Annuities

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
longinvest
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Re: Annuities

Post by longinvest » 24 May 2015 12:44

like_to_retire wrote:
longinvest wrote:Delaying CPP and OAS is one way to buy a cheap CPI-indexed life annuity and allows one to spend more in earlier retirement years without increasing the risk of ruin.
I suppose if you were at or near clawback, then the increased OAS income in 5 years may increase clawback at that time. That may be a negative.

ltr
Yes, but the clawback is a rich people problem, over $75K+ in retirement income, $150K+ for a couple (OAS doesn't not count towards the clawback). These people don't need life annuities. :wink:
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Re: Annuities

Post by Curmudgeon » 24 May 2015 12:52

Ken wrote:Regarding delayed CPP and/or OAS... My opinion FWIW is if the gov't is willing to give you money then take it. Take it now.
I agree, and I did. Suppose you die before 70 and never collect. The calculations above do not take this into account. There needs to be a way to include the probability that the return on all or part of the $35K "cost" is zero. Perhaps that is why it appears to be such a good deal. It should really be compared to some sort of deferred annuity.

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Re: Annuities

Post by longinvest » 24 May 2015 12:56

Curmudgeon wrote:
Ken wrote:Regarding delayed CPP and/or OAS... My opinion FWIW is if the gov't is willing to give you money then take it. Take it now.
I agree, and I did. Suppose you die before 70 and never collect. The calculations above do not take this into account. There needs to be a way to include the probability that the return on all or part of the $35K "cost" is zero. Perhaps that is why it appears to be such a good deal. It should really be compared to some sort of deferred annuity.
I did explicitly say that a break-even analysis would require one to live to 90+ or even 100+ to break even, depending on assumptions.

My analysis still stands as a valid approach to spending more in the earlier part of one's retirement, and that includes the unlucky retiree who dies at 69.

The only ones suffering from the delayed CPP/OAS choice are the survivors, not the dead who got to enjoy more of his wealth when alive!
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longinvest
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Re: Annuities

Post by longinvest » 24 May 2015 13:04

The alternative, to still spend more, is to claim as early as possible and use VPW with an aggressive early death age (90 to 95). But, then, you better not have any aversion to longevity risk.

Otherwise, you'll be depriving your younger self in favor of either your survivors or, possibly, your older self who won't necessarily have a good use anymore for this money.

I'm not advocating in one favor or another. I was just presenting a rational / mathematical analysis of the choices one can make and of their consequences on money available to spend, longevity risk, and risk of ruin.
Last edited by longinvest on 24 May 2015 14:33, edited 1 time in total.
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like_to_retire
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Re: Annuities

Post by like_to_retire » 24 May 2015 13:20

longinvest wrote:OAS doesn't not count towards the clawback
Sure it does. OAS income is part of your net income to determine amount over threshold.

The amount clawed back of course isn't taxable.

You must be thinking of GIS. OAS does not count towards income when calculating the GIS threshold.

ltr

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Re: Annuities

Post by longinvest » 24 May 2015 13:57

like_to_retire wrote:
longinvest wrote:OAS doesn't not count towards the clawback
Sure it does. OAS income is part of your net income to determine amount over threshold.

The amount clawed back of course isn't taxable.

You must be thinking of GIS. OAS does not count towards income when calculating the GIS threshold.

ltr
ltr,

You're most probably right!

Still, one has to have $70K+ in retirement income ($140K+ for a couple) to experience this problem. This person could want a life annuity, but she definitely doesn't need it. :)
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Re: Annuities

Post by longinvest » 24 May 2015 14:06

longinvest wrote:
like_to_retire wrote:
longinvest wrote:OAS doesn't not count towards the clawback
Sure it does. OAS income is part of your net income to determine amount over threshold.

The amount clawed back of course isn't taxable.

You must be thinking of GIS. OAS does not count towards income when calculating the GIS threshold.

ltr
ltr,

You're most probably right!

Still, one has to have $70K+ in retirement income ($140K+ for a couple) to experience this problem. This person could want a life annuity, but she definitely doesn't need it. :)
Quick math:
- Assuming a 4% withdrawal rate, this is a $3.5M portfolio for a couple. They don't need a robust additional $700 per year.
- Assuming a 2.54% spend-the-dividend rate, this is a $2.8M portfolio for a single person. Why worry about an additional $58.33/month?
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Re: Annuities

Post by gaspr » 24 May 2015 16:42

@longinvest
I totally agree with your analysis. I would add however that the no income "delay years" represent an excellent opportunity to spend down RRSPs while paying little or no taxes on the withdrawals. This can turn a tax deferred RRSP into an actual tax free RRSP!!!

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Re: Annuities

Post by longinvest » 25 May 2015 00:16

gaspr wrote:@longinvest
I totally agree with your analysis. I would add however that the no income "delay years" represent an excellent opportunity to spend down RRSPs while paying little or no taxes on the withdrawals. This can turn a tax deferred RRSP into an actual tax free RRSP!!!
Interesting idea.

But this probably depends on how investments are distributed across accounts (TFSA, RRSP/RRIF, taxable). If we assume that all investments are in RRSP/RRIF accounts, for example, then taxes will be higher both during the delay and after, due to the higher total taxable income. :( (Or, maybe this should be :D as net income will be higher).
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Re: Annuities

Post by gaspr » 25 May 2015 00:41

For this to work, one would need significant taxable investments from which to make "non registered liquidations" to supplement the RRSP withdrawals and any taxable investment income...

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Re: Annuities

Post by Springbok » 25 May 2015 09:00

gaspr wrote:@longinvest
I totally agree with your analysis. I would add however that the no income "delay years" represent an excellent opportunity to spend down RRSPs while paying little or no taxes on the withdrawals. This can turn a tax deferred RRSP into an actual tax free RRSP!!!
This is a good time to draw down RRSPs, but it is unlikely you would do it tax free. The withdrawal will be taxed as income and will be added to any other non registered income you may have. At best, you can withdraw at a rate that will put you in a tax bracket that will be lower that when you actually have to convert to a RRIF and make compulsory minimum withdrawals.

We did this between retirement and 72. We also used, in part, so called tax efficient funds (that pay distributions as 100% ROC) to minimize our non-registered income. (I understand that many of those type of funds may be closed due to changes in legislation). We received CPP/OAS which added to taxable income and did not have to sell any taxable securities. I don't recall actual numbers, but my guess is that the RRSP withdrawals were taxed on average at about 35%.

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Re: Annuities

Post by gaspr » 25 May 2015 10:05

But the trick is to delay receiving CPP and OAS for as long as possible. At age 60, a couple pays no tax on the first $23000 of taxable income. At age 65, the couple can then withdraw at least $40000 annually in RRSPs tax free by using all the available tax credits. Yes, this would not be enough to live on, so the plan is to spend some non registered capital which of course is non taxable. I project that the effective tax rate will be somewhere between 5 and 10% for the foreseeable future...at least in our case.

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Re: Annuities

Post by adrian2 » 25 May 2015 12:03

Springbok wrote:I don't recall actual numbers, but my guess is that the RRSP withdrawals were taxed on average at about 35%.
I would take any numbers you quote with a boulder of salt so big that it will require hypertension medication. Just like the numbers you claimed for the marginal tax rate on your RRSP contributions.
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Re: Annuities

Post by ghariton » 15 Aug 2016 13:30

Larry Swedrow suggests delaying the start of your delayed annuity to age 85.

The argument is that an annuity should be considered, not an investment, but rather an insurance policy. Specifically, it is insurance against longevity risk. Like all insurance policies, it is costly -- the insurer's (or issuer's) administrative costs and profit. So, like for other types of insurance, get a big deductible. In the case of annuities, the deductible comes in the form of absorbing longevity risk yourself for, say, ages 65 to 85. In other words, budget to live to 85, and then rely on your deferred annuity beyond age 85. You may never get any payout from your annuity, but that's in the nature of insurance.

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Re: Annuities

Post by AltaRed » 15 Aug 2016 13:37

ghariton wrote:You may never get any payout from your annuity, but that's in the nature of insurance.
And that is the hard part for the A types here who have had their hands on the investing controls for decades and can't let go, and/or have this misguided (?) need to produce legacies.

Another way to think about it is to consider those that have DB pensions. Most investors would call them 'lucky dogs' but that same DB pension is nothing more than an insurance policy itself....from the date one starts to take that pension. Can't have it both ways.
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Re: Annuities

Post by DenisD » 15 Aug 2016 13:59

If I purchase a deferred annuity with money from my RRSP, is that treated like a withdrawal? That is, is the money immediately taxable?

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Re: Annuities

Post by BRIAN5000 » 15 Aug 2016 14:03

Specifically, it is insurance against longevity risk. Like all insurance policies, it is costly --
You could look at delaying CPP & OAS the same way.
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Re: Annuities

Post by adrian2 » 15 Aug 2016 15:49

DenisD wrote:If I purchase a deferred annuity with money from my RRSP, is that treated like a withdrawal? That is, is the money immediately taxable?
No. Purchasing an annuity with RRSP money is treated the same way as converting an RRSP to a RRIF, no immediate tax due.

Each payment you receive from such an annuity is 100% taxable (like a payment from a RRIF would be).
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Re: Annuities

Post by izzy » 15 Aug 2016 16:23

adrian2 wrote:
DenisD wrote:If I purchase a deferred annuity with money from my RRSP, is that treated like a withdrawal? That is, is the money immediately taxable?
No. Purchasing an annuity with RRSP money is treated the same way as converting an RRSP to a RRIF, no immediate tax due.

Each payment you receive from such an annuity is 100% taxable (like a payment from a RRIF would be).
So can you purchase such a deferred annuity with RRIF funds thus deferring the income to an even later age?
I suspect one can only buy an immediate annuity with such funds but it would be an interesting wrinkle if such a deferred annuity were allowed.
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Re: Annuities

Post by like_to_retire » 15 Aug 2016 16:27

izzy wrote:So can you purchase such a deferred annuity with RRIF funds thus deferring the income to an even later age?
But the RRIF at age 71 (for example) requires a mandatory withdrawal of 5.28%. I would think an immediate annuity payout would be higher than that?

ltr

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Re: Annuities

Post by gaspr » 15 Aug 2016 17:17

The payout rate for age 71 would be between 7 and 8% if deferred annuities pay at the same rate as regular life annuities. One of the problems I see with deferred annuities is that you cannot buy any inflation protection for the years between the purchase and the start of the payouts. All you can do is estimate/guess what inflation will be and then purchase extra to cover the shortfall...not optimal in my mind.

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Re: Annuities

Post by twa2w » 15 Aug 2016 21:59

izzy wrote:
adrian2 wrote:
DenisD wrote:If I purchase a deferred annuity with money from my RRSP, is that treated like a withdrawal? That is, is the money immediately taxable?
No. Purchasing an annuity with RRSP money is treated the same way as converting an RRSP to a RRIF, no immediate tax due.

Each payment you receive from such an annuity is 100% taxable (like a payment from a RRIF would be).
So can you purchase such a deferred annuity with RRIF funds thus deferring the income to an even later age?
I suspect one can only buy an immediate annuity with such funds but it would be an interesting wrinkle if such a deferred annuity were allowed.
AFAIK, you cannot purchase a deferred annuity with an rsp. Life annuity or term certain annuity only.

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Re: Annuities

Post by brucecohen » 16 Aug 2016 09:53

twa2w wrote: AFAIK, you cannot purchase a deferred annuity with an rsp. Life annuity or term certain annuity only.
I too thought that an RRSP annuity had to be immediate but this 2010 article says you can buy a deferred annuity. As with a RRIF payments must begin by the annuitant's 72nd year, according to page 12 of this Sun Life writeup. SL says maximum deferral period for RRSP annuity is 10 years, but I don't know if that's their policy or statutory.

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Re: Annuities

Post by Shakespeare » 14 Oct 2017 17:47

This strategy could have you thinking twice about the benefits of annuities - The Globe and Mail

A tidbit:
It's worth noting that the payout for a similar annuity – except one that is registered – at mid-month was $16,020. Why the difference? Basically, it's because actuarial data shows people with a large amount of non-registered assets live longer.
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Re: Annuities

Post by kumquat » 14 Oct 2017 19:45

Paywall problem alert.
I don't intend to offend anyone, that part is just a bonus.

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