Most of us save money for the long-term. When you think about it, there's only one reason we do this. That's so that we can have regular income in retirement, liquidity and or legacy. And although most people think of legacy as leaving money for their kids and/or charity, keep in mind legacy can also mean leaving money for your surviving spouse.
Although we are saving money for these three possible reasons; income, liquidity and/or legacy, it's interesting to note that if you do not have enough income in retirement, most of your assets will be used to create income, therefore leaving little to nothing for liquidity or legacy. Therefore; income really is the most important focus for long-term savings.
What are the ways we can generate income in retirement? We can either use our assets to generate return and live off of the income or we can use an insurance product called an annuity.
If we are living off the interest generated from the account, it's important to realize that, according to the scholars there is a maximum amount you should be taking out every year in order to not run out of money over the long run. Currently they are recommending that we do not take more than 2.8% to 3% of our account [as per “Safe Withdrawal Rates for Retirees in Canada Today” MorningStar January 5, 2017]. On $100,000 of assets, this would be $2800-$3000 This is known as “the safe withdrawal rate” and is recommended in order to overcome the issue of protecting your portfolio against large negatives in the market. We have other strategies that can also be helpful in this manner, but one way to not have to worry about market risk at all, is to buy an annuity with some of your money.
With an annuity you are exchanging a lump sum of money with an insurance company who agrees to pay you a regular income for as long as you live. Currently a 65-year-old man would be receiving approximately $5814 per year for life whereas a female would receive approximately $5304 per year for life, and a couple age 65 would receive approximately $3438 per year for life [rates quoted as of September 30, 2019 for an RSP or RRIF). Note, the ladies receive a little less because they generally live longer.
|Rates as of Sept 30th, 2019 for $100,000.00||Income per year from annuity||Best 5-Yr GIC 2.46*|
|Male age 65 RIFF||$5814||$2460|
|Female age 65 RIFF||$5304||$2460|
|Joint couple age 65||$3438||N/A|
An annuity is a great option if you want to get more income and not have to worry about the markets. Also, if your money is not registered [ i.e. not an RSP, not a riff and not a TFSA], then they can be way more tax efficient than money in GICs or bank accounts.
Although this pays you much more income, you should keep in mind that your estate value will probably not be as high as if you had an investment. This is similar to a pension plan where the surviving spouse gets less if the annuitant passes away.
If you're still growing your investments for retirement, you definitely don't have to make this decision now. If you are close to retirement or in retirement and would like to see if an annuity would be a good idea for you, give us a call and we can discuss it.
*Deposit Broker Services, Retrieved on September 30, 2019.
Author: Julie Kranitz-Andrade
Date: September 30, 2019