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Home Financial Health Blog Active retirement - the early years Annuity “paycheque” key to happiness

Annuity “paycheque” key to happiness

by Tim Weichel

You may have seen headlines such as “Lifetime Income Stream Key to Retirement Happiness”, and “Happiness in Retirement is a steady income”.

Studies show that life annuities generating a retirement “paycheque” from an annuity can make retirees smile.  According to Towers Watson, people with annuitized income are happiest, compared to retirees with similar wealth and health characteristics. 

And according to the CD Howe Institute, most middle and high-income earners would likely benefit from directing some of their savings into a life annuity.  Ninety-seven percent of Canadians say they want some of their retirement income guaranteed, according to The Sun Life Canadian Unretirement Index Report

An annuity can help you cover your basic retirement expenses, no matter how long you live. Or it can replace the fixed income portion of your investment portfolio with a much higher cash payout.  You can then focus on the retirement lifestyle that makes you truly happy.

Read: Surprise!  Annuities Beat RRIFs

Payout annuities can provide the highest level of guaranteed monthly income in retirement, and deliver protection from market volatility.  (Click here to download some sample Annuity quotes.)  But most people (62% of Canadians) don’t understand how they work.  The following video provides a primer as to how annuities work:

Annuities: suitability and benefits

  • Annuities provide an income stream or “paycheque” that is guaranteed for life in return for one or more premiums paid to an insurance company
  • Immediate annuities are suitable for ages 60 and over.  You can begin your “paycheque” immediately.  Buying an annuity is like creating your own personal pension plan
  • Annuities are available with many options such as cash refund, guaranteed number of payments to heirs if you pass away, indexed, and joint last to die
  • You can create an annuity “ladder” by purchasing several spread over several years.
  • An annuity can be combined with an insurance policy to ensure that money is left behind for heirs
  • Annuities can be purchased with RRSP or RRIF money, or with non-registered funds.  If the premium is paid with non-registered funds, these annuities provide very tax-efficient income – with only about 10% to 20% of the income taxable, depending on the circumstances.  By comparison, 100% of the income from GICs and bonds is taxable. 

Myth: I can’t invest in a life annuity because I won’t have access to my money.

Generally, it is best to include a life annuity as only a portion of your retirement income portfolio. Calculate your basic expenses such as food, shelter and clothing required at retirement and subtract your expected CPP and OAS and other permanent sources of retirement income. That will help you calculate how much income you will need from a life annuity to cover the rest of your basic expenses. Creating an investment portfolio with a mix of products, including at least one annuity, allows other products to provide growth and access to money. As a good place to start, you could think about having 25% of your retirement income come from a life annuity.

Myth: I’m not confident I’ll receive my principal back.

How long does it take before you actually get your principal back when you buy an annuity?

The average life expectancies of 65-year-old Canadians are age 84 for men and age 87 for women. A 65-year old man would break even at approximately age 80 or in 15.3 years from the time he purchased the annuity. After you break even, your life annuity payments continue for as long as you live. Most people choose a guarantee period to cover the possibility of dying before breaking even. In other words, if a 15-year guarantee is chosen in the case above, you or your heirs will receive payments for 15 years, even if you die sooner. The break-even point occurs sooner with no guarantee period. Another option is a cash refund annuity, which provides a lump sum to your heirs upon your death if you have not yet received the amount you originally invested in the annuity.

Purchases of annuities are rising – and for good reason

Purchases of life annuities grew by 23 percent in 2014 in Canada, compared to last year. This shows that clients are discovering the benefits of life annuities in retirement portfolios. Canadians are living longer, so they need their retirement income to last longer.

I can show you how a life annuity can help form the foundation of your retirement income portfolio.  Call me for a free quotation.  416-230-2703 or 705-798-0062 or email me at tim@timweichel.ca.

 
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