More About Annuities
Financial advisors have long been encouraging people to consider portioning out some of their retirement savings to an annuity. But it has always been a hard sell. Part of the reason for their low popularity could be that people find it difficult to compare payouts from the various insurers.
In short, we want to know how much we will be making monthly upon retirement. We like to have a solid figure that we can budget around and plan the rest of our life accordingly.
Defined benefit plans are clearly desirable for this reason – they offer a set amount of monthly income. However, not everyone has this pension available to them. For those who are looking at defined contribution plans – those whereby the employer and employee both make contributions – the employee ends up with a lump sum of money to invest to generate the retirement income.
Now, financial advisors typically recommend investing a portion of that money into annuities. This makes sense for two reasons:
- Annuities reduce the risk that the retiree will outlive their savings
- The money put into an annuity is set apart from volatile stock markets
It has been reported that less than five percent of these plan members invest in income-for-life annuities. One main objection to annuities is that the monthly payments they produce are influenced in large part by interest rates. So, don’t put your eggs all in one basket in one go. Rather divide your money into separate annuities and purchase them over a longer period of time.
Another objection to annuities is the loss of control of your money. You are essentially trading a lump sum of money for guaranteed monthly income. That is why it is recommended that you use only a part of your retirement income for annuities and not the whole thing.
At what age should you consider buying an annuity? The big picture here – annuities benefit older investors. That is, an annuity bought at 70 pays more than one bought at the age of 65.
If you don’t have a defined benefit pension, speak to your financial advisor today about an annuity for some of your retirement savings.
At McDougall Insurance & Financial, we can compare annuity payout rates from all major Canadian insurers. If you are looking for more information or payout rates, you can call us anytime.
Source: Globe and Mail