfolio: DCPP, DPSP, Group RRSP, RRSPs,
TFSAs and LIRAs)

Defined Contributions Pension Plan (DCPP)

Amount of pension income an employee will receive does not rely on a pension formula
Benefit amount depends on the total value of the contributions plus any interest,
dividends and capital gains earned on the investment portfolio
Flexible retirement options

Defined Profit-Sharing Plan (DPSP)

Amount of pension income an employee will receive does not rely on a pension formula
Benefit amount depends on the total value of the contributions plus any interest,
dividends and capital gains earned on the investment portfolio
Flexible retirement options
If you are less than age 71, and leave your employer, and if contributions are vested
(meaning you own the funds), you can transfer your DPSP to your RRSP, transfer to
another RPP or another DPSP or term annuity (10 years)

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Group RRSP options
Cash out your account and pay taxes
Transfer to another RRSP
Convert to a Registered Retirement Income Fund (RRIF)
Purchase a term annuity
Purchase a life annuity

Retirement income conversion options for RRSPs

Cash out your account and pay taxes
Transfer to another RRSP
Convert to a Registered Retirement Income Fund (RRIF)
Purchase a term annuity
Purchase a life annuity

Registered Retirement Income Fund (RRIF)

A retirement income conversion option for RRSP’s
By the end of the year in which you turn age 71, you must cash in your RRSP or
transfer your RRSP assets into an income-producing plan, most commonly used is a
RRIF
Certain percentage of the assets held within an RRIF must be taken into income each
year after the year in which the RRIF was established
Assets do not have to be sold when moving from one plan to the other
Risk that you are investing in assets that may decrease in value

NOTE: TFSA assets cannot be transferred into an RRIF

Registered Retirement Income Fund (RRIF) Example

Vicky Zhao turns 71 in 2020. Before the end of the year, she must either collapse her
RRSP for its cash value or transfer her RRSP assets into an income-producing plan.

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Vicky decides to transfer her RRSP, valued at $400,000, to a RRIF on November 15,
2020. As a result of this transfer, Vicky must make a withdrawal from her RRIF before
December 31, 2021.

The amount that must be withdrawn from an RRIF is prescribed by the CRA in an RRIF
table. Exhibit 15.4 shows an RRIF table highlighting the minimum amount that must be
withdrawn. Assuming that Vicky is age 71 on January 1, 2021, she will have to withdraw
5.28% of her RRIF before the end of the year. The amount that she has to withdraw will
be based on the value of her RRIF assets on January 1. The RRIF table represents only
minimum withdrawal amounts. Vicky has the option to withdraw more money in her
RRIF at any time.

Retirement Income Conversion Options for a LIRA/LRSP

Two main conversion options: registered life annuity, life income fund (LIF)
A LIF is a restricted form of an RRIF
Annual withdrawal from a LIF is subject to a maximum amount
In the year that the owner of the LIF account reaches age 80, any remaining assets
must be used to purchase a registered life annuity
In some provinces, assets from a LIRA or locked-in RRSP may be transferred to a
locked-in retirement income fund (LRIF)

Differences between an LRIF and a LIF:

The formula used to determine the maximum withdrawal from an LRIF is different
An LRIF does not have to be converted to a life annuity at age 80
Also consider investing in an annuity (to no longer be exposed to the risk that your
investment may decrease in value)
 Term annuity: a financial contract that provides a fixed sum of money at regular intervals
until a specified year
 Life annuity: a financial contract that provides a fixed sum of money at regular intervals
for one’s lifetime

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Pension Splitting
Allows pensioners receiving income that is eligible for the pension income tax credit to
split their pension income with their spouse or common-law partner

Types of qualifying income that can be allocated:

 A pension from a registered pension plan (RPP)
 Income from an RRSP annuity
 Payments from or under a registered retirement income fund (RRIF)

Pension Sharing
Canada Pension Plan / Quebec Pension Plan (CPP / QPP):
 Married or common-law couple can decide to share their CPP/ QPP retirement pensions
in order to reduce their income taxes

Reverse mortgages
 More than 70% of Canadians age 65 or older own a home which makes up a significant
proportion of a senior’s net worth being in their home equity.
 The most important source of retirement income will be the equity in their home.
 In many cases, the ideal solution for unlocking home equity is to use a Reverse
Mortgage.

Reverse Mortgage is a secured loan that allows older Canadians to generate income
using the equity in their homes without having to sell this asset.
 To apply for a reverse mortgage, an applicant must be a certain age (age varies but
textbook uses age 60 or older). Depending on various criteria, a homeowner can borrow
up to 40% of the value of his or her home or $500,000 using a reverse mortgage
(percentage and value varies, textbook uses 40% and $500,000)
 Largest provider of reverse mortgages is Canadian Home Income Plan (CHIP)
 Provider allows the interest to accumulate during the period of the loan
 Many cases, the reverse mortgage does not have to be paid back until the death of the
borrower
 Proceeds may be paid in a single lump sum, set up as a line of credit, or used to
purchase an annuity
 Ideal for seniors who wish to remain in their home but do not have sufficient retirement
income

Drawbacks to a reverse mortgage:

Setup costs, which include appraisal, legal, and closing costs, may be as high as $2
000 to $2 500

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Interest that accumulates on a reverse mortgage loan will reduce the value of your
estate over time

(Interest rates on reverse mortgages are typically higher than those on conventional
mortgages or lines of credit. Because the interest compounds, the mortgage can quickly
“balloon”).

Smart tips & Quick References:

 Manage your debts well.
 Start saving, keep saving, and stick to.
 Create a realistic budget that takes inflation into consideration.
 Know your retirement needs.
 Contribute to your employer's retirement.
 Learn about your employer's pension plan.
 Don't touch your retirement savings.
 Monitor your investments.
 Focus on being and staying healthy.
 Pay off your mortgage (and other debts) before retirement.

"I always try to be smart. I try to treat all the money I'm making like it's the last time I'm
going to make it." – Eminem

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