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Immediate Annuity Income Steady for Decades

In the Financial Post’s “The search for shelter,” Fred Vettese questions if investors are willing to sacrifice some return for guaranteed income in retirement.  Based on the responses to his previous articles, investors aren’t always fond of annuities or the insurance companies who sell them.  But Vettesse, who has no personal interest in defending insurance companies and annuities, says that a quick analysis of lifetime returns should change some minds.  We’ve talked before about how insurance companies could stand to benefit in changes to the marketing of annuities.  For some reason, a negative attitude about these financial products is keeping some investors away who could truly benefit from an annuity product.  I think this comparison of lifetime income options is a good start.  It’s at least worthwhile to look into buying an annuity for retirement, even if you decide it isn’t the best fit for you.

This example compares an annuity product with unchanging monthly income to making annual withdrawals from a Canadian Registered Retirement Income Fund, similar to making withdrawals from a 401k.  The article’s example uses a 75-year-old healthy man with $100,000 saved in an RRIF account.  By withdrawing the required 7.85% for a 75-year-old, yearly income would be $7,850.  He could earn yearly interest of around 1.75% by playing it safe and investing in a five year Canadian GIC.  At age 85, the man’s yearly income will have decreased to $4,964.  By age 95, he will be receiving $2,564 each year, an enormous decline from what he received at age 75.

Another option would be to purchase an immediate annuity product with his $100,000 at age 75.  He would be guaranteed $8,280 each year for the rest of his life, according to current annuity rate tables.  That $690 per month would be guaranteed through the age of 85, 95, and even past that, much longer than the previous RRIF drawdown.  By factoring in death benefits, if the man were to die within ten years of buying his annuity, his beneficiaries would receive payments to finish out the ten years.  The total of 120 payments would ensure that this man’s beneficiaries receive at least $82,800 of his $100,000 annuity purchase.  If this 75-year-old man dies prematurely, he could lose some of his initial investment.  But that price is worth it to many people in order to guarantee lifetime income should he live a long time.  At age 95, he would be receiving $8,280 from his annuity versus $2,564 if he went with the drawdown method.  And while he might not live to age 95, he just might.

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