Annuity

An annuity is a product you buy from an insurance company that pays you a regular income, usually monthly, for a set period or for the rest of your life. You hand over a lump sum, and in return, you get guaranteed payments.

The simplest version is a life annuity: you give the insurance company $200,000, and they pay you a fixed amount every month until you die. The amount depends on your age, interest rates at the time, and the terms you choose.

Why it matters

Annuities solve one specific problem that other retirement accounts don’t: the risk of outliving your money. With a RRIF or a regular investment account, it’s up to you to figure out how much to withdraw each year without running out. An annuity takes that guesswork away.

The trade-off is that you give up control. Once you buy an annuity, that money is generally gone. You can’t change your mind, access the lump sum, or leave it to your heirs (unless you’ve paid extra for specific options like a guaranteed minimum payout or survivor benefits).

Annuities also depend heavily on interest rates. When rates are high, annuity payouts are more generous. When rates are low, you get less income for the same lump sum. Timing matters.

It’s uncommon to put all your retirement savings into an annuity. A common approach is to use an annuity for a portion of your savings to cover essential expenses (like housing and groceries), while keeping the rest in a RRIF or investment account for flexibility. That way you get some guaranteed income without locking everything up.

Example

A 65-year-old takes $200,000 from their RRSP and purchases a life annuity. Based on current rates, they might receive roughly $1,100 per month for the rest of their life. If they live to 90, that’s $330,000 in total payments on a $200,000 investment. If they pass away at 70, the insurance company keeps the remainder. That longevity risk is the core tradeoff.