# When Is An Annuity A Good Idea?



## dogleg (Feb 5, 2010)

If a retired couple is approaching 80 for example would it make sense to use a RIF to set up an annuity for a potentially surviving spouse?


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## Guban (Jul 5, 2011)

Annuities may make sense if they are looking for something simple to use, guaranteed, and if leaving an estate is not a concern. MoneyGal is the expert on annuities, but I haven't seen her post for a long time. Hope she will comment on this topic further.


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## OptsyEagle (Nov 29, 2009)

dogleg said:


> If a retired couple is approaching 80 for example would it make sense to use a RIF to set up an annuity for a potentially surviving spouse?


Sounds like an OK idea to me.

Many people feel that as they get older, annuities pose the risk that the annuitant will die and money will be lost. That is a risk, however, it is the same risk at all ages, and it is the cost of protecting yourself from outliving your money. Since an annuity is designed to payout all the capital and interest over the expected lifetime of the annuitant, it doesn't matter what age a person is. What matters is whether they die when they are supposed to. Since we don't really control that, today is as good of time as tomorrow or yesterday.


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## birdman (Feb 12, 2013)

I don't know much about annuities but think the time to buy them is when interest rates are high, not low.


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## dogleg (Feb 5, 2010)

Some interesting points made. Thanks. The couple I am thinking of have no ongoing money problems and have good current and survivor pensions. The issue came up because evidently their financial advisor tried to convince them to collapse one or both of their RIFs and convert to an annuity. Makes no sense to me especially at their age and as Frase said you don't get much of a deal with interest rates in the tank.


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## Spudd (Oct 11, 2011)

If their pensions are enough for them to live on, then an annuity makes no sense.


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## Guban (Jul 5, 2011)

dogleg said:


> Some interesting points made. Thanks. The couple I am thinking of have no ongoing money problems and have good current and survivor pensions. The issue came up because evidently their financial advisor tried to convince them to collapse one or both of their RIFs and convert to an annuity. Makes no sense to me especially at their age and as Frase said you don't get much of a deal with interest rates in the tank.


It is true that the payments will be low for what they have to pay because the interest rates are high, but what do they invest in now? Bonds? Any fixed income investment faces the same issue.

Spudd makes a great point about the older couple's need for money with their pensions, but I still stand by my earlier answer of simplicity. Also, I understand that annuities may be more tax efficient outside of a registered account.

Does anybody out there know about a possible conflict of interest? How much does an advisor make for selling annuities? The cost of stocks and mutual funds is well publicized, but I don't know about annuity products.


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## leslie (May 25, 2009)

Since the retiree is presumed to have a healthy CPP, OAS and defined benefit pension, there is little need for an annuity. Those incomes already have no investment risk, or longevity risk or inflation risk.. 
But to the general question "Are annuities a good idea for an 80 yr old" I would say yes. I plan on buying one to cover my basic needs (not met by CPP (taxed at 50%) and OAS just as soon as I am old enough for my cohort to be dying at about 2% a year. But then I personally will have little CPP and no pension.
You can find out the details about Canadian annuities at http://www.retailinvestor.org/annuity.html


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## My Own Advisor (Sep 24, 2012)

Spudd said:


> If their pensions are enough for them to live on, then an annuity makes no sense.


I think Spudd raises a good point. Annuities are great for the fixed-income they provide. If you need fixed-income stability _and_ need the income from an annuity, they might work for you.

If you are running a surplus after expenses from existing fixed-income, I struggle with understanding why purchasing an annuity is needed.

Where is MoneyGal when we need her?


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## wendi1 (Oct 2, 2013)

Quite right. I assume the advisor will be getting a fat cheque when they purchase an annutity.


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## OptsyEagle (Nov 29, 2009)

Yes. Annuities only make sense to guarantee you have enough money to live on. If you already have that, then I would pass on it.

Now all that being said, there is a tax advantage to replacing GIC/Bond investments with and Annuity combined with a life insurance policy. On an after tax basis, no guaranteed fixed income solution will beat the annuity/life insurance combo, provided the insured's are an average risk. This annuity/life insurance combo is for money that you are unlikely to need in your lifetime but is being taxed away while you live.


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## Karen (Jul 24, 2010)

I can't see any point in using your retirement funds to buy an annuity if you know you have enough income and assets to last yours and your spouses' lifetimes, as in the OP's example. Why would you give up the opportunity to leave a legacy to family members or anyone else of your choice if it isn't necessary?


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## lonewolf (Jun 12, 2012)

frase said:


> I don't know much about annuities but think the time to buy them is when interest rates are high, not low.


 Frase you are right When interest rates are high it is the best time to buy annuities. The early 80s when interest rates were high near the end of summer K wave would have been an amazing time to have bought an annuity. Aprox 30 years from now I will be looking to buy an annuity near the top of the 30 year interest rate cycle.


When the DJI gets down to around 1000 & again around the 1974 lows below 1000 I will be wanting to buy stocks so I might buy an annuity around this time that is linked to the stock market.


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## dogleg (Feb 5, 2010)

Our 80 year old plus friends have confided more details about their investment advisor's advice. Evidently he told them to expect a 7% return for life from an annuity. He told them they would need to take more and more out of their RIFs and thus their income from that source would drop too. (not exactly stop the press news! But if they don't need it they would just invest it elsewhere.) He said they can get an annuity plan with a 5 to 10 year payment guarantee. (This must cost something for 80 year old folks.) The husband has a pension with a 60% survivor payout for his wife. The advisor warned them that her pension would drop far more than 40% because she would have no income splitting and her taxes would go up big time. This sounds like a lot of cr-p to me. What do you folks think? Where is Money Gal ? Thanks.


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## OptsyEagle (Nov 29, 2009)

dogleg said:


> Evidently he told them to expect a 7% return for life from an annuity. He told them they would need to take more and more out of their RIFs and thus their income from that source would drop too. .


He was probably talking about the annual income divided by the lump sum payment. I have no doubt it could get to 7%, but of course that is not their internal interest rate, since a lot of that income is their own capital. 

The annual RRIF payment at age 80 is 8.75%, so yes the annuity would generate less annual taxation. However, when you add the lifetime of RRIF payments and compare it to a lifetime of annuity payments it is the performance of the investments that will make the difference. An annuity today has about a 3% internal rate of return. If the RRIF beats that by more then a few percentage points then the after tax income of the RRIF and left over estate will beat the annuity, if these people die when the insurance company says they should or earlier.  If they live a longer then average life the annuity will most likely win. The only answer to that last point is a question "do they feel lucky" lol.




dogleg said:


> He said they can get an annuity plan with a 5 to 10 year payment guarantee. (This must cost something for 80 year old folks.) .


Yes, an annuitant can get a 5 to 10 year payment guarantee and yes it does cost something. It definitely costs someone 80 a lot more in lost income then someone let's say 60. They probably should be prepared to forgo the payment guarantee and be happy with the fact that it will pay them for life. Anything else is maximizing an estate and if that is more important to them, then most likely an annuity is not the best investment to do it.




dogleg said:


> The husband has a pension with a 60% survivor payout for his wife. The advisor warned them that her pension would drop far more than 40% because she would have no income splitting and her taxes would go up big time. This sounds like a lot of cr-p to me. What do you folks think? Thanks.


There most likely will be some increased taxes since declaring 60% of the pension will draw more tax burden then 50% would with income splitting. That is simply interesting information with very little one can do about it. Yes, the annuity will draw less annual taxation, but may or may not have a better long term after tax return. It all still depends on what rate of return they get on the RRIF while they are alive and again, how long they live.


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## OptsyEagle (Nov 29, 2009)

At the end of the day, the question is quite simple. Do they need the income to cover their minimum expenses while they both live and when one of them is deceased? If the answer to that is no, then it is unlikely an annuity would be my first suggestion. If the answer is yes, then we can debate the issue of what is the best way to do it, however an annuity will be one of a number of contenders in the list of possible choices.


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## lonewolf (Jun 12, 2012)

dogleg

I have often herd that there is a lot higher comision paid for the sale of annuities then there is for the sale of stocks & bonds to the seller of these products. So advise can be toward getting a big fat check for the salesman.

The best way to get around the conflict of interest is through an advisor @ a credit union that is paid by the credit union. If the company does pay a commision for its product it could to the members of the credit union. Since everyone is a member of a credit union the members would want to receive advise that is sincere from the adviser. If I were in the position of your friends I would work with an adviser from a credit union so there is no conflict of interest.


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## dogleg (Feb 5, 2010)

Thanks to all for your help. Optsy E.. Could you expand on the "...annual income dividend..." please.


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## OptsyEagle (Nov 29, 2009)

dogleg said:


> Thanks to all for your help. Optsy E.. Could you expand on the "...annual income dividend..." please.


Are you talking about this statement: _ annual income divided by the lump sum payment_

Remember an annuity pays out more then just the interest that the insurance company pays on the lump sum of capital. It also pays out the lump sum of capital as well. To understand an annuity, you just need to understand a mortgage, which many of us do because they are much more common.

A mortgage is a lump sum paid by the financial institution to the customer, where the customer pays it back with a series of level payments that are a blend of interest and principle. The amount of the payments will be determined by the internal interest rate and the amount of time to pay it all back. 

An annuity is a lump sum paid by the customer to the financial institution, where the institution pays it back with a series of level payments that are a blend of interest and the principle. The amount of the payments will be determined by the internal interest rate and the amount of time to pay it all back. The time here is the actuarial life expectancy of the annuitant.

So you see, a mortgage and an annuity work exactly the same. 

Since 80 year old customers do not have an overly long life expectancy (think about a loan with a very quick payback period), their level payment is fairly large but a lot more of that level payment is their own principle due to the shorter time they have for this thing to amortize. When the advisor takes the annual income (12 monthly annuity payments) and divide it by the principle amount they paid, the number will most likely work out to a number greater then 7% (for 80 year old annuitants). Once must remember, however, that this rate IS NOT the interest that the insurance company is paying on the deposit. It is simply a number.


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## OptsyEagle (Nov 29, 2009)

lonewolf said:


> dogleg
> 
> I have often heard that there is a lot higher comision paid for the sale of annuities then there is for the sale of stocks & bonds to the seller of these products. So advise can be toward getting a big fat check for the salesman.
> 
> The best way to get around the conflict of interest is through an advisor @ a credit union that is paid by the credit union. If the company does pay a commision for its product it could to the members of the credit union. Since everyone is a member of a credit union the members would want to receive advise that is sincere from the adviser. If I were in the position of your friends I would work with an adviser from a credit union so there is no conflict of interest.


The problem here is that annuities require the advisor to have an insurance license and the other investments require either a mutual funds license or a securities license. The lions share of independent advisors will have both an insurance license and an investment license, however not all. With credit unions you will probably find that many advisors there will most likely only have a mutual funds license and hence that issue will most definitely bias the advise. _ If I am a hammer that needs to stick 2 boards together am I going to select a nail or a screw?
_
The annuity will pay all its commissions up front but in my opinion, it is not overly high, as compared to the clients putting their money into a mutual fund with a DSC schedule. The commission on the annuity would be at most 1/2 of that amount, up front, with no annual trailing commissions. 

So in this case I suspect the reason for this advise is:

1) the advisor only has an insurance license and couldn't sell a segregated fund (same commission as mutual funds) since it is very difficult to get much of a guarantee on seg funds for customers over 80 years old. So the annuity might have a better chance to make a sale.

2) the advisor likes quick up front money in his/her pocket and is willing to forgo the future trailing commissions of mutual funds, even though the mutual funds would pay more over time.

3) the advisor thinks this is the best advice for these clients.


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## lb71 (Apr 3, 2009)

In my opinion, the main reason to purchase an annuity is to alleviate the risk of outliving your money. It buys piece of mind. It seems to me that your friends both have stable pension income and the RIF is "extra" in that they don't need it to live. If so, then annuitizing does not make sense. You mentioned pension splitting, that suggested to me that one of your friends is making much more than the other. So on an after tax basis yes it would drop more than 40%, but not sure if it is a lot more. So they should make sure that upon the death of one person, the other is fine with the survivor pension(s). Is the advisor providing them with any illustrations, or is it all word of mouth?

Regarding the commission, the advisor could be licensed for segregated and/or mutual funds, and he has already received compensation for moving the assets to specific funds. This may be a way for him to churn the business for more commission. (He could sell them other funds, but that would be too obvious.) In what is your friends' money invested?


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## cannew (Jun 19, 2011)

If your investments were in good dividend growth stocks, even in a rrif, you would never have to worry about future income. Over the years your return on investment should continue to grow. Even when you must take rrif withdrawals, the shares can be transferred to a non-registered account and continue to pay you a growing income (at a lower tax rate). Annuity never grows it's payments and even at 80 you could be around 15 or more years.


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## OptsyEagle (Nov 29, 2009)

cannew said:


> If your investments were in good dividend growth stocks, even in a rrif, you would never have to worry about future income.


If they needed to use this income to pay for some of their fixed expenses, I doubt those investments are going to be as worry free as you suggest, when the companies run into a recession and start cutting dividends, filing for bankruptcy and losing 30%, 40% or 50% of their share prices.


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## cannew (Jun 19, 2011)

OptsyEagle said:


> If they needed to use this income to pay for some of their fixed expenses, I doubt those investments are going to be as worry free as you suggest, when the companies run into a recession and start cutting dividends, filing for bankruptcy and losing 30%, 40% or 50% of their share prices.


During the 2007/2009 financial crisis, only one of my 20 companies Manulife cut their dividend. The banks held them and half continued to increase, though at a slower rate (but still higher than inflation). My income has continued to increase and even mfl has started increasing the div.

Yes the portfolio value dropped about 35% but it did not affect my income.


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## OptsyEagle (Nov 29, 2009)

That's great but it is still an apple and orange comparison during a stock market crisis. One is guaranteed and the other is not. It's not what ends up happing that matters, but what can possibly happen, and what an investor ends up doing because of their fears, the lack of guarantees and the overall need for this money.

Anyway, your suggestion is a strategy that may work for some people's situation and not for others, as would an annuity.


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## dogleg (Feb 5, 2010)

This thread has generated some enormously valuable information. Thanks. As you can imagine I don't wish to pry into our senior friends affairs but they have volunteered some interesting financial data that makes me wonder why they would need an annuity and what their fee for service financial advisor is thinking. They have a combined pension income of about 75k $ a year and his wife would get 60% of his $57k company pension plus her federal pension. They tell me they have about $300k invested and a house worth about that amount too. Their TFSA s are maxed out with GICs and ETFs . Evidently they have about $90k in their RIFs and it is invested in mainly ETFs like XDV, CBO, XCV, XSB, XBB, XTR and I think he said about $35k of it is in CIBC monthly Income Fund. Their unregistered savings seem to be equally diversified. So my question remains why would they want/need an annuity. Help! It seems to me they might be overly diversified and or are overlapped on several investments.


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