Should retirees buy a Canadian Life Annuity

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Executive Summary

Your mom lived to 95, does this mean you’ll inherit her longevity and outlive your money? Investment returns have been very strong recently, does this mean long term returns will be below average? Colleagues are working past 65, does this mean you should?

If you’re worried about longevity, market volatility or insufficient savings, then you’re suffering from “retirement anxiety”. Not knowing if you have enough retirement income to cover all of your lifestyle expenses for life is the cause of this common disorder.

My thinking has evolved on this topic, and I now believe that financial independence occurs when one’s guaranteed retirement income covers 100% of their discretionary and non-discretionary expenses. For life!

In recent articles, I discussed government pensions (CPP and OAS) and reverse mortgages, and I have shown how they can be used as part of a guaranteed retirement income strategy.

This article explains how a Canadian Life Annuity is a third source of guaranteed retirement income for life. The article explains how Life income annuities work and who would be the best investors for this insured product.

Read this article if you’re interested in creating a guaranteed retirement income for life that can cover most (if not all) of your lifestyle expenses, then call our office to learn more.

Worried about your retirement income plan?

You’re about to retire and instead of dreaming of all exotic places you’ll visit and all the memories you’ll make, you find yourself worrying about money!

What happened… you saved for decades and now it’s time to “party” but your mind keeps dwelling on money, you keep asking yourself, “should I take that once-in-a-lifetime cruise that I’ve always wanted?” “Should I help my kids purchase their first homes?” “Should I renovate the kitchen and create more entertainment space?” And the questions keep circling.

If you think this way, I say “welcome to my world” ….

I grew up in a lower middle class home where going out for a Big Mac was considered a luxury. So I have worried about money since I was old enough to deliver the Toronto Star.

As a financial planner, I help clients establish financial goals and create plans to achieve their dreams. Perhaps the most common goal is to become financially independent (note: I intentionally avoided the “R” word). I have written several articles on the topic of how much money is needed to be financially independent:

As you can see, it took four articles and approximately 10,000 words to answer the question: How much do I need to retire/to become financially independent. Why? Because it’s not an easy question to answer.

If you have time, read the articles.

But if you’re in a hurry, I’ll spoil the secret and say, financial independence is achieved when passive income covers lifestyle expenses (discretionary and non discretionary).

Let me expand, when investment income (dividends, interests, capital gains, net rental income, etc.) plus government and/or employer pensions exceeds lifestyle expenditure, you’re financially independent. An alternative route is to become a successful entrepreneur. To learn more about entrepenurialship, listen to my podcast with Kyle Kotack.

Financial independence illustrated

Ms. Snow owns a $1,000,000 investment portfolio, and using the 4% rule, it generates a variable income stream of $40,000 of passive income per year. Ms. Snow is also a member of a company pension plan that guarantees an annual income of $30,000 for life (indexed to inflation). Finally, Ms. Snow is entitled to a maximum CPP and OAS pension of $22,000 per annum (indexed to inflation).

Thus Ms. Snow’s expected annual income is $92,000 or approximately $60,000 after tax. Therefore, if Ms. Snow’s lifestyle expenses are $60,000 per year or less, she’s financially independent.

– Keep reading, I have fine tuned my definition of when one is considered financially independent –

Guaranteed retirement income for Life

The problem with this example is that $40,000 of the $92,000 comes from a variable income source, which can fluctuate and directly affect Ms. Snow’s lifestyle.

When I retire, I want all (or most) of my retirement income to be guaranteed and indexed. Since I no longer have the luxury of time to correct big mistakes, poor investment returns and/or longevity. So I don’t want my income to hamper my globetrotting retirement plans. But, is it possible to guarantee most of my retirement income? Yes!

In previous articles, I discussed how government pensions ( CPP and OAS) and the equity in one’s home (link goes here) can produce a guaranteed income stream for life and in this article, I will discuss how a Canadian life annuity is also a guaranteed income stream for life.

What is a Canadian life income annuity and how does it work?

A life annuity is a contract between an individual and an insurance company. The individual invests a lump sum with the insurance company and in return the insurance company guarantees an annual/monthly payment for the life of the individual.

There are many types of annuities but for this article, I will only consider a single life annuity. (Note: married couples may consider a joint life income annuities with/without inflation protection).

Advantages and disadvantages of a life income annuity

The biggest advantage of adding a life annuity to your investment portfolio is that it is a guaranteed monthly payment payable for as long as you live, regardless of investment returns, inflation or how long you live.

However, if you die prematurely, the contract ends, and no further payments are made to your estate. Worst case scenario, if Ms. Snow, who is expected to live to 88 sadly dies at the age of 73, her estate receives nothing for the years of expected payments.

(NOTE: Ms. Snow could have bought a rider guaranteeing payments for a selected period of time (i.e. 10 years) and if she died within the selected period, the estate would receive the remaining years of payments.)

A Canadian life income annuity quote (as of early December/21)

In Canada, only insurance companies are permitted by federal laws to offer annuities to Canadian residents. For this illustration, I used the Sun Life website for quotes, and I’ve made the assumption that Ms. Snow, who is 65 years old, buys a $250,000 life annuity, and has a 35% average tax rate.

Life annuity quote:

At the time of writing, Sun Life’s life annuity pays Ms. Snow a pre-tax annual income of $13,841 (or approximately $8,996 after tax) for as long as she lives.

Should a retiree (especially a widow) buy a life income annuity?

As with most important life questions, the answer is, “it depends.”

In my example, Ms. Snow’s retirement plan was to maximize her monthly income for life (100% guaranteed if possible). She wasn’t overly concerned with the value of her estate and was completely comfortable using all or most of her assets during her lifetime.

Based on her objective, a life income annuity makes sense as it guarantees a portion of her lifestyle needs. For example: Ms Snow’s retirement looks like this:

Guaranteed Income streams:

Guaranteed Company pension: $30,000

Guaranteed Government pension: $22,000

Guaranteed Life Income Annuity: $13,841

Total guaranteed and indexed retirement income for life of $65,841 pre-tax per year.

Variable Income Stream:

Investment portfolio of $750,000, ($1,000,000-$250,000 (life annuity)), which generates an approximate income, using the 4% rule, of $30,000 per year for life.

Total variable retirement income for life of $30,000 pre-tax per year.

Total Retirement Income For Life (Guaranteed And Variable) Is $95,850 Pre-Tax Per Year.*
* Most importantly, almost 70% of her annual retirement income is guaranteed for life!

Final thoughts

For years, I believed that financial independence occurred when passive income covered 100% of lifestyle expenses, but now, I have fine tuned my thinking.

Today, I consider that financial independence occurs when 100% of my spending requirements come from guaranteed retirement income sources (i.e. government and corporate pension, reverse mortgages, life income annuities). If 100% is not possible, then I suggest covering one’s non discretionary expenses with guaranteed and indexed retirement income sources.

In the example above, Ms. Snow is financially independent if her non discretionary expenses (e.g. food, shelter, clothing) are in the $65,000 per year range.

Government pensions (CPP and OAS), a reverse mortgage and a life income annuity are three products that help create guaranteed retirement income for life.

  • Are you maximizing these guaranteed income sources?
  • Are you financially independent?
  • Do you worry about your retirement income?

If you’re having trouble answering any of these questions, book an appointment with me and I’ll personally help you assess your retirement income streams and determine when and how you’ll draw from those sources and identify ways to cover non discretionary expenses with guaranteed and indexed sources. In fact, if you have any goal in mind — big or small — that requires some financial planning, but you’re struggling with where to start, reach out to our team. We have the expertise and life experiences to help guide you to achieving your goals.

Contact us today to learn more about the options available to you. CLICK HERE.

Learn more:

The process of finding a financial advisor can be overwhelming. It is our job to make that process simpler and easier.

Dri Financial Group’s proprietary Wealth Navigator Process is designed with you in mind.

Its structured framework helps you make an informed decision and feel confident in our team and management practices before we get started.

We offer you a range of services from creating bespoke financial plans and providing investment advice to helping you take advantage of our investment models. If you would like more information on the Wealth Navigator Process or our team, call me any time at 416.355.6370 or email me at richard.dri@scotiawealth.com.
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source https://richarddri.ca/should-retirees-buy-a-canadian-life-annuity/

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Published by drifinancial

The Dri Financial Group motivates entrepreneurs and their families to enhance their financial life. Our team of experienced entrepreneurs, personalized financial planning tools and proprietary investment strategies are the cornerstone of our program’ s success

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