Can Annuities Guarantee Income in Retirement? Yes, Here’s What You Need to Know

What you need to know to ensure you can enjoy your golden years

The concept of retirement often conjures mixed emotions. On the one hand, finally having the freedom to pursue your interests and hobbies is an incredibly empowering feeling. Knowing that you can, for example, leave for Hawaii for a month is exhilarating. On the other hand, for too many Canadians, the concept of retirement creates financial dread. All of a sudden, you're transitioning from a world of stable paycheques to a world where there's no money coming in (except your investments). Annuities help ease that anxiety by providing a consistent income stream for life. Can annuities guarantee income in retirement? Absolutely. Here's what you need to know to ensure you can enjoy your golden years and that you won't run out of money when you're 100!

How Do Annuities Guarantee Income in Retirement?

Life annuities can guarantee income in retirement by providing a monthly payment for as long as you and your spouse live. With an annuity, you could get $500 a month, let's say, for as long as you're alive. You can buy as many annuities as you want and for as much as you want, provided that the insurance company is willing to offer them. Therefore, you might get $500 to $800 a month depending on year of age from a $100k annuity, but that also means you could get $6,000 to $9,600 a month from a $1 million one.

There are also term-certain annuities that will provide you with a guaranteed income over a specified period. So, instead of having money for as long as you live, you can get monthly payments for 10, 15, or 20 years. Since the insurer has a fixed end date (as opposed to needing to pay for as long as you live), the monthly payments for this option are higher.

The amount you'll receive and who will receive it vary depending on what options you pick for your particular annuity. While their concept is simple, like most insurance products, you can custom tailor annuities to suit your specific financial needs.

Which Options Are Right for Me?

At its core, an annuity is simple: you provide the company with a one-time payment, and, in exchange, you'll receive monthly income for life.

However, all Canadian annuity providers offer different options that you can choose for your particular annuity. Sometimes these options can feel a little overwhelming, so here are the top five you'll need to consider.

Does Your Spouse Receive Payments If You Die?

If you are married, this is a fundamental question to answer. By default, if you pass away, the annuity ends. However, you can choose to confer the benefits of your annuity on a beneficiary or opt for a joint annuity where the payments that would have gone to you automatically go to the surviving spouse. Some providers even offer annuities that give less money to the surviving spouse so that you can have more when you're both alive (since there will be two people to support, not just one).

Do You Want to Defer Payments?

Annuities don't always start right away. Some people elect to purchase them earlier on in life and commence the payments later. An excellent example of this is someone with personal savings they want to use first and then have the monthly payments kick in when they're older. The longer you wait to start your annuity, the higher your monthly income will be. So, instead of having $100k in savings and buying a $100k annuity that begins right away for $500 a month, the person might buy the annuity but have it start five years later for $700 a month after they project they will run out of savings.

Do You Want Any Death Benefits?

Some insurers provide "death benefits" or unique benefits that beneficiaries receive once the annuity holder passes away. Typically, these are either a single lump sum or in the form of monthly payments.

For example, you might set your annuity to have lifetime payments. This is important if you have a disabled child and want to know they will be ok after your passing.

Annuities Guarantee Income, but Do You Need It?

Most people opt for fixed annuities because they provide a stable monthly payment. However, there are variable annuities known as segregated funds, which pay more if market conditions are favourable. For example, instead of getting $500 a month, this annuity might get $800 a month if the market does well. So, in bad times, you'll collect only $500, but in good times you'll do better at $800 a month.

Therefore, if you don't need the guaranteed income, you may want to put some money into segregated funds as it can potentially have more significant rewards.

Do You Need Your Payments Increase for Inflation?

Another choice you can make is to have your monthly payments be constant or increase with inflation. You might have an annuity that pays $500 for life or one that pays $400 but will adjust upwards with inflation every year (so if inflation were 3%, it would be $412 the following year).

Typically, choosing a non-inflation-adjusted annuity will result in having more purchasing power now and less as you get older, whereas having it adjusted for inflation will result in more consistent purchasing power as you age. If you're worried about how you'll pay your bills as you get older, choosing an inflation-adjusted annuity might be the wiser approach.

Canadian Annuities Guarantee Income and Provide Peace of Mind

Annuities guarantee income and, depending on how you structure them, they will also provide peace of mind that you and your loved ones will have the funds necessary to thrive during their golden years.

If you have any questions about annuities, please speak with your annuities broker about them. They will work to understand your particular financial situation and help you find the right annuity product for your peace of mind!

Should You Purchase A Life Annuity?

• Let us calculate your income payments with your personal life annuity. Use our Annuity Quote form and we'll compare all the annuity companies in Canada to get you the best income.