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Income Carpet 2: Plenty of assets in RRIF, with ALDA
Starting year
Age1920 1930 1940 1950 1960 1970 1980 1990 2000
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
Note that there was one starting year (1937) out of 81 where income was insufficient after age 91 (indicated by one green pixel followed by three orange pixels). This happened because money in the RRIF wasn’t able to grow sufficiently. The RRIF withdrawals became excessive (12% at age 80) while waiting for ALDA payments to start. By age 91, income was not sufficient to provide what Indira required.
This outcome is preventable. After buying the ALDA, if the RRIF
withdrawal rate exceeds 7% prior to age 80, or 9% after, Indira could
start the income stream from the ALDA immediately rather than waiting
until age 85. This would mean a slightly lower income payment from the
ALDA, but she would reduce the excessive drainage of the RRIF port-
folio and improve its outcome in such low-probability, extreme instances.
Scenario 2: When assets in the RRIF are not enough
Since both scenarios have the same dollar amount — $500,000 — you might ask why I say Scenario 1 has plenty of assets and Scenario 2 does not. What matters is not how many dollars a retirement portfolio holds, but how fast it is drained. In this scenario, the initial withdrawal rate is 4%. This is one-third larger than withdrawals in Scenario 1: $20,000 per year versus $15,000 per year. The income carpet for a required initial withdrawal rate of 4% without an ALDA is displayed below.
Income Carpet 3: Insufficient assets, no ALDA
Starting year
Age1920 1930 1940 1950 1960 1970 1980 1990 2000
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
tax & estate
In many scenarios, an ALDA is probably not a good choice
In this scenario, the retiree, Hank, was forced to withdraw more income than he needed about 55% of the time (purple pixels). On average, he had to withdraw 18% more than he needed during his retirement.
However, don’t be blinded by the abundance of purple pixels; the red pixels are most important. There was a 13% chance that the RRIF port- folio would be exhausted by age 95. Specifically for the starting year 1937, the portfolio depleted at age 87. If income from the RRIF was for essential expenses, this would be an unacceptable plan. Always keep in mind that the primary objective in retirement income planning is sustainability of life- long income. Until this objective is properly addressed, topics like estate value or income taxes are irrelevant.
Can an ALDA help? Notice the abundance of orange pixels in Income Carpet 4, below. As it turns out, in these orange areas, the average com- bined income after age 82 was only 21% of what the retiree needed. This would definitely not be acceptable for essential expenses.
If this income is for essential expenses, we have the proverbial “Sophie’s Choice”: neither choice, with or without an ALDA, would be acceptable. If the income was for discretionary expenses, it would be an easy choice: buy an ALDA for tax deferrals.
Income Carpet 4: Insufficient assets, with ALDA
Starting year
Age1920 1930 1940 1950 1960 1970 1980 1990 2000
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
Conclusion
Here are four simple guidelines for using ALDAs:
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If income from the RRIF is for non-essential expenses only (such as gifts, donations or multiple vacations), then an ALDA can be a suit- able choice to defer the tax burden to a later age.
If the initial withdrawal rate that the client needs is less than 3% at age 65, less than 3.5% at age 70 or less than 4% at age 75, then an ALDA may be suitable.
For all other scenarios, an ALDA is probably not a good choice. Preference should be given to ALDAs with the following riders: return of remaining premium balance on death, and client-initiated flexible payment start age.
Keep in mind, these income tables and conclusions need to be revisited
after ALDA products become available in the marketplace. Stay tuned. AE ADVISOR.CA 11