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Updated 2mo ago.
Updated 2mo ago.
A life annuity is a financial product offered by an insurance company that guarantees regular payments for the rest of the annuitant's life, in exchange for a lump-sum capital payment. The payment amount depends on the capital invested, the age at purchase, and prevailing interest rates. It is a popular decumulation tool in retirement to eliminate the risk of outliving your savings.
Jean is 72 years old with $300,000 in his RRIF. He worries about running out of money if he lives to 95. He transfers $150,000 to Sun Life to purchase a life annuity. In return, he receives approximately $1,050 per month guaranteed for life, no matter how long he lives. He keeps the remaining $150,000 in his RRIF invested in VRIF.TO (Vanguard Retirement Income ETF) to maintain some flexibility and liquidity.
A life annuity solves the biggest risk in retirement: outliving your money. It provides peace of mind through guaranteed income, similar to a defined benefit pension plan. The trade-off is that the money is locked in — you lose access to the capital and cannot pass it to heirs (unless you add an optional guarantee). The optimal strategy is often to combine a life annuity, RRIF, and OAS/CPP to diversify retirement income sources.