June 27: Annuities prevent you from outliving your investments: Jonathan Kestle CFP, CLU, H.B.Com

June 27, 2024

Annuities prevent you from outliving your investments: Jonathan Kestle CFP, CLU, H.B.Com

The higher interest rates of the mid-2020s are making people revisit an old retirement planning friend, the annuity.

An annuity is a financial product that you can buy which then pays you a specified amount each month for the rest of your life. While you no longer have control over the money you used to pay for the annuity, your monthly income payments from it are guaranteed to last your lifetime.

Save with SPP reached out to Jonathan Kestle of Ian C. Moyer Insurance Agency to find out more about annuities.

Q. We’ve not seen anyone comment on how choosing an annuity takes away the headache of having to make withdrawals from a registered retirement income fund (RRIF) or similar vehicle (a minimum amount that must come out, taxation, perhaps increased income and further taxation, etc.) Does having an annuity for some or all of one’s retirement income simplify their taxes?

A. An annuity will not necessarily simplify taxes unless it is a “non-registered” annuity, meaning the funds used to purchase the annuity are regular taxable savings and not from registered savings (Registered Retirement Savings Plans (RRSPs), a Locked-In Retirement Account (LIRA), etc.)

What an annuity does simplify, is the task of making a savings account last. Annuities eliminate the risk of outliving your investment and pay a pretty good payout rate in comparison to what would be prudent with a normal investment account.

Q. Similarly, when you choose an annuity you can pick one that can provide a spouse with a pension, or beneficiaries with a lump sum amount. If you have a lump sum, isn’t it possible that you’ll spend it all before you die and leave little or nothing to beneficiaries?

A. Not really, an annuity typically makes it harder to leave funds to beneficiaries. The guarantee periods are often limited to 10 or 15 years, at which point no money will pay to a beneficiary upon the death of the owner.

I would look at it this way… if you aim for a retirement income of $60,000, you could use an annuity to supplement your social benefits (such as CPP and OAS) to reach that amount. This way, you secure a steady income and preserve other investments, which can then be left to your beneficiaries.

Q. Interest rates have been persistently higher – are we seeing more annuities being chosen?

A. Yes. Now is a great time to consider an annuity. I checked today, and payout rates are up about 19% from 2021.

Q. Any other observations on the topic?

A. The payout ratio of an annuity is often overlooked. The “payout ratio” of an annuity is simply the amount of annual income received divided by the lump sum used to purchase the annuity. The concept is that those who unfortunately pass away early have their contributions support those who live longer. This mechanism is known as “mortality credits.”

Mortality credits are a unique feature of annuities. Essentially, the contributions from those who pass away earlier than expected are pooled and used to provide higher payouts to those who live longer. Because of this, annuities can safely sustain a higher withdrawal rate than a traditional investment portfolio. Achieving the same withdrawal rate from a traditional savings account would be too risky for many investors. This system allows annuities to offer more stable and predictable income throughout retirement, providing peace of mind for retirees.

We thank Jonathan Kestle for taking the time to answer our questions. Here’s a link to an earlier interview SPP did with him on annuities.

The Saskatchewan Pension Plan offers its retiring members a variety of annuity options. There’s the Life Only Annuity, which pays you and you alone a monthly income for life. There’s also the Refund Life Annuity, which can provide a lump sum benefit for your beneficiaries, and the Joint and Last Survivor Annuity, where your surviving spouse can continue to receive annuity payments after your death. Full details can be found here: retirement_guide.pdf.

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Annuities, Jonathan Kestle

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