D Smith: Make sure your don’t outlive your savings after retirement

In retirement you need sustainable income that will last for your life and the life of your spouse.

It is crucial to have guaranteed income in retirement. You need sustainable income that will last for your life and the life of your spouse.

Nearly half of Canadians have indicated they don’t have a plan for turning their retirement income into an income stream.  51 per cent of households are at risk of being unable to maintain their standard of living in retirement.

If you have your retirement funds in a GIC at your bank or credit union, remember you are making the financial institution richer, and you face the risk of running out of money in your retirement.

There are better investments to have sustainable income paid for life.

The largest life insurance company in Canada is offering a five per cent income bonus in 2011. This bonus is available now, if invested before year end (Dec 31, 2011).

This insurance investment product offers Guaranteed Withdrawal Benefit (GWB).

A Guaranteed Income Withdrawal is an ideal financial planning solution in pre-retirement or in the early years of retirement.

In retirement, you receive income for life; you have the financial security to know how much your annual retirement income will be in every year until death.  You do not deplete your capital.

In pre-retirement, when no withdrawal is taken annually, you receive a five per cent income bonus. Bonuses are a powerful way to increase the amount of your guaranteed payments. This can increase your guaranteed income to help keep pace with inflation.

This insurance product can also be used for non-registered money in a tax efficient manner, so you pay less tax now, and upon death.

A beneficiary can be named on a non-registered account to bypass probate and it is paid out quickly upon death. Non insurance products (GICs, traditional mutual funds and bond products) will trigger probate with a typical 18 month delay and additional legal costs.

The estate benefits offer a minimum of 100 per cent Death Benefit Guarantee to protect your savings against market volatility.  In the event of your death, the proceeds of your insurance contract pass privately and directly to your designated beneficiaries, without delay and expense of probate.

A GIC in a RRIF with current low interest rates will deplete your principal and you will run out of money.

The math is easy to do. Example: $100,000 in a RRIF at age 72 in a GIC must receive a mandatory RRIF payment of 7.48% or $7,480.  When a one year GIC pays 1% interest, this is $1,000 income paid. At age 72, in the first year of mandatory RRIF withdrawal, the principal loss is $6,480 ($7,480 – $1,000).

At age 73, the RRIF mandatory payment is 7.59%, and your one year GIC pays 1%, so that’s another large loss of principal.  Each year this loss continues until your principal is depleted, because the mandatory RRIF withdrawal is higher than a low interest GIC.

The mandatory RRIF withdrawal increases each year until age 94, when it tops out at 20%.  There is no escaping RRIF mandated percentage payouts, even if it results in you outliving your money.

With the segregated insurance guaranteed investment product, you receive predictable, sustainable and potentially increasing retirement for life.

Doreen Smith is with Capri Wealth Management.