Annuities

As you reach the back stretch of your professional career, retirement savings will jump to the forefront of your mind. You want security - a guarantee that you will be covered long after you have stopped working - and stability. Annuities offer just this, yet they remain the most underutilized retirement product in Canada today.

In theory annuities are simple. Canadians provide a lump sum of money to insurers and then receive monthly payments that includes the interest accrued. However, as we are all aware, financial decisions can never be this simple! Let’s look at the two most common annuity options and everything you need to know when approaching this retirement tool.

Fixed Term Annuity

With this option, the purchaser provides a lump sum of money and then instructs insurers as to how long they want this investment (or term length) to be paid back to them for. Annuity Brokers note that this option is preferable if “a guaranteed income stream was needed for a specific period of time”¹ . Although the term must extend at least until you turn 90, payments will continue to go into your estate if you die beforehand.

Life Annuity

Unlike fixed term, life annuity will continue to provide you with monthly payments until the day you die. A single life annuity will pay until an individual dies, whereas a joint life annuity continues to pay as long as one of the two annuitants are alive. Unless there are extenuating circumstances, “payments usually stop when you die, and no money will go to your estate” ^2. As the annuitants receives payments until they die, it is possible to earn considerably more money than invested if an individual lives longer than expected.

The Quick Guide

How is Income calculated?

Numerous factors determine your annuity income. The three greatest determinants are your age, current interest rates, and the amount of money deposited. Women also tend to receive slightly less as they live longer on average. Adding different options will increase insurance company costs and therefore lower your income as well.

It is a great backup plan!

A general rule of thumb - don’t put all your savings in one basket. The same goes for annuities, however they are an incredible backup plan when paired with other retirement saving options. The stability of fixed monthly payments is a great insurance policy if your portfolio of stocks and bonds happen to perform abnormally poorly at a given time.

Ensure you have a good insurer

By putting a lump sum down, you are putting a ton of faith in your insurance company! Make sure that your company is well-established and capable of providing payments for years to come.

Resources

1. https://annuitybrokers.ca/types-of-annuities/

2. https://www.getsmarteraboutmoney.ca/plan-manage/retirement-planning/annuities/how-annuities-work/

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2024 Advisor Websites.