Can Annuities Help the Average Retiree?
An Unexpected Discovery
David and Susan have done everything right.
Born in 1960 and now turning 65, they’ve worked steady careers, raised a family, and saved carefully. Their London, Ontario home is mortgage-free, their debts are paid off, and between their RRSPs, TFSAs, DC pension plans, and a bit of extra savings, they’ve built what they thought would be a comfortable retirement.
But as they sat down to map out the next 30 years, an uncomfortable reality crept in: even with the Canada Pension Plan (CPP) and Old Age Security (OAS) kicking in, market returns and carefully planned withdrawals might not fully cover their living expenses.
That was a surprise.
Fortunately, David and Susan found a way to build more certainty into their retirement plan: a strategy blending annuities with continued investing. Here’s how it worked and why it could be an option worth considering.
What is An Annuity?
An annuity is a financial product that turns a lump sum of money into a steady, guaranteed stream of income, usually paid out monthly for life. In Canada, annuities are commonly immediate life annuities, meaning the payments start right away and continue for as long as you (or you and your spouse, if the annuity is set up that way) are alive. The amount you receive each month is fixed when you buy the annuity and doesn’t change over time, offering predictability and protection against the risk of outliving your savings.
The Feeling of Dislocation
At first, David and Susan thought they had everything covered. After all, they have generated substantial assets in RRIFs, TFSAs, and pension savings, with entitlement to CPP and OAS as well.
But when they laid it all out carefully, they noticed something that caught them off guard, something that had been masked while they were accumulating assets. They had always been well-diversified in their investment strategy so even though they had been troubled by the financial turmoil during the 2000 dot-com bubble, the 2008 global financial crisis, the 2020 COVID lockdown and consequent 2022 inflation spike, they had simply kept on investing. However, they have started to feel uneasy about the prospect that they will be drawing on those accumulated assets in just a few months. They especially wonder how the impact of the recent gyrations in global trade will affect them in the first year of their retirement.
David and Susan’s returns highlight the unpredictability of retirement. Even good savers can face unpredictability:
Market volatility
Even with a well-diversified, balanced portfolio, market volatility remains an ever-present feature of investing. For retirees like David and Susan, fluctuations in investment returns can be unsettling, especially when withdrawals are needed to fund day-to-day expenses. While long-term returns tend to even out, short-term downturns—particularly early in retirement—can have a significant impact on the sustainability of a portfolio. This phenomenon highlights the need for flexible withdrawal strategies and, in some cases, the stabilizing role of income sources that are not tied to market performance, such as government benefits or annuities.
Inflation
Inflation quietly erodes the purchasing power of money over time. While it may seem modest from year to year, even an average inflation rate of around 2.1% (the current long-term guideline from FP Canada’s Projection Assumption Guidelines) can significantly reduce the value of a retiree’s savings over a 20- or 30-year retirement. For couples like David and Susan, this means that today’s comfortable budget may feel increasingly tight in the decades ahead unless investments and income streams keep pace. Planning assumptions that account for inflation are essential in maintaining a stable standard of living.
Long Lifespans
One of the most unpredictable elements in retirement planning is how long retirement will last. With increasing life expectancies, it’s entirely reasonable for one or both members of a couple to live into their 90s or even reach 100. Again, referring to the Projection Assumption Guidelines, a 65-year-old retired couple has an even chance that one of them will live to age 94. FP Canada takes a cautious approach and recommends using the 25% probability of survival, in which case one of the couple could reasonably live to age 98. For David and Susan, this possibility underscores the importance of balancing current income needs with the risk of outliving their assets. Longevity risk, that is, living longer than expected, can be mitigated through strategies like annuitization, judicious withdrawal rates, and maintaining appropriate exposure to equities (stocks), but no plan can completely remove the uncertainty. Rather, a good plan builds in flexibility to adjust as life unfolds.
While these uncertainties will have no impact on their CPP and OAS payments, estimated at $900/month and $730/month, respectively for each of them, or about $3,260 per month in total, the rest of their income sources offer no guarantees. After all, as the saying goes, “The market doesn’t care that you own the stock (or bond).
A Fresh Insight
David and Susan decided that they wanted more certainty in their retirement income. For that reason, they decided to explore annuities.
They have Defined Contribution Registered Pension Plans through their employer that are individually worth $150,000, or $300,000 in total. They decide to take half their balances, $75,000 each, and use this money to purchase an annuity. Both David and Susan’s annuities will generate $351 per month for the rest of their lives, or $702 per month in total. Since they have elected not to reduce payments upon the first death, there is no reduction in payments for the survivor.
The balance of their respective pension plans will be transferred to Life Income Funds (LIFs) and be withdrawn in a fashion similar to their RRIFs. This works out to $258 per month during the subsequent years At the end of the year they turned 70, David and Susan have decided that they will take the balance of their LIFs and each buy another annuity. They estimate that their respective LIFs will have $77,900 by the end of the year they turn 70. Using those funds to each buy annuities on the same terms, they anticipate receiving $405 per month or $810 per month between the two of them.
Adding these two annuity sources together means that they can expect $1,512 per month for the rest of their lives, adding to their guaranteed income sources.
It should be noted, however, that annuities do not replace investing. They work alongside it to create a more reliable baseline income stream.
The Resulting Joy
With their mix of CPP, OAS, annuities, and investment returns, David and Susan now have a secure “floor” of guaranteed income for life with fewer concerns about their investment assets running short as they age.
A smaller, more manageable funding gap of $4,000 to $11,000 per year can be filled flexibly by using the income and capital gains from their non-registered accounts and withdrawals from their TFSAs, as shown in this table for the first 10 years of their retirement (2025 reflects only a half-year of retirement income).
Notes: The annuity figures decrease to reflect the fact that their annual purchasing power decreases by the rate of inflation (assumed to be 2.1%).
The impact of this more stabilized source of income is greater peace of mind, allowing David and Susan to enjoy a sense of freedom to enjoy retirement without worrying about stock market swings or outliving their savings.
An Invitation
You’re not alone if you feel unsure about your retirement income security. Many Canadians feel the same. A variety of strategies are available to help your assets live as long as you do. Investing adequately in growth assets is one choice, flexible spending is another, and partial annuitization as illustrated here is a third strategy to employ to create both emotional and financial security. Talking with a financial planner can help you build a strategy that fits your real retirement dreams.
This is the 287th blog post for Russ Writes, first published on 2025-04-28.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.
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