By Sheryl Smolkin
When retirement approaches, we convert our savings into income. Here’s how not to wear it out.
As retirement approaches, we move from building up the woolen sock to converting it into income. But how do you avoid depleting your savings?
This is a significant cause for concern, especially if you live 30 years or more in retirement. Exhaust the capital and yield of a registered retirement income fund, secure income with bonds or guaranteed investment certificates (GICs), or withdraw money gradually from your bank account; these are all ways to turn your savings into income. But each of them carries the risk of exhausting your capital before your death.
Purchasing a life annuity from an insurance company provides guaranteed income for life. You pay a certain amount to the insurer, and, in return, the insurer agrees to pay you a fixed amount (the annuity) each month for the rest of your life. The grant is unaffected by market volatility, so it is an attractive retirement income option.
You can buy your annuity with funds from a defined contribution (DC) pension plan, a registered retirement savings plan (RRSP), or non-registered funds. If you use funds from a registered plan, you will be taxed on all annuity payments received in a given year. If the funds come from a non-registered account, only a portion of each periodic payment is taxable.
