Annuities: You don't have to go "all-in"

Retirement planning concept

Annuities provide guaranteed income for life. In that regard, they are one of the most effective ways to eliminate investment risk in retirement. But putting all of your retirement assets into the annuity basket is not necessary if you want to combine risk-free income with the ability to leave a legacy for future generations or tap into your assets from time to time. 

That’s why Frederick Vettese, a retired actuary and author of several books including Retirement Income for Life, suggests that retirees with some savings, who also expect to collect benefits from the Canada Pension Plan (CPP) and Old Age Security (OAS), should consider converting about one-third of personal retirement assets into an annuity that provides income for life. 


An annuity is a contract between you and the financial institution that provides it. You turn over a fixed amount of cash and the annuity provider agrees to pay you a monthly amount for the rest of your life. The payments are guaranteed because the amount is insured ahead of time. 


In today’s dollars (2020), every $150,000 that you spend purchasing an annuity creates about $8,250 in annual income ($687.50 a month). Vettese admits that “$8,250 a year doesn’t seem like a lot” but it can be a real game-changer over 20 or 30 years of retirement because the amount is guaranteed for life. 


There are two types of annuities; one is indexed for inflation and one is not. Vettese argues that the annuities that are indexed for inflation are not worth the additional cost for two reasons. 

  1. CPP and OAS are both indexed for inflation. So, a good portion of your portfolio will automatically adjust to rising costs and, in both cases, you put the investment risk on the shoulders of the government. 
  2. Your expenses are likely to decrease as you age. Inflation may drive up prices but your monthly spending is likely to decrease in real terms. One should more or less cancel out the other.  

Vettese also recommends purchasing a “joint and survivor annuity” that continues to pay one spouse about 60-75 per cent of what is payable when they are both alive. And payments to the surviving spouse are guaranteed for life.  


Many Canadian retirees will rely on three income sources. (1) Government plans including CPP and OAS. (2) Personal savings in a Registered Retirement Income Fund (RRIF) and (3) A portion of their assets turned into a “Joint and Survivor” annuity. Note that buckets (1) and (3) both provide some form of income for life with absolutely no risk to the retiree. Bucket (2) is the only place where the retiree is expected to manage investment risk and estimate his or her own lifespan.
In Retirement Income for Life, Vettese recommends that retirees begin to spend the money from bucket (2) in the early years of retirement to effectively lower their overall risk level as they age. For example, assuming that a retiree follows the order of events as described above, the goal is to steadily reduce risk and rely more heavily on government plans and annuities over time. To maximize the effect of CPP, Vettese suggests that retirees should be willing to use more of their own money to finance retirement up to the age of 70 in order to qualify for the maximum CPP amount. Learn more about the advantage of CPP at 70.

Viewing annuities as just one pillar of a well-balanced retirement income plan helps to put their unique benefits into sharp focus. Your Lawyers Financial Advisor can help you plan to ahead to create the ideal balance of risk-free income options for you and your portfolio. 


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October 14, 2020