Canadian Life Annuities: How to Turn Your Investments into Cash for Life

Life Annuities Provide Cash For Life

Every year, countless Canadians buy lottery tickets that have a chance to win Cash For Life. These tickets typically offer a chance at a jackpot like $1,000 a week for the remainder of their lives. Of course, the vast majority of people who buy these tickets don't win cash for life - they're just out the cost of the ticket. However, that doesn't mean getting money for life is a pipe dream. Indeed, many Canadians opt to get regular, guaranteed income for life from their retirement savings through Canadian life annuities. These financial investments are fantastic for people who would prefer a stable, guaranteed income during retirement instead of lump-sum distributions that may be at the whim of the markets.

Here's how these annuities work and how you can use them to your advantage during retirement!

Canadian Life Annuities: Guaranteed Monthly Income for Life

The premise of life annuities is quite simple. An insurance company will take a lump sum of money (typically from your RRSP) and, in exchange, write a policy (the "annuity") that will give you a certain amount of money each month.

For example, let's say you have $100,000 and wish to purchase an annuity at age 65. Your policy might say that, in exchange for that now registered $100,000, you will receive $580 per month for as long as you live. Or, maybe you wait until you're 75 and the payment is much higher at $700 per month. Regardless, you'll get this guaranteed monthly income for life.

The general principle is taking a sum of money and converting it to a guaranteed income stream. Like most insurance-based products, the insurance company considers various factors, like life expectancy and creates the appropriate monthly payment amount. Of course, you know exactly what that payment amount will be when you buy the annuity, so there are no surprises.

If you like the concept of guaranteed monthly income for life, a life annuity is arguably the best way to get that, outside of a pension, which is in fact an annuity.

Why Choose an Annuity?

At first, buying an annuity may seem counterintuitive. After all, you're trading $100,000, for example, for $580 a month? You may be wondering, what if you put that money in a bank account and just took $580 a month from that? Wouldn't that have the same effect?

There are two reasons why choosing an annuity is often the better approach: annuities provide peace of mind and simplicity.

Life Annuities Provide Peace of Mind

Consider the hypothetical example above of a middle-aged man at age 65 buying an annuity, trading a $100,000 one-time payment for $580 per month. In one year, the insurance company will make $6,960 in monthly payments. If you put that money in a chequing account with 0% interest and made those payments yourself, you would run out of money in just under 22 years - at age 77! Even if you put it in a bank account that earns 1% interest, you'll run out in 24 years. Even if you make a consistent 3% ROI, you'll still run out of funds in about 31 years.

Therefore, putting that money in a bank account isn't a viable solution as the funds will run out somewhere between age 77 and 86. If you live to be 100, as projections estimate that one-third of people will do, you won't have any money left.

Some people may say to invest in equities and other riskier assets to make their money stretch further. However, recessions are inevitable. In 2008, for example, a retiree may have seen their portfolio decline by 50% or more, making withdrawing funds challenging.

Ultimately, life annuities provide peace of mind. No matter what the market does or how much bank interest fluctuates, you can still count on a guaranteed monthly payment to help with your daily expenses.

Annuities Are Simple

Another benefit of annuities is that they are straightforward. Buying one from an insurance company is a relatively painless process. You'll merely need to let the broker know you want an annuity, and they will take care of walking you through all the options to find your perfect fit. Once you have the annuity, there's no portfolio to manage or monthly withdrawals to set up. All you do is collect the monthly payment that goes directly into your account!

When Should You Purchase A Canadian Life Annuity?

The example above illustrates purchasing an annuity at age 65. However, most experts believe this is too early, and the best time to buy one is around 70 years old. At that point, you have started CPP and OAS, and you should have a relatively good handle on what your government benefits will be and how much extra you'll need to live per month. Plus, by age 72, all RRSP funds need to be either taken out, converted to an annuity, or converted to a RRIF. That provides a perfect opportunity to take some of your funds as a lump sum payment to have extra spending money and transform the rest into a stable monthly income with Canadian life annuities.

Annuities Make Retirement Less Stressful

The last thing people want to stress about during retirement is when their money will run out. Unfortunately, for too many Canadians, that's the reality. Fear of running out of money can lead to significant underspending and a lower overall quality of life. Indeed, the added stress may even reduce their lifespan!

Canadian life annuities are the ticket out of that stress. They let people turn their hard-earned money into guaranteed income for life (cash for life!). That gives people peace of mind that they will always have the money to pay their bills. This guaranteed monthly income also makes budgeting a breeze.

Therefore, talk with your annuities broker to see if this financial product is right for you. If you want to have a stress-free retirement when it comes to finances, there's a good chance that your annuities broker will be able to find the right annuity to give you that peace of mind!