A thought for retirees cringing at their losses in both stocks and bonds last year: Consider the annuity alternative for some of your money.
A life annuity is a contract with an insurance company where you exchange a lump sum of money for a guaranteed, fixed amount of monthly income for life. Whether stocks and bonds go up, down or sideways, you get your money every month.
Last year’s declines in stock and bond prices highlight the benefit of this income predictability, but the argument for considering annuities is much broader than that.
Among the factors influencing the amount of money you get from an annuity is the level of interest rates at the time of purchase. It can’t be news to anyone that we’ve had a big run-up in rates in the past 12 months. “Now is probably one of the best times in recent history to look at annuities,” said Naunidh Singh Hunjan, chartered life underwriter and president at Hunjan Financial Group Inc. in Mississauga.
Annuities have long been at the back of the product shelf of life-insurance companies. They’re not for the masses because of the compromises one must make when choosing an annuity to generate retirement income.
But a recent surge in the popularity of guaranteed investment certificates suggests that annuities deserve a closer look. More than ever, people are open to the idea of buying a guaranteed investment that taps into today’s high interest rates.
GICs lock in a rate for a set term and guarantee you interest and principal at maturity. There’s no risk that financial market volatility will change that. If a GIC issuer goes bust, there’s deposit insurance from Canada Deposit Insurance Corp. or provincial credit union plans if you stay within coverage limits.
Annuity payouts are similarly backstopped. Payments of $2,000 or less a month are fully guaranteed by Assuris, a compensation plan that protects clients of life-insurance companies that fail. Payments larger than that are 85 per cent guaranteed.
To demonstrate how annuity payments have risen along with interest rates, Mr. Hunjan used the example of a 65-year-old male who buys a $100,000 annuity with payments guaranteed to run 10 years at least. If this individual died after buying an annuity, the beneficiary would continue receiving the payments for up to the length of the guarantee period.
In January, 2021, the monthly payout in this situation would have been $441. Since then, annuity payouts have increased by roughly 25 per cent, which puts recent monthly payouts in the area of $550 or thereabouts.
Stubborn inflation means interest rates could still rise a bit more, which in turn means that annuity payouts could edge higher as well. One way to navigate this rate outlook is to stagger your annuity investments. You could, for example, buy a $50,000 annuity today and put in another $50,000 in six or eight months. Commonly, $50,000 is the minimum annuity purchase.
Your principal is non-refundable when you buy an annuity – you’re essentially trading it for reliable monthly income for the rest of your life. For this reason, you’ll want to use annuities for only part of your retirement portfolio, registered or non-registered. Mr. Hunjan said his clients typically have 20 per cent of their retirement portfolios in annuities.
One of the objections people have to annuities is the risk of dying not long after buying one. A 10-year guarantee helps offset this risk to some extent, but Mr. Hunjan said the cost of this clause is a 10-per-cent to 15-per-cent reduction in your monthly payouts.
The lack of interest insurance companies show in marketing annuities means there are few resources available online to compare products on your own, without involving a seller of insurance products or providing your personal contact information.
RBC Insurance offers a rudimentary annuity calculator, while Sun Life Financial offers something a little more detailed. The financial data provider Cannex offers a limited survey of monthly payouts for a male at various ages buying a $100,000 non-registered annuity.
You have to be diligent in comparing payouts because there are large gaps between insurers. The Cannex numbers show a spread of $95.82 a month between the high and low annuity rates for a 65-year-old male – a maximum of $566.63 and a low end of $470.81.
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