Create your own personal pension plan with an annuity.
To paraphrase the great playwright, William Shakespeare: to annuitize or not to annuitize, that is the question. For the two-thirds of us without workplace pension plans, annuities can provide some much-needed income stability in retirement. The problem is many retirees are hesitant to annuitize their savings because annuities have gotten a bad rap over the years. An annuity is a form of risk management. In exchange for a lump sum payment, you’re guaranteed a monthly payout for the rest of your life. Whether you live to be 70 or 100, your annuity won’t stop until your month of death.
Is An Annuity Right For You?
While annuities can be an attractive choice for those without the luxury of a defined benefit pension plan, they’re not for everyone. If you’ve been squirreling away your money towards retirement and you plan to live a modest lifestyle, you might be just fine without an annuity – CPP, OAS and your RRSPs could provide plenty during your golden years.
For those of us not in good health, an annuity is probably not a good choice. If you’d like to leave money to your heirs, by buying a single life annuity with your savings the only one who will get paid when you pass away is the insurance company.
Fixed Indexed Annuities
Fixed Indexed Annuities – or FIA for short – earn interest on the premium, based on positive changes in the market place. Jim Poolman debunks some of the myths of Fixed Indexed Annuities in a recent article.
A lot of people think FIAs don’t offer great returns – that couldn’t be further from the truth. “The interest rate is guaranteed to never be less than zero, even if the market goes down,” writes Poolman. “The index is used as a benchmark only, so the policy owner is not invested in the risky market; therefore, once interest is credited, it can never be lost, even during market downturns.”
Similar to segregated funds, FIAs provide a guarantee to protect your investment. Poolman cites the example of the financial crisis in 2008 and 2009. While those who invested heavily in the stock market lost their shirt, those who invested in FIAS didn’t lose a dime. If you’re a risk-adverse investor, FIAs might be the investment for you.
While it’s helpful that FIAs are guaranteed, a guarantee is only worth the paper it’s written on if the insurer is around to collect. While many people believe FIAs aren’t guaranteed, that’s false.
“FIAs have minimum guarantees and are backed by some of the world’s largest, most reputable insurance companies,” explains Poolman. “Insurance companies must show they have the financial capacity and ability to make these guarantees, and their products must be reviewed and approved by state insurance regulators. In addition, insurance companies are continually audited by regulators and must comply with stringent requirements to ensure they have the ongoing ability to meet commitments.”
Are you a fan of annuities? Would you consider annuitizing your retirement savings?
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.
Sean, the only annuity that you should buy (assuming you need and want one) is a single premium immediate annuity. These annuities give you a guaranteed stream of income for life in exchange for a lump sum. Fixed indexed annuities are very expensive, complex annuities that are bad deal. Sure the interest rate may be guaranteed to not go below zero, but what they don’t tell you is that in good years there is a cap to what you can get, so over the long term the returns are terrible. You pay a high price for the downside protection. At any rate what happened in 2008 is irrelevant. If you buy a single premium immediate annuity you get a steady payment no matter what the market does. People pushing FIA’s are usually those who benefit from selling them