Saturday 14 March 2015

More reasons to buy an annuity

Last post, I came to the conclusion that buying an annuity makes sense given a couple of guiding principles and the contrasting alignment of annuities vs my present stock/bond portfolio against key retirement risks and desired features.

That's not quite the whole thinking, however. Some additional motivations are driving me towards annuities.

Not burdening my children or the state - I want make sure I have enough income throughout my life not to oblige my children to pay for my upkeep. Call me old-fashioned but I also don't want to count on the government to bail me out at age 85 either.

Wish and project as we might with the best financial planning, monte carlo software and projections based on historical data, there's always a residual chance that an invested stock/bond portfolio subject to withdrawals might run out except at ridiculously low withdrawal rates or impossibly long planning horizons. But the slower and safer I withdraw, the more chance the money is never withdrawn, so I don't get to enjoy a lot of it. Which complements my next motivation ...

The inheritance I leave will be what's left over, not any specific planned amounts - I (and my wife) have already given the kids a good legacy by supportive parenting and a solid education that seems so far to be enabling them to make their own way.

Tax increase risk diversification - Governments can get into financial trouble and may look to the "wealthy" to impose extra taxes, spurred on by social activist thinking such as at the Broadbent Institute. Turning assets into an income stream today reduces the risk of future rising taxation on either accounts (like TFSAs, which are viewed in some politically-correct quarters as accounts benefiting the rich despite the opposite reality) or dividends and capital gains.

Living a longer and happier life - It is well-known by insurance companies that people who buy annuities live longer than the average population. Now, it is comforting to me to think that because I am intending to buy annuities, I will live longer. But it may not just be accidental, that people who are in good health figure the odds are good. It may be causal i.e. buy an annuity and it will make you live longer! Moshe Milevsky's superb summary of annuities for the CFA Institute quotes the research on page 108: "... he found that veteran pensions reduced mortality for both acute and nonacute causes of death ... [and then Milevsky quotes Jane Austen to put it in plain talk] ... All of these findings echo the famous Jane Austen quote from Sense and Sensibility (published in 1811):If you observe, people always live forever when there is an annuity to be paid them.
It's called buying peace of mind. Bill Gates or Warren Buffett don't get disturbed when markets go down because they have far more than they could ever need. But for those of us who have managed a relatively volatile stock-bond portfolio for twenty years and who cannot sustain a prolonged period of poor returns, we can relate to the findings Milevsky quotes.


Garth said...

Curious as to why you chose to take CPP early if you were at the same time considering an annuity purchase in the future. Seems to me that deferring CPP and OAS to the max is the cheapest way to "purchase" an indexed and government guaranteed (implicit) annuity. Does require that one spends down his savings during the deferral period, but this can be an opportunity to redeem RRSP's while paying little in the way of taxes...

CanadianInvestor said...

Perceptive question. Yes, normally deferring CPP to 71 is the best way to maximize indexed annuity income. In my case, I have been receiving a CPP survivor pension since my wife died some years ago. CPP is only ever a maximum of $1065/mth, whatever my own and the survivor portion might sum to, so I am now receiving the maximum standard CPP (65 yrs) despite being several years away from 65. It's the sum of the survivor portion and my own reduced (taken early) CPP. It made no sense to defer taking my own CPP.

Anonymous said...

Why do you bother with the off-topic editorializing?

"TFSAs, which are viewed in some politically-correct quarters.." etc add nothing to your real point, and dissolve your creditability with anyone who doesn't 100% agree with your point of view.

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