It has been an ugly few years for investors since the market crash in 2008. Canadian households saw years of savings in stocks and bonds wiped out overnight. While the market has recovered some of its losses, it’s still below its peak. In addition, the world economy is shaky and it is very possible that the market could crash again. As a result, many Canadians are turning to the safety of Guaranteed Investment Contracts (GICS). While these investments are safe, they have a very low return. If you want to upgrade your guaranteed return, consider investing in an annuity.
Problem with GICS
When you put money in a GIC, you aren’t going to lose anything. You get a fixed guaranteed return on your money and get your entire investment back at the end of the contract. It’s a nice feeling of safety in today’s unsteady market. However, while a GIC’s return is guaranteed, it isn’t very high. The average GIC pays well below 2 percent a year. This isn’t even enough to keep up with inflation. If you are trying to build your savings for the future, you won’t get very far with a GIC and have to pay tax on any earnings.
Annuities
Another way to get a guaranteed return is by investing in an annuity. An annuity is an investment contract between you and an insurance company. When you deposit your money in an annuity, the insurance company promises to pay you a fixed return each year. Just like a GIC, you get this money no matter what. However, the average return on an annuity is significantly higher. By investing in an annuity, your money is just as safe as in a GIC but is growing faster.
Annuity Investments
An insurance company can offer a higher return because of its investment strategy. It takes your deposit and builds a portfolio of stocks, bonds, and money market funds. These assets have a higher long-run return than bank deposits.
Retirement Payments
An annuity offers an extra guarantee that GICs do not. When you retire, you can convert your savings into a life annuity. When you buy a life annuity, your insurance company agrees to give you a monthly payment for the rest of your life. No matter how long you live, you get this guaranteed paycheque for life. If you keep all your money in a GIC, you do not receive guaranteed income. When you invest in an annuity, you get both a guaranteed payment plus a guaranteed income. This makes it a true upgrade over a GIC.
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I agree, investing in annuities is a great way to get a guaranteed lifetime income. But before you do so, make sure you are aware of the types of annuities. Also, have someone like a retirement income expert help you.