WEALTH Matters — FALL 2008

Variable annuities

Variable Annuities with lifetime income guarantees have been very popular in the United States for over 10 years, but have only recently been available in Canada.

A traditional guaranteed annuity is just like a pension – a fixed monthly or annual income that continues as long as you live (or as long as either spouse lives).

The main benefit is that you can never run out of income, even if you live so long that your original principal would have been used up. 

There are two main disadvantages though. The income usually will not go up over time, even though inflation will increase the cost of living.  And unless the annuity is an ‘insured annuity’ (see our Summer 2008 newsletter), then there will be nothing payable to your heirs after your death.

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Managing portfolio volatility

Variable annuities

The Variable Annuity can address both of these drawbacks.

 The Variable Annuity holds one or more investment funds containing both stocks and bonds.  This gives it the potential to earn a much higher long-term return than the guaranteed annuity. 

If the portfolio performs well it can provide an increase in annual income over time, and any capital remaining in the portfolio at the last annuitant’s death is paid to your beneficiaries. 

So far, this is no different than a RRIF or Open portfolio with regular withdrawals providing income.  The biggest risk is that with poor investment performance you could run out of money.

But a Variable Annuity can include a guarantee of a minimum annual income for life, even if the investment portfolio is used up because of the withdrawals and prolonged poor performance.  This can provide the same peace of mind as a guaranteed annuity, since you are protected against a significant and prolonged decline in investment markets by the lifetime annual income guarantee.

This can give you the confidence to hold a diversified portfolio throughout retirement, through both bull and bear markets, the opportunity to have your income increase over time, and the ability to still leave your beneficiaries an inheritance.

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