Looking for guaranteed retirement income? Think about an annuity

As retirement nears, you change your focus from building your savings to converting them into income. You may also be thinking about how much money you’ll need during retirement, like Marie.

The mother of two in her mid-forties worries about running out of money. “People in my family on both sides tend to live a long time. I invest every year in my RRSPs and TFSAs, but I don’t have a group pension plan. It’s hard to really know how much I need to have saved for retirement. I can’t predict how long I’ll live or whether I will be healthy. I worry that I’ll eventually run out of money and become a burden to my children.”

Marie’s concern is genuine, because Canadians are living longer. 

Are pension plans enough to pay for longer retirements?

In 2020, Canadians at the traditional retirement age of 65 could expect to live about two decades longer. According to the Life Expectancy dashboard from the Government of Canada:

• Women live an average of 22.2 years longer (87.2 years old).
• Men live an average of 19.5 years longer (84.5 years old).

With that length of retirement in mind, how can you avoid outliving your money? 

Pension plans can provide guaranteed retirement income. You’ll want to find out more about the following government plans for your retirement income strategy:

• Canada Pension Plan (CPP)/Quebec Pension Plan (QPP), 
• Old Age Security (OAS), and 
• Guaranteed Income Supplement (GIS).

These sources of income, however, likely won’t provide enough income for you in retirement. For example, the maximum monthly amount you could receive for the CPP in 2023 is $1,306.57, if you start this pension at age 65. That’s according to the Government of Canada. But not everyone gets the maximum amount. For payments starting at age 65 in 2023, CPP currently pays an average of $772.71 per month.

OAS currently pays a maximum of $707.68 per month at age 65.

Another source of retirement income is a registered pension plan (RPP). Employers or unions for employees set up RPPs. Close to 7-million Canadians were active members of an RPP in 2021 (Statistics Canada). Unfortunately, many Canadians don’t have access to an RPP.

Annuities also provide income during retirement.

Annuities can add to your guaranteed retirement income

Rising interest rates and stock market uncertainty have made Canadians more interested in annuities. Life annuities also provide a steady source of income for as long as the annuitant lives. (An annuitant is a person on whose life the annuity income payments are calculated.)

With a life annuity, you pay a certain amount of money to a life insurance company. It commits to paying you a specified monthly amount for the rest of your life. You won’t outlive these payments.

Ups and downs in the stock market won’t affect the annuity’s payments to you. That’s an attractive retirement income option. You’ll get a specific amount, for as long as you live. 

This annuity calculator will give you an estimate of your guaranteed retirement income with an annuity. What if Quebec resident Marie bought a life annuity with $250,000 in registered funds at age 65? The calculator estimates she’d receive $16,063 per year, before tax, and $11,641 per year, after tax, assuming a marginal tax rate of 26.53%.

Life annuities are easy to buy. You can use various sources of existing registered retirement savings to purchase an annuity. Or you can use non-registered money to buy an annuity. 

What factors influence the payments I can expect?

Here are things to consider about the best time to buy an annuity:

• Your life expectancy at the date of purchase. Monthly payments are higher if you buy a life annuity at a later age. That’s because the life insurance company assumes it won’t have to make as many payments to you.
• Interest rates affect the investment return the life insurance company will achieve with your money. The company expects to pay an annuity income over a long period of time. That means long-term interest rates affect annuity payments much more than short-term rates.

Speak with your advisor to learn if annuities are right for you. You can find an advisor at Sun Life. 

What other options do I have?

An annuity can be an important consideration as you prepare for your retirement. There are other options to think about. Products can be in non-registered or registered accounts, plans, and funds, such as:

• TFSA (tax-free savings account)
• RRSP (registered retirement savings plan)
• RRIF (registered retirement income fund)
• LIRA (locked-in retirement account)
• LIF (life income fund)

Like Marie, you have many choices to make sure you have retirement income for as long as you live. Buying an annuity could be part of your strategy to convert your retirement assets into streams of income you need for a secure retirement.