Retirement is so much more than ending a career. It’s about new beginnings and new opportunities ahead. Helping to ensure a secure retirement means converting some of your savings into reliable income, but how do you safeguard against the possibility of outliving your wealth?
Relying on returns from registered retirement income funds (RRIFs), bonds, or guaranteed investment certificates (GICs) all carry the risk of your capital running out before you die. This is a real concern given people are living longer than ever before. It is possible you’ll need to sustain 30 or more years of retired life.
A life annuity may be your answer by turning a portion of your savings into regular income. Not affected by market fluctuations or changing interest rates, you’ll receive guaranteed income payments – for the rest of your life.
How life annuities work
You pay an insurance company a certain amount of money, and they commit to paying you a specified amount for the rest of your life – giving you the peace of mind of a guaranteed paycheque.
You can even use funds from a defined-contribution (DC) plan, registered retirement savings plan (RRSP), or non-registered money to purchase a life annuity. It is important to know that if you do use money from your registered account, you will be taxed on the entire annuity income payment in the year you receive it. If you use non-registered funds, only a portion of each income payment is taxable.
Purchasing an annuity
Your payments will be higher if you purchase an annuity at a later age, simply because the insurer assumes a shorter income period. Generally, women live longer than men do, so a life annuity with a female annuitant will usually have lower annuity income payments.
Other factors at the time of purchase can impact how your payments are calculated. These factors include, but are not limited to, your predicted life expectancy, if you opt to have the income indexed to help keep pace with inflation, and the current interest rates that affect the investment return the insurer will make with your money. Whether or not you choose to add a guaranteed period, such as five or 10 years, will also have an impact on how your payments are calculated. A guaranteed period will ensure that any unpaid income is paid to a beneficiary, should the last surviving annuitant die during the time that has been guaranteed.
Choosing an annuity
Once you commit to the terms of an annuity, it cannot be changed. That is why it is so important to choose an annuity that aligns with your personal and financial goals.
Here is a high-level example of how annuities can differ:
- A life annuity will make income payments to you as long as you live.
- A joint life annuity will make income payments as long as either you or the joint annuitant are alive (the joint annuitant is commonly a spouse).
- Single or joint term-certain annuities are also available, which will pay income for a specified period of time*.
Legacy planning with annuities
If leaving behind a legacy is a priority, using some of your retirement savings to buy an annuity may make sense.
For example, you could calculate the difference between your monthly expenses in retirement and how much income you’d expect from the Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) and Old Age Security (OAS) and any other pension plans. Then, you could buy a life annuity that provides just enough to cover the difference.
Using an approach like this will allow you to invest the balance of your savings in other investment solutions, such as bonds or a diversified portfolio of stocks. These can grow over time to help you build a legacy to loved ones after you die.
Purchasing a life annuity could be your key to a guaranteed paycheque in retirement. Contact your advisor today to build a specialized plan that meets your personal and financial objectives for your retirement.
*Term certain annuities bought with registered money must extend to age 90