Longer lifespans and a variety of financial options are giving the old axiom “life is full of choices” new meaning for those in their retirement years.

This is especially true for seniors who have to make the difficult decision of what to do with their RRSPs when they are forced to wind up the plans by the end of the year in which the seniors turn 69. Although withdrawing funds from an RRSP in a lump sum is an option, it is rarely practical because the money is fully taxable in the year of withdrawal. This means retirees have to decide between annuities, which provide the security of guaranteed income, or a registered retirement income fund (RRIF), which requires holders to withdraw a certain percentage of money every year.

To help determine the best fit, advisors need to ask their older clients the following questions:

> How involved do you want to be in managing their money?

> What’s your tolerance for risk?

> What’s your need for income security?

> What are your estate planning needs?

A good candidate for an annuity, for example, is “someone who really needs a base income, perhaps someone without a pension plan,” says Troy Rumpel, an estate planning consultant with Assante Estate & Insurance Services Inc. in Hamilton, Ont.

Other good candidates include couples wishing to avoid placing the burden of financial management on surviving spouses. In those cases, he says, a joint life annuity that continues to deliver income until the death of the second spouse should be considered.

Flexibility is key

However, these clients must be aware that once they buy an annuity, there is no going
back.

With a RRIF, on the other hand, there is a choice. Retirees who are approaching their 69th birthday and are required to roll over their RRSPs by Dec. 31 of that year, but who have yet to make a decision, are well advised to go with RRIFs. Not only is the switchover a relatively simple process, but it also allows clients to keep their options open. Annuities can always be purchased later.

That is a major reason why RRIFs are the preferred investment vehicle for many retirees:
because of the flexibility they provide. Flexibility is something people in their early retirement years are often keen to have, especially if they’re in good health and are used to managing their own money. “Among the clients of an investment firm such as ours, RRIFs are more popular because people want to maintain control over their investments,” says Wayne Chappell, vice president and director ofOdlum Brown Financial Services Ltd. , the insurance and financial planning arm of Odlum Brown Ltd. , a Vancouver-based investment dealer.

Another benefit of RRIFs is they allow smart investors to continue growing their retirement savings — at least, for a few years. The minimum annual withdrawals required in the early years of a RRIF (5% at age 70) are relatively small compared with what they are later on (8.75% at age 80).

Still, it’s important to ensure clients are making decisions for the right reasons, says Tina Di Vito, vice president and managing director of retirement planning at BMO Nesbitt Burns Inc. in Toronto. “There are some clients who are not comfortable with annuities.
They don’t know what [annuities] are, but maybe they’ve heard bad things about them and won’t consider them,” she says. “On the other hand, you have clients who think an annuity is the only option. They’re not aware of the alternatives. So that’s the first thing I speak to our advisors about: [I tell them] to take the time to make sure that the client fully
understands what the options are.”

That’s precisely why Chappell recently delivered a series of presentations to Odlum Brown’s investment advisors. “There are certain things advisors need to know about annuity products to broaden their horizons,” he says. “They need to understand [annuities] well enough to say, ‘Maybe you should talk to our financial services department about whether an annuity would work for you.’”

Advisors also need to understand that annuities have changed significantly from days gone by. “[These] are not your father’s annuities,” says Rumpel, who also provides consulting services to advisors at Assante Wealth Management Ltd., IQON Financial Inc.
and Stonegate Private Counsel LP across Ontario. “You can do all sorts of neat things with them you couldn’t do even 10 or 15 years ago.”

@page_break@For example, clients used to fear losing the entire principal of a traditional annuity if they died soon after buying it. But, today, life annuities that are paid out for a guaranteed period, even after death, are the norm. That alleviates concerns about not being able to leave anything behind to family members or charity.

In addition, there are also annuities indexed to inflation and even a “performance annuity” tied to stock market returns, adds Rumpel. This latter product from Standard Life Assurance Co. is attracting clients who may have been put off by annuities’ low interest rates. “Too many advisors today think it has to be either/or,” he says. “Some of our most successful solutions have involved layering: we have the traditional annuity in place and we’ve added a performance-based annuity, as well as a RRIF component. So we’ve had all three.”

Advisors also need to remember that what makes sense for a 72-year-old client may not make sense for someone who is 82 years old. At BMO Nesbitt Burns, for instance, an advisor will run a retirement analysis for a client, using it to consider fluctuations in income and expenses over the years, including the extra care that may be required later in a client’s life. The client and advisor then run through various scenarios, forecasting what the income stream will be with different combinations of RRIFs and annuities purchased at different ages.

This approach appeals to more and more seniors. “It’s a new phenomenon we’re seeing,” Di Vito says. “Clients who rolled into a RRIF because they didn’t want to lock themselves into an annuity, over time realize they would like a certain amount of income guaranteed. One of the biggest fears Canadians have is outliving their money. So when clients get older, they start wondering: ‘Would I rather leave an inheritance to a family member or do I want a guaranteed income for life?’ And the scales tip a bit.”

She adds that there may be other benefits to delay the purchase of an annuity. If investors wait until they are older, the payments tend to be higher because their longevity is shortened. And, she points out, interest rates may increase down the road, which would also boost payments.

But chasing rates is always tricky, and investors should make their financial decisions based on more than dollar-and-cents arguments. Many want peace of mind, says Chappell: “If a client says, ‘I’m 75 years of age and I’m worried about my ability to handle my money, and I can get this rate, whatever it is, and the cheque goes in the bank every month and I don’t have to worry about it,’ then maybe a point or two in the rate of return isn’t the driving factor.

“To me, an annuity is a product that is designed to do a job,” he adds. “It’s like any other financial product. If it’s sold where it fits, it will do a good job. But if it is crammed into a hole into which it doesn’t fit, it probably won’t do a good job. The trick to this is helping clients understand what they really need.” IE