Annuities | General financial discussion | Discussion forum

Please consider registering
guest

sp_LogInOut Log In sp_Registration Register

Register | Lost password?
Advanced Search

— Forum Scope —




— Match —





— Forum Options —





Minimum search word length is 3 characters - maximum search word length is 84 characters

sp_Feed Topic RSS sp_TopicIcon
Annuities
April 20, 2017
3:05 am
JenE
Member
Members
Forum Posts: 70
Member Since:
May 24, 2016
sp_UserOfflineSmall Offline

I've always been puzzled about why anyone would give up control of their money for a guaranteed monthly sum, which is only guaranteed until death. Does anyone have any support for buying an annuity?

April 20, 2017
4:17 am
Loonie
Member
Members
Forum Posts: 2588
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

It's true that they're out of favour at the moment, primarily, I think, because interest rates are so low.

They do make a certain amount of sense, depending on your circumstances and age. There was at least one other thread about this earlier which you may want to look at.

It's possible to buy an annuity that is guaranteed for X years, usually 10. If you die before that time is up, it will pay out the remainder to your estate. I think you can also buy them with a life insurance payout but I am not sure about that - and they would definitely cost more.

The question arises as to why you would care if it doesn't pay out after your death since it won't affect you. If you do care, it implies that you are trying to leave an inheritance. Annuities are not a good tool for that - except for charitable annuities, which are a whole other field. They are an income tool for while you're alive.

Its possible to buy an annuity that covers both spouses so that it carries on until the survivor dies, much like an RIF. The RIF, however, may leave a remainder to your estate although it will be fully taxed upon death of the survivor.

What they are good for is as a portion of your retirement income. Let's say you want to have a minimum income of 60K in retirement. You have OAS, CPP and perhaps a corporate pension, some savings and some RIF/LIF funds. You need to find a way to draw enough money from them on a steady basis so that you always have the 60K and also, hopefully, allow for inflation. The portions that are guaranteed and linked to inflation are probably the OAS and CPP, maybe pension plan if you have one (although those are not all linked 100% to inflation). Let's say you have 45K from OAS, CPP and pension plan; that means you have to find the other 15K. For the rest, you are dependent on income from savings, RIF etc., which will fluctuate from year to year., depending on your returns from investments. If you use some of your savings to buy an annuity, then you may be able to get your guaranteed 60K without having to worry about these fluctuations or how you are going to draw the money. Then you are free to invest whatever other money you still have in whatever way you want, and to consider your heirs, without worrying that there won't be enough for you on an annual basis.

That said, I believe the previous discussion concluded that it was difficult or impossible to get an annuity in Canada that would be adjusted to inflation; and, if you did find one, the return would be significantly lower. The way to cope with that, such as it is, is to buy more than one annuity and spread the purchases over time. Some suggest buying them gradually between ages 70 and 75 approximately; others suggest waiting to about 80. The longer you wait, the higher annual return you will get, but of course for a shorter time. On the other hand, you may benefit from rising interest rates, if they ever come. You may also be able to deal with inflation by selling a property at some point, thus freeing up more capital.

Another reason some people like them is that they can help to cope with the mandatory RIF withdrawals. Some people find that the rates the government has set do not fit with their own needs, and prefer a consistent predictable amount which will in due course be lower than the required minimum withdrawal. If you expect to live into your late 80s or 90s, it can also be a way of avoiding coming close to the 20% range of mandatory withdrawals, which can bump up the tax bite in your later years. Also, this high withdrawal rate comes at a time when you are not likely to be doing a lot of discretionary spending. The actuaries say we do most of our spending as seniors by age 75, although this too may creep up, if you live long enough to enjoy it.

One other thing that can be helpful in terms of taxes is if you buy the annuity with your non-registered funds. Because a good chunk of the annuity payments are from the capital which you contributed, that chunk is not taxed if it's not in RIF when it is returned to you as annuity income. This enables you to spread out your operating funds while still keeping your taxes and clawbacks under control. You could, alternatively, just take the money out of your savings. But the annuity frees you from having to manage the money and ensures a steady predictable flow which will never run out. While it may not protect you adequately from inflation, it does protect you from market downturns and the bad decisions that people sometimes make when they are no longer as mentally sharp as they once were.

And this brings me to one other advantage. If you have no one to whom you need or want to leave your money, if you don't have anyone who seems like the ideal person to hold your power of attorney, if you are or will be alone in your old age, if you are afraid of losing your wits and losing control, an annuity may be part of the answer. It will just keep paying out and you don't have to lift a finger to manage it. It takes the worry out of investing, especially if you feel you ought to be in the stock market but realize your time horizon isn't suitable.

I think the main use of annuities should be to top up your income to a desired level, to provide a secure basic income. People with substantial assets don't need them; and people with minimal assets don't have the money to put into them. People with relatively small assets but not broke should probably just cash out any RSPs over a few years so as not to have that drain on their taxes and clawbacks etc. later, and put any excess into TFSAs.

If you decide to buy one, go to an annuity broker. They are too complicated and too variable to just deal with one institution. Rates change constantly, but, once you lock in, that's it.

April 20, 2017
5:52 am
Bill
Member
Members
Forum Posts: 447
Member Since:
September 11, 2013
sp_UserOfflineSmall Offline

JenE, "only guaranteed until death"? You'd have a hard time convincing some folks they need a better guarantee than that, I can see the appeal.

April 20, 2017
9:50 am
JenE
Member
Members
Forum Posts: 70
Member Since:
May 24, 2016
sp_UserOfflineSmall Offline

Thanks Loonie, lots and lots of unbiased information, most of which I was unaware of. Much food for thought.

Bill, I couldn't live with myself if I died earlier than expected and my heirs lost out! sf-laughsf-laughsf-laugh

April 20, 2017
10:04 am
JenE
Member
Members
Forum Posts: 70
Member Since:
May 24, 2016
sp_UserOfflineSmall Offline

What am I doing wrong in that I thought I'd started a new topic about Annuities but have just seen that it comes under "Credit Card Rewards Program"?

April 20, 2017
10:40 am
Peter
Admin
Forum Posts: 708
Member Since:
May 15, 2007
sp_UserOfflineSmall Offline

JenE said
What am I doing wrong in that I thought I'd started a new topic about Annuities but have just seen that it comes under "Credit Card Rewards Program"?  

I don't know how that happened, but I've moved it to "General financial discussion" now 🙂

April 20, 2017
11:42 am
JenE
Member
Members
Forum Posts: 70
Member Since:
May 24, 2016
sp_UserOfflineSmall Offline

Thanks Peter!

April 21, 2017
6:45 pm
Norman1
Member
Members
Forum Posts: 1098
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

Loonie said

That said, I believe the previous discussion concluded that it was difficult or impossible to get an annuity in Canada that would be adjusted to inflation; and, if you did find one, the return would be significantly lower.…

That previous discussion was Indexed annuities. That was spawned by these two posts.

April 21, 2017
7:22 pm
AltaRed
Member
Members
Forum Posts: 393
Member Since:
October 27, 2013
sp_UserOfflineSmall Offline

One other plus for annuities is 'longevity risk'. If your portolio is such that you could run out of money if you live a long(er) life than your peers, buying an annuity takes away the risk of going broke before you die. It will pay out until you die.

I was playing with the Sun Life longevity calculator recently, and to use an example I remember because of a discussion forum thread elsewhere about it, a 84 yr old woman today has a 50% chance of living to 91 and a 25% chance of living to 95. Spin forward to this woman being 91 and she then has a 50% chance of living to 95 and a 25% chance of living (if I recall correctly) to 99. Granted this data is based on actuarial norms and we know that genes have a lot to say about our longevity. But if you think you will live longer than actuarial norms, then an annuity for all, or part of, your cash flow needs could be a no brainer.

As others have said though, interest rates are currently so low that payouts are relatively low for the sums that must be invested. Best to wait for some movement in interest rates. Just don't write off annuities without considerable thought.

April 22, 2017
10:44 am
Bill
Member
Members
Forum Posts: 447
Member Since:
September 11, 2013
sp_UserOfflineSmall Offline

AltaRed, I agree. Let's say that your last surviving parent has a small but real chance of outliving her money, let's say that you are the one loyal offspring to stick around in her old age to visit or help so she has entrusted you with her finances, let's say you decide to blow the last few hundred thousand for a generous annuity that goes until her death, let's say that relieves Mom's money worries forever. (Let's say another bonus is that the other offspring, the uninvolved ones licking their lips in anticipation of their small but still eagerly-awaited inheritance, are really mad now and - thank you! - cut off all communications with you and leave you forever in peace.) Hypothetically. Just one example where an annuity can accomplish a lot.

April 23, 2017
12:00 am
Loonie
Member
Members
Forum Posts: 2588
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Even better if mom figures this out for herself!sf-smile
Sometimes people need to be reminded that the money they have saved should first keep them in safety, enjoyment, and as much health as possible.

April 23, 2017
7:50 am
Norman1
Member
Members
Forum Posts: 1098
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

Offloading longevity risk and the non-cash benefits Bill mentioned seem to be all life annuities offer at the moment.

The current annuity returns are quite underwhelming. I ran some rate of return numbers using the best rate from the Globe & Mail life annuity rates for Mom starting age 65, 70, and 75.

Returns, the financial ones (not including what Bill mentioned), don't look very appealing unless she makes into her 90's. Also, with the current prices, it is not always better to start later at 75 than at 65:

$100,000 life annuity, single female, 10-year guarantee
65-year old
$463.85 per month
70-year old
$529.51 per month
75-year old
$603.61 per month
Age Total Payments Return
per annum
Total Payments Return
per annum
Total Payments Return
per annum
65 0 $0.00
70 60 $27,831.00 -42.25% 0 $0.00
75 120 $55,662.00 -10.64% 60 $31,770.60 -38.42% 0 $0.00
80 180 $83,493.00 -2.32% 120 $63,541.20 -8.38% 60 $36,216.60 -34.54%
81 192 $89,059.20 -1.41% 132 $69,895.32 -6.11% 72 $43,459.92 -24.24%
82 204 $94,625.40 -0.64% 144 $76,249.44 -4.30% 84 $50,703.24 -17.32%
83 216 $100,191.60 0.02% 156 $82,603.56 -2.83% 96 $57,946.56 -12.42%
84 228 $105,757.80 0.59% 168 $88,957.68 -1.63% 108 $65,189.88 -8.81%
85 240 $111,324.00 1.09% 180 $95,311.80 -0.63% 120 $72,433.20 -6.08%
86 252 $116,890.20 1.52% 192 $101,665.92 0.21% 132 $79,676.52 -3.95%
87 264 $122,456.40 1.90% 204 $108,020.04 0.92% 144 $86,919.84 -2.27%
88 276 $128,022.60 2.24% 216 $114,374.16 1.52% 156 $94,163.16 -0.91%
89 288 $133,588.80 2.54% 228 $120,728.28 2.04% 168 $101,406.48 0.20%
90 300 $139,155.00 2.80% 240 $127,082.40 2.49% 180 $108,649.80 1.12%
91 312 $144,721.20 3.04% 252 $133,436.52 2.88% 192 $115,893.12 1.88%
92 324 $150,287.40 3.25% 264 $139,790.64 3.23% 204 $123,136.44 2.53%
93 336 $155,853.60 3.44% 276 $146,144.76 3.53% 216 $130,379.76 3.08%
94 348 $161,419.80 3.61% 288 $152,498.88 3.79% 228 $137,623.08 3.55%
95 360 $166,986.00 3.76% 300 $158,853.00 4.03% 240 $144,866.40 3.95%
96 372 $172,552.20 3.90% 312 $165,207.12 4.24% 252 $152,109.72 4.31%
97 384 $178,118.40 4.03% 324 $171,561.24 4.43% 264 $159,353.04 4.61%
98 396 $183,684.60 4.15% 336 $177,915.36 4.59% 276 $166,596.36 4.88%
99 408 $189,250.80 4.25% 348 $184,269.48 4.74% 288 $173,839.68 5.12%
100 420 $194,817.00 4.35% 360 $190,623.60 4.88% 300 $181,083.00 5.32%
April 23, 2017
8:33 am
AltaRed
Member
Members
Forum Posts: 393
Member Since:
October 27, 2013
sp_UserOfflineSmall Offline

Indeed, annuity payouts are anemic due to current low interest rates and are best purchased in one's mid to late 70s.

But they are a viable option for peace of mind and longevity risk. The only really 'pissed off' people would likely be lurking beneficiaries unhappy about the lack of a legacy. And if that is their mentality/personality, I'd say good.... be pissed. sf-laugh

April 23, 2017
8:12 pm
Loonie
Member
Members
Forum Posts: 2588
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

You'll get a better return if you forego the 10 year guarantee which, after all, is really only for the beneficiaries.
To see any benefit, one needs to look at it as part of a retirement income system and largely forget about beneficiaries. Longevity is a consideration in that, but longevity is less predictable than income needs.

My favourite related story, not exactly parallel, as it is about life insurance, but bears many of the same considerations, was about a woman in France who died perhaps 10 years ago or more. It was prominent in the news at the time. Someone had bought a life insurance policy on her when she was perhaps in her sixties; I don't remember precisely. He thought it was a no-brainer. Time passed. The guy who bought the policy died. Time passed. The old lady got older and older and lived to be the oldest person in the world. She was in her 120s when she died, as I recall.

April 24, 2017
10:37 am
Bill
Member
Members
Forum Posts: 447
Member Since:
September 11, 2013
sp_UserOfflineSmall Offline

Agreed, if one purchases an annuity to ensure they don't run out of money, i.e. no intent for anything to beneficiaries, then they purchase without any guaranteed minimum payments, and then the monthly payments increase. The increase can be dramatic if you're very old when you buy the annuity. Again, the idea is there's likely a high chance you lose out (though that becomes irrelevant the moment you expire) but you've insured against the small chance you'll outlive your money. Most folks spend a lot of money in their lives on insurance against unlikely though potentially catastrophic events, this is just another version of insurance.

April 24, 2017
6:05 pm
Norman1
Member
Members
Forum Posts: 1098
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

Loonie said

My favourite related story, not exactly parallel, as it is about life insurance, but bears many of the same considerations, was about a woman in France who died perhaps 10 years ago or more. … She was in her 120s when she died, as I recall.  

I found someone of that description: Jeanne Calment. If it was her, then the parallel is quite good as it was about a life annuity! sf-laugh

Apparently, a then 47-year-old lawyer agree to pay the then 90-year-old Calment a life annuity in return for her apartment. This is from the Wikipedia article about her:

… In 1965, at age 90 and with no heirs, Calment signed a deal to sell her apartment to lawyer André-François Raffray, on a contingency contract. Raffray, then aged 47 years, agreed to pay her a monthly sum of 2,500 francs (€381.12) until she died. Raffray ended up paying Calment the equivalent of more than €140,000 which was more than double the apartment's value. After Raffray's death from cancer at the age of 77, in 1995, his family continued the payments until Calment's death. Calment's comment on this situation was reported to be, "In life, one sometimes makes bad deals." …

April 24, 2017
10:02 pm
Loonie
Member
Members
Forum Posts: 2588
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Yes, that was the woman. I knew her name stated with "C" but that's all I could remember. I kept thinking of Callebaut, as my brain runs to chocolate...
Obviously I misremembered a lot of the story. Good one though!sf-laugh

Please write your comments in the forum.