An annuity gives you a monthly payment from any insurance company of your choosing for handing them over a lump sum of cash. Moshe Milevsky a professor with York University says that “annuities are a near essential part of a retirement plan”. The main reason is that nobody can predict the future.
I have to admit right off the bat, I doubt very much I will buy an annuity to supplement my pension income as I move down the age ladder toward 90. You see all of my retirement planning is heading in that direction because my Dad is still kicking at call it 87 years young. All things being equal that will mean I will be spending 30 years in retirement.
I might change my mind you never know. What about what the experts say and what can we expect to receive should we decide to buy one. Where can we find the best retirement annuities. Annuities are an insurance product. That’s probably why I don’t like them. That doesn’t mean they aren’t a worthwhile purchase for a lot of people.
Two of the best authors in Canada that I follow on the subject of retirement planning are Daryl Diamond and Fred Vettesse. They explain how you may not want to buy an annuity with all of your retirement savings but you can use a part of it for this purpose.
All you are basically doing is buying your own pension plan. Take a look at what $100,000 will buy you in today’s marketplace if you go shopping for a guaranteed income stream for life.
When should you buy your annuity?
Everything I’ve read and studied on the subject so far says if you hold off until your 75 years old this is ideal, so says – Fred Vettesse. You will get a bigger bang for your buck. As you can see from the examples above right now for males and females that BMO Life is providing the best rates. This is for a non-guaranteed annuity. What that means is you give them your 100K and then they start paying you that monthly amount. Should you die there is no money paid out, the insurance company keeps what’s left over. For a lot of people they want to leave something for their heirs or spouse. You can do that too but it’ll cost you.
What are the advantages of buying an annuity?
- you never run out of money
- guaranteed pension for life
- longevity risk is avoided
- income stream is safe
- never have to worry about what investments to pick again
Disadvantages (perceived or otherwise)
- hand over all your money to a faceless insurance company
- you feel like your getting an allowance every month
- all your money is now tied up
- insurance companies in general have a bad reputation
- give up the ability to earn a higher return elsewhere
What other options can I buy?
- a survivor benefit
- inflation protection
- guarantees of different lengths
RRIF vs Annuity
Here in Canada in the year you turn 71 years old you have to collapse your RRSP and convert it to a RRIF (registered retirement income fund). This is the most common option most people choose rather than annuitizing their retirement savings. The main drawback here is the minimum withdrawal rules we have.
Let’s take one of Fred’s examples and compare what happens to a 75 year old male in good health with $100,000 in his RRIF.
If he chooses the RRIF option he would have to withdraw 7.85% of his income which equals $7,850. He has to invest the money somewhere so he buys a safe 5 year GIC earning 1.75%. That’s what he’ll earn on the remainder.
Instead he decides to annuitize that same $100,000. He would receive $690 a month or $8,280 a year. These quotes are provided by CANNEX Financial Exchanges Limited.
As you can see there’s a big difference in the pay out from a RRIF vs the annuity. The annuity stays the same and you’ll end up with more money on an annual basis and you have eliminated the risk of outliving your money.
Because of the withdrawal rules currently in place, your monthly pay out goes down with the RRIF and your safe investment return rate of 1.75% can not keep up with the drawdown. As you age you’ll be receiving a lot less money from your RRIF.
Best of both worlds
I have batted around the idea of earmarking a portion of my retirement savings to purchasing an annuity and here’s why. I’m already receiving workplace pension income and so will my wife in another four years. We have a generous amount of guaranteed income already in place.
So, I’m thinking of buying an annuity with 50% of my money and leaving the other 50% invested in the stock market. That annuity would be safe predictable and would replace any fixed income investments I’m now holding in my retirement account. I could choose to do this in 5 years when I turn normal retirement age of 65 or wait for better rates at 75. It’s a decision for me that is still years down the road but also something I’m planning for and thinking about.
Buying an annuity or buying your own pension plan will simplify your life. This is it’s biggest selling point. What then is the best retirement annuity?
One that is simple gives you peace of mind and a predictable safe income stream. One that is guaranteed to pay your spouse or heirs for a pre-determined amount of years after you die. For my money this seems like a great option.
I mentioned Moshe Milevsky earlier in my post. If you would like to read more about buying a pension and annuitizing your retirement savings. His book is called:
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