The situation
Adam*, 59, and Leila*, 61, are preparing to retire within two years.
They envision an active retirement in travel and family activities with their children who are at the start of their adult lives.
On the financial side, Adam and Leila consider themselves in a good situation to support a lifestyle projected at around $90,000 per year during the first decade of their retirement.
Then, as they get older, Adam and Leila anticipate their lifestyle will gradually increase to $120,000 per year as assistance and health care costs are added. .
In the meantime, the couple has benefited from good salaries ($326,000 per year) to build a pot of financial assets estimated at $1.9 million among their registered savings accounts.
Also, its financial balance sheet is free of debt, in addition to a net asset value of around $375,000 linked to their property.
However, because their future retirement income will greatly depend on the return and disbursement value of their financial assets, Adam and Leila are concerned about the need to “secure” their sources of retirement income in the medium and long term. .
“Despite the importance of our retirement savings assets, we become a little more financially cautious with age and the imminent end of our good employment income,” admits Adam.
“In the meantime, we doubt that our next retirement income (Leila’s retirement plan, QPP and PSV pensions after age 65, retirement savings disbursements) will be sufficient to support our projected lifestyle at the end of the year. retirement. »
In this context, given that he does not have a retirement plan linked to his employment, Adam questions the relevance of using part of his assets to purchase an annuity, in order to secure his income until old age.
“Is this relevant in terms of financial planning and tax optimization of our future retirement income? asks Adam.
” If not why ? If so, how can I “shop around” for the purchase of an annuity? Should we hurry while interest rates are still relatively high? Or wait until they start to drop? »
The situation and questions of pre-retirees Adam and Leila were submitted for advisory analysis to Louis Morneau, who is a financial planner and financial security advisor at the firm Aisance Gestion de Patrimoine, based in Brossard.
NUMBERS
Leila: 61 years old
Annualized income:
– salary until 2025: $130,000
– retirement plan after 2025: $30,000
Financial assets :
– RRSP: $160,000
– TFSA: $170,000
Adam: 59 years old
Annualized income:
– employment until the end of 2024: $196,000
– financial assets: approximately $4,000
Financial assets :
– RRSP: $580,000
– TFSA: $229,000
– Locked-in retirement account (CRI): $767,000
– Non-registered investment account: $280,000
Joint assets:
– main residence: $375,000 (mortgage free)
– recent purchase vehicle: $65,000
Joint liabilities:
– No debts
– Annualized disbursements: $80,000
Advice
First, financial planner Louis Morneau wants to reassure the couple about their financial situation in relation to the lifestyle planned for retirement.
“With their current financial assets, the couple can hope to maintain an average cost of living of $102,000 per year, indexed at 2%, until an advanced age of 95,” summarizes Louis Morneau.
But to achieve this, he advises, “it would be necessary for them to delay retirement pensions from both levels of government until they are 70 years old”, instead of the age of eligibility at 65 years old.
“This five-year deferral of public pensions would make it possible to increase their future and lifetime amount, which will increase the fully secure retirement income of Adam and Leila towards their advanced age. »
With these enhanced pensions, the gradual increase in their cost of living when health care and assistance costs are added would be better taken into account and should not worry the couple.
Louis Morneau, financial planner
In addition, points out the financial planner, “this analysis assumes that their primary residence will not have been sold. Therefore, in the event of large unforeseen expenses that would cause their cost of living to inflate beyond their forecasts, the net amount from the sale of their residence could then cover their need to increase their asset disbursement income.
What about buying an annuity?
As for Adam and Leila’s questions regarding the purchase or not of an annuity at the start of retirement, the planner advises them that such a project “deserves in-depth consideration, because it presents both advantages and disadvantages significant”.
What are the advantages of purchasing an annuity?
Louis Morneau identifies them as follows: security and “peace of mind” of future income, protection of the value of this income against inflation, as well as “simplicity of management”.
“Purchasing an annuity from a well-established financial company simplifies managing personal finances in retirement because it requires less monitoring and investment decisions,” he explains.
Furthermore, “by choosing an annuity indexed to inflation, future payments will increase according to the rate of inflation in the economy, which helps retirees and annuitants maintain their purchasing power over the years.”
As for “securing” income by purchasing an annuity, Louis Morneau mentions two advantageous elements.
With an annuity, future (or new) retirees can obtain “the guarantee of a regular long-term income which reduces the anxiety linked to the good management of financial assets in retirement in relation to the fluctuations of the financial markets and the economic conditions “.
Also, underlines Mr. Morneau, “purchasing an annuity ensures a stable income stream in retirement, eliminating the risk of exhausting one’s financial resources in the event of surviving to a very advanced age”.
Some disadvantages
On the other hand, purchasing an annuity may have some disadvantages for future retirees who are already comfortable with their personal finances.
“Once the capital is invested in the purchase of an annuity, it is no longer accessible other than through periodic payments. This can limit the financial flexibility of certain retirees to face unforeseen expenses or to help their loved ones financially,” mentions Louis Morneau.
Furthermore, “compared to other forms of investment, purchasing an annuity may offer a lower total return over the years, especially when financial asset markets perform well,” warns Mr. Morneau.
Also, “the cost of purchasing an annuity may include management fees and additional “options” such as indexing annuities to the rate of inflation, which can reduce the amount of payments over the life of the annuity. annuity”.
Finally, underlines Louis Morneau, “if a payment period guarantee has not been selected when purchasing an annuity, the funds used to purchase this annuity could be lost in the event of the premature death of the annuitant. “.
Visit the AMF website to find out more about purchasing an annuity
* Although the case highlighted in this section is real, the first names used are fictitious.