# Annuities - does anyone here use them?



## prisoner24601 (May 27, 2018)

I would appreciate peoples advice on how they use annuities as part of their retirement income strategy. If you don't, why not? After looking at some of the quotes from BMO, single annuities with 10-year guarantee offer 5-7% return (based on age) and look better than fixed income options like bonds or GIC. Wondering why I wouldn't convert the FI portion of my portfolio to annuity and what age maximizes the benefit of doing so. As always, thanks for anyone taking the time to respond


----------



## OptsyEagle (Nov 29, 2009)

That rate of return you calculated is overstated because it includes the capital plus the interest. When the calculation is done correctly the internal rate of return is fairly close to other fixed income investment.

My advice is for a person to buy an annuity when they need guaranteed income. Since we all need guaranteed income then I would suggest buying an annuity if your guaranteed income does not cover your minimum fixed expenses. The absolute minimum amount of money you need to live subtracted from your guaranteed incomes from work pensions, CPP, OAS, GIS, etc.

I don't have an annuity because I am too young. When they would be willing to sell me one I will look closer at the particulars, my needs and any alternatives, at that time.


----------



## Beaver101 (Nov 14, 2011)

OptsyEagle said:


> *That rate of return you calculated is overstated because it includes the capital plus the interest. When the calculation is done correctly the internal rate of return is fairly close to other fixed income investment.*
> 
> My advice is for a person to buy an annuity when they need guaranteed income. Since we all need guaranteed income then I would suggest buying an annuity if your guaranteed income does not cover your minimum fixed expenses. The absolute minimum amount of money you need to live subtracted from your guaranteed incomes from work pensions, CPP, OAS, GIS, etc.
> 
> I don't have an annuity because I am too young. When they would be willing to sell me one I will look closer at the particulars, my needs and any alternatives, at that time.


 ... "overstated" ... doesn't that mean it's misleading? And if the "correct IRR (aka true) calculation" is fairly close to the rates of other FI investments, why would anyone (other than the salesguy/gal getting the big fat commissions) want to consider them as "investments"? I parallel them to being segregated funds (ie. funds that can be sold by insurance companies only) and what're the pros of getting those ... creditor protection and .... ? I can't think of anything else.


----------



## ian (Jun 18, 2016)

I plan to look at them when I reach my early seventies and only if the interest rate is higher than it is today.


----------



## Topo (Aug 31, 2019)

prisoner24601 said:


> I would appreciate peoples advice on how they use annuities as part of their retirement income strategy. If you don't, why not? After looking at some of the quotes from BMO, single annuities with 10-year guarantee offer 5-7% return (based on age) and look better than fixed income options like bonds or GIC. Wondering why I wouldn't convert the FI portion of my portfolio to annuity and what age maximizes the benefit of doing so. As always, thanks for anyone taking the time to respond


It is a good strategy to annuitize a portion of your portfolio for the guaranteed income. The later you do so, the better rates you will get. The rates are also dependent on interest rates at the time, which we have no control over. Some suggest dividing and annuitizing your allocation over a few years. The best annuities are SPIAs (single premium immediate annuities) since there are less fees. One has to take account the reputation of the annuity company too.

One point to consider is that since most annuities are not inflation-adjusted, you will lose purchasing power as the years pass. CPP and OAS are inflation-adjusted, which is an advantage. It may be beneficial to position the rest of your portfolio to counter inflation effects.


----------



## GreatLaker (Mar 23, 2014)

I also will consider an annuity when I get somewhere between 70-80 years old, depending on my health. I would use it as a bridge amount to cover any gap between my guaranteed income from CPP/OAS plus my investment income (dividends & income). I would want a cushion over my investing income because they could drop in a deep recession. I'm retired and not yet collecting CPP/OAS, and my investing income covers my non-discretionary expenses. It looks like all my expenses will easily be covered when I begin collecting CPP & OAS, so an annuity may not be necessary.

Consider an annuity to be long life insurance, rather than an investment. It can protect you in case you fail to die in a timely manner. There is the concern that most annuities are not indexed, and indexed annuities, especially ones indexed to inflation, are expensive because the insurance company does not want to take on unpredictable inflation risk. One way to deal with the risk of inflation is to have equities, that should keep pace with or exceed inflation. Another way is to only spend 2/3 of your annuity income when first starting, and save the rest. Then gradually increase the amount of the annuity payment you spend to compensate for inflation. Then later on you can dip into those savings as inflation erodes your spending power. Very rough calculation, but you get the idea.

I went to a retirement planning seminar at the local library. The speaker was from IG Wealth. I asked about annuities, and said I may consider one when I get to around 70-80 years old. The speaker suggested it would be better to buy a deferred annuity now, since my money would have lots of time to grow and the payments would be higher. Well duh... the insurance company would have my money for that much longer. I'm sure the IG Wealth person would vastly prefer to sell annuity and collect the commission now than in a decade.


----------



## Beaver101 (Nov 14, 2011)

^ I'm not sure about getting them at all, especially at a later age ... 70 or 80.... will I be of sound mind then? And then there's the suggestion of getting a "deferred" one ... right so you pay the commissions first and live a long-life. Then what ab out interest rates. Are the insurance companies predicting they will go to 10% in a couple of decades or so. Can't win either and each way with these things.


----------



## prisoner24601 (May 27, 2018)

GreatLaker said:


> Consider an annuity to be long life insurance, rather than an investment. It can protect you in case you fail to die in a timely manner.


The long-life angle makes sense to me. I could always self annuitize by gradually spending down the FI portion of my portfolio to generate income similar to an annuity from a bank and save the fee. But... as you rightly point out I might live longer than planned so either I'd draw down too conservatively or go broke to insure against long life. I guess the bank annuity has the use of capital from 'die early' members that pay for those that hang in longer.


----------



## prisoner24601 (May 27, 2018)

Yes, I agree. Thanks for pointing out the return of capital that makes sense.


----------



## AltaRed (Jun 8, 2009)

prisoner24601 said:


> The long-life angle makes sense to me. I could always self annuitize by gradually spending down the FI portion of my portfolio to generate income similar to an annuity from a bank and save the fee. But... as you rightly point out I might live longer than planned so either I'd draw down too conservatively or go broke to insure against long life. I guess the bank annuity has the use of capital from 'die early' members that pay for those that hang in longer.


I also agree with GreatLaker that annuities are longevity insurance, the financial risk of living too long. Contrary to DIYers who like to trash annuities more often than not, there is a place for some 'guaranteed income for life' If one dies too early, well....you WON'T know that you left money on the table. But if you don't die when you are supposed too, you will KNOW that you are beating the actuarial odds and getting paid to do so. But as also said, if interest rates remain low, such annuities will be costly to purchase. Still, there is a place for them circa age 75-80 if: 1) one is in good health and believes they could see 90+ years of age, and 2) has no other annuity income other than full CPP and OAS and not much reserve in the tank in the form of investment assets.

I have no plans for purchasing an annuity given the size of my investable assets and that I already have a relatively small non-COLA'd DB pension. That is not the case for most retirees though.


----------



## OptsyEagle (Nov 29, 2009)

Also, a big misconception out there is that an annuity should be purchased when a person is much older, like 70 or 80. I am not sure where that comes from but it is causing a lot of people to think incorrectly when it comes to annuities. The internal rate of return of an annuity is based on 3 things:

1) Mortality
2) Current long term interest rates.
3) Insurance Company expenses.

1) Mortality. When a person is 60, the actuarial tables will say that they should live till age 84 or something close to that. At age 70, those same tables will say that person should live till they are 88, or something like that, because they have already survived the last 10 years and the younger person has not.

Do you really think an annuity where the insurance company expects to pay until a person is 88 will be better then an annuity where the insurance company thinks their obligation will be over at age 84? The answer is no. Yes, the annuity taken at age 70 will pay a higher monthly income then one taken at age 60, but that is only because the older person does not get the 120 monthly payments, between age 60 and 70, like the younger person does.

2) The long term interest rates available today will be the same whether you are age 60 or age 70.

3) Expenses. Well we all know the biggest expense will be the commissions to the agent. Those are very difficult to avoid and they should just be factored into the benefit to see if they change the attributes any. That said, again, do you think it would be cheaper on a monthly benefit, to factor those expenses over 24 years for the 60 year old, or 18 years for the 70 year old. The agent gets the same commission no matter what age you buy these products and when you die is when you die. That will certainly not change.

The proper answer to the question is that an annuity should be purchased when you find out that your guaranteed monthly income does not cover your absolute minimum monthly expenses, or when you are age 55, whichever comes later. Age 55 is the youngest that an insurance company will sell you an annuity.

I think the reason people seem to think older is better is because it does show a much higher monthly payment, but that is only because there is more return of capital in a shorter time frame then a longer one. The internal rate of return does not change.

Anyway, that is how annuities work and my opinion on them. There are other ways to achieve the same thing but usually to get more income one must waive some amount of guarantee. It is a trade off like everything else in life.


----------



## GreatLaker (Mar 23, 2014)

prisoner24601 said:


> I guess the bank annuity has the use of capital from 'die early' members that pay for those that hang in longer.


That's exactly it. Like DB pensions, annuities spread the risks among many members or plan holders. It's know in the industry by the unpleasant term "mortality credits".




Beaver101 said:


> ^ I'm not sure about getting them at all, especially at a later age ... 70 or 80.... will I be of sound mind then?


Yes, I was thinking exactly that as I typed my post. Can be used to protect yourself against loss of mental acuity if you already have an annuity. You are less likely to make critical mistakes with your portfolio if enough of it is locked away and paid to you monthly by an insurance company. Scammers preying on elderly cannot get the money you have in an annuity. OTOH you shouldn't wait too long, and it's hard to assess your own mental acuity. I know several people in their 90s that are still very sharp, and it's sad to see others much younger that have lost it.


----------



## AltaRed (Jun 8, 2009)

@ OE, while I agree the goal posts keep moving (actuarial age as one gets older), I don't think the delay in buying an annuity is as much because of the 'much higher monthly payment' as much as it is not being to rationalize a 30 year forward cash flow analysis when one is 60 and perhaps just retiring, or just recently retired. Some vague 'crisis' point 30 years from now is not nearly as urgent as a 'crisis' point 20 years hence when one has become 10 years older. 

I also agree the IRR doesn't change whether one is 60 or 70 today BUT the IRR could very well improve over time as that 60 year old progresses towards 70 if interest rates go up in the meantime. None of us know if that will be the case, but we do know that if we lock in today at low interest rates, we will never have the opportunity to lock in at a potentially higher rate 5 years from now. 

Lastly, the timing of the commission paid to the agent does make a difference, because until that commission gets paid, there is time value of money compounding in investments from today, until the date that commission is paid. Putting off that lump sum expense has some value, e.g. no different than deferring tax in RRIF withdrawals as long as possible.

Ultimately, the decision on when to annuitize is highly situational depending on one's financial resources, presumed longevity and actual regional cost of living. There is no single right answer.


----------



## james4beach (Nov 15, 2012)

I am very open minded to buying an annuity, though at the moment I'm under age 40, so presumably I shouldn't even give this a further thought until I'm older (?)

I like the idea of an annuity for diversification. In addition to your regular assets, you now have a different kind of instrument that guarantees a cashflow. I like that it's locked in, and that it doesn't depend on asset price fluctuations. It's just a whole different beast.

Those are things I like. What I am wrestling with is the feeling that I'm going to get ripped off. I learned long ago that in financial transactions and pricing, you'd better be capable of independently pricing the thing, otherwise you're going to get a bad deal (disadvantage of information and knowledge).

This is the same reason I have hesitated to buy various kinds of insurance, even though I want the insurance. I know that people build careers on sales commisions, and I see them driving fancy cars and having big homes. This tells me I am going to get ripped off when I buy insurance.

I have no clue how to value annuities and I know that the marketing and sales process is complex. They have these high commission salesmen, and many parameters. It all seems very complex and tricky.

I would need to spend a lot of time studying and learning about how to value and price these things. But once I can get past that, yes, I am open to buying one and using it as part of my diversified investments.


----------



## like_to_retire (Oct 9, 2016)

james4beach said:


> I like the idea of an annuity for diversification. In addition to your regular assets, you now have a different kind of instrument that guarantees a cashflow. I like that it's locked in, and that it doesn't depend on asset price fluctuations. It's just a whole different beast.


Wouldn't it be easier to take the large sum of money that you would hand over to the insurance company for an annuity and put it in an income fund? Surely that would be a better deal. 

There has to be some risk with the insurance company as you're giving them the entire sum and it's the credit worthiness of that single company that you rely on until your demise. With an income fund, they invest in a diverse number of companies.

I know part of the annuity payment is return of some capital, so you could continually sell shares of the income fund to replicate that feature if you required it.

ltr


----------



## AltaRed (Jun 8, 2009)

For those considering an annuity, this article is worthy of a read for some simple math. https://retirehappy.ca/the-math-of-life-annuities/

The one thing that really angers is the inability yet to bypass a commissioned salesperson to buy an annuity. I've seen articles that suggest the commission is in the range of 2.5%. While not a lot when you think that a monthly $500 payment could have been $512.50 bypassing a commissioned salesperson, it is not a deal breaker. Just a freaking royal PO!


----------



## GreatLaker (Mar 23, 2014)

The price of an annuity should be the net present value of the payment stream, similar to calculating the commuted value of a pension. Using n = months to actuarial life expectancy, PMT = monthly payment, and i =monthly interest rates. Depending on the age and life expectancy, using 7 year Canada bond rates for the first decade and 10 year Canada bond rates for the balance. Add some additional factor to the interest rate to allow for the fact that insurance companies probably invest in a very conservative balanced portfolio, to adjust for the risk premium of that over pure fixed income. Plus a reasonable factor for the insurance company's cost and profit.

James I will be disappointed if you cannot have that calculation done before dinner! :tongue:


----------



## james4beach (Nov 15, 2012)

I understand those basics GreatLaker, but there are so many parameters on the actual annuities they sell. There are many tiny differences, it seems, and I don't understand how to factor in those things. I'm sure I can figure it out but I currently don't know.

They feel tricky to me and until I have a good grasp of all those parameters, I can't do it. I also hate the idea of these gatekeepers like the salespeople. A big turnoff. I hate talking with sales people and I don't trust them.

I don't trust mutual fund salespeople either, but at least we've largely eliminated them -- good riddance.

like_to_retire I am currently *am* just investing my capital, which should theoretically achieve the same thing. But there is still a big difference in these things. There is something nice about a guaranteed structure that is detached from market pricing (capital) risk. Plus it becomes automatic, which also insulates me from problems such as making horrendous mistakes, or perhaps losing my mind and blowing all my capital on bitcoin or some other stupid thing.


----------



## AltaRed (Jun 8, 2009)

like_to_retire said:


> Wouldn't it be easier to take the large sum of money that you would hand over to the insurance company for an annuity and put it in an income fund? Surely that would be a better deal.
> 
> There has to be some risk with the insurance company as you're giving them the entire sum and it's the credit worthiness of that single company that you rely on until your demise. With an income fund, they invest in a diverse number of companies.
> 
> ...


That is what the managed payout products do from the likes of RBC Asset Management, e.g. 5%, 6%, 7%. 

The risk (in addition to a DIYer making a competency mistake due to cognitive decline) is the fund depletes prematurely due to poor market returns and/or the payout gets cut. An annuity puts that risk burden on the lifeco. 

It is easy for us to say now when we 'pontificate' about how much better we can drive the car, but the problem will most likely manifest itself in hindsight when it becomes apparent the keys should have been taken away before we did ourselves harm. Too many are too stubborn to acknowledge that liklihood.


----------



## stantistic (Sep 19, 2015)

I am in my mid-eighties and have been drawing an annuity for about two years. I have two comments: 

a) I am happy that I do not have to make make important financial decisions now because I know that I am not sharp. I find it ironic seeing members quibbling now over fractions of a percent when an erroneaous decision later could blow their savings out of the water.

b) As an example of myself, my annuity is hadquartered in Quebec. Periodically, there is talk of separation. Suppose it occurs. What happens then ?


----------



## james4beach (Nov 15, 2012)

AltaRed said:


> The risk (in addition to a DIYer making a competency mistake due to cognitive decline) is the fund depletes prematurely due to poor market returns and/or the payout gets cut.* An annuity puts that risk burden on the lifeco. *


Exactly, there's a big difference here regarding what kind of risk is being assumed by the investor. There are clearly some advantages to the annuity. It's just a different beast.


----------



## james4beach (Nov 15, 2012)

stantistic said:


> a) I am happy that I do not have to make make important financial decisions now because I know that I am not sharp. I find it ironic seeing members quibbling now over fractions of a percent *when an erroneaous decision later could blow their savings out of the water*.


Very good point! I like that the annuity gets locked in. The decision is out of the way and I don't think I will always be able to manage my capital as well as I am currently.



> b) As an example of myself, my annuity is hadquartered in Quebec. Periodically, there is talk of separation. Suppose it occurs. What happens then ?


Interesting question. I don't know.


----------



## OptsyEagle (Nov 29, 2009)

In my case it is possibly even a little more annoying that it is difficult to bypass an agent because, not to be too conceited, if I talk to 20 agents, I doubt even one will know as much about the product as I do. One gets a little tired explaining to the agent how to go about getting the quote, what parameters to put in and what some of the questions on the application mean, etc., and then seeing the whole deal reduced by 2.5% (that is a very close number) so that agent can get paid.

That said, I can assure you that if you find yourself a agent, who is trustworthy and independent, that they will easily be able to find an annuity deal that is a lot better then 2.5% more, when compared to what you might get by walking into the Royal Bank and being directed to an RBC employee that works for that bank's insurance arm, even if no commission is paid.

Another thing that I did not mention in the pricing, since it is impossible for us to calculate, is how badly a particular insurance company wants to sell the annuity. For example, in your broker's GIC section you will constantly see a list of all the banks offering GIC. Let's say the best 5 yr rate is 2.50%. There will be a bunch of banks at 2.47% and 2.45% etc., and then you will see a few banks at 1.0% and so on. Have you ever wondered why that bank even bothers offering a 5 year GIC? The answer to the question is at this particular time they do not have enough 5 yr mortgages originating to place the 5 yr GIC money, so they are temporarily bowing out of that market. They will back, just not now.

Annuities have the same issue but perhaps in reverse. All the insurance companies quote their products the same way. It is the mortality risk that varies a fair amount. Not only will one company think a 60 year old will live till they are 84, when another company will think they will be lucky to make it to 83, but there is another factor that plays into the risk calculation. If an insurance company is issuing a lot of life insurance to a cross section of the population, but for some reason seems to have too many people buying it at age 60, they have two choices to deal with that lopsided risk situation. They could buy some re-insurance from a re-insurer, effectively swapping out the risk on those 60 year olds dying too soon...or they could save some money by finding a bunch of 60 year olds that want to buy an annuity. Remember life insurance insures against the risk of dying tomorrow and an annuity insures against the risk of never dying at all. Together in an equation they equal zero to an insurance companies risk. So when all the insurers quotes are listed together, this temporarily motivated insurer will move much higher up the list of how much monthly income they are willing to pay for the same dollar invested. They really want the deal and are willing to pay for it.

What that means is that if your agent can get you a quote from all the insurers in Canada, you would easily be able to obtain an income amount way higher then the 2.5% commission that agent is paid. I hope some of that makes sense.


----------



## like_to_retire (Oct 9, 2016)

OptsyEagle said:


> and then seeing the whole deal reduced by 2.5% (that is a very close number) so that agent can get paid.


I just know that I can do a lot better creating my own annuity when I hear that the vig is 2.5%.

ltr


----------



## AltaRed (Jun 8, 2009)

OptsyEagle said:


> That said, I can assure you that if you find yourself a agent, who is trustworthy and independent, that they will easily be able to find an annuity deal that is a lot better then 2.5% more, when compared to what you might get by walking into the Royal Bank and being directed to an RBC employee that works for that bank's insurance arm, even if no commission is paid.
> <snip>
> What that means is that if your agent can get you a quote from all the insurers in Canada, you would easily be able to obtain an income amount way higher then the 2.5% commission that agent is paid. I hope some of that makes sense.


How about this for starters? https://lifeannuities.com/annuity_rates/index.html I don't know that I necessarily need an agent/broker


----------



## james4beach (Nov 15, 2012)

OptsyEagle said:


> That said, I can assure you that if you find yourself a agent, who is trustworthy and independent, that they will easily be able to find an annuity deal


From what I've seen of salespeople, including my various old classmates who became salespeople, I don't have much faith that I can find a trustworthy & independent agent.

Finding such a person may be just as difficult as deciphering annuities myself.


----------



## AltaRed (Jun 8, 2009)

like_to_retire said:


> I just know that I can do a lot better creating my own annuity when I hear that the vig is 2.5%.
> 
> ltr


What products would you pick that would guarantee you a fixed monthly payment (more than an annuity provider) until you are maybe 105 with no oversight, and no input from you or your POA in case you have a cognitive dysfunction?

The closest I can think of would be perpetuals delivering perhaps 5.5% and somehow some of them also need to be bought down along the way. Of course, the issuers could call them, or go bust, but when you are eating pablum and drooling, you won't know either of those things. Really am curious how you would create an annuity that requires absolutely no intervention for the rest of your life, and guarantees the payout?

Added: Let's use this BMO illustration example https://lifeannuities.com/annuityquotes/2019/20191202.annuityquote.pdf as the basis for what you can do better than $2182/month off $410k of capital forever?


----------



## Topo (Aug 31, 2019)

Deferred annuities are different instruments and can't be compared to immediate annuities. While immediate annuities may not beat a 60/40 portfolio, there are certain aspects that they are very effective for a retiree such as: protect against mental decline, elder abuse, fraud, etc; insure against longevity; isolate against the effects of market volatility. 

One of the reasons for delaying annuitizing the funds is that later in life, people have better insight into their health and longevity to assess if it is worthwhile to annuitize their funds. In the meantime, the portfolio can grow.


----------



## like_to_retire (Oct 9, 2016)

AltaRed said:


> What products would you pick that would guarantee you a fixed monthly payment (more than an annuity provider) until you are maybe 105 with no oversight, and no input from you or your POA in case you have a cognitive dysfunction?
> 
> The closest I can think of would be perpetuals delivering perhaps 5.5% and somehow some of them also need to be bought down along the way. Of course, the issuers could call them, or go bust, but when you are eating pablum and drooling, you won't know either of those things. Really am curious how you would create an annuity that requires absolutely no intervention for the rest of your life, and guarantees the payout?


I haven't really given it much thought, but when I'm ahead of the pack by 2.5%, I don't think it would take too much to beat an annuity.

If you could set up some sort of arrangement where you use a low cost income fund, with all distributions re-invested. 

Then you arrange to have a fixed dollar amount removed every quarter (through a sale)and then review the situation every 5 years or so.

I don't really know, but my antenna go up when I hear that an annuity salesman makes 2.5% before we even get started.

ltr


----------



## AltaRed (Jun 8, 2009)

Well, I think it is worth the effort to try and articulate one if you are that certain that you can do so. Remember you cannot intervene any changes once you start.....so who will guarantee that the markets will cooperate? A Japanese equity market for example, or German bonds going negative.

$2182/month on $410k is equivalent to a yield of 6.386% without invested capital draw. There is the starting point.....

Added: Here is a possibility. RBC's 7% managed payout solution https://www.rbcgam.com/en/ca/produc...tfolio-solutions/rbc-managed-payout-solutions but then the best I can tell is RBC doesn't guarantee that fund will still deliver the same performance 40 years from now (for that 66 year old that might not die until he is 105). So unless you can get RBC to guarantee in writing they will deliver for the next 40 years, you now probably have to go out and buy insurance to guarantee the payout, in essence a re-insurer perhaps.

Added2: Here is another reference point IAF.PR.B Current eligible dividend yield 5.246%. Maybe worth north of 6% on an fully taxed income basis. Would you bet $410k on a few of those and pray there are no calls for 40 years? Would you do it if you could find 5 different issuers to spread the risk of a FU by one issuer? Disclosure: I own that pref with a cost base about $21 (effective yield about 5.4%).


----------



## GreatLaker (Mar 23, 2014)

Annuities are insurance products. They are designed to protect against running out of money if you live a very long life, or experience bad economic conditions, or to give a guaranteed stream of money even if you are not capable of managing money yourself. And their benefits get delivered when the annuitant has the least ability to recover from financial problems. They transfer those risks from the insured to the insurance provider, and the insurance company then spreads that risk among many annuity holders. They are not intended to help people fortunate enough to live a normal lifespan, during normal economic conditions, with full cognitive capabilities.

It's very hard to self annuitize and eliminate the risk of running out of money, without adding the risk of dying with a big pile of money. Warren Buffett, Bill Gates and Jeff Bezos don't need annuities because they have enough money they will never run out. A low income senior living off OAS, GIS and CPP does not need an annuity because all their spending comes from government guaranteed indexed income streams. For a lot of people in between those extremes annuitizing portion of their savings could be an important part of their lifetime income plan.

This discussion reminds me of the CPP deferral debate. Experts like Michael Kitces or Fred Vettese do detailed analysis based on in-depth empirical data on the reasons for deferring CPP, economic conditions that could make it valuable and for what type of investor it can be useful. Then somebody comes along and says they could do better with a dividend portfolio. Pages later it's a never ending debate.


----------



## AltaRed (Jun 8, 2009)

GreatLaker said:


> This discussion reminds me of the CPP deferral debate. Experts like Michael Kitces or Fred Vettese do detailed analysis based on in-depth empirical data on the reasons for deferring CPP, economic conditions that could make it valuable and for what type of investor it can be useful. Then somebody comes along and says they could do better with a dividend portfolio. Pages later it's a never ending debate.


I was waiting for someone to retort they could achieve the same thing with a dividend stock portfolio yielding 6.3% or so. The point is, as you say, there is NOTHING "hands off" that can provide the assurances of an annuity when it is needed most by someone with no capacity to do anything about it.


----------



## ian (Jun 18, 2016)

^Agree.

Plus they are guaranteed up to a certain amount by an industry fund. You can buy multiples in order to have a rock solid guarantee against the insurance company going bust and no honouring the commitment. I know of at least one family situation where an annuity was a perfect fit. The person was older, had a set sum to invest, no investment knowledge....but even more important had disingenuous children who would have convinced the person to 'loan' them money until the savings were greatly bled dry.

This is one place to see sample annuity rates: https://www.hughestrustco.com/


----------



## james4beach (Nov 15, 2012)

AltaRed said:


> Added: Let's use this BMO illustration example https://lifeannuities.com/annuityquotes/2019/20191202.annuityquote.pdf as the basis for what you can do better than $2182/month off $410k of capital forever?


That appears to be non inflation adjusted withdrawal right? Starting at age 66.

I ran a Monte Carlo simulation with my asset allocation of 30% stocks, 50% bonds, 20% gold. This appears to (historically) have done quite well. From $410,000 initial amount, withdrawing $2182 per month without inflation adjustment. simulating until age 106, the result is that 96.85% of simulated runs survive all withdrawals to age 106.

Or in other words, _looking backwards_, this would provide the same result as the annuity to age 106 with about 97% likelihood of success.

Link to monte carlo simulation with same dollar figures as BMO quote

While that's encouraging (and this basically is my plan with my capital) it's also based on historically stellar US stock return data. If you do a similar analysis with average global returns the results aren't so great.

There's also the tricky issue that excellent backtests like this, whether it's my 30/50/20 or even 60/40, run the danger that we're just back fitting to a uniquely ideal situation and reading way too much into what the future may bring.

The advantage of the annuity is clear. In a scenario of best case market performance yes, you can DIY. But the annuity pays out whether or not markets do this well. So for example if we get a Japan, Finland, or Italy kind of scenario, the annuity still pays.



AltaRed said:


> I was waiting for someone to retort they could achieve the same thing with a dividend stock portfolio yielding 6.3% or so. The point is, as you say, there is NOTHING "hands off" that can provide the assurances of an annuity when it is needed most by someone with no capacity to do anything about it.


I agree, nothing can provide the same cashflow with assurance. And not that easily! Expertly managing an ideal asset allocation is extremely challenging even for a sharp adult in their peak years -- it's _hard_. The annuity insulates the person from all of this.

Personally I think that the DIY movement over-simplifies the whole investment process, and downplays the psychological challenge in optimally investing. We know in real life that people do not invest optimally. The annuity can achieve what many investors simply cannot, even at the best of times. And in bad market scenarios, the annuity kicks the pants off anything a DIY investor can do.


----------



## AltaRed (Jun 8, 2009)

Standard annuities are not inflation adjusted, so the monthly payout never changes. Just like my DB pension payment this month being the same as it was in May 2006....some 13.5 years later.

The thing is.... it is not that hard to achieve the same investment returns (or better) as what an annuity provides BUT it takes oversight and intervention by someone to keep it going for potentially 40 years or more, and maybe the bigger risk is the irreparable damage that can be done by an incompetent account owner, or by that owner's attorney. An annuity is essentially a bomb shelter protected from all environmental forces. That is what an annuity buys.


----------



## fireseeker (Jul 24, 2017)

GreatLaker said:


> Annuities are insurance products. They are designed to protect against running out of money if you live a very long life, or experience bad economic conditions, or to give a guaranteed stream of money even if you are not capable of managing money yourself. And their benefits get delivered when the annuitant has the least ability to recover from financial problems. They transfer those risks from the insured to the insurance provider, and the insurance company then spreads that risk among many annuity holders. They are not intended to help people fortunate enough to live a normal lifespan, during normal economic conditions, with full cognitive capabilities.
> 
> It's very hard to self annuitize and eliminate the risk of running out of money, without adding the risk of dying with a big pile of money.



+1
Succinct and wise words.


----------



## james4beach (Nov 15, 2012)

Absolutely agree. It would take incredible stamina to keep a DIY approach going like this (even couch potato) for 40 years.

I still don't see any flaw in the annuity concept, other than complex pricing and quotes.

Even something like VBAL. Sure, it's a good ETF as far we can tell, but a lot can change over the years. Imagine in 10 years they re-write the mandate of the ETF. This has happened several times since 2000 to various ETFs. Someone has to always be on top of these things, and sometimes make decisions to change. e.g. the time may come when money should be pulled out of VBAL and moved to XBAL or another alternative.


----------



## lonewolf :) (Sep 13, 2016)

AltaRed said:


> @ OE, while I agree the goal posts keep moving (actuarial age as one gets older), I don't think the delay in buying an annuity is as much because of the 'much higher monthly payment' as much as it is not being to rationalize a 30 year forward cash flow analysis when one is 60 and perhaps just retiring, or just recently retired. Some vague 'crisis' point 30 years from now is not nearly as urgent as a 'crisis' point 20 years hence when one has become 10 years older.
> 
> I also agree the IRR doesn't change whether one is 60 or 70 today BUT the IRR could very well improve over time as that 60 year old progresses towards 70 if interest rates go up in the meantime. None of us know if that will be the case, but we do know that if we lock in today at low interest rates, we will never have the opportunity to lock in at a potentially higher rate 5 years from now.
> 
> ...



A deferred annuity grows @ a faster rate then most investors can make in bonds, GICs or playing the market. The older the investor is that is holding the deferred annuity the faster it grows. 

Most people do not buy deferred annuities the best investments most do not buy.


----------



## Topo (Aug 31, 2019)

lonewolf :) said:


> A deferred annuity grows @ a faster rate then most investors can make in bonds, GICs or playing the market. The older the investor is that is holding the deferred annuity the faster it grows.
> 
> Most people do not buy deferred annuities the best investments most do not buy.


Sorry, deleted comment was on variable annuities, not deferred annuities.


----------



## OptsyEagle (Nov 29, 2009)

All I know is that retirees have been retiring on pensions all their lives and have done just find and seem quite happy with them. A pension is just an annuity. With that in mind I always wondered why Canadians had such an aversion to them. I assumed it was because advisors make more money selling other products, like mutual funds, and under bias came up with all kinds of reasons why the investor could do better somewhere else.

Obviously one big difference between a pension and an annuity is that a pension is at least 50% funded by the employer (sometimes 100%) whereas, the retiree has to fund their annuity with all their own money. In any event, I hear people dumping on annuities all the time but the only complaint I ever hear about pensions is that they wish it was bigger.


----------



## prisoner24601 (May 27, 2018)

OptsyEagle said:


> All I know is that retirees have been retiring on pensions all their lives and have done just find and seem quite happy with them. A pension is just an annuity. With that in mind I always wondered why Canadians had such an aversion to them. I assumed it was because advisors make more money selling other products, like mutual funds, and under bias came up with all kinds of reasons why the investor could do better somewhere else.


I wonder about that too. When I talk to my friends who have a DB pension they seem quite pleased with retirement prospects. They don't believe me when I suggest that any employee that maximizes RRSP and now TFSA in a forced savings plan equal to mandatory pension deductions will generate at least the same or more if they buy an annuity at retirement. Of course it needs to be invested well and there is market risk and opportunity. The difference -it seems to me - is that I have a pretty good chance of building significant wealth to pass on to my kids (or blow later in life) whereas with a 100% pension/annuity it dies with you or at least half of it if does if you are married. The aversion to an annuity for me is handing over a big pile of cash to a financial organization never to be seen again. Also suspicious of high fees but mainly fearful of handing over the cash and secretly thinking that I could do better. It really is like insurance - once I no longer had a need for life insurance (kids on their own, debt gone) then it was easy to cancel the policy. As others have pointed out if I am uncertain that my guaranteed income will cover basic expenses, insurance would be a prudent thing to have.

Thanks for comments, very helpful


----------



## prisoner24601 (May 27, 2018)

stantistic said:


> I am in my mid-eighties and have been drawing an annuity for about two years. I have two comments:
> 
> a) I am happy that I do not have to make make important financial decisions now because I know that I am not sharp. I find it ironic seeing members quibbling now over fractions of a percent when an erroneaous decision later could blow their savings out of the water.


Thanks for this wisdom. Thinking about this when I'm approaching 60 is very different to how I'll be thinking about it in my eighties. If you don't mind me asking, what percentage of your portfolio did you convert to an annuity and what was the deciding factor?


----------



## gaspr (Mar 24, 2014)

Wade Pfau proposes that the most efficient retirement portfolio would replace bonds with annuities. This article explains the basics. His latest book goes into much more detail. It is a persuasive argument IMHO


----------



## like_to_retire (Oct 9, 2016)

gaspr said:


> Wade Pfau proposes that the most efficient retirement portfolio would replace bonds with annuities. This article explains the basics. His latest book goes into much more detail. It is a persuasive argument IMHO


Interesting article. I hadn't thought about the point below with respect to partial annuitization and the liquid assets left in the smaller portfolio.. Makes sense.

_"An important point to understand about the assets in a liquid financial portfolio is that a retiree may overstate the degree of control that they have for these assets. Retirees do not really maintain full control over their financial assets because they have a stream of lifestyle spending goals which must be financed in order to have a successful retirement. Those spending goals represent a liability that must be financed by assets on the household balance sheet. Certain assets must be earmarked to fund these liabilities and this has implications for how those assets should be managed. Many retirees end up earmarking more assets than necessary to support income. They therefore spend less than possible because there is no guarantee component with their income and they worry about outliving their assets. The possibility to consider is whether an income annuity provides an explicit way to earmark the assets needed for income in such a way that it frees up others assets for meaningful liquidity."_

ltr


----------



## prisoner24601 (May 27, 2018)

gaspr said:


> Wade Pfau proposes that the most efficient retirement portfolio would replace bonds with annuities. This article explains the basics. His latest book goes into much more detail. It is a persuasive argument IMHO


Thanks, the example in this article made it very clear for me. About 20 years for the insurance policy to stat paying off for a 65 year old taking 30% and buying a non-indexed annuity. But peace of mind and a higher equity portion for the invested assets are benefits without taking on more risk. I shall file the quote "if you are not willing to subsidize the payments to others in the event you die early, then you have no right to earn the subsidies from others in the event you live long." That sums it up nicely.


----------



## AltaRed (Jun 8, 2009)

gaspr said:


> Wade Pfau proposes that the most efficient retirement portfolio would replace bonds with annuities. This article explains the basics. His latest book goes into much more detail. It is a persuasive argument IMHO


When I retired early in 2006, I could have taken a significant portion of my DB pension and put it in a LIRA/LIF. I chose not to do so for the explicit reason the annuity would provide me with certainty, allowing me to run much higher equity allocations on my portfolio. Which is what I have done...currently about 85% equities. I have been much better for it.

The other interesting aspect of that decision was that had I converted that part of the pension to a LIRA/LIF and purchased a commercial annuity with the funds, the monthly payment would have been somewhat less than what the DB pension was giving me. IOW, the insurance companies would have taken their profit cut from that annuity purchase. I forget what the difference was but I do recall it would have been material enough for me to take notice. Moral to the story: Take the DB pension option and stop thinking you can 'beat the system'.


----------



## OptsyEagle (Nov 29, 2009)

prisoner24601 said:


> I wonder about that too. When I talk to my friends who have a DB pension they seem quite pleased with retirement prospects. They don't believe me when I suggest that any employee that maximizes RRSP and now TFSA in a forced savings plan equal to mandatory pension deductions will generate at least the same or more if they buy an annuity at retirement. Of course it needs to be invested well and there is market risk and opportunity. The difference -it seems to me - is that I have a pretty good chance of building significant wealth to pass on to my kids (or blow later in life) whereas with a 100% pension/annuity it dies with you or at least half of it if does if you are married. The aversion to an annuity for me is handing over a big pile of cash to a financial organization never to be seen again. Also suspicious of high fees but mainly fearful of handing over the cash and secretly thinking that I could do better. It really is like insurance - once I no longer had a need for life insurance (kids on their own, debt gone) then it was easy to cancel the policy. As others have pointed out if I am uncertain that my guaranteed income will cover basic expenses, insurance would be a prudent thing to have.
> 
> Thanks for comments, very helpful


I am pretty sure I know the reasons for the public aversion to annuities and you touched upon the big ones. First and foremost is *greed.* The Advisors prey on this emotion as well to convince you that you can do better and that alone keeps you from doing what the so called smart people are saying is a mistake, and gets you into higher fee alternatives. Remember the agents gets 2.5% gross commission. From that many other hands are in that kitty, whittling it down to a little or a lot below 2% for them. After that. Nothing. The goose egg. Exactly the same as if the client transferred their account to another broker. Compare that to sometimes 5% on mutual funds and always 1% every single year after that, when you stay invested, and you can tell me where your advisor's bias might lie. It does not mean they are right or wrong, but probably explains the major cause of the reduced interest in annuities.

The 2nd important reason is its *finality*. As you say, once you give the money to the insurance company, your future is set. One might think a retiree would like that assurance but another human emotion is to avoid important decisions. If you don't buy the annuity today, you can not only do anything else with your money, but you can always buy the annuity tomorrow (assuming you haven't lost any or all of your money). 

Probably the next is people just don't have enough money. Put another way annuities are *too expensive*. Now be careful reading that last sentence. It is not that you are overpaying or anything like that. The problem is providing, what one thinks they might need (or want) in retirement, using an annuity. Not only does the annuity buyer have to pay 100% of the cost, as opposed to the pensioner paying around 30% to 50% for most pensions, or less then 25% if you work for the government, but as interest rates keep falling, the cost for each $100 of monthly income gets higher and higher. Most people either underestimate the risks they are taking with higher return investments (dividend portfolios for example) or they are doing it out of necessity. They might say, "if I buy an annuity I will fall quickly into bankruptcy, due to insufficient income, so I might as well take the risks of the higher return investments".

*Confusion about annuity options and features* and *little direct access without a commissioned agent*, would probably round out the rest of the objections most people have.


----------



## agent99 (Sep 11, 2013)

gaspr said:


> Wade Pfau proposes that the most efficient retirement portfolio would replace bonds with annuities. This article explains the basics. His latest book goes into much more detail. It is a persuasive argument IMHO


I have looked at annuities from time to time, but somehow never saw an advantage for us. But I will read that link and see what it is that I may have missed.

Some of us have most of our fixed income in registered accounts. Once those become a RRIF, a certain minimum withdrawal is required. If the funds invested in fixed income are used to buy annuities, then the annuity payments would be fully taxed as income. On top of that you would still have to withdraw the prescribed minimum from the remaining equity in RRIF. I haven't done the numbers, but it seems to me that in our case, our taxable income and therefore taxes, might increase considerably. The CPP/OAS we receive is in effect like an annuity. It provides us a base income of about $35k. 

I suppose an annuity that paid the same (for couple) would provide many with a livable base income. Not sure what that would cost if it was indexed.

Does Pfaus' book covers taxation aspects? 

Our thought has always been to live comfortably off the income from our portfolios. We have never been big spenders, so that is no hardship. If we have a need for a larger outlay, we can always use our TFSAs (we don't draw from them). Near the end, we hope to leave a legacy for our family to enjoy.


----------



## AltaRed (Jun 8, 2009)

That is all well and good as long as you are in control of your steering wheel. At least some of that goes out the door when a POA takes over. Here is the response I wrote to J4B in post #14 in the ZMI vs VBAL thread


> I think you primarily mean Guidance for a Power of Attorney? Not necessarily a Will where an Executor crystallizes an estate and distributes the proceeds, albeit it could be guidance for a Trustee operating a testamentary trust for beneficiaries that are minor children.
> 
> Your Attorney has an obligation to do what is your best interests (or in the case of a testamentary trust for minors) and as such, you cannot restrict the Attorney from taking the necessary actions to meet appropriate living standards. That "Guidance" should be in the form of an IPS for your attorney/trustee.
> 
> ...


I was teasing LTR to make a point, but in essence, if I was your POA, I would annuitize enough of your portfolio, primarily fixed income, to make sure your base living needs would be met regardless of market conditions. It also has the potential for a higher overall return than a 5 year ladder of anything.


----------



## like_to_retire (Oct 9, 2016)

agent99 said:


> Some of us have most of our fixed income in registered accounts. Once those become a RRIF, a certain minimum withdrawal is required. If the funds invested in fixed income are used to buy annuities, then the annuity payments would be fully taxed as income. On top of that you would still have to withdraw the prescribed minimum from the remaining equity in RRIF. I haven't done the numbers, but it seems to me that in our case, our taxable income and therefore taxes, might increase considerably.


You'd have to do some math on those taxes. I don't know if would actually be a lot different. If you removed half your RRIF and bought an annuity, as you know the payments of an annuity includes both interest income and a return of capital which would be taxable. If you didn't purchase the annuity, then that capital in the RRIF not used for the annuity would then be subject to the mandatory RRIF withdrawal percentage and would again be taxable. Each year that percentage increases, so you would have some calculations to make for sure. Maybe the result would be a wash after a number of years?

ltr


----------



## ian (Jun 18, 2016)

There will always be a difference between a DB stream of payments vs taking the commuted value and purchasing an annuity.

The DB pension actuarial rates take into account the lifespan of the population. The annuity tables take into the lifespan of an annuitant. The difference is that people who buy annuities are typically in better health and/or expect to live longer lives.

We may look at annuities in a few years. Longevity in our family. If this was not the case, or if we had health issues, annuities would not be considered.


----------



## Topo (Aug 31, 2019)

The best annuities available are CPP and OAS. They are indexed to inflation and administered by the government. Of course, there are limitations and one cannot simply buy into them but has to qualify over many years.


----------



## AltaRed (Jun 8, 2009)

ian said:


> There will always be a difference between a DB stream of payments vs taking the commuted value and purchasing an annuity.
> 
> The DB pension actuarial rates take into account the lifespan of the population. The annuity tables take into the lifespan of an annuitant. The difference is that people who buy annuities are typically in better health and/or expect to live longer lives.


I was talking about my specific earned pension entitlement and my CV of that specific entitlement at the specific date of retirement. Lifespan of the population does not enter into my specific CV. It is only a factor for the DB plan itself.

For me specifically https://www.investopedia.com/terms/c/commuted-value.asp

From https://bpmmagazine.com/article/should-you-take-your-pension-commuted-value/


> Your commuted value is essentially the amount required to pay your pension for your life expectancy and then stop. By taking your commuted value, you are no longer part of the group of pensioners and there is nothing left behind by others to keep paying your pension.


The difference between DB plan payout and annuity payout is essentially what the insurer takes for their profit and 'at risk' component, both market and skewed towards longevity (as you noted).


----------



## james4beach (Nov 15, 2012)

I suspect that living through a time period like 1980-2019 makes DIY and balanced funds seem more appealing. After a period like this recent history, everyone assumes they can do better than an annuity.

However if someone just lived through 1950-1975, the annuity would probably look like a slam dunk. Same goes for someone who lived through the extended bear markets in Finland, Iceland, Japan, or Italy.

That reminds me: what happened to American annuities through their financial crisis and the insurer defaults? Did any annuity contracts blow up?


----------



## OptsyEagle (Nov 29, 2009)

james4beach said:


> I suspect that living through a time period like 1980-2019 makes DIY and balanced funds seem more appealing. After a period like this recent history, everyone assumes they can do better than an annuity.
> 
> However if someone just lived through 1950-1975, the annuity would probably look like a slam dunk. Same goes for someone who lived through the extended bear markets in Finland, Iceland, Japan, or Italy.
> 
> That reminds me: what happened to American annuities through their financial crisis and the insurer defaults? Did any annuity contracts blow up?


2008 and 2009 were interesting enough. One got to see one company after another, in their portfolios, reduce or cut dividends all together. You get a quick reminder about the faith you can truly put into a dividend portfolio. Memories do fade fast, however, so I agree that many people underestimate the risks involved in the alternatives to an annuity.


----------



## agent99 (Sep 11, 2013)

like_to_retire said:


> Maybe the result would be a wash after a number of years?
> 
> ltr


It could be. Might depend on type of annuity chosen. Can't see doing it anyway. Our FI is in a 5 yr ladder and not so easily cashed in.


----------



## AltaRed (Jun 8, 2009)

agent99 said:


> It could be. Might depend on type of annuity chosen. Can't see doing it anyway. Our FI is in a 5 yr ladder and not so easily cashed in.


But that can be re-organized so that in 5 years time, the FI could be all used to buy an annuity. The IPS I helped write for both my current spouse and my ex (assuming I might be hit by that big bus tomorrow) included a RRIF section where I put a few sentences on how to migrate from a 5 year GIC ladder to purchasing either a bond ETF like VAB, or an annuity, if they got tired of managing a 5 year GIC ladder on their own. And included the point it would take 5 years to put that into play. 

There are always options that can be engineered to get to the endpoint one wants.

We have discussed in this thread about when/where/if annuities have a place in one's retirement (withdrawal) mode. The bigger question might be...... Have any of your key views been addressed in your IPS? It is just as important (maybe more so) to have an IPS as one approaches, or enters, retirement so that one's POA understands: 1) why your portfolio is what it is, and 2) suggestions on alternatives to simplify portfolio management.

I've seen it written where an IPS can be one page, e.g. 1 fund, or 3 fund, couch potato portfolio, its asset allocation (accumulation and withdrawal stages), but in most cases that won't do if one has a fairly comprehensive portfolio with complicated holdings. Some direction on alternatives should be included on how to simplify complicated portfolios for ease of management by a POA. In my own case, my 5 year laddered FI, which is all in a small RRSP, could be annuitized and it could result in a better overall return because of the equity component inherent within annuity quotes, never mind longevity insurance.


----------



## MarcoE (May 3, 2018)

I plan to buy annuities when I'm in my 60s. They have a few advantages:

1) Peace of mind. You can relax and just collect a check. No need to manage anything. No need to stress about the markets. Your entire job becomes walking to the mailbox to pick up your check (literally or metaphorically if you're paid online).

2) Longevity protection. In this sense, they're the opposite of life insurance. In fact, they can complement life insurance nicely. The life insurance protects you from dying early, the annuity protects you from dying late.

3) An annuity reduces your net worth, thus reducing your estate taxes. For a legacy to an heir or charity, you can then use life insurance instead, which is tax free.

4) Extra diversification. It's really a different type of asset, which can fit in nicely with other assets like ETFs, gold, stocks, and insurance.

Right now I'm too young to get a good deal on an annuity. But if conditions are the same in 20-30 years, I want them.


----------



## lonewolf :) (Sep 13, 2016)

james4beach said:


> I suspect that living through a time period like 1980-2019 makes DIY and balanced funds seem more appealing. After a period like this recent history, everyone assumes they can do better than an annuity.
> 
> However if someone just lived through 1950-1975, the annuity would probably look like a slam dunk. Same goes for someone who lived through the extended bear markets in Finland, Iceland, Japan, or Italy.
> 
> That reminds me: what happened to American annuities through their financial crisis and the insurer defaults? Did any annuity contracts blow up?


If a 40 year old purchased a deferred annuity in the early 1980s they probably would have out performed 99.9% of those playing the market. Commission was expensive back then, no ETFs & most under perform the market. High interest rates would have been locked along with mortality credits very few investments would have had that good of a return.


----------



## ian (Jun 18, 2016)

I am hoping to see more financial analysis and discussion in 2020 on the ALDA -Advanced Life Deferred Annuity. 

https://business.financialpost.com/...n-option-that-every-retiree-should-know-about


----------



## lonewolf :) (Sep 13, 2016)

ian said:


> I am hoping to see more financial analysis and discussion in 2020 on the ALDA -Advanced Life Deferred Annuity.
> 
> https://business.financialpost.com/...n-option-that-every-retiree-should-know-about


 thanks for info


----------



## OptsyEagle (Nov 29, 2009)

ian said:


> I am hoping to see more financial analysis and discussion in 2020 on the ALDA -Advanced Life Deferred Annuity.
> 
> https://business.financialpost.com/...n-option-that-every-retiree-should-know-about


My problem with ALDA is two fold:

1) I am not as optimistic as others about life after age 85. Even if I make it and the actuaries probably would say I won't, I doubt I am going to be doing a lot. I am destined for public pay nursing care, if I need it, so allocating money now so I can have more money to reduce the cost to the government then, just doesn't sound like something that helps me out in any significant way.

2) I don't understand why a person that is retired and not earning any work income anymore, and living just fine, would need an income vehicle like an annuity in the future. In this thread we have talked about the so called optimum age to buy an annuity and if anyone recalls my suggestion, it is only when and exactly when you need the money. If you don't need it today, why are you going to need it when you are a lot older. I imagine there might be a few reasons but I doubt they would add up to enough to ever get me to buy an annuity, because of them.


----------



## Beaver101 (Nov 14, 2011)

MarcoE said:


> I plan to buy annuities when I'm in my 60s. They have a few advantages:
> 
> 1) Peace of mind. You can relax and just collect a check. No need to manage anything. No need to stress about the markets. Your entire job becomes walking to the mailbox to pick up your check (literally or metaphorically if you're paid online).
> 
> ...


 ... is it true that an annuity can reduce your net worth (so as to reduce your estate taxes)? If so, how's that? I can't see annuity payments as being tax-free.

Re your comments that if conditions (biggest is low interest rates environment) are the same in 20-30 years, you would still want them. Or maybe you do if you're selling them.


----------



## AltaRed (Jun 8, 2009)

They could be of benefit for those with larger RRIFs whereby taxes otherwise starting in the year one turns 72 can be deferred even longer as a result of lower RRIF balances that result in lower minimum withdrawals before, for example, age 80 or 85, or whenever one wants the ALDA to start. Also to avoid/reduce OAS clawback up to the age of 85. 

The FP article provides some legitimate and valid reasons why an ALDA may make sense, including what we have been talking about, the risks of a DIYer becoming incompetent. I suppose the best way to characterize ALDA is simply as another vehicle to use RRIF funds. It may, or may not, be beneficial to very many.

I suspect the government motivation is to find more ways to mitigate the number of people running out of retirement savings and tapping into the public purse such as GIS in their later years. We've all seen the articles where people have unrealistic assumptions about their retirement savings, the very ones who will likely end up on the public teat.


----------



## james4beach (Nov 15, 2012)

This is going to a severe problem in coming years, especially since pensions have become a rare thing compared to past generations. Many people have insufficient savings for retirement and are going to end up in poverty.

For me, other than CPP + OAS, the only money I will have in my senior years will be whatever I accumulate in my RRSP, TFSA, and non-reg. But I have several friends who basically have nothing in these. In my circles, none of us have any kind of pension (not even DC), it's basically entirely "do it yourself".

It's scary, frankly. Knowing that it's entirely up to me and entirely in my accounts (under my management) causes me a bit of stress and I'm sure I'm not alone. I worry both about making mistakes, but also worry about getting scammed, or suffering theft or fraud. I've heard exactly the same thing from friends who are doctors... there is stress that comes from self-managing one's entire future.

Options like buying an annuity, or perhaps optionally paying into CPP if they start permitting that, would be good alternatives. This would diversify my retirement picture and leave less in my "do it yourself" accounts. Perhaps CPP could play a role in this kind of paying-into-annuitization. They are good at managing money and Canadians trust the CPP.

But these ^ are situations of people who actually have enough money. For the bigger problem of people with insufficient retirement savings, the government is going to have to come up with some mechanism. It seems inevitable to me otherwise the costs are just going to show up in welfare costs.


----------



## like_to_retire (Oct 9, 2016)

james4beach said:


> It's scary, frankly. Knowing that it's entirely up to me and entirely in my accounts (under my management) causes me a bit of stress and I'm sure I'm not alone. I worry both about making mistakes, but also worry about getting scammed, or suffering theft or fraud. I've heard exactly the same thing from friends who are doctors... there is stress that comes from self-managing one's entire future.


Your day to day life is entirely up to you today, so I don't understand why managing your retirement income would be any different than managing your income today. Presumably, it's probably more complicated today than it will be in retirement, and for sure you'll have more time in retirement to manage your income and various forms of accounts. I know myself, I have a ton more time in retirement to fine tune everything in my portfolios that I would never have in my working career.

Are you afraid you'll be addle minded and won't be able to make decisions - is that the fear?

ltr


----------



## agent99 (Sep 11, 2013)

like_to_retire said:


> Are you afraid you'll be addle minded and won't be able to make decisions - is that the fear?
> ltr


I don't really understand the ALDA, but it sounds to me like you will still only be able to be addle minded for 25% or $150k. The rest will still need some thought. 
I would have preferred it they had allowed us to buy into CPP. $150k would buy quite an increase in CPP payments and no worries about the insurance company going broke. But then, I guess, the feds would be competing with some of companies that keep political parties afloat.


----------



## james4beach (Nov 15, 2012)

like_to_retire said:


> Are you afraid you'll be addle minded and won't be able to make decisions - is that the fear?


My primary fears relating to managing my own money are

1. theft / fraud - since this can't always be recovered from banks, especially if you don't catch it quickly
2. the fact it's not totally separated out and actually is available "if needed"

I've seen the second example play out in other people's lives. Suddenly there is a need for money within the family, perhaps due to health or siblings in desperate need. Or someone else who chronically manages their money badly. You take from your own resources and before you know it, you've depleted your own stash. And you might be tempted to say that this is entirely up to the person but the fact they have money available and don't give it to other family members in need can cause fallout (seen as greedy or selfish).

I've seen numerous examples of this, including people who started caring for their older parents (and children!) who had significant health problems. I would like to care for my parents as well, but to a point. At some point a person needs to isolate and keep some money for themselves to survive. But if you're caring for someone you love, it would be very easy to mismanage this.

Instead, being able to put the money behind a firewall (like an annuity) where you *and others* truly can't access the lump sum can be an advantage.

I wish it was an option to pay 100K or 200K into the CPP to boost the future pension payout.


----------



## james4beach (Nov 15, 2012)

I can give a more tangible example of the concern I wrote about above, which might help illustrate my fear. I came pretty close to this in real life.

Imagine that I've worked for several years, created my own business, and worked hard to save up money before getting married. My finances are on solid footing at this point and I am on track to have enough for retirement. I've been responsible and have saved for my future.

Then I get married or settle in with a long term girlfriend. But uh-oh, the girlfriend's family members need help or additional assistance. I had an ex girlfriend like this, and it was clear that due to various life circumstances, her family members needed _constant_ assistance. So now I start paying out a thousand bucks here, a thousand there. Her sister needs something. Her mom needs something. Somebody needs help paying their tuition or their rent. Because the girlfriend doesn't have any money, I start paying for all of it.

If that kind of situation runs away from me, the savings I've worked hard to accumulate can get spent on various other people other than myself! And imagine the reaction when I say these are my retirement savings. Her sister or her mom are sick now and need money now, and I'm talking about my "retirement" which is 40 years away?

Or her sister needs to pay her rent, or is going to get evicted, and I'm sitting on $200,000 in liquid investments... how dare I? How can I be so heartless and selfish?

This is what concerns me. My liquid investments are accessible and can be accessed. What I would like is a firewall of sorts, some entity that removes it from being readily available. Not all my savings of course but surely this would be a good idea for some of my wealth?

The RRSP helps with that to a point, but my investments go far beyond my RRSP. The annuity seems like another way. Any other methods for this?


----------



## agent99 (Sep 11, 2013)

I guess you need to put in just as much effort in choosing a girlfriend as in choosing investments


----------



## Topo (Aug 31, 2019)

An ALDA, if favourably priced, could be advantageous for retirees. By reducing the longevity risk, one would have more funds to spend early in retirement instead of having to be overly conservative.


----------



## Topo (Aug 31, 2019)

james4beach said:


> The RRSP helps with that to a point, but my investments go far beyond my RRSP. The annuity seems like another way. Any other methods for this?


One solution is to accumulate less liquid assets such as raw land which would be more difficult to tap into, unless you open a HELOC.

Variable annuities are generally not recommended, but could be a way to lock the funds.

Long term balloon loans come to mind, but I don't know if it is feasible and financially safe to arrange those.

I guess there are types of trusts that would make access to the funds more difficult. If you find a particularly heartless trustee (Mr. No!) to administer it, it could be ironclad.


Of course with all the solutions above, your own access to the funds would be limited too. So there is a big downside here.


P.S. One other way is to go into debt (like buy a rental building) so that all your income has to be used to service the debt and you have nothing left to give away.


----------



## lonewolf :) (Sep 13, 2016)

james4beach said:


> I can give a more tangible example of the concern I wrote about above, which might help illustrate my fear. I came pretty close to this in real life.
> 
> Imagine that I've worked for several years, created my own business, and worked hard to save up money before getting married. My finances are on solid footing at this point and I am on track to have enough for retirement. I've been responsible and have saved for my future.
> 
> ...


 I would copy Gail on till Debt do us part. Those needing money assistance I would have them supply you with the numbers of money coming in & money going out. If they do not supply the numbers tell them you can not help them.

They are not even trying to help themselves since they have no idea how they can stretch their dollars farther or be able to bring in more money. If they can supply the numbers & they all add up go over the numbers with them.

If they are always having money problems I am sure you will be able to see why when you go through the numbers. Point out where they are going wrong. Tell them your not giving them money because they are not helping themselves with their poor money management. Tell them it is a waist of your life energy working hard for your money then throw it away to help someone that does not want to help themselves.


----------



## latebuyer (Nov 15, 2015)

I'm surprised the issue of leaving a legacy hasn't come up that much as that is what i hear from people at work who take the commuted value instead of the pension. For me i have a pension (not a rich one) but am also investing in the sasketchewan pension plan. My goal is to have the equivalent of a pay cheque in retirement and just use my investments for fun money and travel. I'm not sure i'll achieve that but i'm trying. I think i'd have trouble plunking down for an annuity all at once so its nice i can invest gradually although i've heard the argument i'd do better investing in etfs. Just to add i'm single so don't have a dual set of oas and cpp like a couple so i feel justified in getting another pension (really an annuity)


----------



## AltaRed (Jun 8, 2009)

I'd take those anecdotes with some salt. I think it is a case of moderation. Some of one's needs can be met by annuity income for certainty, and the rest with the flexibility to spend (or not) as one ages. Pretty much everyone wants to leave some legacy, if for no other reason than knowing when to die broke is really just a roll of the dice. There will (should) be a residual.

Some want to leave a residual for certain personal reasons like helping a disadvantage family member via a trust, others because their ego wants a final 'look at me' even if they are prone in a casket, and more likely just to spread a bit of good cheer to select beneficiaries including one's favourite charity. My own adult kids have successful business careers so they are not wanting... but I will still want to leave them something so they can either retire earlier or have a higher spend rate on things they wouldn't normally do. I don't think it is any more complicated than that.


----------



## latebuyer (Nov 15, 2015)

Just curious if people feel differently about the money they get from a pension or annuity. I think i would feel differently about spending that money vs. what is drawn from my portfolio but maybe that isn't the case.


----------



## AltaRed (Jun 8, 2009)

There is definitely a difference. The annuity is there as sure as the sun rises in the east every day. The portfolio could go sideways in turbulent times.


----------



## james4beach (Nov 15, 2012)

AltaRed said:


> There is definitely a difference. The annuity is there as sure as the sun rises in the east every day. The portfolio could go sideways in turbulent times.


And there's a psychological benefit here. If I'm living my life and spending money each month, it would be nice to not be affected by market turmoil and be able to separate my lifestyle from markets. In contrast, a portfolio with liquid securities experiences declines as well as sequence of return risk. You would (correctly) want to reduce your spending during bad years to help preserve capital.

AltaRed, curious what you might think about this issue where an annuity could help protect capital (in a sense), assuring it's there for retirement. One cannot always say "no" to money demands, especially from family. I write this as a single guy who's working hard to invest in my future and is more than a little bit concerned that a partner/spouse/girlfriend in the future could unravel a lot of the work I've done in building up capital.

On one hand, I am too young to buy an annuity (little bit under age 40) but on the other hand, could it be a way to move my capital behind a firewall that cannot be breached? This is "Single James" brainstorming about how to protect his future retirement, with all the unknown things that could happen in my future. Keeping in mind I have no other pension of any kind.

Or are there better ways for Single James to make sure his capital is truly there for his retirement?


----------



## latebuyer (Nov 15, 2015)

What i would advise you is to be private about how much money you have until you know your girlfriend well. As long as you are not showy in clothes or transportation, i don't know they would know how much you have. I have friends who have separate bank accounts and i think that is more common. Speaking as a female, i think you'll find it more common that women also want to maintain separate accounts, particularly as you get older. Just a comment you may want to post the question in redflagdeals or reddit as i believe is a younger crowd there.


----------



## james4beach (Nov 15, 2012)

latebuyer said:


> What i would advise you is to be private about how much money you have until you know your girlfriend well. As long as you are not showy in clothes or transportation, i don't know they would know how much you have. I have friends who have separate bank accounts and i think that is more common. Speaking as a female, i think you'll find it more common that women also want to maintain separate accounts, particularly as you get older.


Definitely good advice, thanks! I would of course love to meet someone with compatible money habits.

I just wondered if some mechanism like the annuity could help out in this situation. The CPP does a great job for this by the way. Think of all the people who, due to life circumstances, have not been able to save money and end up with nothing in their own accounts. This isn't just about marriage but also other kinds of important needs for money. The CPP forces saving for retirement in a way that cannot be undone.


----------



## AltaRed (Jun 8, 2009)

james4beach said:


> AltaRed, curious what you might think about this issue where an annuity could help protect capital (in a sense), assuring it's there for retirement. One cannot always say "no" to money demands, especially from family. I write this as a single guy who's working hard to invest in my future and is more than a little bit concerned that a partner/spouse/girlfriend in the future could unravel a lot of the work I've done in building up capital.
> 
> On one hand, I am too young to buy an annuity (little bit under age 40) but on the other hand, could it be a way to move my capital behind a firewall that cannot be breached? This is "Single James" brainstorming about how to protect his future retirement, with all the unknown things that could happen in my future. Keeping in mind I have no other pension of any kind.
> 
> Or are there better ways for Single James to make sure his capital is truly there for his retirement?


Assuming you might live together, keep separate accounts except for common household expenses and for example, joint ownership (or tenants in common ownership) in a matrimonial home. Each of you may contribute proportionately or disproportionately to such account depending on earning power, etc.

You cannot protect against Division of Assets in a breakup whether common law or marriage except for the assets (Excluded Assets) you bring into the relationship. Pensions, annuities, registered accounts, non-reg accounts are all subject to division. Just the way it is. My ex and I divided everything down the middle back in 2008. She got half my DB pension and half my CPP because she had been a homemaker for most of her life. It is what it is and it is of course fair as she kept house and raised 2 boys.

If you continue to live alone (and a lot of women prefer this more than men these days for independence reasons), then your 'partner' has no need to know the extent of your wealth or your bank/investment accounts. Obviously your standard of living says something about your assets and/or earning capacity, but specifics don't need to be disclosed. When I got together with my current common law wife, we lived apart for 4 years until we decided to take up house together. She really had no idea of the depth of my assets and I kept it that way, albeit she assumed I was a pretty comfortable, maybe wealthy, oil man. It was only after we did a co-hab that we each had to disclose our assets. That is the decision I had to make (and take) for a relationship. 

I've never felt pressured to help out family members financially, and none have asked me. Our family grew up on the premise we took care of ourselves. Perhaps I was/am lucky.


----------



## Topo (Aug 31, 2019)

One significant advantage of annuitizing portion of one's portfolio is to mitigate the effects of sequence-of-return risk. Just came across this article on MarketWatch by Shawn Langlois entitled:



> *This is how dangerous ‘dollar-cost ravaging’ can be for your retirement*


The gist of the article is the following graph, comparing accumulation and decumulation in the same time period (from 2000 until now):










The portfolio in decumulation got ravaged in the 2000-2002 bear market and again in 2008, with little recovery in the 2010's even with a strong bull market. If another bear hits, the retiree could be in dire straits. For a retiree who had annuitized to create a floor of income, they could have helped their portfolio by keeping withdrawals to a minimum during the aughts. 

One interesting note is that nominal annuities seem to have a reverse SOR risk, in the sense that they are more valuable early in retirement (when inflation has not yet eroded into the buying power) than later.

https://www.marketwatch.com/story/t...-for-your-retirement-2019-12-11?mod=home-page


----------



## james4beach (Nov 15, 2012)

AltaRed: Very useful and valuable info; thanks so much. Do 'Excluded Assets' mean that I get to keep assets I already have prior to the relationship? For example my NW today contained in RRSP + nonreg, as a single person: is that generally mine to keep since it precedes the partnership?

I ask all these questions because I have seen friends and coworkers go through some really bad situations. I know several men a bit older than me who were absolutely destroyed by marriages, financially. After I saw the first few instances I realized this isn't a rare / outlier event.


----------



## latebuyer (Nov 15, 2015)

If you wanted to exclude your assets I believe you would need a prenuptial agreement.


----------



## AltaRed (Jun 8, 2009)

latebuyer said:


> If you wanted to exclude your assets I believe you would need a prenuptial agreement.


Or a co-habitation agreement in the case of common law. In theory, I think in most provinces, you may not need a formal document to set aside those Excluded Assets but it could be a royal mess trying to develop the evidence in hindsight.

Yes, James, you prepare a schedule of your assets and their value as they exist effective the first day of cohabitation (or marriage). It might be $2000/month annuity payment too. That value is forever preserved as Excluded Assets. Note I said value, not specific holdings which you can change in/out as part of normal investing. Note however that growth in value must be shared. Example: You have investment accounts of $1M at time of cohabitation but those accounts grow to $1.2M. The $1M is protected, but the $200k growth must be shared (unless of course your co-hab says no, and it could say that, but your partner's lawyer would likely say 'no way Jose'). Ultimately a co-hab or pre-nup is supposed to be fair (not equal) to both parties.

Any annuities you have at that moment would also be Excluded. For example, I won't have to share my CPP or DB pension as it existed at time of co-habitation.

A lot of these things become more complicated if you decide to have a family. That bond tends to end up co-mingling a lot of stuff, but it is still possible to keep separate accounts. There obviously would be issues of child and spousal support in that kind of breakup. My situation was really 'clean'. We took up house AFTER we both retired, so it was easy to define Excluded Assets and it is easy to maintain separate accounts without becoming pedantic about it. For instance, my spouse is on my EHP which is a deduction on my pension cheque. I don't charge her for her share of the premiums though I could.


----------



## james4beach (Nov 15, 2012)

Thanks AltaRed. I did not know this about people entering cohabitation with assets... news to me. That actually sounds a lot more fair than I had assumed earlier.


----------



## AltaRed (Jun 8, 2009)

Most co-habs are written to auto-morph to pre-nup should a formal marriage take place. A clause to that effect.


----------



## Topo (Aug 31, 2019)

I believe inheritances are also excluded.


----------



## AltaRed (Jun 8, 2009)

Topo said:


> I believe inheritances are also excluded.


Yes, provided an inheritance is not used to purchase common property (perhaps only some, not necessarily all, provinces). Remember that Division of Assets is Family Law which is provincial jurisdiction. There can be significant differences, e.g. BC is one jurisdiction where common law is quite close to legal marriage. Note: Way off-track from annuity discussion now........


----------



## Topo (Aug 31, 2019)

AltaRed said:


> Note: Way off-track from annuity discussion now........


One interesting aspect with nominal annuities that I haven't seen discussed yet is what could be described as "sequence-of-inflation" risk. High inflation is the early years should result in less real spending power than high inflation is later years. So as an example for a 30 year retirement, one with 6 percent inflation in the first 15 years and 0 inflation in the second 15 years would be worst than another with those inflation results in the reverse order, even though both average out to 3% per year.


----------



## lonewolf :) (Sep 13, 2016)

Topo said:


> One interesting aspect with nominal annuities that I haven't seen discussed yet is what could be described as "sequence-of-inflation" risk. High inflation is the early years should result in less real spending power than high inflation is later years. So as an example for a 30 year retirement, one with 6 percent inflation in the first 15 years and 0 inflation in the second 15 years would be worst than another with those inflation results in the reverse order, even though both average out to 3% per year.


A 45 year old that purchased a deferred annuity when interest rates were sky high along with inflation in the late 70s & early 80s made out like bandits.


----------

