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When it comes to the safe portion of our portfolio, we’ve talked about GICs and high-interest savings accounts before, but one option that we haven’t talked about yet, is one that gives you guaranteed income for life, no matter what the markets are doing, and those are called annuities.
So, I thought it would be good for you and me to get some annuities 101 knowledge under our belts, so that we can better understand what’s out there, what are the pros and cons of annuities, and so that we can better determine if they are something that we should look into further, based on each of our particular situations.
To learn more about this, I thought it would be good to get our information from two different sources. The first, would be fee-for-service financial planners who don’t actually create or sell annuities, but are responsible for potentially using annuities as part of a total financial plan.
With that in mind, I’m definitely going to be asking financial planners that I interview in the future about annuities, so that we can get a holistic view and multiple perspectives on the subject.
The other source of information that I thought would be good to interview, is an actual creator of annuities. This way we’re getting the information right from the source about how they actually work, their intent, the pros and cons, and how they can potentially fit as part of a financial plan.
To help me with this, I have Selene Soo on the show. She is the Director of Wealth Products for RBC Insurance. She has been there for over 17 years, and has been in the industry itself for over 2 decades, so she definitely has a wealth of experience and knowledge when it comes to annuities.
Resources:
You can learn more about annuities and other retirement investment products by going over to: rbcinsurance.com/retirement
Questions Covered:
1. Many Canadians are feeling concerned about their purchasing power and expenses. We’re definitely not used to seeing inflation be this high, and on top of that we’re still at relatively low interest rates. The rates have also gone up so those of us who invest in bonds have really seen some pretty significant declines that we’re not used to.
With these concerns, I know many Canadians are curious about what kinds of options exist out there in Canada when it comes to the safe portion of our investment portfolio.
This takes us into the realm of annuities, but before we get into that, I was told that you and your team have recently completed a survey of Canadians around this subject. Can you share that with us first?
2. To start things off, for anybody not familiar, can you explain what an annuity is?
3. For those of us who, let’s say didn’t work for the government and don’t have a solid defined benefit pension (in other words, we don’t have that guaranteed income for life in retirement), I’ve often heard that an annuity is a tool where us “non-pension” Canadians can actually have access to the same thing. Is this true? And are there any key differences that we should be aware of?
4. What factors impact how much guaranteed income we can receive for an annuity?
5. I realize that the answer to this next question varies depending on where interests rates are and other factors, but just to give us a bit of a ballpark, with the way things are now, what is a range of income that we can expect to receive, guaranteed for life, for let’s say, every $100,000 that we put into an annuity?
6. One strategy that I’ve heard recommended in the past (and one that I think can make a lot of sense for some people), is to use an annuity to generate that guaranteed income in retirement for your essential living expenses. Then, doing something like total market index investing through ETFs for example to cover our discretionary spending in retirement. This way if we have a major recession, we’re not worried about paying for essentials like food and housing, as those are covered by the annuity. What are your thoughts on this strategy? And are there any other strategies that you’ve seen Canadians successfully use to navigate retirement through the use of this guaranteed income that annuities provide?
7. I’ve often heard that annuities aren’t typically a fit for younger people because they become more expensive the younger the person is. Is this true? And if so, is there a particular age range that you think someone should be, before realistically considering an annuity?
8. We’ve already touched on several pros of annuities. Are there any others that you think are worth mentioning? And can you also take us through some of the cons or negatives where they might not be a good fit for some Canadians?
9. A lot of the listeners of the show are passive, total market index investors where we just buy the same low-cost ETFs every month (and full disclosure, I’m also very much this type of investor). With that said, I noticed that in the realm of investment insurance products, segregated funds come up. In the past I’ve stayed away from them because the fees tend to be higher than ETFs (in terms of the MER), and they may include deferred sales charges. But, I recall that there are some unique elements when it comes to segregated funds (like certain guarantees). Can you speak these?
10. For those listening that want to learn more about annuities, or any other areas that we touched on today, are there any free educational resources that you’d recommend?
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