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Annuities and Income Alternatives

While a RIF is by far the most popular retirement income option—chosen by about three-quarters of retired Canadians—there are other possibilities. For some retirees, these may be more suitable. For others, a combination of a RIF and another option might work best. Know what’s available before you decide.

Annuities

An annuity provides regular, fixed income payments for the rest of your life or for a fixed period. Annuities are available through life insurance companies and their agents.

When you purchase an annuity, you turn over your retirement savings to a financial institution, which is then responsible for providing regular, fixed payments. Typically these payments are made monthly. They are a combination of a repayment of a portion of the annuity principal and income earned by the invested money. Payments are taxable in the year they are received. Annuities often appeal to retirees who want a simple income solution that provides worry-free fixed payments that won’t change throughout retirement.

Cash From Your RSP

You can withdraw lump-sum amounts from your RSP, or even cash in the entire plan at one time. However, this is the worst way to generate retirement income because the amount you withdraw will be subject to tax in the year of withdrawal. Not only will you pay tax on a large amount, the withdrawal may increase your taxable income so much that your tax rate will rise. In some cases you could lose close to half the withdrawal to federal and provincial income taxes.

Home Equity

You may be able to tap equity you’ve built up in your home to help finance your retirement. You can use part of your home’s value without selling the house. A BMO Bank of Montreal Canadian Home Income Plan (CHIP) provides access to 10% to 40% of the appraised value of your property.

CHIP is what is often called a “reverse mortgage.” It is secured by the equity in your home. Unlike a regular mortgage through which you make regular payments, a reverse mortgage pays you. You don’t make any repayments as long as you or your spouse live in your home. A BMO CHIP is available to homeowners 62 and older.

Pension Sources

Your workplace pension can go a long way toward providing for a comfortable retirement. Make sure you’re aware of the details of your pension, particularly whether it’s a defined benefit or defined contribution plan. This can make a big difference not only in what you’ll receive, but whether you can count on the payments you expect. And if you have a pension, is it secure?

Don’t forget about public pensions and programs such as Old Age Security and the Canada Pension Plan/Quebec Pension Plan. They’ll provide additional retirement income.

Other Savings and Investments

Do you have other savings and investments, particularly outside an RSP? They can be potential sources of retirement income. Or if you intend to sell your large house and buy something smaller you’ll free up capital that can be used to generate retirement income. You might even be expecting an inheritance that can be used to finance your future.

Whatever your options, consider how you’ll convert them to regular income. BMO Term Investments and BMO Mutual Funds can be used to generate monthly, semi-annual or annual income.
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