While it’s understandable that guaranteed investment products are a source of curiosity during this emotional period that the stock markets have been going through for the past year, the use of annuities in retirement planning also seems to be generating some renewed interest, as Michel testifies here.
“I am 72 years old. Considering the higher interest rates for a few months, I wonder if acquiring an annuity could be a good opportunity to seize in order to ensure myself a regular income for the rest of my life. »
This question is both legitimate and complex. Our reader has
right to point out that the current context of rising rates is driving down the prices for the purchase of a life annuity, paid until the death of the annuitant. The insurers, who distribute these products, finance these annuities with long-term bonds, the price of which is falling with the rise in interest rates.
Concretely, Michel would now have less capital to invest than three years ago to guarantee the same income. All other things being equal, the price is also set according to the life expectancy rate.
However, don’t cancel your holiday plans: not all pre-retirees and retirees need to buy an annuity right away, because you see, as is often the case, there are a number of things that can come into play. to analyse.
What is your life expectancy?
If this answer could be obtained, the financial planner could perform her calculations with much greater ease. A good retirement payout plan considers several assumptions: value and categories
of assets you have in your possession, your family and tax situation and the projected rates of return based on your risk tolerance profile.
The best plans also present various strength tests to validate the retiree’s decisions. But they all remain theoretical, because it remains impossible to predict the number of years before disbursement.
“Why so much insistence on the date of death? “, you will say to me. Simply because there are life annuities and fixed term annuities whose purchase requires making choices about different options, such as
guarantee or reversibility
joint.
With the same initial amount to invest, the monthly annuity you will receive will not be the same whether you choose a life annuity, with a guaranteed period — and if necessary, even the duration chosen — or reversible to the spouse. And the financial profitability analysis of these different options is always based on life expectancy, a theoretical assumption.
I used an insurance company’s online calculator to illustrate Michael’s case. According to this tool, the life expectancy of Michel, 72 years old, would be 88 years old.
Buying a life annuity
including a 10-year guarantee period, from his registered retirement income fund (RRIF) of 100,000 dollars, would generate a gross annual income of 7830 dollars which is guaranteed for life. In comparison, a balanced portfolio (40% fixed income, 60% growth) generating an annual net return of 3.60% would theoretically allow the same disbursement until age 89, or more flexibility in disbursements if needs change.
For many retirees, therefore, a more growth-oriented risk tolerance profile would be needed to beat the annuity to reduce exposure to longevity risk. But will Michel die before his life expectancy, or after?
Security or flexibility, the choice is yours
You understand that the lower your risk tolerance and the more moderate your investor profile, the more the integration of the annuity could be suitable for your retirement planning.
If you don’t benefit from a defined benefit pension plan, the main advantage of buying an annuity is mainly to obtain a form of peace of mind, for you or your surviving spouse.
No longer having to worry about the market and securing your investments, however, presents an opportunity cost. If, for example, you choose an annuity with a guarantee period or a reversibility clause, the amount available for the needs of the annuitant will be lower.
If you do not take out a guarantee or a very short guarantee period to obtain a higher pension and you die quickly after having purchased it, the assets transferred to your estate will be affected. It is important to clarify your retirement needs and objectives, as well as your estate wishes.
An annuity offers peace of mind that can be paid for: it is, after all, an insurance product. Our
reader Michel should base his decision on concrete illustrations allowing him to compare the different options that are adapted to his situation. It is also important to compare several offers, companies do not use the same current interest rates in the establishment of their products. Unless his savings are very modest, Michael’s pension should fit into a set of strategies and not be made up of all of his available investments.