Ah, the annuity, in some cases people think it is great while others think it is an awful way to invest. I tend to think both are wrong, an annuity isn’t evil or great. It rather is just another option.
So what’s good about an annuity?
- It’s easy. Sign over a lump sum of cash and get a guaranteed stream of cash till you die. No worrying about investment performance or how much you need to take out of your RIF each year. It can be funded by pension money or RRSP money.
- It’s secure. Basically with an annuity you are buying an insurance product where someone else is taking the risk of you out living your money, but if you don’t get an inflation adjustment you are taking on some risk too.
What’s bad about an annuity?
- Limited application. If you die the day after you buy one and you didn’t specific a minimum payout time frame you money will be gone. Also don’t assume your spouse will get 100% of the cash flow. Read the fine print and understand what exactly you are buying.
- The more options you add on the lower the payment becomes. So if you want it the cash flow to transfer to your spouse and have a long minimum payout and be inflation adjusted you will be paying a lot of cash for little return.
So where do you use it? I tend to think an annuity is best used when you are getting older (65+) and you just don’t want to worry about your investments as much. It allow some security and ease without much effort. I would also suggest not putting all you money in one. Keep some outside to hedge against any inflation risks or you dying early.
For early retirement I’m not even thinking about using one. It’s just too far out to worry about locking in some of my money into a product like this in my mind. I would consider one as I get older and don’t want the hassle of watching everything, but only so much to provide a minimum standard of living. The rest I would keep outside of one.
In the end, it is just another tool. Use it or not, it is really up to you.