As a former teacher you might think I’d be the last person who would want to learn more about investing in annuities in Canada.
It’s common knowledge that teachers enjoy a solid stream of pension income when they reach retirement. In fact, it’s so commonly known, that it can become a bit of a heated talking point.
If I have to listen to one more Canadian dinner party story about misinformed non-teachers telling teachers that they are sooooo lucky to have a pension, followed by misinformed teachers telling everyone else that they deserve the pension because of [fill in bad part of job here] – my neck might snap from shaking my head so vehemently.
Look – teachers – I’m one of you. Yeah, I know you pay into your pension from a young age. Yes, I know what it felt like to see so much of your paycheque disappear when you were in your early twenties and had just got out of five years of university study.
Just get over it – simply agree with everyone else that it’s really, really nice to have a defined benefit pension. It is the equivalent of retiring with something like $1-2M in the bank and all the logistics are taken care of for us.
Not to mention the fact that our employers (the provincial governments) range from good to excellent partners when it comes to helping our retirement savings. Very few people have these defined benefit (DB) privileges – just politely smile and say that you are thankful.
And for goodness sake Canadian dinner party guests – just accept the polite smile and move on. We all made our decisions in life. Every job has its perks and its drawbacks. Teaching is no different.
(You can imagine how much fun opinions like this – which somehow manage to offend all sides – make me at dinner parties. This is why I’m so fortunate my wife is good at making friends.)
What Is An Annuity?
An annuity is a contract that lets you buy your own teachers pension.
I mean… there are some details to sort out within that, but that’s more or less the gist of it.
For example, the month before you turn 60, you hand BMO $100,000, and BMO promises to send you $440 each month until you go to that great tax haven in the sky.
I first became interested in annuities when I was skimming an article a few years ago, hoping to find something to say to people when they unleashed their pension envy on me. Ever since then I’ve been fascinated by three things:
- All of the annuity surveys I’ve ever seen confirm my anecdotal Canadian dinner party experience: Canadians are cautious, generally dislike the idea of managing their own investments, and love the idea of a teacher’s pension – which everyone knows, arrives each month like clockwork.
- An incredibly high majority of experts agree that annuities are a great tool. One that should be used by many Canadians.
- No Canadian wants anything to do with an annuity no matter how many experts tell them otherwise.
Number three might be a bit of an exaggeration – but not by much.
So what does it mean to invest in an annuity?
The basic idea is that you’re going to hand over a chunk of your money to a financial institution like BMO or Manulife, and in return they are going to send you a pension-like amount of money each month.
You can invest in an annuity that will pay you for the rest of your life – or a specific period of time. You can buy an annuity that kicks in immediately – or one that only kicks in later in life.
There are many options and many tweaks that one can look into, but the value proposition of an annuity is:
Hey – want to take a lot of risk and complexity away from your retirement planning? We can do that for you with an annuity – but it’s going to cost you.
Is an Annuity a Good Investment in Canada?
The two names that have popped up over and over again when I’ve researched retirement planning in Canada are Moishe Milevsky and Fred Vettese.
These two fellas didn’t write the book on Canadian retirement planning – they’ve written dozens of books on the topic.
Due to a recent Covid quarantine I had some reading time on my hands. I limited myself to the last 12 years (these two have been at it for a while) so I think I’ve got my arms around this whole annuity thing.
So, you want to know if an annuity is a good investment?
Well, that’s easy.
The formula is a bit intimidating, but the good news is that other people have already created the spreadsheet.
Just tell me when you’re going to die and what the interest rates are going to be the entire time you’re alive. While you’re at it, let me know the future annual returns of the stock market, and I can then tell you if an annuity is a good investment.
In case my dripping sarcasm isn’t coming through, the truth is that there is absolutely no way in advance to know if using your money to purchase an annuity is better than investing it on your own.
Consequently, we can never truly know in advance if an annuity is the investment that will give you the highest total returns.
Say we take our example from before. Johnny is about to be a 60-year-old Canadian. He is considering buying an annuity and wants to know if it’s a good investment or if he should keep his cash in his online brokerage.
If we look at the $440 Johnny will get each month for his $100,000 investment, that might look like Johnny is getting a guaranteed 5.28% annual return on his investment – pretty not bad!
But remember, that $100,000 belongs to BMO now – it isn’t sitting there in Johnny’s account “just in case”. So, for Johnny just to break even on the deal, he’s going to have to collect that monthly annuity payment for 19 years.
If Johnny sees his 79th birthday, he’s “playing with the house’s money”. That seems like a pretty good bet considering modern medicine – so Johnny should just put it all in an annuity, right?
Well… it’s not quite that simple.
Economists and other smart money folks often talk about “the present value of money”. They put it into long intimidating math equations.
But the basic idea is pretty straight forward: A dollar today is worth more than a dollar a year from now.
If Johnny kept his $100,000, instead of purchasing an annuity from BMO, and put it in a high interest savings account that earned 2% per year, and then spent $440 per month, he would run out of money sometime during his 83rd year.
As long as Johnny is sure he’ll die before he turns 83, then he shouldn’t purchase the annuity.
See, annuity companies are going to take Johnny’s money – and just like my teacher’s pension plan – they’re going to pool it along with thousands of other retirees.
They’ll employ a lot of really, really smart math gurus to figure out the average amount of time all of the retirees will live (we can’t figure out how long you’ll live, but we’re surprisingly good at figuring out on average how long a group of people just like you will live), and then they’ll determine how much the pool of money can afford to pay all of the individuals for as long as they live.
After they take their cut, of course.
Here’s the thing though:
While we can’t tell in advance if an annuity is the best numerical investment, we can determine if an annuity is the best investment for you – and your goals!
How Does An Annuity Help You Meet Your Retirement Income Goals?
Most retirees or soon-to-be retirees have a few simple goals when it comes to their money.
Some “well off” retirees have large scale goals that involve complicated inheritances and trusts.
But most retirees just want to know that they can afford to live a certain lifestyle (leaving the cat food eating for the cats) until the day they pass away.
Statistically speaking, if your goal is to maximize the size of your net worth after you retire, you should not purchase an annuity. Check out our free eBook to see our suggestions on how to DIY invest in your retirement.
The thing is that most Canadian seniors that I know, don’t want to worry too much about probabilities and market outcomes. They don’t love the idea of trying to assess the risk of a 95% chance they will be just fine if they live to 95 vs the 5% chance they’ll deplete their nest egg before that vs the chance they’ll live to be older than 95.
This is why a teachers pension causes so much envy!
As much as retirees may be envious of the actual amount of money getting deposited each month, I think what people are really after is the burden of retirement planning being lifted from their shoulders. The knowledge that no matter what happens in the stock or bond markets, that automatic deposit will show up each month, is a powerful peace of mind.
Consequently, the question isn’t: Is a Canadian Annuity the Best Investment.
It’s: Is a Canadian Annuity the Best Investment for You and Your Goals.
The Different Types of Annuities in Canada
By far the most common type of annuity in Canada is the lifetime annuity. This is the product that we have been describing so far.
These life annuities can be further broken down into the categories of single and joint annuities. Joint annuities are generally recommended for couples, as when one person passes, their annuity (or a portion of it) can continue to be collected by the remaining partner.
A less common type of annuity is what is known as a time-certain annuity. This annuity is set up for a predetermined period of years, and if you were to pass before the end date, the payouts would continue to your estate.
In addition to the broad category decision of joint/single lifetime annuities vs time-certain annuities, the following are common features or “tweaks” that can be added to your annuity contract.
Just remember that, generally speaking, everytime you add a feature, your monthly payout will go down. The more complicated the annuity – the fewer dollars per month!
- A guaranteed money back annuity. This is to help alleviate fears of buying a large annuity, only to pass away a few years later – and “lose” all of that capital – which could have been bequeathed.
- A deferred annuity is one that doesn’t start paying out right away, but rather one that will begin paying out at a later date. It is useful for people who are really worried about extreme longevity.
- An indexed annuity. As time goes on your money buys less and less stuff. You can buy some annuities that track the inflation rate (as tracked by the Consumer Price Index), but most annuities experts instead recommend an annuity that goes up by a set rate – such as 2% per year.
- A cash-back annuity acts as almost a type of life insurance tied into your annuity contract in that it pays your estate if you die before the annuity has paid a certain amount. It’s similar to the guaranteed money back option.
- A variable rate annuity is a bit of a complicated product that is quite rare in Canada. The annuity company will guarantee you a minimum payout with a certain portion of your money, and then with the rest of it they will invest in mutual funds. You could get substantially more than you would with a regular annuity – or you might get less (as the minimum is substantially less than you’d get with a plain vanilla annuity) – depending on how the mutual funds do.
At the end of the day, these small tweaks are meant to ease certain fears that people have in regards to laying down a large sum of money up front. Every single expert that I’ve read or talked to recommended going with a very simple annuity – after shopping around for the best deal.
Comparing Current Joint and Single Annuity Rates in Canada
Given all of the different types of annuities in Canada, you need to be careful that you’re “comparing apples to apples” when it comes to shopping for the best annuity in your situation.
We’ll get into how to buy annuities in just a second, but here’s a look at a few different annuity types and what the monthly payout would be. Below are some Canadian annuity rates pulled from Cannex Financial Exchanges Limited at the beginning of 2022 and are for illustrative purposes only.
Canadian Single Life Female Annuity Rates
Desjardins Fin. Security
RBC Life Insurance
Sun Life Insurance
Canadian Single Life Male Annuity Rates
Desjardins Fin. Security
RBC Life Insurance
Sun Life Insurance
Canadian Joint Annuity Rates
Desjardins Fin. Security
RBC Life Insurance
Sun Life Insurance
(full lifetime payment to surviving partner)
How to Buy an Annuity in Canada
When you set out to buy an annuity in Canada, it’s important to comparison shop and make sure you get the best bang for your buck.
The good news is that it’s relatively easy to comparison shop for annuities. Each province in Canada has its own regulations when it comes to the precise definition of who is allowed to sell annuities, but basically it boils down to people who are licensed to sell insurance can generally also sell annuities.
As an interesting aside, it has long been speculated that because many Canadian “advisors” are incentivized to sell mutual funds in Canada, but are not allowed to sell annuities, most Canadians are never made aware of the positive teachers pension-like benefits annuities bring to the table.
In any case, when it comes to buying an annuity in Canada, your only real move is to go see an insurance professional that is licensed to sell them. They will in all likelihood use a company called Cannex (by far the biggest annuity quote comparison site in Canada) to see what the latest offers are from each of the big annuity providers in Canada (there aren’t that many). From there it’s simply a matter of determining exactly what type of annuity you want, and then selecting the best payout.
Are Canadian Annuities Safe?
Look – I get it. You put down $100,000+ to “buy your own teachers pension” – you want to make sure that thing is air tight!
The first line of defense your annuity will have is the fact that the vast majority of annuities are sold by massive publicly traded companies. It’s not impossible that the Bank of Montreal could go bankrupt – but I mean the company was already fifty years old when Canada became a country.
BUT – even if somehow the Canadian government decided that it was going to let such a massive Canadian financial institution declare bankruptcy – your annuity would have a second line of defense known as Assuris.
Assuris is a non-profit entity regulated by the Government of Canada. It was created in 1990 to make sure that products such as life insurance and annuities could be safely guaranteed to Canadians.
The long and short of it is that the first $2,000 per month you receive in annuity payouts is 100% protected no matter what. Over and above $2,000, Assuris guarantees a minimum of 85% payout in a worst case scenario.
The great thing about this Assuris “insurance” or guarantee is that you don’t need to do anything to get it – it’s automatic and doesn’t cost anything extra.
RRIFs, RRSPs, TFSAs and Annuities in Retirement
When it comes to choosing how to draw down an individual’s or couple’s retirement nest egg, there are obviously many things to consider.
When should OAS and CPP be taken?
How much investment risk is one comfortable with?
Are you comfortable handling your own investments?
How much value do you place on simplicity of income vs mathematical probability of a larger net worth?
What level of assets do you have in your RRSP/TFSA/Non-registered accounts?
Do you have any debts? If yes, what are the interest rates?
Is leaving an inheritance of high importance to you?
Do you have a history of longevity in your family gene pool?
Do you prioritize making daily health choices?
What type of retirement spending do you see yourself doing over the next few decades?
+ Several More
It’s impossible to explain the full context of all of these choices in one article, but here are some really great reasons to “buy your own pension” using an annuity.
- The simplicity of knowing exactly what you will get, when you will get it, and how you can use it to plan your budget is incredibly valuable to a lot of people.
- If you eat right, exercise often, stay away from smoking, and generally do more things right than not – then you are quite likely to get your money’s worth when it comes to an annuity.
- Most people don’t know how to properly manage their own investments. If you want to read our free eBook ‘Can I Retire Yet’, and then put those low-fee strategies into play – awesome. But most people get quite intimidated by the idea of building a flexible game plan for retirement spending – and then consequently pay way too much money to misincentivized advisors who fail to give good advice.
- If you’re going to have a portion of your retirement nest egg in “safe” investments like GICs or bonds anyway – might this same amount be allocated to an annuity and give you more spending over the long term?
- The worry of passing away soon after buying an annuity and “losing” all that hard-earned money can be assuaged by using a guaranteed-for-ten-years option, and/or by realizing that the intent of that money was to provide a better life for you. If it did that by reducing stress – then even if it was a bad mathematical decision – then perhaps it’s not that large a “loss”.
Personally, I’d stay away from annuities under the following conditions.
- I had investable assets of over $2.5M – and spending needs less than $90,000 per year. (In other words – High Net Worth folks).
- I was entering retirement without any investable assets.
- I already had a pension.
- I was unhealthy and/or had poor health prospects.
Everyone else should at least consider annuitizing a portion of their assets.
It’s worth noting that the government is going to force you to draw down your RRSP assets after you turn 71 anyway (after you convert to a RRIF). You can convert your RRSP or TFSA into one type of registered annuity, while using any non-registered assets to convert into a a separate annuity stream.
The tax man forces us to keep those two pools of retirement funds separate because (just like if you left the money in an RRSP or RRIF) there is still tax owing on money coming from the registered annuities.
If you had a defined contribution (DC) plan from one of your jobs, chances are that it will be converted to a Locked In Retirement Account (LIRA) when you retire, and you can chose to annuitize some or all of this money – just like an RRSP.
Investing in Canadian Annuities – FAQ
Is a Canadian Annuity Right for You?
Canadians appear to love the idea of a teacher-pension-esque monthly automated deposit being transferred into their bank account – they just hate the idea of paying for it.
This distaste for engaging with an uncommon money solution – one with a high price tag – is likely leading to some poor outcomes in the future.
Annuitizing a part of your retirement nest egg and taking some of the longevity risk off the table is a really sound move when it comes to lowering stress levels while helping meet retirement goals.
I cannot emphasize enough that while I’m still a fan of handling my own nest egg retirement spending strategy, a Canadian annuity is an excellent option for folks who don’t want to worry about the minutiae of rebalancing a portfolio, and/or don’t want the stress of watching the stock market collapse huge amounts of their net worth in their golden years.
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