THE COMEBACK OF ANNUITIES

Did you know that annuities are now a top investment option for many people?

It has been years since that has been the case.

So, even if you consider yourself financially savvy, you may have long written off annuities as an option.

And that makes sense. Being so tied to interest rates, annuities haven’t stacked up well enough to conservative rates of return on traditional investments. Of course, they have always offered a very safe option, but other safe options provided much better returns.

Until now.

Not with interest rates where they are.

Annuity payout rates in September were 25% to 35% higher compared to even three years ago. And the payouts are the highest they have been, on average, in thirteen years.

With all the doom and gloom recession talk, looking at an option with great returns and a guarantee makes sense. That’s essentially what an annuity offers: guaranteed income. Depending on the annuity you choose, that income could be guaranteed for a fixed amount of time or for life.

Buying an annuity is like buying into a traditional employer-defined-benefit pension: highly reliable.

An annuity is perfect for people who are at or near retirement. The investment is safe, provides excellent returns right now, and gives peace of mind that your income isn’t going to plummet when you pull it out.

But there are a few different kinds of annuities. Which one is best for you?

1. Life Annuity

A life annuity provides guaranteed income for as long as the “annuitant” (you) lives. The longer you live, the more you’ll get from the annuity. But typically, once you die, the payments stop.

For example, if you purchased a life annuity at age 65 for $100,000, you might receive approximately $500 per month, guaranteed. By age 82, you will have received your $100,000 back. But you will continue receiving your $500 monthly as long as you live. This is possible because annuities provide income from three sources: principal, interest, and transfer payments, from those who do not live long enough to receive the total value of their investment back.

You can add “features” to annuities, such as making a “joint” annuity, where income continues to your spouse even if you die. The trade-off for a death benefit is a lower (but still great!) income.

2. Term-Certain Annuity

A term-certain annuity provides guaranteed income for a certain time (term length). Even if you die before the end of the term, your estate (or beneficiaries) will continue to receive the payments or may receive the balance as a lump sum.

For example, if you purchase a $100,000 term-certain annuity for five years, you may receive $1,700 per month, meaning you would receive $102,000 total. If you purchase a 20-year term, you might receive $500 per month, for a total of $120,000 once the term is complete.

How should you select an annuity?

There are a lot of factors to consider when deciding on an annuity type.

• How much guaranteed income do you need to supplement other sources of income (pension, CPP, RRSP or TFSA)?
• When do you want the most guaranteed income? (Earlier in retirement, to fund travel? Later in retirement to cover increased care costs? For your entire retirement?)
• What is most important to you: the highest guaranteed income while you’re alive or leaving some legacy to your beneficiaries? Level income or income increasing with inflation annually? Income until you die, or for a guaranteed period even if you pass early?

When should you buy an annuity?

Purchasing an annuity is irreversible, so purchasing at the right time is important. Locking your money into an annuity can yield beneficial results, but it can also cause problems if done at an inopportune time.

Buying annuities later in life typically makes the most sense since you get a higher payout rate. Age 71 is a prime opportunity since you are required to convert your RRSP to an RRIF or an annuity.

Determining how much to purchase, what type, with what features, and when, are all complex factors that depend on your individual financial landscape. Although they’ve been scorned for many years, annuities have become a great option for many people today.

If you want to use annuities to their maximum benefit, book a call with me.