Why investing on your own can't match what your annuity can do

By Ivon T Hughes
Why investing on your own can't match what your annuity can do
Figure 1. Why investing on your own can't match what your annuity can do?

What are immediate annuities?

Immediate annuities generally provide you with more lifetime income than you could get by following a strategy of systematic withdrawals. One reason: Annuities have a unique and valuable advantage investors simply can’t duplicate on their own; mortality credits

Mortality Credits

What on earth are mortality credits? They are additions to the straight interest calculations, which insurers factor into the payout to reflect the fact that annuity owners will die at different times, often many years apart.

The idea is that the monthly payments that would have gone to the annuity owners who die earlier, are transferred to the annuity owners who live longer. This means that the annuity payment is higher as you receive investment profits and the return of your original investment. This is a source of income that you can’t get from any other investment.

Every person starts off equally as with every type of investment but need and death can alter the outcome drastically.

And this is why the return on a GIC will never match the return on an annuity.

Ivon T Hughes

Bond and Annuity Comparison

You are a 65-old-male with $100,000 to convert to a guaranteed -for -life income stream . You could invest the $100,000 in an immediate annuity, And at today’s rates you would receive about $501.75 a month.

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Or instead of buying the annuity, you could draw a monthly payment. But can you get the same monthly income (or more) than the annuity provides by investing on your own? Since you are going to rely on this income for the rest of your life, you need low risk investments like Government bonds.

Recently if you invested in 10 or 20 year Government bonds, the yield was about 2.1%. Assuming you withdraw $501.75 each month, the same amount the life annuity guarantees for life, your $100,000 would last about 17 years.

If you live longer, this investment just ended anyway. And we have not yet considered your health. What happens now if either you or your partner are sick? Where is the income coming from? If you decide to take this latter route,it means accepting the possibility that you will run out of guaranteed income at about age 83. It is unrealistic to think that you can match a life annuity’s guarantee of lifetime payments as you are sharing the risk of your projected life span with others.

Phil Barker

About the Author

Phil Barker

Phil Barker is a leading expert on life annuities in Canada. LifeAnnuities.com has different financial products and has been a recognized authority since 1972.

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