What is the rate of return on an annuity?
What can you expect as an annualized rate of return for your life annuity?
The Ontario Securities Commission [OSC] helpfully lays out the 6 fundamentals that determine the annuities rate of return:
- Current interest rates of long term bonds, etc.
- Your deposit amount
- Your age and age of any joint annuitant
- Duration: Shorter vs longer term annuity
- Additional options you may choose - to enhance your plan
For example, based on our ever-trusty life annuity calculator, you can see that for a single 65 year old woman, in Ontario, the average annuity payout for every $100,000 with a 10 year guarantee period option at today’s rate is: $471.45. Multiply that amount by 12 months and you get $5,657.40 a year, which translates to a 5.6% return a year including capital.
While GIC interest rates are not high, it’s still a very competitive annualized return on your principal.
I don’t know of any GIC’s or Term Deposits from the big 5 banks currently paying out THAT kind of return year after year.
In fact, most long-term GIC’s are laddered, so that you only reach the highest rate of return in the last year of the term.
For a life annuity, the calculation is based on prevailing long term bond interest rates: when they rise, your rate of return is generally higher.
BUT, current interest rates are too low!
Given that long term bond rates guide annuity rates, it stands to reason that when the bond rates are lower your monthly income will follow. So why invest in an annuity? Why not wait until they rise to a satisfactory level – say 10%? 15%?
Because inflation like in the eighties, will eat up the extra income.
Why shouldn’t I try to TIME my rate of return? Why not wait for that PERFECT moment?
Because it’s a risky proposition. Can YOU predict when that perfect moment will come? Life annuity rates have been going down for 20-30 years.
You can wait for decades to achieve the all-time highs of up to 20% returns that many saw in the early 1980’s. Great for investing, but horrible for borrowing and prices, whether for business or a mortgage on a new property.
Canadians have not seen those rate highs in almost 40 years. (Source: Bank of Canada)
Concentrate on where we are NOW
Because your rate of return is also based on age, the older you are, the greater the monthly payout rate of a life annuity.
So you have an incentive to invest at ANY time.
Today may not seem ideal to buy a life annuity, but peace of mind dictates that Canadians need and want guaranteed fixed income, along with the fixed income they receive in their government life annuities.
So what do other Canadians know that you don’t?
Investors are still investing in GICs to mitigate any short or long term equity losses. They do this to balance their financial portfolio; though all that extra interest is fully taxable.
A balanced portfolio should contain both fixed income AND equity investments. But those fixed income investments can also be in the form of an annuity – to give you a stream of predetermined income in your retirement.
There are no guarantees in life. But a Life Annuity can ease some of those financial concerns.
With the purchase of a life annuity, you will come out ahead. The years leading to retirement and the first 10 years into retirement should not be a time for RISK. So even a moderate rate of return in the 4 to 5% bracket is considered ideal by many.
So YES, the income of a life annuity is important.
BUT, it should not necessarily determine WHEN you buy a life annuity.
So when should you buy?
TODAY is usually the best time to start planning.
Search out a life annuity broker!
A life annuity broker can help you navigate the ins and outs of this great option. In a short phone call or online fillable form, they can send you an accurate quote for your future payouts, based on:
- Your principal investment
- Your age and gender
- Current life annuity rates
You won’t have to wonder what payout you will receive for LIFE.
You won’t have to guess at the current rate of return.
You can find out IMMEDIATELY.