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Annuity vs. GIC: What makes sense for retiring?


I’m guessing you’re thinking about GICs as an alternative because you’re aware of the longer term risks associated with an annuity, and you may want to maintain control and flexibility over your money.

A GIC can give you a guaranteed income over the length of the term and control of your capital; however, there is no guarantee on future interest rates or a lifetime income. You may also find it difficult to draw a monthly income from a GIC portfolio. This will prompt you to create a GIC ladder with different maturity dates so there is cash available when needed. The laddered approach may have an overall return that is less than the five-year return you are using to compare to an annuity.

Think about the different ways you—and the world for that matter—may change in the next 25 years. Look at interest rates, inflation, your lifestyle and spending habits, and so on. Inflation is likely the biggest risk you’ll face when purchasing a life annuity.

If you purchase a $100,000 annuity, what other financial resources do you now have? What will be coming to you in the future? What can you use to deal with any changes in your life? It’s important for you to know the answers to these questions.

It’s not just about comparing GICs and annuities

Those are a few general things to think about when comparing GICs to annuities.

But, what about you? What income do you need to support the retirement lifestyle you want, no matter what happens? Do you want to build your retirement portfolio based on guarantees, probabilities or a blend of both?

A portfolio based on guarantees is usually made up of GICs and annuities. Combined, they provide a sense of security and if you have enough money, you’ll never see your capital decline in value. The real risk, though, as mentioned above, is inflation. Will tomorrow’s dollar buy the same as a dollar today?

Most financial plans are based on probabilities—i.e., an equity investment will earn a certain rate of return over your lifetime. There are no guarantees. One risk, in the absence of a life annuity, is running out of money. And another risk is how you react when equity markets move up and down.


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