Q: I am a 73.5 year old male in very good health. I have been quoted a payment of $642 per month or $7700 a year for a $100,000 immediate single life annuity with a ten year payout guarantee. I calculate that if I die at age 87, my current life expectancy, the annuity will return a yield of less than 0.7%. To me it is obvious that the annuity is a very bad deal. Is this calculation accurate? And is there any reason why I should consider the purchase in spite of these numbers? I have a balanced portfolio of equities, fixed income, etc.
A: A life annuity is similar to a fixed income coupon bond. You get regular equal payments with the number of payments variable depending on how long you live. Your age being in the early 70s is a “sweet spot” to increase the amount of regular income for life. As you close in on average life expectancy your monthly payments, given the same premium, will increase. You might be anticipating that your personal longevity will reach beyond the population average. Then a life annuity might make sense.
People without lifetime pension plans (outside of CPP & OAS) are more at risk of outliving their money than others with strong pensions. A life annuity could play a role to boost lifetime guaranteed income. You don’t have to commit your entire portfolio. Just enough to secure for basic spending.
Life annuities are priced to be competitive with fixed income bonds. Unfortunately, the continuous drop in interest rates since 1981 has made life annuities more and more costly (less monthly payment).
A Canadian male aged 73 has a life expectancy of 86.50. Notice the steady increase in the annual rate of return as you live beyond the average life expectancy.
|Age at Death||87||88||89||90||91||92||93||94||95|
|$642/month (with 10 year guarantee)||0.58%||1.55%||2.35%||3.02%||3.59%||4.07%||4.49%||4.84%||5.15%|
|$682/month (no payment guarantee)||1.49%||2.42%||3.19%||3.83%||4.37%||4.83%||5.22%||5.56%||5.85%|
Interest rates may soon be on the rebound. You could step into life annuity products a bit at a time. Work with an annuity broker and shop around.
Source: Stats Canada, Cannex Financial Exchanges Ltd
Tom Feigs is a fee-for-service financial planner, money coach and retirement planning expert based in Calgary, Alberta.
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