Retired Money: the case for laddering Annuities

“The more bells and whistles, the lower the monthly income,” from annuities, says Caring for Clients’ Rona Birenbaum,

My latest MoneySense Retired Money column looks at the case for laddering annuities in order to avoid the problem of committing funds to annuities at interest rates that are only now coming off their historic lows. You can retrieve the whole article by clicking on the highlighted text: A low-risky annuity strategy to beef up your retirement cash flow.

Many investors are already acquainted with the concept of “laddering” guaranteed investment certificates (GICs), or bonds with different maturities. Maturity dates are staggered over (typically) one to five years, so each year some money comes due and can be reinvested at prevailing interest rates. This minimizes the likelihood of investing the whole amount at what may turn out to be rock-bottom interest rates, only to watch helplessly as rates steadily rise over time.

The same applies when it comes time for retirees or near-retirees to annuitize. At the end
of the year you turn 71 you must decide whether to convert your RRSP into a RRIF,
cash out and pay tax (few do this), or thirdly to annuitize.

Fortunately, annuitization isn’t an all-or-nothing decision. You can convert some of your RRSP to a RRIF and some to a registered annuity. You can take a leaf from the GIC laddering
concept and buy annuities gradually over five, ten or even more years. As regular Hub contributor Patrick McKeough observes in the piece, laddering annuities can reduce the potential downside: “You could buy one annuity a year for the next five years. That way, your returns will increase if interest rates rise, as is likely.”

Tally up how many annuities you may already have

Mind you, few observers believe in converting ALL your disposable funds into annuities. After all, as another Hub contributor — Adrian Mastracci — notes, you need to take inventory of the annuity-like vehicles you already may have, or expect to have: such as  employer-sponsored Defined Benefits, CPP or OAS. Some investors may have a high component of annuity-like income without realizing it, and many families may already have five or six such sources of annuity-like income.

Certainly you need to consider both the benefits and drawbacks of annuities. The main benefit is they are a form of longevity insurance: making sure you never outlive your money no matter how long you live. There’s a case for having enough annuities that your basic “survival expenses” (shelter, food, heat, transport etc.) are taken care of no matter what. Finance professor Moshe Milevsky is also quoted in the article to the effect there are compelling financial and psychological reason to at least partly convert to annuities. And Milevsky is famous for making a distinction between “REAL” pensions (like DB pensions) that behave like annuities, as opposed to vehicles like RRSPs and TFSAs, which provide capital that only have the potential to be annuitized. Hence the title of Milevksy’s excellent book, Pensionize Your Nest Egg.

But annuities are not perfect. Apart from the common reluctance to commit to buying annuities at today’s still-low interest rates, there’s also the matter of the irreversible nature of the decision to convert some capital to an annuity. You’re handing over a large chunk of change to an insurance company and should you die earlier than expected, they in effect “win,” to the partial detriment of your estate. If on the other hand you live to 120, then YOU “win.”

This can be mitigated by having joint-and-survivor benefits (with a spouse) and/or establishing guarantee periods that ensure some payout for a set number of years whether you’re around to collect or not. But you pay for those frills by having somewhat lower payouts.

The MoneySense article concludes with some sample quotes of how much $100,000 in registered and non-registered annuities would pay out monthly under various scenarios, data furnished by financial planner Rona Birenbaum,  founder of the financial planning firm, Caring for Clients.


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