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Funding Retirement With Annuities

For most investment savvy individuals looking for a fixed income, the annuity is often overlooked. It’s usually something your grandparents talked about. But what are annuities and how do they work?

What is An Annuity?

An annuity is a contract with a life insurance company where you purchase a stream of income that will be returned to you over time. Simply, you turnover a sum of money to the annuity provider and you receive your money back with interest.

An annuity can be purchased with registered money from your RRSP or RRIF (known as a registered annuity) or with non-registered money.

Other Features of Annuities

The plain vanilla life annuity pays you a fixed sum of money monthly or quarterly for life. You can have other features added to spice things up and customize the annuity to meet your specific needs. Some common features include:

Many of these features come at a cost. So be aware that the more features you select will decrease your annuity payments.

How Are Annuity Payments Determined?

The two main factors used to calculate payments is life expectancy and log term interest rates. With life expectancy, the life insurance company is guessing at how long they will have to pay out on the annuity.

Interest rates are important because they are used to match the rate of return the insurance company expect to receive by investing the funds themselves. They are betting they can earn more income on the annuity deposited with them than they will have to pay to you with your regular payments.