What’s the right guaranteed lifetime income solution for you?
Everyone’s situation is different. Your personal and family circumstances, risk tolerance, age, investment capital available, existing sources of guaranteed income, and retirement income expectations are all important considerations.
A life annuity is for those of us who want safety and guarantees, and don’t want any management responsibilities. It will guarantee you income for life, or provide income for the lifetimes of you and your spouse. Because you give up flexibility and access to your capital, you need to keep other money available for the unexpected, or have access to money with a secured line of credit against your home.
Annuities can be great for a healthy individual or couple with longevity on their side, and for the financially unsophisticated (or when one spouse is more knowledgeable than the other, it can protect the surviving spouse if they outlive the more financially experienced one).
If you have ever spent sleepless nights worrying about your investments because of market volatility, locking part of your money into annuities will provide risk-free income at a high rate of return relative to current low interest alternatives like term deposits and bonds. Annuity income is also very tax advantaged, if you invest non registered money.
Your annuity income is determined at the time of purchase based on how much you deposit, current interest rates, your age and sex, whether income will continue to your spouse, and if you choose a minimum guaranteed payment period as a potential death benefit.
Variable annuities, also referred to as GMWBs (Guaranteed Minimum Withdrawal Balances), tend to attract those of us who want guaranteed lifetime income, but also more flexibility.
GMWBs will ‘bonus’ your future guaranteed income by 5% each year you defer starting income, then guarantee you a fixed percentage of income for life (based on your age when you start your income).
For example, if you invest $100,000 at age 55, and decide to retire and start income at age 65, your guaranteed lifetime income will be based on at least $150,000 ($100,000 deposit plus 10 years of 5% bonuses). At 65 you will then enjoy at least $7500 per year ($150,000 @ 5% income). Starting income earlier or later than age 65 may affect the rate of lifetime income you receive.
GMWBs allow you to choose from a wide variety of managed investment portfolios, while eliminating your downside risk by guaranteeing you lifetime income based on your original deposit (plus any bonuses). In addition, if your investments grow, your market gains will be locked in periodically for income purposes.
There is also a rollover feature so your surviving spouse can continue income. And, like annuity income, there are tax advantages if you invest non registered money. Although registered money is always taxed as normal income, the lifetime income guarantee ensures that as your increasing RRIF minimum payments deplete your capital, even if you run out of assets, your guaranteed income will continue as long as you do.
While your money is not locked in with a GMWB, you want to think of these like you would your own personal pension plan. You are buying yourself income for life, not a short or fixed term investment. If you decide to liquidate your plan, you will receive the current value of your investments at that time, without benefiting from any of the bonuses, market value resets, lifetime income or death benefit guarantees.
Market volatility isn’t going to stop. Inflation and longevity are real concerns. Increased interest rates will be very difficult to achieve, and income tax is unlikely to go down. Our need for safety, security, and guarantees has never been more important to those of us either side of retirement. Insulating ourselves with guaranteed income to cover at least our basic lifestyle expenses makes sound sense.
Call your ZLC Associate to help you plan your stress free retirement.
