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Pattie Lovett-Reid: How do I ensure I don't outlive my money?

ANALYSIS: Without a doubt the most frequently asked question I get is, how will I know if I have enough to see me through retirement? This extreme market volatility has some with the luxury of time on their side saying they will ride out this turmoil, many may even decide to work a little longer, while it has others wondering how they lock in their retirement income to create some sort of annuity - or income for life.

While most Canadian retirees want guaranteed income for life, they are in the dark when it comes to an important retirement solution, according to a study by RBC. Ninety-four percent of Canadians aged 55 to 75 say they would like to have guaranteed income for life when they retire, but 61 percent say they don't understand what annuity is and how it might help.

Annuities can form an important component of a retirement plan because they provide guaranteed income for life that is protected from stock market volatility. Although the majority (58 percent) of respondents to the RBC survey indicated that they are worried about outliving their retirement savings, only 35 percent are exploring or considering annuities as part of their retirement plans.

Annuities often get a bad wrap as investors worry that when they pass so does their money to the insurance company and not their beneficiaries. There is also a belief this is not the best investment in a period of low interest rates. Locking up your money in a low interest rate environment could compromise your standard should inflation rear its ugly head and rates trend higher.

However, RBC points out it is important to remember annuities can provide payment guarantee options to your beneficiary. By choosing a guaranteed payment period of up to 25 years, your income stream will in fact transfer to your beneficiary if you pass away during the guarantee period.

When asked whether a statement was true or false here's how investors’ knowledge stacked up -

1. Annuities can provide income for life.

True. Seventy percent of those surveyed answered correctly. Annuities provide an income stream that is guaranteed for life. That's a set amount of money each month or year for life.

2. Annuities can only be purchased from a licensed insurance advisor.

True. Only 40 percent of respondents answered correctly. It’s always best to speak with your licensed insurance advisor to ensure you are purchasing the annuity solution that is right for your individual situation.

3. There are potential tax advantages to investing in an annuity.

True. Seventy-one percent answered correctly. When purchased with non-registered funds, the interest portion of your monthly payment is spread out evenly over the life of the annuity.

4. Annuities are not a good investment during low interest environments.

False. Canadians were evenly split on answering correctly. Generally, the interest rates that influence annuity payouts are long-term rates, which mean they are typically higher than one-to five-year rates that investors may be focused on. It is important to note that interest rates are only one factor that influence annuity payouts.

Other factors influencing your payout include

Current interest rates

If interest rates are high when you buy your annuity, your annuity payments will be higher than if interest rates were low. That's because the financial institution predicts it can earn more by investing your money.

The amount you deposit

The more money you put into your annuity, the more you get back as income.

Your age

The older you are when you buy the annuity, the higher your annuity payments will be. That’s because you're not expected to live as long.

Your gender

Women get less money than men of the same age because they are expected to live longer.

The length of time the payments are guaranteed

You choose the number of years you receive payments with a term-certain annuity. The shorter the term, the higher the payments. If you have a life annuity, you can arrange for your annuity payments to continue to your spouse, your dependent children, or your estate after you die. The longer you want payments to continue after your death, the less you get each month while you’re alive.

The options you add​

You get the highest income with a basic annuity that covers only you. Any options you add (like a joint-and-last survivor option) will lower the amount of your payments. That’s because these extras increase the costs to the insurance company.

The bottom line: Ultimately when you reach 71 years of age and it’s time to wind down your RRSP you basically have 3 options, take cash, which given the tax consequences makes little sense, purchase a RRIF or buy an annuity. I think you owe it to yourself to at least explore the option.

As the Chief Financial Commentator for CTV News, Pattie Lovett-Reid gives viewers an informed opinion of the Canadian financial climate. Follow her on Twitter @PattieCTV

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