So you are going to buy an annuity. With what?

[Flights of Fancy]

Be aware, when you are using that calculator, that the defaults are all locked to Manulife's products and Manulife's capital market assumptions.

[Shakespeare]

You also have to lie about being an advisor.

It wanted me 95% in annuities.

Added: That's for 99% supposed guarantee of not outliving my money. But Bill Bernstein pointed out that guarantees above about 80% were effectively meaningless because of the possibility of major unexpected catastrophe such as a major war. So I'm not sure it's worth giving most of my money to Manulife or another insurance company to get above the ~75% I rate now - some annuity exposure is something I expect to do but I don't think 95% is needed.

[Bylo Selhi]

But Bill Bernstein pointed out that guarantees above about 80% were effectively meaningless because of the possibility of major unexpected catastrophe such as a major war. So I'm not sure it's worth giving most of my money to Manulife or another insurance company to get above the ~75% I rate now - some annuity exposure is something I expect to do but I don't think 95% is needed.

Speaking of Dr Bill, annuities and life guarantees (not ours, but the underwriters', dummy ): Wild Ride Hasn’t Changed ‘Verities’ Of Investing

From the point of view of personal finance, I think the thing that stunned everybody was just how fragile the largest financial institutions are. Where that becomes important to the individual is that most people should be annuitizing when they retire. If you’ve won the game, why keep playing it? If you pay an insurance company a fixed sum of money and then have an income stream that is perfectly safe that’ll see you through to the end of your retirement, then you’re crazy to put that money at risk in any substantial amount in the stock market.

However over at Bogleheads he points out that half his message, arguably the more important half in light of recent events, got deleted.

In both Manifesto and the interview I said the same thing:

1) In theory, annuities are a wonderful idea, particularly for folks who need to withdraw >3% of their portfolio and who don't want to make their kids rich, *but*

2) In the real world, I just don't trust any large insurance company to be around in 30 years.

Olivier and I did a long interview, only a small part of which made it into "print," and it seems that point 2) got edited out...

(There's other interesting stuff in the interview that are worth reading even if annuities don't turn your crank.)

[BRIAN5000]

I was trying to see using the ML calculator how much difference to the RSQ a small (10%ish) annuity would make.

[Shakespeare]

I think the problem with the ML calculator is that you should ask it the minimum income you must have, not the larger income you would like to have. That allows you to adjust your portfolio path to circumstance, living well if returns permit, and buying an annuity if returns suffer.

I basically intend to annuitize 100K at 65 or so to supplement OAS/CPP/pension. That will bring me up to somewhat less than my minimum. If returns go well, I will live well and leave an estate. If returns are poor, I will buy another annuity when what remains falls to the level that is needed for an annuity income that will guarantee my minimum.

That approach allows me to live well early in retirement, while my health is good, with the possibility that I will have a much lower income in my later years.

[OhGreatGuru]

2) In the real world, I just don't trust any large insurance company to be around in 30 years.

Aside from the rarity of failure (or more properly defaulting on benefits) of insurance companies in Canada, there is an industry association, Assuris, http://www.retirementadvisor.ca/retadv/ ... u=articles
which underwrites insurance benefits in case of a company failure. The underwriting is 85% for annuities, and I think 100% if the annuity is less than $2000/mo.

Although a lot of CDN insurance companies have "Gone out of Business" in the last couple of decades, most of them were bought out in corporate takeovers that had no effect on policyholder benefits.

[Shakespeare]

there is an industry association, Assuris

And how many failures do you think it can handle?

[Bylo Selhi]

there is an industry association, Assuris

And how many failures do you think it can handle?

While it hasn't (yet, thankfully) been put to the test, I wouldn't bet on survival from a D'Alessandro-sized one

(Although in that case the feds would most likely step in.)

[OhGreatGuru]

1. If one is really worried about it, one can spread their risk by buying multiple annuities from different companies.

2. If we have simultaneous annuity defaults by multiple insurance companies in Canada, any other investments you made as an alternative will have tanked as well, because it would indicate a complete collapse of the economy.

3. If we have annuity defaults by multiple insurance companies in Canada you probably won't survive the civil disorder long enough to worry about your annuity payments.

[Pickles]

2. If we have simultaneous annuity defaults by multiple insurance companies in Canada, any other investments you made as an alternative will have tanked as well, because it would indicate a complete collapse of the economy.

3. If we have annuity defaults by multiple insurance companies in Canada you probably won't survive the civil disorder long enough to worry about your annuity payments.

Well, that's a relief.

It seems to me that the insurance companies are already putting the screws to potential annuitants. They've changed the actuarial tables to assume people will live longer, and I note that the annuity payouts are changing as GIC and mortgage interest rates rise. I assume this means they are using new money to pay off bad debts.

[Flights of Fancy]

Brian5000 - use this calculator instead: http://www.qwema.ca/calc_pensionize.html

It uses the same algorithms as the Manulife calculator. In order to use it effectively, you will need to "convert" some fraction of your nest egg to an annuity and then recalculate the RSQ based on your new "pensionized" income.

[Shakespeare]

Interesting - that gives me 86% sustainability, whereas I got 74% from Manulife.

(I figure 86% is good enough given the uncertainty - I doubt it is better than 10%.)

[BRIAN5000]

Brian5000 - use this calculator instead: http://www.qwema.ca/calc_pensionize.html

It uses the same algorithms as the Manulife calculator. In order to use it effectively, you will need to "convert" some fraction of your nest egg to an annuity and then recalculate the RSQ based on your new "pensionized" income.

Tried it, not bad, not much info. I can draw 3%, leave $900,000 for the kid with a 96 % RSQ and have it all in fixed income, who would have thought.

[Shakespeare]

OK, so fast forward a few years. I decide to buy an annuity with RRSP money and find an insurance broker.

1.) Is he a fiduciary? (I suspect not, but...)
2.) Since the money is from an RRSP, I can't just write a cheque for (say) $100K. I assume there is a transfer form? What is it?

[Norbert Schlenker]

1. No.
2. The insurance company will have their own form to accomplish the transfer. T2033, which is commonly used for RRSP and RRIF transfers, doesn't accommodate annuities directly. For a CRA discussion, see Chart 9, under the section "Property from an unmatured RRSP".

[BRIAN5000]

1.) Is he a fiduciary? (I suspect not, but...)

Maybe you can get him/her to sign something like this? From an email from IDA.

Fiduciaries are required to act with undivided loyalty to their clients. They are required to disclose how they get paid and reveal any corresponding conflicts of interest.

The Committee for the Fiduciary Standard states the five principles of fiduciary standard, as follows:

Put the client's best interest first.
Act with prudence; that is, with the skill, care, diligence and good judgment of a professional.
Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts;
Avoid conflicts of interest.
Fully disclose and fairly manage, in the client's favour, unavoidable conflicts.

______________ is a fiduciary. I/We willingly accept the responsibility to put _____________ best interests above our/my own, and at all times, making investment recommendations that are squarely in the best interests of _________________ and their ability or need to take on stock market risk.

I_________________ fulfill this standard for individuals, institutions, and retirement plans .

I/We gladly accept this fiduciary obligation because we receive no revenue sharing and no incentives to recommend one fund over another unless disclosed in writing, thereby avoiding conflicts of interest.

[Springbok]

Don't worry - The Government is working on the high cost of annuities:

http://50plus.com/Money/BrowseAllArticl ... ntID=23430

This is something I am interested in. Years ago, I think I posted here, or in the earlier forum about those without CPP or other pension income, perhaps being able to CONTRIBUTE so as to boost CPP payments to say, double what they are. I even wrote to the then Finance minister as well as a retiree advocate group about same proposal. I never received a reply. But it seems others have had similar thoughts and the Senate Banking, Trade and Commerce Committee is holding hearings on proposals that would help us save for retirement as well as reduce the cost of annuity type income.

This paragraph in the above link provides current annuity costs (and margins for sellers):

One way to deal with the problem would be to create a system that enables RRSPs and defined contribution plans to be annuitized at a group rate. He told the committee that each $1,000 of lifetime annuity income costs a 65-year-old couple $12,000 or $13,000 at the wholesale (group) level compared to $17,000 to $18,000 at the retail (individual) level. "It is quite a difference," he observed. It certainly is: as much as 50 per cent.

If a couple with no pension and modest savings could buy $40k of income for $500k at current interest rates, that plus CPP/OAS would provide for a comfortable retirement.

[marty123]

One way to deal with the problem would be to create a system that enables RRSPs and defined contribution plans to be annuitized at a group rate. He told the committee that each $1,000 of lifetime annuity income costs a 65-year-old couple $12,000 or $13,000 at the wholesale (group) level compared to $17,000 to $18,000 at the retail (individual) level. "It is quite a difference," he observed. It certainly is: as much as 50 per cent.

If a couple with no pension and modest savings could buy $40k of income for $500k at current interest rates, that plus CPP/OAS would provide for a comfortable retirement.

[devil's advocate]

I always try to be skeptical of an author's research, analytical skills or agenda.

Is the incremental 50% cost strictly related to a retail-vs-wholesale pricing situation? Insurance companies assume that an annuity buyer is healthier than average (someone who expects to die at 70 is not going to buy an annuity). I suspect that the differential is partially attributable to forced-participation (i.e. there is no opting out of a corporate pension plan or CPP/OAS if you are deemed to be unheathly. Once that is factored in, the real figure may be closer to $14, 15 or even 16K instead of $12-13K.

[/devil's advocate]

[Bylo Selhi]

[devil's advocate]
Is the incremental 50% cost strictly related to a retail-vs-wholesale pricing situation? Insurance companies assume that an annuity buyer is healthier than average...
[/devil's advocate]

Good point

When RRSPs were introduced there were only two options at maturity: (a) cash the RRSP or (b) convert the RRSP into an annuity. It wasn't until the 1980s (IIRC) that the third option, RRIFs, came about. So one way to validate your argument would be to compare the spreads between group and individual annuity quotes from that period with today. That's because the only way to self-select back then would have been (a) and that would be unpalatable for all but terminal patients because the entire RRSP gets taxed in a single year.

[marty123]

So one way to validate your argument would be to compare the spreads between group and individual annuity quotes from that period with today.

Correct, provided that the RRSP annuity market was sufficiently large and competitive back then. If the annuitant was captive, the portfolios too small and/or the market was too niche, it's not impossible that rates from the "individual annuity" tables was not just applied by default (or as a way to pad the bottom line).

[Flights of Fancy]

What Marty123 said.

This is an anti-selection issue. Think about it: CPP pays much "more" than a conventional annuity bought with the same amount of dollars precisely because of the forced participation aspect. If you are a healthy annuitant you are "getting what you deserve" for the annuity price.

The study I can dig up shows that the pricing differential is closer to 10% in Canada. If annuity spreads were really as large as implied earlier, you'd be seeing a lot more people selling life annuities. Instead, there is a whole branch of academic study investigating the so-called "annuity puzzle," which attempts to explain why these relatively inexpensive and useful products are not more widely taken-up by individuals.

No one in Canada has comprehensive annuity pricing data going back to the 1980s. The earliest that anyone started keeping it comprehensively was 1999.

[Shakespeare]

why these relatively inexpensive and useful products are not more widely taken-up by individuals.

When I recently started looking at 'all-taxable' cash-flow projections post-65, it became clear that a $100K annuity purchased at 65 with RRSP money or so would, combined with LRIF, OAS, CPP, and my small pension, look after my basic requirements, leaving the rest of the RRSP (which is my largest portfolio after a 50% LRSP unlock) for travel and 'goodies'. So it would make my portfolio management much simpler.

[Flights of Fancy]

Indeed. This is precisely the rationale elaborated in this forthcoming book.

[brucecohen]

No one in Canada has comprehensive annuity pricing data going back to the 1980s.

I believe that Fiscal Agents in Oakville, ON has such data though early years might be on paper. Talk to Dave Newman.

[pmj]

Indeed. This is precisely the rationale elaborated in this forthcoming book.

List $26.95 - or $16.89 over at Amazon.ca