Wednesday, November 5, 2014

Retiring Without An Annuity

Work, save, retire. Buy an annuity and enjoy. Maybe.

When I started saving for retirement I was in my mid twenties. At some point between then and now, I talked with a financial advisor about what to do with my RSP funds when I turned 65. The answer: buy an annuity. I was told, my RSP should pay about $750 for every $100,000 saved. I was going to be wealthy in retirement. Not!

By the time I retired, interest rates had collapsed. The last quote I received, late last year, said $100,000 would buy a joint life annuity of about $475 monthly. I thought taking a cut of 25 percent in my pension was bad. This is a cut of about 37 percent from what I had been told to expect.

I admit I was financially naive. And I understand that today I may still be holding lots of erroneous beliefs. When one is 40 and holds erroneous ideas about retirement, the disaster is 25 years in the future. A lot can happen in 25 years to avert the coming disaster.

But when one is wrong and retired, the problems are immediate and may well affect the remainder of one's life. I cannot undo what I did in the first years of my retirement. But what I do today, or don't do, is still in my control. And so far, I am taking my retirement funds and investing them in the market, in good, dividend-paying stocks.

Do I have more money available each month than if I had simply tossed all my savings to an insurance company or bank and converted everything into an annuity? No. Even a payment of $475 a month is a return of 5.7%. That is more immediate cash than my portfolio is generating. (That said, the portfolio itself is growing quite smartly. I am up more than 60 percent since I retired in 2009.)

On the downside, and there is a downside, that payment of $475 would remain the same until the day when both my wife and I were dead. With each passing day, our income would be shrinking. According to the Bank of Canada, what I could buy for $475 when I retired would cost $521 today. That's a lot of shrinkage in just a few short years.

Returning to the B of C calculator, someone retiring 30 years ago with an annuity paying $750 annually would now need $1550 in order to have the same buying power. The annuity shrank in in buying power by almost two and half percent each year.

If in 2009, at the start of my retirement, I had invested $100,000 in a joint and last survivor annuity paying say $500 a month or $6000 a year, today I would find I need $6580 to enjoy the same buying power.

If instead I had put $100,000 in the TD Monthly Income fund and removed an amount equal to the annuity payout that first year but increased the withdrawals lock-step with inflation, today I would be drawing about $550 monthly or $6600 annually. Amazingly my portfolio would have grown to approximately $140,166 after withdrawals. (Note: I am removing more than the dividend payments from the TD fund.)

In retrospect, it is clear not buying an annuity when I retired was the right decision. The growth of my actual portfolio after years of withdrawals makes this immediately clear. I don't have to look to graphs on the Internet. I am far better off today than I was when I retired. I was lucky.

The big question is: What will the future hold? Is it time to lock in some of the profits accumulated over the past few years? Is it time to buy an annuity?

Which brings me to the post before this one. Can I put my money into the market in a mix of the bold and the conservative and generate enough money to live while leaving a nice inheritance to my children and grandchildren? Should I simply buy the TD Monthly Income fund? It has been a winner for most of the past 15 years.

Whatever I decide, I am sure at its very core the decision will be a gamble.

No comments:

Post a Comment