November 29th 2011
Is There a Place for Annuities in your Portfolio?
When you retire, you face a number of challenges in ensuring that your retirement income will last as long as you do. We’re living longer, healthier lives, which means that we need to plan carefully so that we don’t run out of money. And the state of the markets over the past couple of years hasn’t made this task any easier. How can you structure your income to provide a comfortable lifestyle, without constantly being worried about market volatility?
First, consider that we all have two different categories of expenses. Fixed expenses include the basics of food, housing, clothing, and anything else that is absolutely required for our survival. Everything else is discretionary – the things we do for fun, that make life enjoyable. It’s important to ensure that your basic needs are covered by guaranteed sources of income. These can include government benefits and monthly payments from a defined benefit pension plan, if you’re fortunate enough to have one. If these sources don’t cover the basics, you may want to consider using a life annuity to close the gap.
With a life annuity, you hand over a lump sum of money to an insurance company in exchange for a regular monthly income for the rest of your life. The main advantage of a life annuity is that there is no possibility of running out of money – the income is guaranteed for as long as you live. The level of income depends on several factors, including the amount invested, prevailing interest rates and the age at which you acquire the annuity. When purchased with funds from an RRSP or RRIF, the annuity income is taxed at regular rates. However, if you plan to use non-registered funds from an investment portfolio, you can purchase a prescribed annuity, which offers very favourable tax treatment. This can be particularly advantageous if you’re concerned about the clawback of your OAS benefits.
Once you have your basic needs taken care of, you can look to your investment portfolio to cover your discretionary expenses. Here, a blend of cash, fixed income and stock investments should ensure that you’ll never have to sell stock when the market is down in order to meet your needs.
While asset allocation and long-term growth strategies serve us well in the accumulation years, the withdrawal years are all about risk management and choosing the right products to provide a comfortable, secure income stream.
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"A welcome new service from CRA" November 2011"Looking for an alternative to mutual funds?"
"Is a reverse mortgage right for you?"
"Protecting your income"
"Is it time to downsize for retirement?"
