Retirement

Should you rethink an annuity for retirement?

One of the most reviled financial products out there is the annuity. Many people don’t like them because it seems like a restriction. After all, you give your money to someone else, and they parse it out to you on a regular basis.

Another downside to the annuity is that it often comes with high fees and there are beneficiary difficulties as well in some cases. However, if you are getting ready to retire, it might make sense for you to reconsider the annuity.

Benefits of an annuity

The main benefit that comes with annuities is the fact that you receive reliable income. As you decide what to do with the money in your RRSP, you are going to have to make a decision: Annuity or RRIF? Many retirees choose the RRIF because of the potential for bigger gains, and the fact that you can draw on your balance at your own pace (as long as you meet the required minimum).

Should You Rethink an Annuity for Retirement?However, with the RRIF, you have the potential to lose out as well. An annuity basically guarantees you income for the rest of your life. The interest rates on your money are depressingly low with an annuity, but you have that income security. In fact, annuities are considered rather safe when you look into those offered by Canadian companies. Not only are you likely to reduce the risk of outliving your assets, but you can get back between 95% and 100% of your premiums paid over the course of your retirement. That’s not bad at all.

When you choose an annuity carefully, it’s possible for you to reap the benefits of a steady source of income. Plus, you don’t have to put all your money into an annuity. It’s possible for you to use a portion of your RRSP to buy an annuity, and then convert the rest into the RRIF. That way, you have the best of both worlds.

Beneficiaries

You are going to have to jump through a few hoops in order to make sure that you have the type of annuity that will benefit your survivors. As long as you are willing to pay, and make sure that you complete the appropriate paperwork, it’s possible for you to get an annuity with survivor benefits that can help you feel peace of mind. Consider the options. There are a number of annuity options out there, and you can choose what is likely to work best for you. A good financial planner can help you determine the pros and cons (just make sure your financial planner isn’t getting a commission for steering you toward a certain annuity).

Annuities aren’t quite the financial monsters that many make them out to be. Yes, there are downsides, and annuities aren’t for everyone. You have to be careful if you decide that you want an annuity. But if you are looking for a stable source of income during retirement, you might want to rethink your no annuity policy. An annuity might be just what you need for income protection and peace of mind.

Comments

  1. My Own Advisor

    Good post.

    As long as I have a pension plan via work, I won’t look into an annuity as part of my portfolio plans.

    I will probably convert part of my RRSP to a RRIF before age 60 and do the rest when I must.

    Never say never though…

    Mark

  2. Rob McAllister

    Prof. Moshe Milevsky and Alexandra Macqueen make a compelling argument for converting at least part of an RRSP into an annuity in their 2010 book “Pensionize Your Nest Egg”. Well written and well worth reading.

  3. Brian So

    Annuities are really suitable for the risk-averse. Someone who does not have the stomach for market volatility in retirement can certainly look at using life annuities as part of their retirement portfolio, especially people who rely on GICs for retirement income. While someone who have managed their RRIF poorly or withdrawn an excess amount may run out of money when they need it the most, this is not an issue with a life annuity.

  4. Maria

    Hi Tom thanks for this article
    I’ve never heard of something like this here in Europe, but I think I prefers a more flexible product and I also prefers to do things by my own rather then trusting on a financial planner.
    An investment should be fun to me! And not thinking that it’s restricting me on something.

  5. Brian Poncelet,CFP

    Hi Tom,

    I think some readers may have missed the point of annuities and how the can help in many ways.

    First annuities is not the answer for everyone like all for all products it has its Pros and Cons.

    Right now 6.6% guaranteed for 65 year males Good
    Lower taxes by over 17% or more Good

    Lost of control of money Bad

    I wrote a story on annuities
    http://www.myownadvisor.ca/2011/11/how-annuities-can-help-you-fight-groundhog-day/

    and Million dollar journey.

    Assuming on retires with say 50% or more in GICs or bonds getting 6.6% can’t be beat. Lowering taxes is excellent.

    The key is to plan ahead (read insured annuities).

    Cheers,

    Brian

  6. Brian Poncelet,CFP

    Hi Tom,

    I forgot one example.

    A lady in Hamilton (84 years old) is good health and bought a joint first to die insurance policy years ago. Her husband died passed away in 2006. Her annuity is 13.2% per year with no taxes payable! Now she gets some of her OAS back because her income is over $80,000 (since some of that of that was interest income) how good is that?

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