Registered Retirement Income Funds (RRIF) are common products found within most portfolios when reaching retirement. Converting your Registered Retirement Savings Plan (RRSP) into a RRIF is a simple process that still allows you to invest in the market. Like all investments, there is a certain amount of risk you take on with a RRIF. This risk can be much higher than expected when you start to withdraw money from your account on a regular basis. With today’s low-interest rates, investing in guaranteed investment certificates (GIC) just doesn’t cut it for retirees. Projecting how your RRIF will perform in retirement can be tricky; the ups and downs in the market can cause your RRIF to deplete at a faster rate than you expect.

The Risk

When moving your RRSP to a RRIF, you try to create a portfolio that will produce a growth equal to the amount you withdraw. This process, in theory, will allow your capital to be preserved longer and provide a longer retirement income. When predicting the future of your investments, a stable percentage is calculated, such as aiming for a 4% growth each month to average a 4% annual return. In reality, the market does not function as a stable flat line of growth. There are highs and lows throughout the year to create an average of 4% annually. Negative returns amplify the issue of preserving your capital when withdrawals are taken into consideration.

Timing is everything

As you can see from the table below, the timing of the market can have a huge impact on your RRIF, depending on how the markets perform. Between the two scenarios, even with the yearly average showing 4% and assuming an equal $4,000 withdrawal each month, negative performance at the beginning can have a huge impact on your RRIF. Having 6 months of negative returns at the beginning versus the end can have almost a $25,000 difference in your investment’s capital, resulting in your retirement income running out much faster than you would expect.

Utilize guaranteed income

A method to counteract this from occurring is to utilize guaranteed income products, such as annuities or Guaranteed Monthly Withdrawal Benefit (GMWB) accounts. Annuities can provide you with a guaranteed stable income for life, similar to a pension with a company. There are additional benefits, such as guaranteed periods that will provide income for a set number of years to your beneficiary in the event of your premature death. One item to remember is that your money is locked in, and therefore you are not able to withdraw additional income if you need it. With a GMWB, you are also provided a guaranteed income for life. Although your money is still invested in the market, your income level will not change in the down markets. When the market grows and your minimum withdrawal amount is higher than the guaranteed level, you gain the extra money without penalties.

Your risk of outliving your money in retirement has never been higher between lower interest rates, unpredictable markets and longer life expectancy. Predictable guaranteed income in retirement can alleviate a lot of the stress that comes with concerns over outliving your income and having a stable income during retirement. Don’t leave your retirement income to chance; take control of your retirement and learn more about your options.