Introducing Annuities to a Retirement Plan

By far, the biggest worry that retirees have is running out of money in retirement.  But what if I told you that there is a financial product out there that is structured to pay you guaranteed income throughout your retirement, regardless of how long you live?

In this video I am going to talk about the role of annuities in a retirement income plan.  I will demonstrate how a hypothetical retiree couple can introduce an income annuity into their retirement plan, boost their guaranteed retirement income, and reduce their stress of running out of money in retirement.  

If we haven’t met yet, my name is Mark Walhout, I run an investment advisory and financial planning business called Walhout Financial.  I help people with retirement and I created this channel to share ideas and concepts that I am using to help my clients with retirement every single day.  If you want to get more videos like these consider subscribing to the channel and hitting the bell icon. 

So before we dig into an annuity, lets re-introduce you to our hypothetical retirement couple – Johnny and Janey YouTube.  I am going to skip through some of the facts about their situation but I will link to the last video I did where we talked about 3 enhancements to their financial plan that improved their retirement income picture.

 So, as you can see, Johnny and Janey’s plan looks pretty good.  They plan to spend $6.5k/mth adjusted for inflation for the rest of their lives.  They have about $1.1M in total investments at the start of retirement.  Things are looking good.  

 But, recall that all financial plans rest on a set of assumptions that will ultimately end up being wrong. In Johnny and Janey’s case, we are assuming that their income portfolio of approximately half equities and half fixed income will provide them with a return of about 5% per year for the rest of our lives.  But we know through recent experience that we don’t always get slow and steady 5% per year returns.  In fact if we look at the year by year returns of a hypothetical 50% equity/50% fixed income portfolio we can see that the return pattern has been pretty volatile over the past 10 years.

 Now, we don’t know what future returns are going to be from year to year.  But we can use a technology to simulate a whole bunch of different market scenarios and see how their plan would hold up.  We can see through running Johnny and Janey’s plan through shows that even in a really run of market returns that their plan looks great until they reach their late 80’s.  Then, under a bad market scenario, they could run into a situation where they need to make some difficult decisions about their plan.

 They could, of course, look to downsize their home but they’ve indicated that they don’t want to do that.  So, what other ways could they create more certainty in their income plan and reduce that risk that the market doesn’t cooperate with their plan?

Enter income annuities.

Income annuities, at their core, are fairly simple instruments.  They are offered by life insurance companies.  In exchange for a lump sum of money, the insurance company will pay you a fixed amount every year for the rest of your life.  This is regardless if you live 15 years or 30 years after that transaction.  

The pros of an annuity is that they create income predictability in retirement.  The payments from an annuity are contractually guaranteed by the insurance company and will continue to pay regardless of how long you live.  The cons are that you need to exchange “liquid” assets (ie. RRIF/Open account) and convert that into an annuity  income stream. 

Generally speaking, the later that you wait to purchase an income annuity, the higher the annual/monthly payout will be.  To me, the right age to begin thinking about annuity income is around age 70.  

So, lets simulate the introduction of an income annuity at age 70 for Johnny and Janey.  We recognize that we don’t want to turn ALL of their retirement assets into annuities because we want to retain some liquidity in their plan, so we will only convert $100,000 each or $200,000 total of their RRIF assets into income annuities.  Using an annuity calculator from Sunlife, we can see that $100,000 into an annuity will generate a lifetime monthly payment of about $595/mth for Johnny and about $560/mth for Janey.

We then re-run the stress test and see that the results are much more positive.  We’ve created more certainty around their income plan throughout their life.  Yes, we have lowered their “best case” but we have also improved their “worst case” outcomes.

Another thing that Johnny and Janey could consider doing is “layering” annuities into their plan.  Meaning, they can annuitize 20% of their retirement assets at age 70, then maybe another 20% of their retirement assets at age 75 at even higher monthly amounts.  They could reach a stage where their entire monthly needs could be covered by fixed payments (OAS, CPP, Annuity), allowing them to feel more free about spending and giving their liquid assets (equity/fixed income investments).

If you are interested in learning more about how annuities can help your retirement income plan, feel free to reach out to me and set up some time to chat.  I’ve got a link in my description field below where you can do that and there are some other resources down there that may help you.  I also send out a private weekly newsletter with links and articles from the week that caught my attention, so consider signing up for that.  If you like this video consider giving it a thumbs up and remember to hit the subscribe button and the bell icon so that you are notified when new videos are posted.  Leave me any questions or comments below.  Thanks for watching and I’ll speak with you again soon.