Skip to main content

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?

Story continues below advertisement

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.

Story continues below advertisement

- 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.

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter