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tax & estate
ALDAs: to buy
or not to
A breakdown of who benefits from the federal government’s proposed annuity
by Jim C. Otar, M.Eng., a retired certified financial planner and professional engineer; he founded
In the 2019 federal budget, the government proposed a new type of tax-sheltered registered income plan: the Advanced Life Deferred Annuity (ALDA). ALDAs would allow a retiree to transfer
up to 25% of their RRIF account value (subject to a CPI-indexed dollar limit of $150,000) to a deferred life annuity, where annuity payments can be deferred until age 85. (RRSPs, deferred profit-sharing plans, pooled registered pension plans and defined contribution pension plans all qualify for ALDAs. Here, we are focusing only on RRIFs).
The ALDA’s purpose is to reduce the risk of running out of income late in life, should the RRIF portfolio deplete. Can it accomplish this?
Here, we look at two different scenarios. In both, the retiree is 65, has $500,000 in registered plans and wants income until age 95 — a 30-year time horizon. Both retirees are invested in balanced portfolios of 40% equities (using the S&P/TSX as an equity proxy) and 60% bonds. The portfolios are rebalanced annually.
In both scenarios we convert the RRSP portfolio partially to a RRIF at age 65: enough to provide the required income until age 71, when we convert the remaining RRSP — as required by law — to a RRIF. This helps to minimize income taxes on the surplus portion of with- drawals while increasing tax-deferred assets in the RRIF account, and possibly reducing OAS clawback prior to age 72.
Here’s the difference. In the first scenario, the retiree — Indira — already has too much income from other sources. She needs only $15,000 per year from her $500,000 RRIF: a 3% initial withdrawal rate, which is easily sustainable for a 30-year time horizon. The second retiree, Hank, needs $20,000 per year. This is a 4% initial withdrawal rate, which many advisors believe is sustainable for a 30-year retire- ment period.
We’ll use an “income carpet,” which shows the income received as a percentage of income required, to observe the ALDA’s impact. The income carpet is a colour-coded income level in real dollars for every year between 1919 (the first available data for S&P/TSX) and 2000, representing a 30-year retirement starting in each year.
Here’s what the different colours on the income carpet mean. n Purple: the minimum required withdrawal from the RRIF
portfolio is larger than what the client needs; therefore,
the client has surplus income for that starting year at that age n Blue: the inflation-adjusted income for that starting year and
for that age is exactly what the retiree needs n Green: the available income is between 90% and 100%
of required income
n Yellow: the portfolio provides between 50% and 90%
of required income
n Orange: the portfolio provides between 0% and 50%
of required income
n Red: the portfolio is totally depleted
At press time there are no ALDA products available in the market- place, so we can only guess the payout rate. For an ALDA purchased at age 71 — with payments starting at age 85 and no CPI indexation of pay- ments, a refund of premium guarantee, and an option to start payments at an earlier age at the owner’s request (with a lower payout rate) — we estimated, loosely, a 12% payout rate.
Scenario 1: When there
are plenty of assets in the RRIF
Income Carpet 1 uses historical market data to show an “aftcast” of RRIF income without an ALDA for the starting years 1919 to 2000. On average, Indira had to withdraw 58% more dollars than she needed during her retirement. This happened because the minimum mandatory withdrawal amounts were larger than her needs. This surplus income created higher income taxes and increased the chances of a larger OAS clawback (which is not included here for reasons of simplicity).
Income Carpet 1: Plenty of assets in RRIF, 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
When you see a lot of purple on the income carpet, the retiree is likely a good candidate for an ALDA, which can help to reduce excess taxable income until age 85. ALDAs also provide a continued income after a RRIF portfolio depletes if its owner lives longer than expected.
Let’s look at how an ALDA would impact Indira’s account. After transfer- ring the maximum allowable amount to an ALDA at age 71, her RRIF account value is reduced by that same amount. This decreased the dollar amount of minimum mandatory withdrawals from the RRIF. On average, with an ALDA, Indira had to withdraw only 35% more income than she needed during her life, compared to 58% without the ALDA (see Income Carpet 2).

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