When you reach retirement, your focus shifts from saving money to spending money. Now before you get too excited, what I mean by spending money is that you are pulling the money out of your account for living expenses. Let me see if I can be clearer.
A payout annuity is a unique product that provides regular guaranteed income in retirement. It’s the ideal solution if you don’t have a regular income from a company pension plan, or if you would like to supplement other retirement income streams, such as Old Age Security (OAS) or Canada/Quebec Pension Plan.
Payout annuities are an excellent solution for:
- Converting your RRSP savings to a payout annuity instead of a registered retirement income fund (RRIF)
- Covering your predictable fixed monthly expenses
- Providing lifetime income for you and your spouse by purchasing a joint and last survivor annuity.
Available only through insurance companies, there are two types of payout annuities, both of which are available for a lump sum.
- A term certain annuity provides guaranteed income payments for a set period.
- A life annuity offers guaranteed income for the rest of your life, ensuring you will not outlive your money.
With term certain and lifetime annuities, there is no need to worry about stock market fluctuations or changes to interest rates. All you need to decide is the type, the payment frequency, and the length of the guarantee.
With a payout annuity, you pay a lump sum to the insurance company, and the insurance company sets up an annuity based on the features you choose, combined with a few other factors:
- Amount of deposit – The larger your lump sum deposit, the higher the income payments.
- Guarantee period – The shorter the guarantee period, the larger your payments.
- Interest rates – While your regular payments will not fluctuate with future changes in interest rates, your initial deposit is based on the current long-term interest rate outlook.
- Indexing – The higher the indexing rate, the lower your initial payments. However, over time, the payment level will increase and ultimately become higher than the non-indexed payments.
With life annuities, additional factors come in to play:
- Your age – When an annuity pays an income for life, your age impacts the amount of your payments. The younger you are, the longer you are expected to live, meaning your payments will be lower.
- Your gender – Since women typically live longer than men, payments are lower for women based on the assumption that the annuity will pay out for a longer period.