Tuesday, February 17, 2015

Money diminishing for life

The television ad promised "money for life." It showed a very happy and a very relaxed retiree enjoying the benefits of having money for life. It sounded too good to be true but I contacted Sun Life Financial anyway. I thought this was probably just a fancy ad for the Sun Life annuity products. and it was -- sorta.

I learned that if I gave Sun Life Financial $100,000, they would provide my wife and me with a monthly income of $435.12 for a guarantee period of 15 years. If either one of us lived longer, we'd continue to benefit. If we died before the 15 years had passed, the remaining money would be paid to our estate. I believe this is an income for life annuity with a guaranteed period certain benefit.

$435.12 per month is $5221.44 a year. This is only 5.221 percent per year on our 100 grand and no inflation protection. Is this good? Maybe -- but I strongly suspect it isn't. It all depends upon how long my wife and I live. I have a bad heart. Everyone will be surprised if I am still here in 15 years. But my wife's grandmother lived into her 90s and my wife shows every sign of doing the same.

Let's consider the effect of inflation on this "money for life." If the next 15 years are like the past 15, then inflation will average 1.91 percent. Historically, this is a rather low rate of inflation. We have gotten off easy these past few years. Still, in just 15 years, my "money for life" would be greatly diminished in value, delivering something in the neighbourhood of 30 percent less buying power.

If my wife lives to 90, another two decades plus, her "money for life" annuity would be slashed in buying power by something approaching almost 50 percent. At age 95 my wife would still be getting a monthly cheque for only $435.12. Does this sound like a good deal? It sure does, for Sun Life.

But I shouldn't be too quick to knock annuities. There is something to be said for having some guaranteed income, even if it is shrinking in buying power every year. My pension is shrinking. It is not completely protected from the ravishes of inflation. But that pension is a wonderful thing to have despite its shortcomings.

Interestingly, I own stock in Sun Life Financial. My investment is up 84% in just a few years. In other words, if I had put $100,000 in Sun Life Financial back when I made my original investment, today I'd have $184,000 in stock. And even better, Sun Life pays a very nice dividend. My initial $100,000 would have purchased 4727 shares and today I'd be enjoying an annual dividend of $6806.88.

This not to say one should never buy an annuity. Annuities have their place in your financial plans but they are not the only investment vehicle to consider. Even the Sun Life representative said as much. He'd put some of our portfolio into an annuity -- he suggested we should have a guaranteed income greater than our expected expenses -- and he suggested putting the remainder of our portfolio into other investments, equities and bonds, while keeping an eye on the tax treatment.

My visit with the Sun Life fellow was educational but it didn't convince me to rush into "Money for Life." Interest rates are down and may drop more. I'll take my chances and hope that by the time my wife and I hit the must-convert-age that interest rates will have recovered somewhat. Higher interest rates translate into higher monthly annuities payments.

When I hit the must convert to a RIF or annuity wall, I hope to know more about investing and the tax treatment of investments. Right now, I believe my wife and I will be ready to add an annuity into our financial plan at that time.

And, I'm keeping the Sun Life rep's card. I liked him.
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Add:

This add is in response to the second comment following this post. I agree with the writer that we all have fixed expenses and variable expenses. I track both categories using an Excel spreadsheet. To keep my expense records accurate, I charge everything using  a card that rewards me with a full one percent rebate based on the total amount charged.

I charge all food, telephone, clothing, all car expenses except for insurance and much much more. I easily charge more than $20,000 annually and collect more than $200 in rebates. (We charged a new furnace and a new central air unit a few months ago. The rebate helped ease the pain of that unexpected purchase.) By charging almost everything, I have a monthly record supplied by the credit card company that tracks in detail most of our expenses.

Now, let me make this quite clear. I do NOT enjoy a 6.8% yield on my Sun Life stock. What I was attempting to do was compare apples and apples. When I retired, I got some quotes from banks and insurance companies concerning annuities. I was not impressed.  I was told a hundred thousand dollars would deliver maybe $5,500 per year and that payment would remain stuck at $5,500 until both my wife and I died.

Instead, I put my wife and my money in the market. Today our investments have grown by 60% and that is after we have removed tens of thousands of dollars from our portfolio in order to live in retirement. One stock I purchased for us was Sun Life. Here is a screen grab of our investment.


Click on the above in order to enlarge and read.


I paid only $21.50 for a stock that paid a dividend of 36-cents this past December. A hundred thousand dollar investment made in Sun Life itself sometime after my retirement would be delivering about $1675 every three months. This is about $558 per month or $6700 annually. The icing on the cake is the capital gain. The stock has gained almost 85% since purchase. Click on the above screen grab to enlarge and read.

And it is not the only winner in my portfolio. The past few years have been an amazing time to be in the market. When my wife and I get a little closer to the 71 years of age milestone, we will again consider annuities. Maybe, just maybe, the government will have, by then, changed the withdrawal rules and we may then just allow our portfolio to continue chugging away until we both have died. Our estate can take care of the expense of liquidating our registered retirement savings.


Click on the above in order to enlarge and read.

As for high dividend paying stocks, there are a few out there that I like for long term holds. For instance, Dream Office Real Estate Office Trust (D.UN). It has been knocked down a little by recent news, the head of the REIT moved on, the holdings in the West are being questioned as the price of oil plummets. With the price not, in my estimation, accurately reflecting its value, the dividend payment calculates out at an inflated value: 8.53% today.

Both my wife and I own units of D.UN. Her tax free savings account has grown by a full 25% since she opened the plan. Today that account delivers more than $1400 annually. It would take a massive correction to put her plan at risk of falling into the red and the cushion is growing.