1. 37376 POINTS
    David G. Pipes, CLU®, RICP®
    Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
    There is a calculator available on the internet called the “Living to 100 calculator.” Medical science is steadily increasing the life expectancy of the general population. If the calculator shows that you can expect to live past normal life expectancy, an annuity is going to make awfully good sense.

    An annuity is a contract with a life insurance company to exchange a sum of money for a lifetime of monthly payments. There are variations to meet your specific situation.

    If you are in pre-retirement an annuity can be used in most tax qualified plans. In these plans your risk tolerance should guide you to a specific plan that allows you to leave all the investment decisions to professionals or handle them yourself. The key is that the deposits in the annuity are a transfer of capital from current consumption to future consumption. The results of the annuity while important are not nearly as important as the decision to move assets from the present to the future. An annuity does this quite well.

    An annuity can also be purchased outside a qualified retirement plan. While losing some of the tax advantages of the qualified plan, the annuity still accumulates money free of current income tax and allows the owner a great deal of flexibility in drawing the annuity down.

    An annuity addresses the issue of excess withdrawal risk by making regular payments without the ability to “raid the bank.” Since excess withdrawals have ruined many retirement programs this is a very important issue. The monthly check is like a paycheck and the retiree learns to live within their means.

    An annuity addresses the frailty risk in that it is already established before the retiree becomes frail. It is very simple to negotiate and the retiree will not require any professional assistance to use the annuity. In the same vein it addresses the issue of Financial Elder Abuse because in most cases no one can access the funds, not even the annuitant.

    Other than a variable annuity, most annuities are not subject to market risk. Once the annuity starts to make monthly payments, they will continue for life regardless of the performance of the market. Annuities are also not involved with Interest Rate Risk
    Annuities can be established in such a way to efficiently handle the unexpected loss of a spouse. The annuity can be set up to pay the same or a reduced benefit for the lifetime of the surviving spouse.

    An annuity can be an efficient way to reduce stress in retirement. The results are predictable; it doesn’t require anything from the annuitant and will be there as long as the annuitant survives.

    An annuity is a contract that is executed outside the estate and can pass directly to the beneficiary without the time consuming probate procedures. This can provide cash for paying estate taxes or final expenses.

    An annuity is a very important part of the retirement income plan. It has its own tax regulations and may be instrumental in keeping taxes at a manageable level. The key is that it is a financial product that blended with others gives the diversification a retiree needs to handle the changes that they might experience.
    Answered on September 29, 2014
  2. 5082 POINTS
    J Paul Wilson CFP, CHFC
    Certified Financial Planner, JPW Insurance Retirement Investments, Halifax, Nova Scotia, Canada
    David's article is well written and the basic principles are the same in Canada, the design and tax regulations and advantages are of course very different.

    Accumulation annuities:
    Guaranteed Interest Annuities (GIA) - your money invested is guaranteed
    Guaranteed Investment Annuities (GIF) also referred to as segregated funds or variable annuities - your money is invested in equities and is not guaranteed. Since the products are issued under the insurance act they include maturity and death benefit guarantees, typically 75% or 100%.

    Payout annuities:
    You exchange a lump sum of money for a stream of payments for the rest of your life or for a specified number of years. Since they provide a guaranteed pension income they are often used by retirement income planners to cover fixed expenses.

    The guarantees, estate planning applications, potential creditor proofing and tax advantages are reasons why annuities are an important part of retirement planning. In Canada as in the USA, whether or not an annuity is right for you depends on your individual circumstances.

    Using an annuity strategy is not always complicated, it is however, often permanent. In most provinces in Canada, almost anyone can call themselves a Financial Adviser or Financial Planner. Look for an insurance broker with a professional designation like a Chartered Life Underwriter (CLU) or Certified Financial Planner (CFP).

    Annuities are often used in combination to increase after tax income, guarantee income, address volatility, "lock in" gains, leave a legacy, ensure privacy and provide potential creditor protection. With their increased risk exposure protecting your retirement nest egg is of special importance if you are the self employed.

    You can find 16 "I want to ... how do I" examples at www.jpw.ca

    If you have further questions please contact me.
    Answered on December 2, 2015
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