Annuities IV

Annuities IV 
 
 So there are no simple rules to decide if an annuity is appropriate for you. As a general statement, I can see no compelling reason to start considering annuities as part of a retirement plan, until there is better disclosure of the fees and charges that go into the pricing of annuities and I can convince myself that they are a cost effective solution. Nevertheless, there may be situations where despite the disadvantages, there may be a place for them. Some of the important considerations are:
Low risk tolerance– if you are an individual who invested during their entire life in guaranteed investments exclusively (GICs/CDs) and will continue to do so because that’s the only way that you are able to sleep at night and you are able to adjust your lifestyle to the resulting income, then an annuity may deliver value to you (tax deferred accumulation, partially taxable income stream…) peace of mind (as long as you don’t worry too much about whether your insurance company providing the annuity will be around in 20, 30 or 40 years to deliver your checks and can live with 50% erosion of the purchasing power of the un-indexed annuity stream over about a 25 year period or live with a much lower indexed annuity stream)
Greater than 75 years old– mortality credits (additional return derived from pooling assets and giving up residual estate value) increase with age. At around age 75 the mortality credits appear to be sufficient to overcome the various costs of annuitization. The mortality credits are always positive, so theoretically (so long as you don’t care about leaving an estate) for a given investment return you should always be better off with an annuity than without one, but in reality you must first exceed, and difficult to determine, embedded costs of the annuity before you see any net benefits.
Low desire/need to leave an estate– if you clearly have a preference toward current spending (and income) rather than leaving an estate, then you are well on your way to be a candidate for annuities.
Family history of longer than average life expectancy, good health and healthy lifestyle- if an above average life expectancy is actually what be your outcome, then you’ll be the beneficiary of the implicit “longevity insurance” associated with annuities; i.e. you’ll be among those who collect the unused annuitized assets of those individuals who died earlier than the average life expectancy.
No other sources of life-time income stream– if you have a reasonable CPP/OAS or Social Security income source plus perhaps a defined benefit pension, then you already have a source of life-time income. Otherwise, an indexed annuity may be a way to secure a life-time income.
If all, or at least most, of the above considerations apply to you then you may be a candidate for an annuity, and you may want to discuss with your trusted advisor. And even then, you may not want to commit all your assets (leaving no funds for an emergency) and probably want to commit the assets targeted for annuitization in two or three lumps over 5-10 years. You will also want to be sure that the insurance company has top ratings and the annuity is priced competitively. Personally, I am still waiting for a more competitive market in deferred annuities and will review when tightly priced, pure “longevity insurance”-like, product becomes available, before I am ready to consider annuities. My sense, is that if you can manage your spending and lifestyle needs to live within the available cash flow of one of the withdrawal strategies  discussed elsewhere at this website, then given that you can execute the plan, you will have a better chance to maximize your wealth; wealth, you’ll recall, was defined as sustainable real spend rate combined with residual assets.
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