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The Money Management Newsletter: Retirement Income Planning
Turning on the RRIF tap


Many people still seem to be confused about what a RRIF is and how it differs from an RRSP. Think of the RRSP phase as a large well into which you continuously pour savings during your working years. As time goes by the well fills up (hopefully) due to your continued efforts and the magic of compound returns. Eventually however you reach an age where you can no longer contribute to the well. You must now begin to let the accumulated savings flow out. You are at what is referred to as the RRIF stage.

Your well could have one big self directed chamber holding all of your investments or be constructed of a lot of little chambers, each representing the various institutions where your RRSP savings are held. A single self directed chamber lets you attach one RRIF tap to allow the savings to flow out while a many-chambered well will require a separate tap for each chamber unless you decide to combine them.

Welcome to the RRIF stage

At the RRIF stage, the government says that each tap must be set so that a minimum amount of savings is allowed to flow out each year. This minimum tap flow is based entirely on age and an increasing percentage of the savings volume in the well or chamber at the start of each year (keep in mind however that you can adjust the taps a little if you use the right tool).

If you want to limit the flow as much as possible, you can use the younger spouse tool if you have one. If you don't have a younger spouse tool, you can always get one before the taps have to be turned on but they can be quite expensive. You can also use this tool after the the savings outflow has begun but you must move the tap to a new chamber to make use of it. The benefit of this device is that it will allow you to adjust the tap flow to a lower initial setting and thus make the well contents last longer. You can then control the tap flow to let out as much as you want over the minimum amount required. Chambers can be added, switched or reduced as you see fit but taps must accompany each new chamber so that the outflow of savings can continue without interruption.

Your investment mixture

Over the years you may have thrown a lot of different chemicals into the well such as GICs, stocks, bonds, mutual funds or whatever other eligible government approved mixtures you thought would fill it the best. Some of your choices may have become toxic waste that disappeared down the well to settle as sludge on the bottom. Fortunately during the RRIF stage you can still adjust the overall chemical mixture of the well to the portion of GICs, stocks, bonds etc., that you think will keep it as full as possible as the savings flow out.

Due to the different viscosity of each investment chemical, some will flow out of the taps more easily than others. GICs are the most sticky and will only flow out at specified times (when interest is paid) and in many cases if you want to increase the rate of flow or take a large amount of savings out all at once, you have to wait until the GIC itself matures. Mutual funds are the most fluid and will allow you to vary the flow at any time or drain a large portion of the well if you so desire.

GICs and bonds will tend to keep the well contents more stable and serene but with the projected continuing low returns on these mixtures your well level may drop faster than you would prefer. Stocks and mutual funds are more volatile chemicals and often erupt and destabilize the mixture. However, they usually help to maintain the well level over time so that when you go to the well, something is there for you.

Turning on the taps

The frequency in which you release the savings from the taps is up to you. You can set each tap to let the savings out at different times as long as the minimum amount is allowed to flow out of the tap of every chamber in your well each year. You can set all taps to release savings to you monthly or set each tap individually to flow out once a year at different times dependent on your cash flow requirements.

As savings were poured into the well, the government gave you a tax deduction and permitted the well level to rise without taxing the gains. Now as the savings flow out the government is there with its cup looking for its share.

The investment chemicals inside the well can still do their stuff without incurring tax but every dollar that flows out the tap must be included in your taxable income. The more you let flow out in any one year, the more likely you are to raise your marginal tax rate , and the government will use a bucket rather than a cup to take it's allotted amount. If you die and do not leave a surviving spouse or financially dependent child or grandchild to pass the care of your well onto, the government will come with a tanker truck to pump out up to half of the volume in your well. If this happens, the total value of the well must be included in your income in the year of death. What ever is left over will be drained and passed to your estate.

Proper well maintenance and investment chemical mixture is very important to keep the taps flowing trouble free throughout your retirement.

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