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Segregated Funds Versus Mutual Funds: Understanding the Differences

Surprisingly, there’s an option that you may not have heard about: segregated funds. Discover the differences between segregated funds and mutual funds and why the former might make a great addition to your investment portfolio.

Key takeaways

  • Segregated funds and mutual funds both involve pooling investments with other investors to create more options and reduce risk, but they also have some key differences.
  • Segregated funds are an insurance product with unique benefits, such as guarantees on your original investment, estate-planning perks, and potential protection against creditors.
  • Before choosing your investment route, speak with a certified professional about considerations that include your retirement timeline, tax planning, and risk tolerance.

What are segregated funds?

Segregated funds, also known as guaranteed investment funds (GIFs), are similar to mutual funds in that they involve the pooling of money by multiple investors. In both cases, a professional fund manager will take that pooled money and invest it in various stocks, bonds, and/or other securities (known as a “portfolio”), based on the fund’s investment mandate. This strategy allows investors to put their eggs in a variety of different baskets, which may limit the risk of market fluctuations.

The major way that segregated funds are unique is that they include insurance guarantees, which means you may be able to protect part or all of the money you originally invested. At their most basic, segregated funds are mutual funds combined with an insurance policy.

How do segregated funds and mutual funds differ?

Mutual funds and segregated funds are similar in many ways: they have professional portfolio managers, they allow you to diversify risk, and they offer potential creditor protection on registered accounts.

But, there are some unique benefits of segregated funds.

Principal protection

When investing in mutual funds, there’s always the risk that the market could be experiencing a downturn when you’re hoping to access your savings for retirement. With segregated funds, the amount you invest (known as your “principal”) is protected by two guarantees.

  • Maturity guarantee: At the maturity date (the date the term is up for your investment—typically, 10 years or longer), you’re guaranteed to receive either the current market value of your investment or a minimum guaranteed amount, whichever is greater (the difference paid is often called a “top up”). The minimum guaranteed amount is typically 75 to 100 per cent of your principal, minus management fees and other costs.
  • Death benefit guarantee: Should you pass away, the person or people you name as your beneficiary or beneficiaries will receive either the current market value or a minimum guaranteed amount (75 to 100 per cent), whichever is greater.

Estate-planning benefits

Normally, the settlement of an estate takes time and involves a public probate process (where the courts formally recognize and review an individual’s will) with fees and taxes. With a segregated fund, the death benefit may be paid out faster to your named beneficiary or beneficiaries, bypassing a lengthy, public, and expensive estate settlement and probate.

If you have a blended family, a segregated fund may reduce potential conflict by allowing you to set aside assets from your overall estate to go directly, and privately, to a specific beneficiary.

The quicker process with the segregated fund could also help your beneficiary or beneficiaries when its proceeds are intended to provide ongoing financial support.

Resets

With segregated funds, you may be able to “reset” the guaranteed amount of your principal investment. Say you invested $10,000 in a segregated fund, and the market rises over the next year, so your investment is now worth $11,000. With a reset, you can lock in your principal guarantee at $11,000 to protect your gains. Just note that your maturity date will likely reset as well.

Potential creditor protection

Segregated funds are an insurance product. That means, unlike mutual funds, segregated funds can potentially protect both registered and non-registered assets from creditors. If you’re a business owner or are self-employed, this perk might be particularly attractive.

Liquidity

Both segregated funds and mutual funds can be cashed in at any time at their current market value. However, you’d need to hold the segregated funds until their maturity date in order to access the maturity guarantee amount.

Fees

Sometimes, the fees for segregated funds may be higher than for mutual funds, due to their additional benefits.

Factors to consider when choosing between segregated funds and mutual funds

When deciding between various mutual fund and segregated fund portfolios (or choosing a mix), you’ll want to consider several factors.

  • Investment goals and timelines: Segregated funds are a long-term investment and will match best with your long-term goals, such as planning for retirement or planning a financial legacy for your family.
  • Risk tolerance: Mutual funds and segregated funds have investment options for all risk tolerances, but segregated funds are generally considered safer, because of the principal guarantees.
  • Liquidity needs: Do you need to be able to liquidate your assets at a moment’s notice? Both segregated funds and mutual funds allow you to access your invested capital at any time; although, cashing in early means you lose your guarantee.
  • Estate-planning considerations: Segregated funds can be a smart idea if you’re planning a financial legacy for your beneficiary or beneficiaries or you want privacy for your estate plans.

RBC Retirement Investment Solutions

Whether you’re building up your nest egg or ready to turn your hard-earned savings into retirement income, our solutions can help you make the most of your money. Have an RBC Insurance Advisor call you to learn more.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

Any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value. RBC Guaranteed Investment Funds are individual variable annuity contracts and are referred to as segregated funds. RBC Life Insurance Company is the sole issuer and guarantor of the guarantee provisions contained in these contracts. The underlying mutual funds and portfolios available in these contracts are managed by RBC Global Asset Management Inc. When clients deposit money in an RBC Guaranteed Investment Funds contract, they are not buying units of the mutual fund or portfolio managed by RBC Global Asset Management Inc. and therefore do not possess any of the rights and privileges of the unitholders of such funds. Details of the applicable Contract are contained in the RBC GIF Information Folder and Contract at www.rbcinsurance.com/gif.

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TORONTO, Oct. 12, 2023 – As Canadians continue to feel the pressure of rising inflation rates on nearly every aspect of their lives, a new study from RBC Insurance finds that employer-provided benefits play an increasingly important role in maintaining a sense of overall well-being. Two-thirds of working Canadians (66 per cent) that have access to employer-provided benefits rate their overall wellbeing as good or excellent compared to under half (49 per cent) of those without these benefits.

Those with employer-provided benefits experience higher overall mental health (65 per cent, up 5 per cent from 2022) than those without benefits (51 per cent, down 2 per cent from 2022), revealing inverse trends and a widening gap between the two groups. To note, the majority of Canadians with employer-provided benefits also felt their employer enables them to have work/life balance (81 per cent).

In addition, there is a growing disparity among Canadians based on their access to employer-provided benefits, particularly when it comes to financial health. More than half (54 per cent) of workers with employer-provided benefits reported their overall financial health as being good or excellent, compared to only a third (33 per cent) of workers who did not have any employer-provided benefits. Low-income households (less than $40K) are also significantly less likely to have employer-provided benefits (44 per cent) than higher income households earning $60K-$100K (83 per cent).

Older millennials (aged 35 to 44) reported the weakest financial health of all Canadians, with only 44 per cent feeling positive about their current situation. This comes at a time when millennials are facing high household debt. According to RBC Economics, these Canadians had a total debt-to-disposable income ratio of 250 per cent in 2019 – compared to roughly 150 per cent with the same cohort in 1999. This debt is set to grow in next few years as Canadians who need to renew their mortgage could face a 25% increase in monthly payments.

“There is a sense of stability that comes with knowing that your needs and the needs of your family will be taken care of in case of the unexpected, and that definitely contributes to feelings of overall well-being,” says Andrejka Massicotte, head of Group Benefits, RBC Insurance. “Considering all of the possible situations that can happen in life, having comfort that you will be able to focus on recovery rather than the cost of care if you get sick, or that you will be able to access mental health supports and services and well-being programs if you need them, can have a very positive impact on your financial and mental health. Group benefits offer a peace of mind that allows you to focus on the important things in your life.”

Online services key for benefits offerings

When it comes to accessing their benefits, Canadians’ preferences continue to shift towards the convenience of online services, which have become more broadly available in recent years. Among the features they desire most from an employer-provided benefits plan are:

  • access to doctors and specialists (73 per cent)
  • online pharmacies (72 per cent)
  • online prescription glasses (65 per cent)
  • online mental health and wellness programs (61 per cent)
  • services for wellness and management of chronic diseases (57 per cent)

Tailored benefits are increasingly important to Canadians

Tailored employee benefits are also increasingly important to the vast majority of Canadians (89 per cent) who have access to them. Overall, satisfaction with their plans is high, with 83 per cent of Canadians who say they are happy with their current benefits, and 87 per cent who feel they have a good understanding of what is offered to them.

At RBC Insurance, our tailored solutions are designed for the evolving world of work. Our plans offer a range of solutions, including convenient access to online services for managing mental and financial health and well-being. As people’s needs continue to evolve over time, we are committed to providing best-in-class advice and service, flexible plans and specialized solutions that get the support you need, when you need it.

About the RBC Insurance Study

These are some of the findings of an Ipsos poll conducted on behalf of RBC Insurance between July 6 and July 10, 2023. For this survey, a sample of 1,000 working Canadians was surveyed online. Weighting was employed to balance demographics to ensure that the composition of the sample reflects the population according to Census data and to provide results intended to approximate the sample universe. The results are considered accurate to within ±3.5 percentage points, 19 times out of 20, of what the results would have been had all Canadian working adults been surveyed.

About RBC Insurance

RBC Insurance® offers a wide range of life, health, home, auto, travel, wealth, group benefits, annuities and reinsurance advice and solutions, as well as creditor and business insurance services to individual, business and group clients. RBC Insurance is the brand name for the insurance operating entities of Royal Bank of Canada, Canada’s biggest bank and one of the largest in the world, based on market capitalization. RBC Insurance is among the largest Canadian bank-owned insurance organizations, with 2,600 employees who serve 4.8 million clients globally.

Media contact

Cody Medwechuk, RBC Insurance Corporate Communications

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Both options offer a way for retirees to create an income stream from their RRSPs to help meet their financial needs, but they differ in the way they operate and the financial situations they best suit.

When planning for your retirement, you’ll want to understand the differences between the two options to determine which one might be the right fit for you. You may even consider a combination of both products.

Once you have a better understanding of the options available to you, you’ll be able to make an informed choice that allows you to enjoy your retirement years to the fullest.

Key takeaways

  • There are important differences between payout annuities and RRIFs, and each one has its own set of potential pros and cons.

  • Payout annuities provide guaranteed stable income payments for a fixed term or for life.

  • RRIFs offer flexibility in terms of when and how much you withdraw (subject to annual minimum withdrawal requirements), as well as control over your investment, but they come with greater risk due to market fluctuations.

  • Your personal circumstances and financial goals in retirement are two key factors to consider before you invest in a specific product.

How do payout annuities work in retirement?

A payout annuity is an insurance product that provides guaranteed income for a set term or for life—it’s up to you to decide. When considering options for your RRSP, payout annuities may be a good choice for people who are:

  • Risk-averse when it comes to market fluctuations

  • Looking for a guaranteed stream of income for life or for a set period of time

  • Looking for fixed and regular payouts

  • Concerned about outliving their retirement savings

  • Lacking the time and skills to manage their own investments (or simply don’t want to).

There are several factors to consider when you’re selecting your payout annuity:

  • How often you’d like to receive payouts. Typical payout schedules are monthly, quarterly, semi-annually, or annually.

  • Do you want to guarantee income for yourself and your spouse/common-law partner, or just yourself?

  • Do you want added protection with a guaranteed period?

Those who choose to invest a portion of their retirement savings into a payout annuity could benefit from a guaranteed income stream with regular payments and a sense of security in knowing how long their income stream will last, whether that’s for a fixed term or for life.

What are some of the different types of payout annuities?

The type of payout annuity you choose will depend on your financial goals and your family’s needs. There are many options available, and each one deserves careful consideration. Here are three common types of payout annuities.

Single Life Annuity

This type of payout annuity provides a series of guaranteed income payments for the life of one person (known as the “annuitant”). When the annuitant dies, the payments stop.

Joint Life Annuity

A joint life payout annuity provides a series of guaranteed income payments for the lives of two annuitants (usually the individual and their spouse or common-law partner, though sometimes also a financially dependent child) during a joint lifetime. When one of the annuitants dies, the payments will continue to be made to the surviving annuitant until the end of their life. This is also sometimes called a “survivor annuity.”

Term-certain Annuity

The key difference in this type of payout annuity is right there in the name—instead of providing payments for life, a term-certain annuity ends on a specific date (at the end of the term that was agreed upon when the annuity was initially set up), or until the individual reaches a certain age.

The benefits of payout annuities

A payout annuity is an effective, easy-to-manage solution that provides you—or you and your spouse/common-law partner, if you choose—with a guaranteed level of income for the rest of your life or for a specified number of years. It can help cover your fixed expenses during your retirement years. That’s why it’s considered a foundational product for a well-balanced retirement portfolio, as it’s reliable and offers a level of predictability and stability once you retire.

Other benefits include:

  • Income security: Regular guaranteed payments are unaffected by changes in interest rates or the stock market.

  • Tax benefits: The amount directly transferred from an RRSP to buy an annuity is not considered a taxable income. Only the payouts from the annuity are considered taxable income and, as a result, they provide some degree of continued tax deferral.

  • Estate planning: A spouse/common-law partner or beneficiary can be added to receive the remaining payments should the annuitant die before the end of the guarantee period. The amount goes directly to the spouse or beneficiary and does not have to go through probate.

  • Easy management: Once you purchase your fixed payout annuity, you’re set. There are no ongoing investment decisions to make.

Considerations and potential drawbacks of annuities

A payout annuity is a product designed for those who prefer predictability and security over liquidity and market risks. Most annuities cannot be surrendered or altered after you start taking income. Why? You’re exchanging control for the assurance of guaranteed income payments for life or for a set term. 

People who think they can get a better rate of return over time than the insurance company provides and wish to continue managing their investments might find other options that better suit their needs. Also, while a payout annuity provides stable payments and security, inflation can eat away at the purchasing power of the annuity payouts.

When considering any payout annuity, make sure to consult with a licensed insurance advisor. Ask lots of questions and invest plenty of time in going over the terms and conditions of the payout annuity you choose, so you fully understand it.

How do RRIFs work in retirement?

If flexibility is a priority for your retirement years, then a RRIF may be an option to consider when your RRSP matures. They’re a popular choice when converting RRSPs into a retirement income plan, as they offer flexibility and allow you to continue to make and manage all your investment decisions.

You’ll need to convert your RRSP to a RRIF by the end of the year you turn 71 (or sooner, if you need income). Your investments transfer directly and don’t have to be liquidated. And similar to an RRSP, the growth earned in a RRIF is not subject to annual taxation. Only the amounts withdrawn are subject to taxation.

The benefits of RRIFs

If you’re looking for greater financial choice in your retirement years, RRIFs might be able to offer you that. In addition to flexibility, they can also provide more control if you wish to make specific choices about where and how to invest your savings. Those decisions might result in growth and a higher income within a RRIF. Smart investments within a RRIF can also lead to a greater potential to leave behind a legacy for your family and beneficiaries.

Instead of fixed and regular payments, if you invest in a RRIF, you can withdraw variable amounts from your plan (subject to minimum annual withdrawal rules) as your financial needs change.

There are many variables to consider when withdrawing money from your RRIF, so speak to your financial advisor to understand the benefits and risks.

Considerations and potential drawbacks of RRIFs

As anyone who’s ever invested money knows, greater flexibility and potential for growth typically come with greater financial risk. Market volatility can affect or cause irreversible damage to your RRIF investments. It may not be a wise strategy to opt for high-risk investing in your retirement years. Careful attention needs to be paid to your investment strategies within your RRIF.

Consider consulting an investment professional for monitoring and advice on where to invest your RRIF funds. Depending on market activity, adjustments should be made to your RRIF portfolio, so your retirement savings remain as secure as possible and your financial needs can be met as they change over time.

Another potential drawback is that your RRIF might not provide a guaranteed income for life. There’s a chance you’ll outlive the savings in your RRIF.

Choosing between payout annuities and RRIFs—factors to consider

Personal circumstances and financial goals

Here are some things to consider when choosing an income stream strategy for your retirement years:

  • Your (and, if applicable, your spouse or partner’s) age and health, expected longevity, and possibility of surviving beyond that age.

  • Your retirement goals, including your desired lifestyle, expenses, and what you hope to leave behind for your family and beneficiaries.

  • Your own abilities for monitoring your investments and making investment decisions on a regular basis as you age. Assess these honestly.

  • Your tolerance for risk in terms of market fluctuations. Would the negative impact of a market downturn on your investments be financially devastating?

Risk and return analysis

Finding a balance between risk and return that suits both your personal preferences and your financial position is important. Of course, higher-risk investing might be enticing with the possibility of higher potential returns. Good decisions and the right market can offer growth within your RRIF, but how much risk are you willing to tolerate?

With a payout annuity, the market can’t affect the retirement income. But you’re giving up growth potential and control over your money in exchange for stability.

Tax considerations

Withdrawals from RRIFs and payouts from registered payout annuities are considered fully taxable income for the year in which they take place.

When a RRIF annuitant passes away, the fair market value of the RRIF investments will be included as income in the final tax return of the deceased annuitant, unless it can be rolled over to the surviving spouse or common-law partner, child, or even a grandchild.

If the annuity does not have a guarantee period, or the guarantee period has ended, the payout ends when the annuitant (or the surviving annuitant, in the case of joint life annuity) dies. As a result, there’s no additional income reporting.

If the guarantee period hasn’t ended when the annuitant dies, and the surviving spouse or partner is the beneficiary, the payouts made for the remainder of the guarantee period will be taxable income to the receiving spouse.

However, when a lump sum payment of a commuted value (the present value of the future payouts for the remainder of the guaranteed period) is made to the beneficiary, it’s considered taxable income to the deceased annuitant.

The tax considerations discussed here are general in nature. It’s important to seek professional independent tax and legal advice before taking any action.

If you’re planning your estate and have a RRIF and/or a payout annuity, make sure your financial advisor knows your wishes and that you understand the tax implications of the various options available for you and your beneficiaries.

RBC Retirement Investment Solutions

Whether you’re building up your nest egg or ready to turn your hard-earned savings into retirement income, our solutions can help you make the most of your money. Have an RBC Insurance Advisor call you to learn more.

*Home and auto insurance products are distributed by RBC Insurance Agency Ltd. and underwritten by Aviva General Insurance Company. In Quebec, RBC Insurance Agency Ltd. Is registered as a damage insurance agency. As a result of government-run auto insurance plans, auto insurance is not available through RBC Insurance in Manitoba, Saskatchewan and British Columbia.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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Financial Planning Managing Money Retirement Wealth Management

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Both options offer a way for retirees to create an income stream from their RRSPs to help meet their financial needs, but they differ in the way they operate and the financial situations they best suit.

When planning for your retirement, you’ll want to understand the differences between the two options to determine which one might be the right fit for you. You may even consider a combination of both products.

Once you have a better understanding of the options available to you, you’ll be able to make an informed choice that allows you to enjoy your retirement years to the fullest.

Key takeaways

  • There are important differences between payout annuities and RRIFs, and each one has its own set of potential pros and cons.
  • Payout annuities provide guaranteed stable income payments for a fixed term or for life.
  • RRIFs offer flexibility in terms of when and how much you withdraw (subject to annual minimum withdrawal requirements), as well as control over your investment, but they come with greater risk due to market fluctuations.
  • Your personal circumstances and financial goals in retirement are two key factors to consider before you invest in a specific product.

How do payout annuities work in retirement?

A payout annuity is an insurance product that provides guaranteed income for a set term or for life—it’s up to you to decide. When considering options for your RRSP, payout annuities may be a good choice for people who are:

  • Risk-averse when it comes to market fluctuations
  • Looking for a guaranteed stream of income for life or for a set period of time
  • Looking for fixed and regular payouts
  • Concerned about outliving their retirement savings
  • Lacking the time and skills to manage their own investments (or simply don’t want to).

There are several factors to consider when you’re selecting your payout annuity:

  • How often you’d like to receive payouts. Typical payout schedules are monthly, quarterly, semi-annually, or annually.
  • Do you want to guarantee income for yourself and your spouse/common-law partner, or just yourself?
  • Do you want added protection with a guaranteed period?

Those who choose to invest a portion of their retirement savings into a payout annuity could benefit from a guaranteed income stream with regular payments and a sense of security in knowing how long their income stream will last, whether that’s for a fixed term or for life.

What are some of the different types of payout annuities?

The type of payout annuity you choose will depend on your financial goals and your family’s needs. There are many options available, and each one deserves careful consideration. Here are three common types of payout annuities.

Single Life Annuity

This type of payout annuity provides a series of guaranteed income payments for the life of one person (known as the “annuitant”). When the annuitant dies, the payments stop.

Joint Life Annuity

A joint life payout annuity provides a series of guaranteed income payments for the lives of two annuitants (usually the individual and their spouse or common-law partner, though sometimes also a financially dependent child) during a joint lifetime. When one of the annuitants dies, the payments will continue to be made to the surviving annuitant until the end of their life. This is also sometimes called a “survivor annuity.”

Term-certain Annuity

The key difference in this type of payout annuity is right there in the name—instead of providing payments for life, a term-certain annuity ends on a specific date (at the end of the term that was agreed upon when the annuity was initially set up), or until the individual reaches a certain age.

The benefits of payout annuities

A payout annuity is an effective, easy-to-manage solution that provides you—or you and your spouse/common-law partner, if you choose—with a guaranteed level of income for the rest of your life or for a specified number of years. It can help cover your fixed expenses during your retirement years. That’s why it’s considered a foundational product for a well-balanced retirement portfolio, as it’s reliable and offers a level of predictability and stability once you retire.

Other benefits include:

  • Income security: Regular guaranteed payments are unaffected by changes in interest rates or the stock market.
  • Tax benefits: The amount directly transferred from an RRSP to buy an annuity is not considered a taxable income. Only the payouts from the annuity are considered taxable income and, as a result, they provide some degree of continued tax deferral.
  • Estate planning: A spouse/common-law partner or beneficiary can be added to receive the remaining payments should the annuitant die before the end of the guarantee period. The amount goes directly to the spouse or beneficiary and does not have to go through probate.
  • Easy management: Once you purchase your fixed payout annuity, you’re set. There are no ongoing investment decisions to make.

Considerations and potential drawbacks of annuities

As anyone who’s ever invested money knows, greater flexibility and potential for growth typically come with greater financial risk. Market volatility can affect or cause irreversible damage to your RRIF investments. It may not be a wise strategy to opt for high-risk investing in your retirement years. Careful attention needs to be paid to your investment strategies within your RRIF.

Consider consulting an investment professional for monitoring and advice on where to invest your RRIF funds. Depending on market activity, adjustments should be made to your RRIF portfolio, so your retirement savings remain as secure as possible and your financial needs can be met as they change over time.

Another potential drawback is that your RRIF might not provide a guaranteed income for life. There’s a chance you’ll outlive the savings in your RRIF.

How do RRIFs work in retirement?

If flexibility is a priority for your retirement years, then a RRIF may be an option to consider when your RRSP matures. They’re a popular choice when converting RRSPs into a retirement income plan, as they offer flexibility and allow you to continue to make and manage all your investment decisions.

You’ll need to convert your RRSP to a RRIF by the end of the year you turn 71 (or sooner, if you need income). Your investments transfer directly and don’t have to be liquidated. And similar to an RRSP, the growth earned in a RRIF is not subject to annual taxation. Only the amounts withdrawn are subject to taxation.

The benefits of RRIFs

If you’re looking for greater financial choice in your retirement years, RRIFs might be able to offer you that. In addition to flexibility, they can also provide more control if you wish to make specific choices about where and how to invest your savings. Those decisions might result in growth and a higher income within a RRIF. Smart investments within a RRIF can also lead to a greater potential to leave behind a legacy for your family and beneficiaries.

Instead of fixed and regular payments, if you invest in a RRIF, you can withdraw variable amounts from your plan (subject to minimum annual withdrawal rules) as your financial needs change.

There are many variables to consider when withdrawing money from your RRIF, so speak to your financial advisor to understand the benefits and risks.

Considerations and potential drawbacks of RRIFs

As anyone who’s ever invested money knows, greater flexibility and potential for growth typically come with greater financial risk. Market volatility can affect or cause irreversible damage to your RRIF investments. It may not be a wise strategy to opt for high-risk investing in your retirement years. Careful attention needs to be paid to your investment strategies within your RRIF.

Consider consulting an investment professional for monitoring and advice on where to invest your RRIF funds. Depending on market activity, adjustments should be made to your RRIF portfolio, so your retirement savings remain as secure as possible and your financial needs can be met as they change over time.

Another potential drawback is that your RRIF might not provide a guaranteed income for life. There’s a chance you’ll outlive the savings in your RRIF.

Choosing between payout annuities and RRIFs—factors to consider

Personal circumstances and financial goals

Here are some things to consider when choosing an income stream strategy for your retirement years:

  • Your (and, if applicable, your spouse or partner’s) age and health, expected longevity, and possibility of surviving beyond that age.
  • Your retirement goals, including your desired lifestyle, expenses, and what you hope to leave behind for your family and beneficiaries.
  • Your own abilities for monitoring your investments and making investment decisions on a regular basis as you age. Assess these honestly.
  • Your tolerance for risk in terms of market fluctuations. Would the negative impact of a market downturn on your investments be financially devastating?

Risk and return analysis

Finding a balance between risk and return that suits both your personal preferences and your financial position is important. Of course, higher-risk investing might be enticing with the possibility of higher potential returns. Good decisions and the right market can offer growth within your RRIF, but how much risk are you willing to tolerate?

With a payout annuity, the market can’t affect the retirement income. But you’re giving up growth potential and control over your money in exchange for stability.

Tax considerations

Withdrawals from RRIFs and payouts from registered payout annuities are considered fully taxable income for the year in which they take place.

When a RRIF annuitant passes away, the fair market value of the RRIF investments will be included as income in the final tax return of the deceased annuitant, unless it can be rolled over to the surviving spouse or common-law partner, child, or even a grandchild.

If the annuity does not have a guarantee period, or the guarantee period has ended, the payout ends when the annuitant (or the surviving annuitant, in the case of joint life annuity) dies. As a result, there’s no additional income reporting.

If the guarantee period hasn’t ended when the annuitant dies, and the surviving spouse or partner is the beneficiary, the payouts made for the remainder of the guarantee period will be taxable income to the receiving spouse.

However, when a lump sum payment of a commuted value (the present value of the future payouts for the remainder of the guaranteed period) is made to the beneficiary, it’s considered taxable income to the deceased annuitant.

The tax considerations discussed here are general in nature. It’s important to seek professional independent tax and legal advice before taking any action.

If you’re planning your estate and have a RRIF and/or a payout annuity, make sure your financial advisor knows your wishes and that you understand the tax implications of the various options available for you and your beneficiaries.

*Home and auto insurance products are distributed by RBC Insurance Agency Ltd. and underwritten by Aviva General Insurance Company. In Quebec, RBC Insurance Agency Ltd. Is registered as a damage insurance agency. As a result of government-run auto insurance plans, auto insurance is not available through RBC Insurance in Manitoba, Saskatchewan and British Columbia.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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Financial Planning Managing Money Retirement Wealth Management

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Planning for retirement as a couple can be a balancing act as you attempt to blend individual goals and needs into a unified financial vision. It starts with a discussion of expectations — namely, what kind of lifestyle do you hope to enjoy in retirement and how much income you’ll need to attain it. For example you may want to purchase a vacation home or start a new business in retirement. A spousal RRSP can help you and your partner even out each of your retirement savings. This way, when you retire, you’ll both be able to withdraw a similar amount of money from your RRSPs based on your needs.

What is a spousal RRSP?

A spousal RRSP is an investment account for your spouse’s or common-law partner’s retirement. If you earn more annual income than your spouse, you can contribute some or all of your individual RRSP contribution into a spousal RRSP account registered under your spouse’s name.

What are the benefits of having a spousal RRSP?

A spousal RRSP allows you to:

  • Save on taxes: A spousal RRSP allows you to “split” your retirement income and find tax efficiencies as a couple if you fall under a lower tax bracket when you withdraw from the account.
  • Invest for retirement: You can contribute money each year into a spousal RRSP, tax is deferred on that money until it is withdrawn.

A spousal RRSP with a segregated fund can help you provide protection to your loved ones. You can hold segregated funds in an RRSP account to help you protect, grow and preserve your money. It can help you reach your retirement goals and guarantee that your beneficiaries receive a certain percentage of your investments when you pass away.

Split your contribution with a spousal RRSP

If you and your spouse earn different levels of income, a spousal RRSP can help you “split income” to even out your annual income tax payments and save on taxes when you eventually withdraw from the account. Take this example:

  • Deborah earns $100,000 annually, and Jack earns $50,000.
  • As spouses, Deborah and Jack are each able to contribute up to 18% (or the CRA established limit for that year) of pre-tax earnings from the previous year into their individual RRSPs.
  • This would mean Deborah can contribute $18,000, and Jack could contribute $9,000.
  • If they open a spousal RRSP where Deborah is the contributor (because she earns more) and Jack is the recipient (because he earns less), Deborah can split her $18,000 contribution and contribute $4,500 to her own RRSP and $4,500 to Jack’s spousal RRSP.
  • Jack may still contribute $9,000 to his own RRSP and they will both have $13,500.
  • Deborah will get a tax deduction for her contributions. Jack will be able to use the funds from the spousal RRSP in retirement and he will be attributed the income (for tax purposes) for withdrawals (in retirement).

A spousal RRSP allows Deborah and Jack to equalize their retirement savings between them so that they have a pool of savings and pay less in taxes upon withdrawal each year of retirement.

This “split income” strategy can help you build a nest egg that provides each of you with a source of income in retirement and a way to manage your taxes efficiently.

What happens to a spousal RRSP if we break up?

Should you and your partner end your marriage or common-law partnership, your spousal RRSPs will be treated the same as your other assets. This means that your RRSPs will be split and can be transferred tax-free.

What happens to a spousal RRSP if one partner dies?

If one RRSP contributor dies, it’s possible to roll over the RRSP tax-free to the surviving spouse or common law partner. This means that the income from the spousal RRSP is transferred to the living spouse or partner and is reported on the beneficiary’s tax return for the year. Spousal RRSPs can be a potentially useful estate-planning tool to provide a tax-free inheritance upon your death.

How do I set up a spousal RRSP?

You can set up an RRSP account with a Segregated Fund and start saving by setting up automatic contributions. Add insurance as a part of you and your spouse’s retirement planning today.

RBC Retirement Investment Solutions

Whether you’re building up your nest egg or ready to turn your hard-earned savings into retirement income, our solutions can help you make the most of your money. Have an RBC Insurance Advisor call you to learn more.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

Any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value. RBC Guaranteed Investment Funds are individual variable annuity contracts and are referred to as segregated funds. RBC Life Insurance Company is the sole issuer and guarantor of the guarantee provisions contained in these contracts. The underlying mutual funds and portfolios available in these contracts are managed by RBC Global Asset Management Inc. When clients deposit money in an RBC Guaranteed Investment Funds contract, they are not buying units of the mutual fund or portfolio managed by RBC Global Asset Management Inc. and therefore do not possess any of the rights and privileges of the unitholders of such funds. Details of the applicable Contract are contained in the RBC GIF Information Folder and Contract at www.rbcinsurance.com/gif.

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Planning for retirement as a couple can be a balancing act as you attempt to blend individual goals and needs into a unified financial vision. It starts with a discussion of expectations — namely, what kind of lifestyle do you hope to enjoy in retirement and how much income you’ll need to attain it. For example you may want to purchase a vacation home or start a new business in retirement. A spousal RRSP can help you and your partner even out each of your retirement savings. This way, when you retire, you’ll both be able to withdraw a similar amount of money from your RRSPs based on your needs.

What is a spousal RRSP?

A spousal RRSP is an investment account for your spouse’s or common-law partner’s retirement. If you earn more annual income than your spouse, you can contribute some or all of your individual RRSP contribution into a spousal RRSP account registered under your spouse’s name.

What are the benefits of having a spousal RRSP?

A spousal RRSP allows you to:

  • Save on taxes: A spousal RRSP allows you to “split” your retirement income and find tax efficiencies as a couple if you fall under a lower tax bracket when you withdraw from the account.
  • Invest for retirement: You can contribute money each year into a spousal RRSP, tax is deferred on that money until it is withdrawn.

A spousal RRSP with a segregated fund can help you provide protection to your loved ones. You can hold segregated funds in an RRSP account to help you protect, grow and preserve your money. It can help you reach your retirement goals and guarantee that your beneficiaries receive a certain percentage of your investments when you pass away.

Split your contribution with a spousal RRSP

If you and your spouse earn different levels of income, a spousal RRSP can help you “split income” to even out your annual income tax payments and save on taxes when you eventually withdraw from the account. Take this example:

  • Deborah earns $100,000 annually, and Jack earns $50,000.
  • As spouses, Deborah and Jack are each able to contribute up to 18% (or the CRA established limit for that year) of pre-tax earnings from the previous year into their individual RRSPs.
  • This would mean Deborah can contribute $18,000, and Jack could contribute $9,000.
  • If they open a spousal RRSP where Deborah is the contributor (because she earns more) and Jack is the recipient (because he earns less), Deborah can split her $18,000 contribution and contribute $4,500 to her own RRSP and $4,500 to Jack’s spousal RRSP.
  • Jack may still contribute $9,000 to his own RRSP and they will both have $13,500.
  • Deborah will get a tax deduction for her contributions. Jack will be able to use the funds from the spousal RRSP in retirement and he will be attributed the income (for tax purposes) for withdrawals (in retirement).

A spousal RRSP allows Deborah and Jack to equalize their retirement savings between them so that they have a pool of savings and pay less in taxes upon withdrawal each year of retirement.

This “split income” strategy can help you build a nest egg that provides each of you with a source of income in retirement and a way to manage your taxes efficiently.

What happens to a spousal RRSP if we break up?

Should you and your partner end your marriage or common-law partnership, your spousal RRSPs will be treated the same as your other assets. This means that your RRSPs will be split and can be transferred tax-free.

What happens to a spousal RRSP if one partner dies?

If one RRSP contributor dies, it’s possible to roll over the RRSP tax-free to the surviving spouse or common law partner. This means that the income from the spousal RRSP is transferred to the living spouse or partner and is reported on the beneficiary’s tax return for the year. Spousal RRSPs can be a potentially useful estate-planning tool to provide a tax-free inheritance upon your death.

How do I set up a spousal RRSP?

You can set up an RRSP account with a Segregated Fund and start saving by setting up automatic contributions. Add insurance as a part of you and your spouse’s retirement planning today.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

Any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value. RBC Guaranteed Investment Funds are individual variable annuity contracts and are referred to as segregated funds. RBC Life Insurance Company is the sole issuer and guarantor of the guarantee provisions contained in these contracts. The underlying mutual funds and portfolios available in these contracts are managed by RBC Global Asset Management Inc. When clients deposit money in an RBC Guaranteed Investment Funds contract, they are not buying units of the mutual fund or portfolio managed by RBC Global Asset Management Inc. and therefore do not possess any of the rights and privileges of the unitholders of such funds. Details of the applicable Contract are contained in the RBC GIF Information Folder and Contract at www.rbcinsurance.com/gif.

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Managing your finances in retirement may present challenges, but careful advance planning and advice from a financial advisor can set you up for success. It also might help to ease some of the current anxieties you may have about ensuring a sustainable and sufficient retirement income.

Key takeaways

  • A well-thought-out retirement income plan will take into account your future expenses and desired retirement lifestyle.
  • Factors to consider in retirement planning include your tolerance for risk and your need for flexibility versus your desire for stability.
  • Payout annuities are insurance products that can provide you with a guaranteed income stream for life.
  • A financial advisor can help support you in assessing different strategies for ensuring a retirement income stream that will suit your needs and goals.

Understanding your retirement income needs

“How much money do you need to retire?” It’s a question many of us come back to again and again. A recent Ipsos poll conducted for RBC Insurance reports that more than a third of Canadians feel anxious about saving enough money to support them in their retirement years, and this feeling of worry increases with age.

Understanding your retirement needs and goals is the first step to creating an income plan that will meet your future financial obligations and help ease the stress and anxiety about your retirement finances.

Ask yourself about the expenses you might face in retirement. Will you have mortgage payments? Do you plan to travel? It’s important to have a clear picture of the type of retirement lifestyle you’re aiming for, as well as an accurate estimate of your future living costs.

A financial advisor or retirement planning specialist can help you estimate your retirement expenses and assess your potential retirement income sources, including the Canada Pension Plan, pension plans relating to your current and past employment, and retirement savings, such as RRSPs.

Creating a retirement income plan

A comprehensive retirement plan will take into account your financial situation, your future needs and goals, and your tolerance and capacity for risk in your retirement years. A financial advisor should look at all of these factors when helping to guide you toward an income plan that’s right for you.

Some of the key factors you’ll want to discuss are:

  • Your tolerance for risk in terms of market fluctuations
  • Your investment goals when it comes to growth within your retirement fund
  • Your desire for flexibility and liquidity versus your need for stability
  • Your personal health and potential longevity; and
  • Inflation and how it can affect your purchasing power during your retirement years

A financial advisor can support you in designing a plan that suits your needs and goals, whether it’s a straightforward strategy or a diversified approach to generating your retirement income.

Payout annuities as a retirement income stream

A payout annuity is a type of insurance product that offers a stable retirement income. It can give you financial security and stability when you retire, offering you regularly timed guaranteed income for as long as you want…even for life! Together with your advisor, you can choose the type of annuity that best suits your needs.

RBC Insurance offers several kinds of payout annuity solutions.

  • Single life payout annuity: This payout annuity provides a guaranteed income for one person until the end of their life, with payments based on the amount of their initial investment. The payments stop when the plan holder dies.
  • Joint life payout annuity: A joint life payout annuity offers guaranteed income for the lives of two people. It allows for a second annuitant (or beneficiary) to be added to the policy—often a spouse or a partner. Payments continue to be made to this person after the annuitant dies.
  • Term-certain payout annuity: Instead of providing payments for life, a term-certain payout annuity ends on a specific date—the end of the term that was agreed upon when it was initially set up. With this type of payout annuity, a beneficiary can be chosen to receive the remaining payouts if the annuitant were to die before the end of the term.

Payout annuities are one product option that can play an important part in a retirement portfolio and can alleviate concerns about outliving your hard-earned savings.

Benefits of payout annuities in retirement income planning

Payout annuities are reliable and stable. Regular guaranteed payments offer a degree of predictability for retirees and are a hands-off option for those who may not wish to actively manage their investments. Fluctuations in the market do not alter these regular, guaranteed payments, and the money invested in them isn’t taxed until a payout is made. A financial advisor can inform you about some of the potential benefits.

The biggest advantage of purchasing a single life or joint life payout annuity is the potential to have an income stream for life.

Factors to consider when evaluating payout annuities

Not all insurance products are created equal, and this goes for payout annuities, too. If you’ve decided to invest in a payout annuity, begin by choosing a provider with a strong reputation and a trusted track record. Come equipped with questions about any attached fees or initial expenses and ask about additional options or features that can help you tailor your payout annuity to better fit your needs.

Incorporating payout annuities into retirement income planning

When planning for retirement, you can seek the assistance of a financial advisor to help decide what type of payout annuity works best to generate income during your retirement. Payments can be timed to be delivered monthly, quarterly, semi-annually, or annually, with the aim of supplementing other sources of income, such as pension plans, investments, and other savings.

Understanding the risks and limitations of payout annuities

Talk to your financial advisor about both the benefits and risks of a payout annuity plan. Purchasing an annuity means that your money is locked in. You’re trading liquidity and flexibility for stability and a guaranteed income for life. If you decide you want to invest elsewhere, according to profitable market conditions, you will not be able to transfer the money in your payout annuity to another financial product. For this reason, investing in a payout annuity should represent only a portion of your total retirement portfolio.

The risks tied to payout annuities include your purchasing power being reduced by inflation. When prices rise, your payouts stay the same. Changing interest rates present another limitation. Buying a payout annuity when interest rates are low can mean lower returns during your retirement. However, in some cases it may be smart to act immediately and not wait.

Other important things to consider

Payout annuities are a solution that you may want to consider as part of a well-diversified retirement plan. If you’re ready to begin retirement planning, consider speaking with an RBC Insurance advisor about the options available to you. They can offer reliable advice and support to help you make wise financial decisions about your future and inform you about the insurance products and investment tools that will allow you to build the kind of stable retirement income streams that suit your needs and goals.

You can look to RBC Insurance to help you create a retirement income plan that meets your financial goals as you move into your retirement years.

RBC Retirement Investment Solutions

Whether you’re building up your nest egg or ready to turn your hard-earned savings into retirement income, our solutions can help you make the most of your money. Have an RBC Insurance Advisor call you to learn more.

*Home and auto insurance products are distributed by RBC Insurance Agency Ltd. and underwritten by Aviva General Insurance Company. In Quebec, RBC Insurance Agency Ltd. Is registered as a damage insurance agency. As a result of government-run auto insurance plans, auto insurance is not available through RBC Insurance in Manitoba, Saskatchewan and British Columbia.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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