Rising rates are good news for near-retirees seeking longevity insurance

For years, low interest rates have been a boon to borrowers but a curse to older investors wanting low-risk interest income options. Now, after a decade of minuscule rates, interest rates are starting to inch back up again: another 0.5% as of June 1st. That’s good for GIC investors (guaranteed investment certificates), as we covered in my?recent column?on the alleged “death” of bonds.

This is also welcome news for retirees seeking so-called “longevity insurance,” even if it’s probable that the same forces at work are also depressing stock prices. In other words, the time may be fast approaching when near-retirees and full retirees start to consider?annuities.

Are fixed annuities a safe investment?

I’ve written about annuities from time to time over this low-interest journey, but it never got to the point for me to pull the trigger personally and buy life annuities. It’s generally a bad time to annuitize when interest rates are low. And it’s worse in periods of high inflation. Another attractive benefit of annuities is that they provide some hedge against stock market volatility: you may have noticed that friends with inflation-hedged defined benefit pension plans tend to be less concerned about the current bear market.

In May, pension expert Fred Vettese?wrote?that retirees may start to be tempted to implement his suggested guideline of converting about 30% of investment portfolios into annuities. As for the timing, he says it is “certainly not now: but it could be sooner than you think.” He suggests the optimal time to commit to them is around May 2023, just under a year from now.?

Fee-only financial planner Robb Engen recently wrote about this on?Boomer & Echo, where he likened annuities to the creation of your own personal pension plan. He cites a March 2022 RBC Insurance study of Canadians aged 55 to 75. It found that among those already retired, 28% are spending more than they planned for, and 41% have unexpected expenses. Inflation and loss of purchasing power is the most pressing concern for most (78%), along with a lack of guaranteed income (47%), outliving their savings (48%) or their spouse (38%), feelings of loneliness (36%) and not leaving behind a legacy (25%).?

Engen was pleasantly surprised by current annuity payouts on $100,000 and $250,000. After the June 1, 2022, rate hike, I asked Cannex Financial Exchanges Ltd. to provide updated quotes for registered life annuities and taxable (proscribed) annuities on comparable amounts. Here’s what it found:?

For a 65-year-old male, investing $100,000 early in June 2022, with a 10-year guarantee period in a prescribed (non-registered) single life annuity, monthly income ranged from a high of $548?to $564 at Desjardins Financial Security, with a cluster at major bank and life insurance companies between $538 and $542. (All figures rounded.) Comparable payouts on $250,000 ranged from $1,299 to $1,390.?

Because of their greater longevity, 65-year-old females received slightly less—ranging from around $500 per month to a high of $518, and for the $250,000 version, from $1,238 to $1,319.

Here’s what Cannex provides for comparable registered annuities (held in RRSPs):

Read the full column at moneysense.ca.