With most pension plans and retirement savings plans, you have two choices for your savings:
1. Buy a fixed monthly income for life (a life annuity). A life annuity is a contract you set up with a life insurance company. You buy the annuity with your pension or retirement savings. The contract ensures that you have a set income for the rest of your life.
2. Invest money in a retirement income fund. A retirement income fund is a plan that is registered with the government in your name. It works like a Registered Retirement Savings Plan (RRSP) in reverse: You invest your money, but you take money out of the plan instead of putting money in.
Make sure you understand what you get from each choice. Then you can decide what's right for you.
Should I choose a life annuity or retirement income fund?
Having control of your own retirement income can look really good when stock markets are doing well and investments are growing. But, investments in stock markets go up and down in value. They are not guaranteed and safe. An annuity, on the other hand, gives you guaranteed income for your whole life.
Which is the right choice for you? A lot depends on your financial priorities, how much risk you want to take, and your personal situation. Ask yourself:
- Do I need to know that my income is guaranteed and safe?
- Do I want to grow my savings?
- Am I confident I can make my savings last if I invest them?
- Do I want to have money to pass on to my estate?
Some experts say the best way to finance your retirement is to do a bit of both.
Example: You could use 25% of your retirement savings to buy a life annuity. You could keep the rest in some flexible investments in a retirement income fund. This may help you protect your income, and make it more likely that your money will last as long as you do.
Remember: There's no one answer that's right for everyone
Many Canadians talk to a financial adviser before they decide what to do. A good adviser can help you understand your options and decide what's right for you.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.