Payout Annuities – The Foundation of a Retirement Income Plan

An annuity is a retirement income tool where a single lump sum is paid as a premium to an insurance company in exchange for a policy that generates a stream of income. This policy can be based on single or joint lives, it can provide level income or adjusted each year for inflation, and the annuity can either be paid for life or for a specified term.

The great thing about payout annuities that pay cash for life is, regardless of how the financial markets perform, the owner, or “annuitant”, is guaranteed to receive that stream of income. Even in the event a life insurance company becomes insolvent, up to $2000 a month per institution is covered by Assuris, a not-for-profit organization funded by life insurance companies that protects Canadian policyholders.

Annuities help address longevity risk, the risk that the money we have to draw on for our retirement income runs out while we are still alive and in need. The Canada Pension Plan (CPP), Old Age Security (OAS), employer sponsored defined benefit pension plans (e.g., Teachers, OMERS, HOOPS), and single premium immediate life annuities offered by Canadian insurance companies are all examples of the “cash for life” payout annuities that can reduce or eliminate this risk.

Helping You Keep Together What You Have Put Together™, a process for proper retirement income planning, helps explain what role payout annuities play in our retirement income planning. While payout annuities aren’t for everyone, at minimum, its states that retirees that they do make sense for, should ensure that the income they collect from payout annuities should be enough to fund the bare necessities of life. Rent, property tax, utilties, groceries are all examples of expenses that your standard of living depends on. Our process says you should match those fixed primary expenses with the guaranteed income offered by a payout annuity or other similar products.

Employer sponsored defined benefit registered pension plans that offer retiring members an income for life are becoming increasingly rare. Employers who offer this type of pension plan take on all the risk of managing the pool of funds that provides the income for retired members. Defined contribution pension plans are the alternative, are becoming more and more common. This type of pension plan typically has the employee contribute a percentage of income, and the employer matches up to a predetermined maximum. Employers who offer this type of pension plan are only obliged to make their contribution, and when a member retires, it is the employee’s responsibility to manage the funds and assume the risk of making them last.

Helping You Keep Together What You Have Put Together™ recognizes that payout annuities transfer most of the risk back to the financial institution.