Should You Buy an Annuity?

The previous chapter explained that a retiree has the choice of transferring his or her assets from an RRSP to a RRIF or buying an annuity. A RRIF allows the retiree to continue to have control over the investments, but this control comes at a price. While a RRIF provides a great deal of flexibility and gives one at least the chance of doing better, it requires one to have substantial knowledge of investments, investment products, and hidden fees. Also, the income under a RRIF can be highly variable and, depending on the investments, one can suffer an investment loss. Finally, the minimum withdrawal rules starting at age 71 can cause anxiety among seniors who are concerned about out-living their assets.

The Purpose of Annuities

This is where annuities come in. An annuity involves handing over your retirement savings to a life insurance company which then provides you with a fixed monthly payment for the rest of your life. While annuities lack the complete flexibility of RRIFs, they effectively solve virtually all of the drawbacks of RRIFs as described above. By buying an annuity, you are transferring the longevity risk to the insurance company. If you live longer than the insurance company expected when they priced the annuity, you come out ahead. On the other hand, if you die early, you might get less than you paid for. We say “might” because if this is really a concern, you can opt for a survivor benefit that pays your beneficiaries a substantial ...

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