Two of the main priorities for many retirees are to first make sure that their retirement income is sustainable and to second pass on a legacy to their children or other charitable priorities.
To fund these aspirations, many conservative investors opt to stick with bonds, GICs and other lower risk investment options as these vehicles meet their safety and capital preservation requirements. The problem is that the low rate of return these investments generate may result in not reaching their retirement goals and/or not having enough money left over to leave to their chosen benefactors.
There is an alternative option that provides a tax-efficient, guaranteed lifetime income while simultaneously provides a guaranteed, tax-free payout to the retiree’s beneficiaries when he or she dies. The Insured Annuity strategy provides a guaranteed income for life and upon death pays your originally invested capital directly to your beneficiaries without the usual estate-related hassles and costs.
There are two approaches to this type of strategy. In the traditional Insured Annuity, your retirement capital is used to purchase an annuity. Part of the monthly annuity payment is used to pay for a life insurance policy that has a fixed cost for life. This insurance policy will then be set up so that upon your death, the benefit amount will be paid directly to your beneficiaries tax free. The remainder of the monthly annuity payment amount is also guaranteed for life and is used to fund your retirement expenses.
The alternative strategy has you pre-pay for the full cost of the insurance policy up front with some of your retirement savings. The remaining capital is used to purchase a life annuity which provides your monthly living expenses. By utilizing this alternative option, you further reduce your tax bill and help to avoid claw-backs of OAS benefits.
For an example, let’s take a look at “Jane” who is 72 years old and has $500,000 in GICs in addition to her pension and RRIF assets. She currently has a total income of $94,050 per year that comes from her pension ($57,000), CPP/OAS ($18,750), RRIF ($5,800) and her GIC account earning 2.5 per cent ($12,500). She is required to repay $3,464 of her OAS each year due to claw-back.
If Jane were to set up a $500,000 life insurance policy and purchase a life annuity with the GIC money, the annuity would pay out $38,340 per year. Only $2,113 of this would be taxable instead of the full $12,500 of GIC interest and her tax bill would drop by $3,979 each year. After paying the annual life insurance premium of $19,375, she would be left with $18,156 of after-tax income instead of $7,713 with the GICs.
The net result for Jane would be that her taxable income would drop from $94,050 to $82,881 and her OAS claw-back would drop to $1,789 each year. At the same time, her retirement income would increase by $10,443 per year and her beneficiaries would be guaranteed to receive the full $500,000 amount tax free!
While not for everyone, this strategy is a good option for those who are between ages 60-85, risk adverse, dissatisfied with the low interest rates we currently face and are also in good health (in order to qualify for the life insurance).
An Insured Annuity strategy can preserve the value of your estate, minimize income taxes and most importantly, guarantee a lifetime income stream for your retirement with no stress of watching your portfolio move up and down with the markets.
For those conservative investors who want to increase their retirement income without increasing their investment risk, this strategy is definitely one worth considering. Feel free to email me if you want to see a quote on this type of strategy and how it would compare to your current retirement plan.