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rob carrick

She's a single woman in her early 70s who is looking just ahead to converting a sizeable six-figure RRSP into a RRIF. Her question: Should she convert half that registered money to an annuity?

This woman manages her investments herself and has the money in blue-chip dividend stocks (these days, who doesn't?). Dividends paid by her stocks are her only source of income, aside from the Canada Pension Plan and Old Age Security. She has no dependents and is mortgage-free, although she has a car loan. To answer the question of whether an annuity makes sense, I suggest she work through these six questions.

- What's my expected lifespan?

Annuities are income for life – the longer you live, the more you benefit. You can guarantee payments to a beneficiary for a period of time after you die, but generally someone in her early 70s would want to feel confident about her health.

- Am I OK with potentially lower returns?

With an annuity, you exchange a lump sum for set monthly payments (there may be an option for fixed annual increases to offset inflation). Those monthly payments are influenced in large part by interest rates, which are low today by historical standards. Quite likely, a portfolio of blue chip dividend stocks would deliver a better return on money invested.

- Will the annuity payments give me sufficient income?

Ask for some annuity quotes from insurance agents and see if the monthly income is enough to meet your needs when combined with government benefits and dividend income.

- How important is inflation protection?

You can buy annuities with payments that rise with the cost of living, but there's a price. The amount of money you use to buy your annuity would generate lower monthly payments than if you didn't have inflation protection. Premium dividend-paying companies regularly increase their cash payouts to shareholders, often by amounts that exceed the inflation rate.

- How important is it to leave a legacy?

Annuity payments stop when you die (unless you have a death benefit guaranteed for a period of time and die within that span). If there's money left in your dividend portfolio, it could go to your estate.

- How much value would I put on getting monthly payments with zero worries about the markets, the economy, the global political situation or anything else?

Annuities are income for life. Economic conditions, interest rates and stock market ups and downs all have an impact on dividend stocks.

"I worry a lot about making a bad decision," this woman said in her e-mail asking about annuities. Fair enough – an annuity is a big decision. Take your time, think it through and remember that the best choice addresses both your financial and emotional concerns.

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