Why this retiree is replacing his bonds with annuities

Jean Lespérance

Occupation

Retired IT manager

The portfolio

Includes ETFs, individual stocks, corporate bonds and Canadian REITs

The investor

After Jean Lespérance became semi-retired years ago, he worked part time, managed his portfolio and blogged on financial topics. Now, at age 64, he is fully retired.

How he invests

His portfolio is spread over equities (67 per cent), fixed income (25 per cent) and REITs (8 per cent). Of these, the fixed-income component is perhaps the most interesting.

Much of it consists of bonds purchased more than 15 years ago, with yields as high as 8 per cent and maturities staggered from 2008 to 2036. As these bonds mature in today's environment of extremely low interest rates, he is rolling the cash into annuities instead of bonds. Although ownership of the capital is transferred to the annuity provider (and cannot be passed on to Mr. Lespérance's heirs), the benefits for him make up for this sacrifice.

For one thing, the monthly income received from each dollar invested is materially higher than for bonds. For another, retirees without company pension plans can be relieved of the worry they may outlive their savings because annuity payments continue for as long as the annuitant lives. This contrasts with a bond-and-stock portfolio, where withdrawals for retirement living can exhaust capital too soon.

The core of his equity allocation consists of index funds diversified over domestic and foreign markets. In his Me and My Money profile of 2008, the funds tracked stocks weighted by market capitalization. He uses index funds focused on low-volatility and fundamental factors that "promise long-term outperformance for the very patient investor."

The inspiration for the switch came from The Missing Risk Premium by Eric Falkenstein and The Fundamental Index by Robert Arnott et al. His holdings include the PowerShares FTSE RAFI Canadian Equity, BMO Low Volatility Canadian Equity and PowerShares FTSE RAFI U.S. 1000 ETFs.

In 2008, Mr. Lespérance avoided individual stocks. Now, he owns more than a dozen large-cap stocks. He got the confidence to buy them as a result of his experience writing the How to Invest Online blog that he started seven years ago.

Best move

Buying annuities gave him "the peace of mind and solid income base to go with an equity-laden portfolio that can give inflation-beating returns – which no fixed-income [investment] is able to offer these days."

Worst move

"It was failing to take advantage of the opportunity to rebalance from fixed income to equities during the 2008 financial crisis," he says.

Advice

"Keep things simple and use basic products that anyone can understand – for example, low-fee funds, GICs and simple annuities."

Want to be in Me and My Money? Contact Larry MacDonald at mccolumn@yahoo.com or his website