Funding Your Retirement With An Annuity...Does It Make Sense?

hi my name's adam welcome to the channel thanks for joining us today today we're going to talk about annuities and the reason i'm bringing this up is because i get a lot of requests on adam does an annuity make sense anymore i know my parents or my grandparents did it back in the 70s 80s and 90s interest rates were sky high at that point so does it make sense in today's low interest rate world so what is an annuity annuity is essentially where you put money into an insurance company think of it like a savings account a guaranteed savings account with an insurance company where they guarantee you a set amount of payments for your lifetime part of that payment back is going to be some interest some of it's your principal or your capital and some of it is a calculation of other people that bought annuities that died early so it's some of their returns so that's kind of built into it as well so there's three pieces to payments that come back to you when you set up an annuity you can collect payments on a monthly quarterly semi-annually or annual basis okay so it depends on how you like cash so for most people it's probably gonna be on a monthly basis especially if you're entering into retirement and you're buying the annuity for that income stream there's some people that buy annuities for a big set expense we have some clients that buy an annuity for paying life insurance proceeds for future debt so that will be a one-time payment so they might set it up annually so it is flexible on when you can start your payments as well when you go to purchase an annuity there are many options and many factors that kind of tie into how much you're going to get paid so obviously your age your gender is going to play into it how long you want this to pay for so if i buy an annuity and i'll go through this in a little bit here on the illustration but i want at least a 10-year or a 15-year guarantee payment so if i pass away in the first 10 years it will still pay out to my beneficiary for the remainder of that 10 years the longer you extend that the lower your payment is because they're guaranteeing a payment for a longer period of time now keep in mind that an annuity is purchased through either a life insurance advisor or an annuity advisor which there's not a lot of those out there anymore so myself i am licensed in bc as an insurance advisor we have put a couple policies in place over the years for annuities if you're looking to get an annuity in place talk to an insurance broker and what they'll do is they'll go on a program called canex and then it spits out here's a different options for all the companies that are on the marketplace so you're getting kind of the best of the best not just you know a quote from one individual insurance company when looking at and comparing different types of annuities there's three main types of annuities so the first type is a life annuity and this is basically will pay you for your lifetime so as long as you're alive it will pay you a set monthly amount what are the pros of a life annuity there is no risk of outliving the money if you put that money in with insurance company it guarantees you even if it technically runs out of money it never runs out of money and this is why annuities kind of catch eyes of retirees especially those of you that don't have a defined benefit pension plan you can also have on these annuities a beneficiary so you know again if you have a joint you can have a continuation payment so you could set it up husband and wife so that if the wife passes away the husband keeps getting at 100 70 60 you can set up however you want and vice versa so much like a defined benefit plan now the downsides of a life annuity is you may not outlive your money there is a chance that if you pass away early and you don't have a long guaranteed payment term on there it could actually mean that you don't get all your money back if you give them a hundred thousand dollars and have a five-year guarantee and pass away in year five and you've only collected say forty thousand of your hundred thousand the other sixty thousand dollars is absolutely gone and lost so if you add on a spouse or partner or someone joint on there obviously that's gonna drop payments a little bit so as you add more benefits you know inflation protection length of guaranteed payment as you add these things on your payment continues to drop and drop and drop so keep that in mind that is a downside is you may actually not get all your money back out of the annuity so the second type of annuity is a term certain annuity and what this is is it guarantees your payment for a set period of time okay so let's say you give money to an insurance company you buy an annuity and they guarantee you a thousand dollars for 20 years if you live beyond 20 years the payment stops at 20 years okay a term certain annuity pays for a set period time whether it's to you or if you pass away to a beneficiary whoever it is that you've kind of left as to collect that money on what happens if you have a say 20-year term certain and you live beyond 20 years that payment stops it's no longer there for you and you've essentially outlived your money and that could be a concern unless it's built into your financial plan the third type of annuity is a variable annuity and this is you're buying an annuity with a very small guarantee on there but there's market upside so what happens is a small part of your payment is guaranteed and the remainder of it is variable depending on investments and how they do and whatever and again every insurance company will structure these a little bit different this may not be a great option for you in retirement because again most people that are buying an annuity they want that control that guarantees so i would look at a life annuity or a term certain annuity for yourself so now let's look at when to buy an annuity and a lot of people again they buy annuities for a certain reason maybe it's to pay for an insurance policy we've had a couple annuities fall on our plate that are part of an estate so parent passes away they maybe have a child or children that they don't fully trust and thus they write in their will that any proceeds you know disposition from the state that go to my kids have to be put in an annuity for a lot of you that are watching this video or you're thinking about or maybe you're now thinking about does an annuity make sense for me when i hit retirement i don't have a defined benefit plan i have a lot of you know savings and other stuff but it would be nice to have that guaranteed income beyond cpp and oas now you can buy annuity with a lump sum payment or with ongoing payments over a set period of time but typically you're gonna buy an annuity with a lump sum payment most insurance companies do require a minimum of 50 000. now if you're looking to add an annuity to your overall retirement income stream you have to look at your other income sources annuities are not something where you want to put all your money into it if you're buying an annuity it needs to be a piece of the pie your oas is a piece cpp your annuity and then everything else you have comes together and again you need to look at your income streams not as silos but as a comprehensive plan you have your rsp and your tfsa and your cpp and your oas and your pension whatever else and now you have your annuity maybe this all needs to come together on a clear income and tax plan if you don't have something that comes all together you're gonna pay way too much tax and you're not maximizing your income stream don't just buy an annuity because you want income stream for life does it give you enough income does it provide income for long enough there's a lot of factors that come into income stream and retirement so let's take a quick look at the annex program and that's what we're looking at here so as you can see we choose your province you know client name birth date gender so annuity type so here's your single life your joint life or term certain so these are the three options we have in here so again if i go single life you know is it going to be an rrsp locked in rsp a non-registered now the difference between non-registered prescribed and non-prescribed prescribed non-registered annuities basically they take the tax bill over a period of time and level it out whereas a non-prescribed is because there's kind of more money in the pool earlier you're going to pay more tax more of the income is going to come to you on a tax basis than later on in the payment schedule so typically i would recommend if you're doing an unregistered annuity to do a prescribed annuity so again you choose your type rrsp and then guarantee payment or cash refund so if we go a guaranteed payment of 10 years on here 250 000 deposit and let's say that's going in today and we can see this is a 60 year old male in ontario we have a 10 year guarantee on there it's an rsp money and this is going to give this individual a lifetime payment of 1 175 per month as long as he lives and again there's a 10-year guarantee so if he passed away anytime before year 10 this would continue to pay to his beneficiary if we look at that number 11.75 a month so that payment will actually decrease over time when you look at it in comparable to inflation within the software you can add inflation on here and typically we would so you can see down here annual income index so if we go two percent index inflation we'll see that payment will go from 1175 down to 923 okay well what happens if we want two percent and we want say a 20-year guarantee you're going to see it goes from 923 down to 8.83 so again the more features and benefits we add on to these annuities or policies the lower your payment goes and that's why you need to sit down with your agent or your broker and find that sweet spot that makes the most sense for you break down the rate of return you know for this one at zero percent inflation there's about 3.87 to age 90. if they live till age 85 it's 2.91 and live until age 80 is about 1.22 the second policy i want to look at here is a non-registered prescribed annuity and this is a 60 year old couple out of ontario again here and we've done a guaranteed payment for 10 years so it's a joint life annuity reducing on first death and you can see here i've added 75 continuation which means that if either one passed away 75 of the payment will continue for their lifetime right it's a it's a joint life annuity it's not a term certain it's a joint life annuity pays for lifetime again i've indexed this at zero percent for now for simplicity you'll see that the payment comes out to 1065 dollars per month and you can see here the different insurance companies that are offering and that's why i say it's very important to get this breakdown from your advisor so desjardin financial is giving us 1065 candlelights the next one into 1039 sun life empire equitable each company has different kind of benefits and features within the policy so it's not just necessarily take the highest payment you have to talk to your broker to figure out what the difference is between those payments and between the companies the rate of return on here if the couple lives if there's payment age 90 so 30 years payment it's about 3.08 percent age 85 is 2.04 the breakeven to get your money back on this policy is age 80 so as long as one of the two spouses uh live till age 80 it would break even now again if one of them passed away really early and it dropped to 75 payment the break even would actually extend a bit further obviously most people buy an annuity not for a great rate of return because it's not there they buy it for guaranteed income and if you're looking to buy annuity that's why you should be buying it now again the rate of return and the amount of income they're giving you is based on current interest rates so as interest rates go up maybe annuities start to make more sense going forward but in my opinion to get a guaranteed two percent rate of return i would rather get a little bit less put my money into high interest savings account at like eq bank or something like that again i'm not getting as great a return maybe now up front but as interest rates go up i think i can average out a bit better than that over 20 years even in a savings account maybe so look at what's out there don't lock your money up because it's safe when you're not getting a great rate of return if you're gonna put half a million dollars let's say into an annuity which is half your assets and it's guaranteed you an income and it meets your needs and it really checks the boxes and allows you to sleep at night maybe annuities for you everyone's situation is different from a numbers-wise like rate of return i don't see it as a great investment now the last thing i want to point out here is are your annuities protected so what happens if the insurance company goes bankrupt or you know something happens with your annuity well every single annuity in canada is protected through assurance of protection this is a government regulated insurance so it's kind of like cdic for your bank account but it's assure us and you can see here that if your payments are under 2 000 on a monthly basis then you're protected 100 anything over 2000 is protected at 85 make sure that you buy it through a fairly large company that you've heard of you understand that it is protected through assurance that is important but just be aware that any amounts up to 2 000 or 100 protected if your payment is over 2 000 a month the whole amount is protected at 85 so thanks so much for joining us in this video hopefully you have a better understanding of annuities what they are how they might work in your plan do they make sense for you again i don't think they make sense for 99.9 percent of you but there's definitely a small sliver of you watching this video that it might make sense for you again if you run the numbers and the the income it generates is all you need and it's guaranteed and it allows you to sleep at night that's a good solution so that may be where it fits for you again for most of you to guarantee that two three percent rate of return doesn't make a whole lot of sense there's better options out there especially right now so again hopefully this helped your annuities thanks so much for joining us in this video today we'll see in the next one you

Channel: Parallel Wealth

Views: 82,480

Keywords: Financial Planning, Retirement Planning, Tax Planning, Investing, Savings, Passive Income, RRSP, TFSA, Wealth, Parallel Wealth, annuities, do annuities make sense, what is an annuity

Id: nc_PYdywQxM

Length: 12min 30sec (750 seconds)

Published: Wed Mar 02 2022