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An Annuity as Part of a Balanced Portfolio

Jarrett McKay - Dec 10, 2015

There are many challenges when it comes to retirement planning and with healthier lifestyles and longer life expectancies, many retirees have been confronted with the reality that retirement income may need to provide support for a longer period of time. For some investors entering their retirement years, annuities can play a complementary role and act as a type of fixed-income investment within a broader portfolio.

An annuity is a form of insurance that provides a stream of payments to an individual for life, in exchange for a lump sum premium.

One of the benefits of an annuity is the income stream that is guaranteed until death. For individuals who want to generate a reliable and sustained flow of income or may worry about outliving their assets, an annuity may be a suitable option because it provides what can be considered a type of longevity insurance.

The corresponding drawback of the annuity is that the initial capital put into the annuity cannot be retrieved as it has been exchanged for the ongoing stream of income. As such, the idea of locking up a substantial amount of retirement funds into an annuity may not be a recommended strategy for many individuals due to the lack of liquidity.

As well, annuities generally do not provide funds to be left within the estate after death, although some annuities may provide survivor income options for an additional premium. An insured annuity may be another way to preserve capital for the eventual transfer to heirs, through the purchase of an exempt life insurance policy (funded by a portion of the annuity payments) with a death benefit equal to the amount of the annuity investment.


The Effect of Interest Rates

Interest rates affect the amount of income that will be paid out to the holder but this amount is generally set at the time of purchase. If an annuity is purchased during a time of lower interest rates, the payments will be less than if it is purchased when interest rates are higher. Today’s low interest rate environment may cause some hesitation for those considering an annuity.  However, a dramatic increase in interest rates seems unlikely in the near term.

An Annuity as Part of a Balanced Portfolio

Generally, an annuity acts like an illiquid, permanent type of fixed income instrument. It can be considered “permanent” because, unlike traditional bonds which fall in price when interest rates rise, the income generated by an annuity remains unaffected by changes in interest rates.


One of the reasons that investors hold fixed income investments is to help provide income and stability against stock market declines and an annuity can play a similar complementary role in a portfolio. To take advantage of this, an investor may wish to put a smaller portion of savings into an annuity and increase the amount over time. This may also be a way of mitigating any concerns over the potential for future rises in interest rates.

Holding an annuity alongside a Registered Retirement Income Fund (RRIF) may also be an effective way to supplement the inflow of income. An RRIF holder will need to draw down on the account over time to meet the minimum annual withdrawal requirements so the income generated will decrease over time, but the pay-outs of an annuity will continue at the same level.


Seek Assistance

If you believe that an annuity may complement your portfolio, there are a variety of things to consider, including your life expectancy and need for control and liquidity of funds. Keep in mind that annuity rates can differ significantly and change frequently, and the quality of the insuring company can also vary, so research on the options available is worthwhile.

If you would like assistance, please don’t hesitate to call.



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