*Sponsored by RBC Insurance*
The reason why retirement planning can be so difficult is because the one variable we need to know – how long we have to live – is impossible to predict. Sure, we have mortality tables and family history to help guide us, but statistically speaking, half the population will outlive their median life expectancy.
That makes longevity risk – the risk of running out of money before you die – a very real threat to your retirement. And yet many Canadians ignore this threat by not saving enough during their working years, retiring before they’re financially ready, taking Canada Pension Plan benefits too early, withdrawing too much from their RRSPs, and so on.
On top of that, a global pandemic and recent economic uncertainty has had a significant impact on seniors and their retirement plans. RBC Insurance conducted a survey of Canadians aged 55-75 in March 2022. The survey data showed that:
- One third (33%) of Canadians say they retired sooner than planned, or intend to change the date of their retirement because of the pandemic
- Among already retired Canadians, more than one quarter (28%) are spending more than they anticipated, while four in ten (41%) have experienced unexpected expenses
- As Canadians live longer the impact of inflation on their savings, expenses and purchasing power is the most pressing concern for the majority (78%), as well as a lack of guaranteed income (47%), outliving their savings (48%) or their spouse (38%), feelings of loneliness (36%) and not having a legacy to leave behind (25%)
Having enough money to support their desired lifestyle is a real concern, highlighted by the fact that nearly half (48%) of those surveyed are worried about outliving their retirement savings.
How Annuities Can Help In Retirement
One way to protect against longevity risk is to purchase an annuity. Annuities fell out of favour (if they ever were in favour) when interest rates plummeted over the past 10-15 years. But with interest rates on the rise, annuities are certainly worth another look.
An annuity provides a predictable income stream for life – much like how a defined benefit pension, CPP, and OAS pays benefits for as long as you live. Nothing protects you from longevity risk quite like having a guaranteed income that’s paid for life.
It’s puzzling why more Canadians don’t choose to turn even a portion of their savings into an annuity – to pensionize their nest egg, to borrow a phrase coined by financial authors Moshe Milevsky and Alexandra Macqueen.
Lack of knowledge around annuities may also be why only 7% of those surveyed are taking advantage of them.
Let’s break down some of the advantages:
- You have the option to continue your payments to your spouse or beneficiary if you pass away during a certain time period.
- Your payments are locked in the moment you purchase a Payout Annuity. You don’t have to worry about what the market does or where interest rates go. Your income is guaranteed.
- It’s possible to invest in an annuity using your RRSP and/or RRIF savings, or non-registered savings.
- When purchased with non-registered funds, the interest portion of your monthly payment is spread out evenly over the Payout Annuity’s life. This levels out your tax payments and minimizes the taxes you pay.
- You can stagger your annuity purchases to help increase payouts.
Annuity Payout Rates (How Much Will You Receive?)
Speaking of payouts, I thought it would be helpful to see some examples of just how much income to expect from an annuity based on several different scenarios:
| Age | Gender | Initial Amount | Annual Payment |
|---|---|---|---|
| 65 | Male | $100,000 | $6,508 |
| 70 | Male | $100,000 | $7,310 |
| 65 | Male | $250,000 | $14,894 |
| 70 | Male | $250,000 | $16,856 |
| 65 | Female | $100,000 | $5,411 |
| 70 | Female | $100,000 | $6,125 |
| 65 | Female | $250,000 | $13,921 |
| 70 | Female | $250,000 | $15,713 |
*Calculations made at https://www.rbcinsurance.com/annuities/index.html
I’ll be honest, I perked up when I saw the payout rates were between 5 and 7 percent of the initial deposit. Now, keep in mind, those rates won’t increase with inflation each year, but it’s still a healthy (and guaranteed) amount to receive for life.
I mean, why wouldn’t a relatively healthy 70-year-old male not want to turn $250,000 into annual income of $16,856?
The break-even age on that $250,000 investment would be 85 years old (84.83 to be precise). But a 70-year-old male has a 50% chance of living until age 89. By that time, he will have collected $320,264 in annuity payments. That’s impressive, considering he is receiving 6.74% of the initial balance each year.
Remember, we’re talking about protection against longevity risk. As tragic as it would be to get hit by a bus in the year you purchased an annuity, you won’t be around to curse the decision and, if you get a 10-year guarantee period, you’ve built in some protection for your beneficiaries.
Quick Facts About Annuities
Your annuity income is determined at the time you buy the annuity and is based on several factors such as interest rates, age, and your life expectancy.
Your payments will be higher if current interest rates are high (and vice-versa).
The older you are when you buy the annuity, the higher your payments will be because you’re not expected to live as long.
Men will receive more money than women because they have a lower life expectancy.
There are many types of annuities, including:
- Single life annuity – guaranteed income for the life of one person
- Joint life annuity – guaranteed income for the lives of two people
- Term certain annuity – guaranteed income for a set period of time
You can also customize your annuity to include:
- A minimum payment guarantee if you (or you and your spouse) pass away before the end of the guarantee period (ranging from 1 to 25 years), remaining payments will be paid to your beneficiary
- A return of premium guarantee where your entire premium deposit is refunded to your beneficiary if you (or you and your spouse) pass away before you receive your first annuity payment.
Under-spending In Retirement
One last thing on the annuity puzzle. Some proponents argue that annuities not only protect against longevity risk, but also the risk of under-spending in retirement.
A U.S. study found that roughly two-thirds of retirees who have $150,000 in savings at age 65 tend to spend no more than they receive from guaranteed income sources, such as Social Security and pensions. They’re afraid to spend the lump sum because they value liquidity.
An annuity, being a guaranteed income source, would make it possible to spend a bit more freely in the early years of retirement.
Final Thoughts
Annuities can play a vital role in your retirement planning by helping to mitigate the threat of outliving your money while providing a predictable income stream for life.
I’m not suggesting you turn every penny of a million-dollar portfolio into an annuity but carving out a portion to create your own personal pension will add another valuable and guaranteed income stream that you never have to worry about managing in retirement.
RBC Payout Annuities are provided by RBC Life Insurance Company.
