Can Mary (65) and John (65) guarantee their income will last?

Mary and John have enjoyed interesting, rewarding careers as consultants. They’re both now 65 and want to retire this year, with plans to do some travelling, enjoy a slower pace of life, and perhaps look forward to grandchildren sometime soon. They’ve been diligent savers and have a retirement income plan in place, but John remembers his own parents having struggles during retirement. He wants to put a plan in place so that he and Mary can expect enough income to meet their basic needs.

Mary and John have two adult children and would like to leave them money, but they also want to prioritize their own income needs.

Working with an advisor, Mary and John identify a core amount to cover their basic needs. They have investments to draw on to generate income above that core amount, but for their own financial security they’ve decided on a non-negotiable income baseline and asked their advisor how to make that happen. In addition to income stability for themselves, they also want to leave money for their children, if possible.  

The solution: an income annuity

Mary and John discover that their government retirement benefits—Canada Pension Plan (CPP) and Old Age Security (OAS)—plus Mary’s pension, will cover all but $2,250 of their basic monthly expenses.  Their advisor recommends that they use $474,717 of their retirement savings to purchase a BMO Insurance joint life income annuity that will generate monthly income of $2,250 and cover their income gap.

Since Mary and John would also like to leave money to their two children, their advisor recommends an annuity with an 18-year guarantee period. In the event of both of them passing away before the end of the guarantee period, their children will receive a death benefit. The advisor points out that this option means Mary and John will pay slightly more for the annuity, but the good news is that this approach addresses both their goals: generating a specific amount of guaranteed income and keeping the door open to leaving money for their children.

Using prescribed taxation, their monthly income payments of $2,250 from the annuity will result in an annual taxable interest amount of $8,900 and an annual non-taxable return of principal amount of $27,000.

If Mary, John, or both, live to age 81, they’ll have received their entire premium as income, and they’ll also continue to receive the same income amount for as long as either one of them is living.

Mary and John could also have opted for indexation. This would have provided an annual increase of their income payments by a fixed percentage to help offset inflation. But this would have required that they make a larger deposit to get the same starting income payment, so they decided against it.

To help offset the cost of inflation, they decide to wait until age 71 to start taking income from their registered retirement savings plans (RRSP). This could substantially boost their income at that point.