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Email this1:44 pm
May 26, 2022
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Norman1 said
NCC1701Z said
… I meant the yield on the annuity would be equivalent to an 1.8% term annuity reducing to zero if one withdrew 6,000 for 20 years. 3.4% for 25 years and 4.3% for 30. It really doesn't get attractive until 25+ years which is highly unlikely either of us would survive.
…
That's by design by the life insurance company!
Life insurance and life annuities are lousy investments, unless the insured dies early or the annuitant lives longer than expected. One needs to decide whether one wishes to have insurance or an investment.
One can have a look at the Statistics Canada life expectancy data to see a bit of what the life insurance company expects. At age 65, men are expected to live another 16.7 years (to age 81.7). Women another 20.8 years (to age 85.8).
Lousy investment but good insurance against longevity and sequence of returns risk which is what you are really buying. No different than a DB pension that so many consider the ultimate security.
2:26 pm
April 6, 2013
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NCC1701Z said
Lousy investment but good insurance against longevity and sequence of returns risk which is what you are really buying. No different than a DB pension that so many consider the ultimate security.
That's true. However, most defined benefit pensioners are not aware of how much that DB pension of theirs cost them, through payroll deductions, and their employer, through the employer contributions and backstop. Thinks look different when one has to sign over that $400,000+ RRSP for that $2,000/month life annuity.
CPP and his DB pension from Bell Canada were a really lousy deal for one friend who passed away around age 65 from cancer.
If one really doesn't need to offload longevity risk through a life annuity, then one needs to also consider how likely one is to survive to the average life expectancy.
3:34 pm
October 21, 2013
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There is no reason to complain about dying at 65 and not getting much from your pension plan. You're dead.
There is a lot to celebrate, however, if you're still collecting it at 100. You're alive , and you haven't run out of money from making bad investments.
It's a pension plan to fund your retirement. It's not meant to fund your grandchildren.
An annuity is not even a lousy investment if your investing acumen is worse, which is true for many people.
4:13 pm
May 26, 2022
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Norman1 said
That's true. However, most defined benefit pensioners are not aware of how much that DB pension of theirs cost them, through payroll deductions, and their employer, through the employer contributions and backstop. Thinks look different when one has to sign over that $400,000+ RRSP for that $2,000/month life annuity.
The quote I got this week was for a 20 yr guaranteed joint 100% payout to survivor. It doesn't look so bad when you consider a 400k annuity will payout a guaranteed minimum of 480k even if you both die the next day.
In our case most of the funds came from a LIRA where my contributions were almost insignificant.
8:30 am
October 7, 2019
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blake said
Just copied from CDIC site.Term deposits, including Guaranteed Investment Certificates (GICs), are eligible for CDIC deposit protection. For example, a GIC with an original term of seven years, would be eligible.
You and Norman1 are absolutely right I stand corrected just checked myself
Now Covering Eligible Deposits With Terms Greater Than 5 Years.
11:11 am
April 6, 2013
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NCC1701Z said
The quote I got this week was for a 20 yr guaranteed joint 100% payout to survivor. It doesn't look so bad when you consider a 400k annuity will payout a guaranteed minimum of 480k even if you both die the next day.
In our case most of the funds came from a LIRA where my contributions were almost insignificant.
That depends on whether or not one thinks it is worth paying $49,000 to insure the longevity risk.
A 20-year term annuity can be done for around $351,000. EQ Bank's current GIC rates are used the first 10 years and current long-term Government of Canada bond rates for the remaining years:
| Year | Cashflow | Rate | Present Value |
| 1 | $24,000 | 3.55% | $23,177.21 |
| 2 | $24,000 | 4.10% | $22,146.74 |
| 3 | $24,000 | 4.25% | $21,182.78 |
| 4 | $24,000 | 4.25% | $20,319.22 |
| 5 | $24,000 | 4.30% | $19,444.18 |
| 6 | $24,000 | 4.30% | $18,642.55 |
| 7 | $24,000 | 4.30% | $17,873.97 |
| 8 | $24,000 | 4.30% | $17,137.08 |
| 9 | $24,000 | 4.30% | $16,430.56 |
| 10 | $24,000 | 4.35% | $15,677.86 |
| 11 | $24,000 | 2.70% | $17,903.43 |
| 12 | $24,000 | 2.70% | $17,432.75 |
| 13 | $24,000 | 2.70% | $16,974.44 |
| 14 | $24,000 | 2.70% | $16,528.18 |
| 15 | $24,000 | 2.70% | $16,093.65 |
| 16 | $24,000 | 2.70% | $15,670.55 |
| 17 | $24,000 | 2.70% | $15,258.57 |
| 18 | $24,000 | 2.70% | $14,857.42 |
| 19 | $24,000 | 2.70% | $14,466.81 |
| 20 | $24,000 | 2.70% | $14,086.48 |
| $480,000 | $351,304.43 |
1:47 pm
October 21, 2013
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It is misleading to frame it solely in terms of spending X dollars to insure longevity risk.
The question is, are you willing to put up with not being able to afford what you need in your declining years? and would an annuity help avoid that situation? I think that's what matters in the end.
There is too much emphasis being put on preserving capital.
6:14 pm
March 30, 2017
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Loonie said
It is misleading to frame it solely in terms of spending X dollars to insure longevity risk.
The question is, are you willing to put up with not being able to afford what you need in your declining years? and would an annuity help avoid that situation? I think that's what matters in the end.
There is too much emphasis being put on preserving capital.
Annuity is basically a form of insurance like you said. And we all know in general insurance premium are NOT the best value but helps a lot of people sleeps better at nite,
6:16 pm
May 26, 2022
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Norman1 said
That depends on whether or not one thinks it is worth paying $49,000 to insure the longevity risk.A 20-year term annuity can be done for around $351,000. EQ Bank's current GIC rates are used the first 10 years and current long-term Government of Canada bond rates for the remaining years:
Year Cashflow Rate Present Value 1 $24,000 3.55% $23,177.21 2 $24,000 4.10% $22,146.74 3 $24,000 4.25% $21,182.78 4 $24,000 4.25% $20,319.22 5 $24,000 4.30% $19,444.18 6 $24,000 4.30% $18,642.55 7 $24,000 4.30% $17,873.97 8 $24,000 4.30% $17,137.08 9 $24,000 4.30% $16,430.56 10 $24,000 4.35% $15,677.86 11 $24,000 2.70% $17,903.43 12 $24,000 2.70% $17,432.75 13 $24,000 2.70% $16,974.44 14 $24,000 2.70% $16,528.18 15 $24,000 2.70% $16,093.65 16 $24,000 2.70% $15,670.55 17 $24,000 2.70% $15,258.57 18 $24,000 2.70% $14,857.42 19 $24,000 2.70% $14,466.81 20 $24,000 2.70% $14,086.48 $480,000 $351,304.43
That works out to 3.2% over 20 years. Where did you get the quote and those rate assumptions?
8:19 pm
April 6, 2013
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Those rates are GIC rates from EQ Bank along with the Bank of Canada statistics for longer Government of Canada bond yields. I knocked 0.10% off the Government of Canada bond yields to allow for some commissions costs.
The $351,000 total is the sum of the estimated amounts required for a do-it-yourself ladder of 20 compounding GIC's and strip bonds to produce $24,000 each year for 20 years.
It is not surprising that the internal rate of return is over 3% with some parts of ladder yielding over 4%!
10:27 am
April 6, 2013
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The cost is lower if one is willing to take a bit more risk and use strip bonds from provinces (Ontario, Quebec, and BC) instead of Government of Canada strip bonds.
For Year 11 to Year 20, I used provincial strip bonds, where available, from Scotia iTRADE today. Cost of the ladder drops from $351,000 to about $332,000 from the higher yield of provincial strip bonds:
| Year | Cashflow | Rate | Present Value |
| 1 | $24,000 | 3.55% | $23,177.21 |
| 2 | $24,000 | 4.10% | $22,146.74 |
| 3 | $24,000 | 4.25% | $21,182.78 |
| 4 | $24,000 | 4.25% | $20,319.22 |
| 5 | $24,000 | 4.30% | $19,444.18 |
| 6 | $24,000 | 4.30% | $18,642.55 |
| 7 | $24,000 | 4.30% | $17,873.97 |
| 8 | $24,000 | 4.30% | $17,137.08 |
| 9 | $24,000 | 4.30% | $16,430.56 |
| 10 | $24,000 | 4.35% | $15,677.86 |
| 11 | $24,000 | 3.60% | $16,264.99 |
| 12 | $24,000 | 3.80% | $15,340.62 |
| 13 | $24,000 | 3.80% | $14,779.02 |
| 14 | $24,000 | 3.80% | $14,237.98 |
| 15 | $24,000 | 3.90% | $13,520.04 |
| 16 | $24,000 | 3.80% | $13,214.59 |
| 17 | $24,000 | 3.90% | $12,524.11 |
| 18 | $24,000 | 2.70% | $14,857.42 |
| 19 | $24,000 | 4.00% | $11,391.42 |
| 20 | $24,000 | 2.90% | $13,548.89 |
| Total | $480,000 | $331,711.23 |
3:23 pm
May 26, 2022
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Fascinating, I never looked at strips before. Thanks for the "lesson"!
I had no trouble finding 3.8+ % rates for 18 and 20 year strips on my investorsedge quotes. Almost no corporate strips though, just Loblaws and CM (CIBC?).
How would the minimum RRIF withdrawals work?
Do you physically receive and redeem the coupons or is it done electronically?
I saw a Great west life 28 year bond for 4.71%,. How could I compare this to the returns of the strips?
8:12 pm
April 6, 2013
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For the minimum RRIF withdrawals, it is easiest to ensure there is enough cash from maturing GIC's and strips to cover the withdrawal. One isn't going to be able to subdivide a strip bond if the minimum withdrawal works out to be something like 1.8 strip bonds.
The RRIF trustee will handle the coupons electronically. Annuitants are not allow to handle the contents of a registered account.
Can't really compare a regular bond with a strip bond. Cashflows are different. It would be like comparing a non-compounding GIC with a compounding one.
That Great-West Lifeco 28-year bond with a 4.71% yield to maturity is actually a pre-owned 30-year 2.981% bond, issued in July 2020, with 28 years left to maturity. It trades at 72.28% of face value to produce a yield-to-maturity of 4.71%. One isn't going to end up with 4.71% compounded annual return unless all those interest payments every six months are reinvested at 4.71%
6:17 pm
May 26, 2022
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20 year strip bonds to pay 24k/year is now just 306k vs 331k in May (Used provincial bonds (years 11-20) and motive rates for years 1-10).
Joint annuity would require 362k to generate 24k for life (20 yr guarantee)
1 $24,000 4.60% $22,944.55
2 $24,000 4.70% $21,893.64
3 $24,000 4.70% $20,910.83
4 $24,000 4.72% $19,956.88
5 $24,000 4.85% $18,939.52
6 $24,000 5.00% $17,909.17
7 $24,000 5.10% $16,943.07
8 $24,000 5.10% $16,120.91
9 $24,000 5.10% $15,338.64
10 $24,000 5.10% $14,594.33
11 $24,000 4.25% $15,183.59
12 $24,000 4.25% $14,564.60
13 $24,000 4.35% $13,797.78
14 $24,000 4.50% $12,959.35
15 $24,000 4.70% $12,050.67
16 $24,000 4.70% $11,509.71
17 $24,000 4.76% $10,886.49
18 $24,000 4.76% $10,391.84
19 $24,000 4.64% $10,138.05
20 $24,000 4.60% $9,762.87
Total $480,000 $306,796.48
4:15 pm
October 30, 2022
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I also want to live on the dark side. Amazes me how much wiggle room the big banks have on 600k.
5:19 pm
April 14, 2021
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Damn, and I recently locked in half that much at 5.25%
Could have done the same amount, if I had known they were willing to go as high as 5.5% 
Still got some cards to play, but maybe not as much as 600K
4:58 pm
November 19, 2022
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Would it be more tax efficient to open a 10,9,8,7,6 year GIC vs lump sum into one 10 year GIC ?
5:34 pm
May 26, 2022
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I was thinking of RRIF's where you are paid the minimums each year
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