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Retirement Planning and Deferred-Income Annuities

 

ivon t hughes

October 6, 2015

 

by

Ivon T Hughes

 

 

Most people today envision a comfortable style of living once they have retired. But the generation of workers that built solid pension plans to fund this anticipated comfortable lifestyle have mostly passed on and the generations that are replacing them are not able to depend on the same type of pension largely due to higher costs.

 

 

Retirement Planning and Deferred Income AnnuitiesCompanies are now pitching highly regulated products known as deferred-income annuities, which will allow the individual earner to create their own sense of well-being when they have decided they no longer wish to participate in the worker’s race to the top. Typically, the consumer will pay a lump sum of money to an insurance company or pay into the plan over time, in exchange for a paycheque for the rest of their life.

 

You have no way of knowing for sure if this annuity purchase is a perfect way of accumulating retirement funds because you cannot possibly predict how long you will live after the distribution begins. Even with taking this unpredictability into consideration, the annuity could be the best answer to providing some form of certainty during the retirement years as it can be guaranteed for life.

 

For the conservative investor wondering what they will do for a financially secure retirement, bonds will not deliver the returns they need, and equities are too risky for their liking. So then, the annuity fits right in the middle and brings peace of mind since the risk is non existent. Yes, you will need to invest a large amount to generate the income you’re striving for, but the return will be higher the longer you wait to access the funds.

 

Deferred Annuity Example

Take, for example, a male who purchases an annuity at age 68 and promptly begins to collect a lifetime income of $12,000 a year or $1,000 a month. That is going to set him back about $167,100. View annuity illustration.

 

Purchasing the same annuity ten years earlier and then waiting until age 68 to make the same $12,000 annual withdrawal would reduce the investment required to $129,139 or $37,961 less. View annuity illustration.

 

The popularity of annuities means that all the insurance companies issue them.

 

It’s interesting to note that deferred-income annuities have been around for quite awhile. Historically, they were marketed as a type of longevity insurance to insure against outliving a retirement plan. They were purchased at or near the age of retirement, but withdrawals were postponed until later. The insurance companies are very much in favour of this approach since it gives them capital to work with.

 

Retirement Income

Purchasing retirement income when retirement is clearly on the horizon requires less guessing. For example, some people will choose to purchase an annuity to fund their basic living expenses, such as housing and food, because they have a good idea of what their income sources might be and then potentially close any remaining gaps with income insurance through an annuity.

 

Deferred annuities are still considered to be a great deal because they know they will have guaranteed income.

 

“No matter how good a cook or an engineer you may be, you can’t bake this in your own kitchen,” said Moshe A. Milevsky, a finance professor at the Schulich School of Business at York University in Toronto, who said he would wait to begin collecting until 70, or even later.

 

Life Annuity Options

It is no secret that there are many people that are sincerely reluctant to part with a large amount of money and, as a result, the insurers help make people a little more comfortable with their decision. A typical example would be if an annuitant dies before receiving withdrawals that the heirs would receive the funds as the annuity owner opted for the cash refund feature. This is a very popular option.

 

Another factor that should be considered is that the annuitant is relying on the unwavering financial stability of the insurer for many years into the future. However, the insurer is part of the guarantee association of Assuris, that would step in to make the payments.

 

Taxes

The tax liability will depend on whether the annuity was purchased using after-tax dollars or with registered funds. By purchasing with non-registered dollars, the annuitant gets back benefits equal to the contributions paid in on a tax-free basis since those funds have already been taxed.

 

If the annuity is purchased with registered or before-tax dollars, then the payments withdrawn will be fully taxable.

 

 

About the Author:

Ivon T Hughes is a leading expert in life annuities in Canada. His website LifeAnnuities.com is a recognized authority on annuities. He's also an established insurance and investment broker, licensed across Canada through The Hughes Trustco Group since 1972. Recently, he's been redefining how annuities are sold in Canada.

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