Income Volatility in Retirement



Cory Hill

Financial Advisor


As investors, we have all seen what effect market volatility has on the value of one’s portfolio. For retirees, this portfolio volatility can have an effect on their retirement income, by way of income volatility, specifically minimum income withdrawals from a registered retirement income fund (RRIF).

The RRIF minimum income calculation is a function of one’s age (or a spouse’s age), the value of the RRIF at the end of a calendar year, the previous year’s investment return, and the schedule of withdrawal percentages set forth by the federal government.

After identifying some of the variables that affect the RRIF income, I will focus on the volatility in a retiree’s income stream from their RRIF and look at ways to mitigate it.

Here’s an example; let's say a retired male, aged 72, has a RRIF valued at $1,000,000 and it’s invested in a balanced portfolio of equity and fixed income securities. The minimum income that must be withdrawn is $54,000 (5.4% of the balance of the RRIF) and he takes it as a lump sum, in the beginning of the year. Markets were not having a good year, and at the end of the year his portfolio lost 5% in value due to market performance.

After the RRIF income withdrawal and the market loss, the portfolio value at the end of the year is now approximately $898,700. This is the value that will be used to calculate next year’s income.

Now, our client is age 73, the RRIF minimum percentage that must be paid is 5.53%. The required income in year two is 49,698. This is a drop of almost 8% from the previous year! This is an example of income volatility. Of course, our retiree could take more than the minimum income but that may put additional stress on the portfolio’s ability to generate stable, long-term income throughout retirement.

One strategy that can be explored to help to mitigate income volatility would be to use one or a series of life annuities with part of the RRIF capital. If we assume all the previous variables as set out above except our retiree, at age 72, had $900,000 in a RRIF and allocated $100,000 to a life annuity, how would the income volatility change?

There would be approximately $48,600 of RRIF income for that year, approximately $7,200 of annuity income for a total of $55,800, and the RRIF balance (after the poor market performance of -5%) is $808,830.

Now, at age 73, how does the income look? This year, the RRIF minimum income is $44,728. The annuity income doesn’t change so the total income is $51,928. The difference from the previous year is roughly $3,872, or a drop of 6.9%. While the amount of income volatility has been reduced a bit, the income level in both years is higher ($54,000 vs. $55,800 and $49,698 vs. 51,928) when we allocated some funds from the RRIF to an annuity.

If you would like to see how using life annuities as part of a retirement income strategy may work for you, I encourage you to talk to your RGF advisor.