How Do Annuities Help (Or Hinder) Your Portfolio?

The long-term goal of any investment portfolio is retirement. For many investors, the specifics of what “retirement is” will vary. Some will be planning to retire earlier than others and what each individual will need in retirement depends on their lifestyle. All retirement goals have one thing in common: the desire to provide income for your entire life

Not many investments can provide this kind of guarantee. Inflation will negatively impact cash value over time, and market volatility can be too risky for many investors. A few options for Canadian investors are considered safe long-term solutions. Annuities are one of these solutions. However, just because something is considered safe and reliable doesn’t mean it’s the right fit for you. 

What is an annuity?

Annuities are one form of security that will guarantee income for life. An annuity is a contract with an insurance company where an investor would make a one-time payment or a series of payments and receive guaranteed regular payments for life. They are considered safe long-term financial planning tools for retirement. 

The gamble in an annuity is that you never know how long your life will be. If you put $100,000 in an annuity at age 71, you could receive between $590-650/month — depending on factors such as health. However, if you only live for another eight years, you only end up using $56,640-$62,400 of that money. Luckily, your spouse or beneficiaries would be taken care of still, so it’s never a waste. 

There are two kinds of annuities: Fixed annuities and variable annuities. A fixed annuity offers a guaranteed rate of return. A variable annuity is based on how a market index, such as the S&P 500, performs. For the sake of this article, we’ll be looking more at the benefits and drawbacks of fixed annuities simply because variable annuities have similar disadvantages without the benefits that make annuities a desirable solution for some retirees. 

Benefits of annuities

Annuities can be a nice way to supplement your retirement income if you don’t have a solid pension. The main benefit of an annuity is the guaranteed income for life. The ability to plan your fixed expenses around a guaranteed and predictable income stream helps to alleviate stress. Additionally, annuities offer customizable features based on your needs, such as a death benefit to protect your loved ones.

Disadvantages of annuities

The downside to annuities is that they can have very high fees and meagre rates of return. Annuities also have no liquidity. Once you sign up, the principal is inaccessible to you unless you pay a surrender charge in some situations. 

In many cases, guaranteed income can’t compete against inflation; over time, the money you receive from the annuity will be worth less. 

How to use annuities in your portfolio

Annuities can be beneficial when used in conjunction with other investment vehicles if you don’t have a healthy pension. If having a guaranteed income each month in addition to CPP is something you’re interested in, putting a portion of your savings in an annuity may make sense. However, because annuities have high fees and low rates of return, holding a large amount of your portfolio in investments that can combat inflation is crucial. 

Ultimately fixed annuities are not investments; they’re insurance products. To continue growing your wealth in retirement, you need to look for investment opportunities that provide a higher rate of return while still managing your risk tolerance. Retirees considering annuities are likely looking at solutions to avoid the stress of market downturns. However, if you can withstand market volatility, history has shown that drops in the market often correct themselves within two years. 

Alternative investments, such as mortgage pools, are a great way to capitalize on reliable markets like real estate. There is less volatility in real estate, and mortgage pools managed by MICs have protection from market fluctuation as the investment is debt-backed and has a physical asset in the case of a default.

Are you interested in finding solutions to maximize your investment potential in retirement? Jordan on our team is here to answer your questions about mortgage investing and how it can compete against inflation. 

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