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The Money Management Newsletter: Retirement Income Planning
Lifetime income solutions for you and yours

Entering retirement calls for a review on how to make ends meet after that regular paycheck stops. For most people there is a shift of focus from saving enough money for retirement to making those retirement savings last. Making the right choices from the vast array of options available is critical since some choices can not be reversed and others can lead to a loss of capital that will be hard or impossible to replace.

Annuities are one investment option to consider. They have been around for hundreds of years and have proven to be an ideal financial product to bring balance to a portfolio or provide a total solution to the retirement income question.

What is an annuity?

Generally speaking, an annuity is much like a mortgage in reverse. Instead of a person borrowing money, they invest money with a financial institution such as a life insurance company. In exchange for this investment, the insurance company makes regular income payments, containing both principal and interest, back to the investor. Unlike a mortgage that would end after a certain period of time, annuities can continue to provide income for the entire life of the investor and their spouse.

Buying an annuity can take the guesswork out of investing for income. With a single-lump sum investment you can arrange to have a stable stream of income for life, including a guaranteed payment period should you die prematurely. You can also select payments for a specific time period such as 10, 15 or 25 years. Annuity payments can be received either monthly, quarterly, semi-annually or annually.

Some annuity options

The modern day annuity comes with lots of bells and whistles. The first and foremost option is allowing the payments to continue to a surviving spouse or other designated party in the event that the annuitant dies prematurely. This is provided that the joint and survivor option was chosen at the time of purchase. Of course the life expectancy of both the annuitant and joint annuitant are factored into the calculation of the annuity payments. Choosing a young joint annuitant will substantially reduce the payment amounts.

Inflation erodes the buying power of fixed income. Nobody knows what the future holds with respect to inflation however if you wish you could choose to have your annuity income indexed at a certain rate so that your payments will be adjusted upwards each year. Your annual raise comes at a cost however because the initial payments will be lower for the indexed annuity than for one without this feature.

Not all annuities have to be bought from retirement savings plans. If you purchase an annuity from a non-registered source such as cash in your bank account or from a matured investment you can realize significant tax advantages. This is because the interest income can be averaged over the lifetime of the annuity and is therefore taxed at a level rate rather than as earned. This is called a prescribed annuity and provides an attractive element of tax deferral. (some conditions apply).

Choosing the right annuity

It's important to review your anticipated or specific income needs when choosing an annuity. These needs will typically include one or more of the following:

  • guaranteed retirement income for life,
  • enhanced income for those with a serious illness,
  • enhanced income to fund nursing care expenses,
  • income for a specific time period, or
  • gradual inheritance transfers.
Case Studies

Accelerated Annuity: Enhanced income for those with a serious illness

Gradual Inheritance Transfers

Guaranteed Retirement Income for Life, Mix and Match

Income to fund Nursing Care Expenses

One thing to remember….you don't have to buy one annuity, you can design an annuity portfolio with a number of annuities. Within such a portfolio you can choose from different issuers, because some companies may be more competitive with their yields at different times while others are more flexible with the features they offer.

How are annuities priced and how is income determined?

The amount of income from an annuity is determined at the time of purchase. The factors that are used to provide the "guaranteed payment" will generally depend upon the:

  • amount of money invested,
  • the interest rates at the time of purchase,
  • your age and if your male or female,
  • the length of time that the annuity payments are to be guaranteed, and
  • the type of annuity(ies) chosen.

Option Terms explained

Term Certain Guaranteed Period/Payments: Normally 3 through 30 years. Ensuring specific minimum payments amounts is paid from the annuity. Meaning, in the event that the annuitant dies during the guarantee period that the designated beneficiaries receive the income payments. (some variation on this option are available)

Prescribed Annuity: A lump sum of non-registered money invested over a fixed period of time or your lifetime, periodically repays your capital together with interest. Income (some capital plus interest) is calculated by a formula that apportions the capital element evenly over the expected payment period. This automatically levels out the interest portion (which is taxable) and reduces tax liability in the early years when you may be in a higher tax bracket.

Single Life: An annuity that provides pre-determined income for a individual as long as he or she is living. When the individual(annuitant) dies, the contract ceases unless there are remaining guaranteed payments, these payments would then be made to the named beneficiaries.

Joint and Survivor Life: An annuity that's designed to cover the lives of two individuals - a primary annuitant and a secondary annuitant (usually husband and wife). Income is generally paid to the primary annuitant and, upon his or her death, the secondary annuitant continues to receive that income for his or her lifetime. Initial income can be increased, if an income reduction is pre-selected to occur at the death of one of the joint annuitants.

Indexing: A fixed annual percentage increase to payments to help guard against inflation.

Income Deferral: Lock in the income rate, and start payments any time within one year.

Return of premium: Guarantees return of 100% of premium to beneficiaries if annuitant dies prior to first payment date.

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© , Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.
(905) 844-7700

 





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