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Hi all

I wonder if anyone out there might have some advice for me. I turn 56 this year and I plan to retire when I turn 60. My investment portfolio includes about fifteen GIC's varying in size between $6,000 and $25,000 with various maturity dates between 6 months and 4.9 years. This is the "GIC ladder" portion of my portfolio and for the last several years I have rolled over maturing GIC's into new 5 year maturities. My plan is that I will use some, or perhaps all, of this money to purchase an annuity at age 60. Now that I am approaching age 56 I am wondering should I invest in shorter and shorter maturities this year and each subsequent year so that I have a single "large" lump sum to purchase an annuity when I turn 60. I would prefer not to shorten my maturities because shorter maturities pay miserably low rates of interest. But the alternative is I have a GIC portfolio with maturities out to age 64-65 when I turn 60. Can I buy a single annuity with whatever cash I have at age 60 and then add to it has my GIC's mature? What do you think?
 

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Hi all

I wonder if anyone out there might have some advice for me. I turn 56 this year and I plan to retire when I turn 60. My investment portfolio includes about fifteen GIC's varying in size between $6,000 and $25,000 with various maturity dates between 6 months and 4.9 years. This is the "GIC ladder" portion of my portfolio and for the last several years I have rolled over maturing GIC's into new 5 year maturities. My plan is that I will use some, or perhaps all, of this money to purchase an annuity at age 60. Now that I am approaching age 56 I am wondering should I invest in shorter and shorter maturities this year and each subsequent year so that I have a single "large" lump sum to purchase an annuity when I turn 60. I would prefer not to shorten my maturities because shorter maturities pay miserably low rates of interest. But the alternative is I have a GIC portfolio with maturities out to age 64-65 when I turn 60. Can I buy a single annuity with whatever cash I have at age 60 and then add to it has my GIC's mature? What do you think?
I'm pretty sure you can't "add to" an annuity contract in instalments that way. The amount an annuity pays varies with your age at the time you purchase it.

I presume your GIC's are paying you income annually anyway, so what is the rush about trying to convert a lot of them all at once at age 60? I would also suggest you do a bit of web searching on optimum ages to buy annuities. I seem to recall reading that for most people it's closer to 70.
 

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You can "DCA" into annuities over time.

I would not, in your shoes, annuitize with either one lump sum (credit risk - you should spread your purchases around) or annuitize at age 60.

The issue is that the mortality credits from annuitizing really only kick in at about age 70 (for men, slightly older for women).

I happen to have a bunch of data on the extent to which mortality credits exceed fixed income returns for Canadian annuity buyers at different ages but, uh, it's for a book I am writing. In the meantime, I will find more generic data to link to...stay tuned.
 

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I know you can buy an annuity today that starts paying in 5 years, etc. Those annuities would guarantee you today, what your income will be in 5 years and therefore, allow you to obtain long term interest rates (20 to 30 year terms) for the next 5 years, while you wait to start collecting income.

So just buy 5 annuities that all start paying when you are 60, over the next 5 years.

As for the other posters point about optimum ages to start an annuity. Interesting, but not all that useful when you are not that optimum age. I suppose if it worked out to be age 70, you could take some of the money and direct it to an annuity that starts at age 70 and the rest for a 10 year term certain annuity to keep you going until then.

Why does the sceptic in me think that when all the dust settles it will work out to be the same as buying the entire annuity for payment to start at age 60. If the posters have some numbers for that, their points about optimum age might be more useful.
 

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Hey, I'm always up for a challenge to provide evidence. :)

The financial math on this point is exceptionally strong. Here's just one popular paper on the point. See page 4 - what you are looking for is the spread above interest rates associated with annuitizing at different ages.

I just prepared numbers using Canadian mortality data and Canadian annuity rates. The point still stands: the spread above fixed income associated with annuitizing increases as the annuitant ages.

You can also see the same effect by using this (free) calculator (it's at the bottom, the SPIA calculator). (I can provide the assumptions for the calculator if you like.)

If you think about this, though; it makes perfect sense. Annuitization is a one-way street. The enhanced return (over fixed income, or over the long-term interest rate - however you want to compare returns) is made up of the payments left on the table by those who die at or before average life expectancy.

It's just the law of survival probabilities: even adjusting for the increased life expectancy among those who annuitize (everybody wants to win the bet with the insurance company!) some people will die earlier than others in the same cohort, "juicing" the returns for the survivors.

This concept is actually called the Implied Longevity Yield, which compares the yield from annuities with the 10-year bond payout. That link contains an ILY index as well as a link to the research paper exploring and explaining the concept.
 

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Sorry, meant to provide one more link as well. This calculator (the ALDA one) allows you to see the effect of buying a deferred (not immediate) annuity...that is, buying now for payments to start later.

Standard disclaimer: all of the calculators I am linking to do not generate quotes. They use the pricing models that insurance companies use to generate annuity prices. This is known as the "fair price" or "no arbitrage" pricing model. Actual annuity quotes will differ, depending on the issuer. You can get annuity quotes from various sources, including Cannex.
 

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Discussion Starter #8
Thank you all so much for your input. You have raised a few issues I had not yet thought out very well. Clearly I need to think about this a bit more.
 
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