Retired ($40,000/Year Income): Annuity Purchase - Helen's Assessment


Helen

Helen's concern is what she should consider before starting to convert her investments into annuity income? Let's take a look at her situation.

  • Sources of Income:
  1. Government pensions: $20,000/year
  2. Investment portfolio withdrawals: $20,000/year
  • Portfolio composition: $200,000, invested in bank term deposits but it will be converted into annuity income over five years.

Annuity Purchase Assessment

“Above all else, Helen wants a steady, predictable income for the rest of her life. Her portfolio of term deposits may not be up to the task. It will struggle to match inflation, if interest rates remain low.”

Tips

  • Draw up a plan and timeline for the portfolio’s conversion into annuities.
  • Annually set a date to monitor the conversion process, your income needs and the increasing annuity.
  • Use an insurance broker to compare annuity rates and companies. Shop around.
  • Avoid expensive options, such as a guarantee period, that will reduce the monthly payment. (Helen doesn’t need to leave money to anyone; she needs to maximize her income.)

To-Dos

1. Suitability and adequacy:

  • Securing your future may require a temporary or permanent drop in income. You will have to live within your means. A review of your expenses may reveal where you can cut back.
  • Explore reducing or deferring a minimum of $5,000/year of expenses for the next five years. Use the annual savings to buy more annuity income.

2. Implement conversion to annuities:

  • Make one lump sum purchase annually for the next five years:
    • Get the benefit of dollar-cost averaging; an advantage, if interest rates increase.
    • Buy more annuity income with the same dollar amount; annuity payments increase with age.
  • Remove $40,000 per year from the portfolio. In year one, subtract the money needed for living expenses and buy an annuity with the remaining amount. Continue each year until the entire portfolio has been converted into annuities as shown below.

  • Assess maturity dates of term deposits held. If required, select maturity dates to align with annuity purchases. Take advantage of deposits offering no-penalty, early cash-out options, if the rates are advantageous.
  • Organize the annuity purchases to be tax efficient. Annuity income purchased with money that was in a life income fund (LIF) or registered retirement income fund (RRIF) is 100% taxable in the year it is received. Only a portion is taxable if the term deposits were non-registered.

To review Helen's story, see Retired: $40,000/Year Income - Helen's Story.