How to close the retirement income gap

For retirees Don and Delores, one option could be a life annuity, CFP Alexandra Macqueen finds

Alexandra Macqueen 6 March, 2020 | 1:48AM
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Don, about to turn 65, is facing an important decision. Laid off from his full-time employment, he’s wondering if his savings are enough to meet his retirement income goals if he decides to pull the trigger on retirement now.

While Don and his wife Delores have saved up a nest egg that’s approaching $1 million, without a defined-benefit pension, Don is worried that unexpected events – from uncertain market conditions, unpredictable inflation, and the potential for living longer than expected – could mean his portfolio doesn’t last as long as he (and his spouse) might need it to.

In thinking about his options, Don has done a lot of reading, and now he’s asking: Should he follow the advice he’s read about buying an annuity to create stable and guaranteed lifelong income?

How much do they need?
Delores, age 70, is already collecting a work pension, the Canada Pension Plan (CPP) and the Old Age Security (OAS) benefits. When he turns 65, Don will be eligible for CPP and OAS, both of which he could defer to age 70.

The couple has a good handle on their household spending and they say they would like about $90,000 per year – including taxes – to meet their needs. They’ve saved up a nest egg of $925,000, spread across Registered Retirement Savings Plan (RRSP) accounts, Tax-Free Savings Accounts (TFSAs), and, for Don, a locked-in retirement account (LIRA). They don’t have kids and aren’t interested in leaving an estate. Instead, they want to maximize income while alive.

Don considers himself an advanced DIY investor with a portfolio allocation of 75% equities and 25% fixed income, while Delores ranks herself as a “new” investor, with 60% equities and 40% fixed income. Using FP Canada’s rate of return assumptions, their expected returns on their overall portfolio is 5.9%, before fees, inflation, and taxes.

Right now, Delores’s income is $31,000 from her CPP and OAS – which are indexed to the general rate of inflation – and her workplace pension, which is not indexed. Don, on the other hand, has no income at all, which has him “blowing through” his emergency fund.

What’s the gap?
Don plans to take OAS at age 65 and defer CPP to age 70. When his OAS income kicks in, their combined, guaranteed household income would hit $39,000 – about 43% of their desired spending. This would leave them with a 57% shortfall that would need to be made up with portfolio withdrawals. When he takes CPP at age 70, their guaranteed income would rise to $63,000; closing the gap between their guaranteed and desired income to 37%.

To reduce the shortfall between what they’re guaranteed to get and what they want to spend, Don is considering buying a life annuity. A life annuity is a financial product, sold by an insurance company, that pays a guaranteed monthly income to the annuitant(s) for as long as they are alive – sort of like a “DIY version” of a defined-benefit pension. Retirees don’t have to go “all-in” on annuities but can allocate a portion of their portfolio to the purchase. Additional annuity income could also be added over the course of retirement.

Assessing the risk
On one hand, retirement “rules of thumb,” such as the “4% rule,” suggest that Don and Delores’ portfolio is sufficient to provide the income they’d like for as long as they are likely to be alive, so long as they continue to generate returns in excess of inflation – and as long as markets behave, inflation doesn’t go wild, and neither of them lives well in excess of their expected lifespan.

“But there’s just a lot that can go wrong,” says Don. “An income annuity would remove some of that risk – but is it right for us? And if we add an annuity to our income sources, how much of our portfolio should we annuitize – and when?”

What are their options?
In order to answer Don’s questions, we put some numbers to the problem. Here are current annuity rates for a couple, age 65 (male) and 70 (female), for a “joint-and-survivor” annuity that pays 60% of the initial income to the surviving member of the couple if one of them dies.

This table shows the average of the top three quotes for a life annuity with payments starting immediately, a premium of $100,000, and a 10-year guarantee (meaning payments will be made for 10 years even if neither member of the couple is alive), purchased with funds from an RRSP.

In addition to their current ages, the table shows the monthly payout if the couple was 70 and 75, and 75 and 80. We’ve also explored the impact on monthly income if indexing is added, with indexing at 1.5%, 2.5%, and 3.5% annually.



No indexing

Indexing at 1.50%

Indexing at 2.50%

Indexing at 3.50%

65 + 70





70 + 75





75 + 80





Average of top three immediate joint-and-survivor annuity quotes generated from on February 3, 2020, for a premium of $100,000 with a 10-year guarantee

Annuity income rises with age and decreases if indexing is included. For example, if indexing at 3.5% per year is included today, a couple would need to wait fully 10 years (while depleting their portfolio) to get monthly annuity income that matches the non-indexed amount available today. (Keep in mind that these figures use today’s annuity rates – who know what will happen to those rates in 10 years?)

Pulling the trigger
Don is thinking about allocating about 20% of his portfolio, or $200,000, to a non-indexed annuity at age 65. If he takes this option, he will get approximately $11,650 in yearly income (at today’s rates) – closing his household’s “guaranteed-income gap” from 57% to 43%.

When his CPP kicks in at age 70, that gap would be further reduced to just 25%, meaning all 75% of Don and Delores’ desired spending would come from guaranteed sources. (The proportion of income from guaranteed sources would diminish over time with the impact of inflation, but Don expects that investment returns could grow his remaining assets – even with withdrawals – faster than inflation.)

Without a defined-benefit pension, Don needs to decide what levers he wants to adjust in order to create a customized retirement income plan – and he and Delores have many different options. The option he’s considering, an income annuity, can step in to provide a hands-off retirement income solution, without requiring the hands-on portfolio management that a conventional portfolio-only strategy requires.

—    With thanks to Owen Winkelmolen at for assistance with initial income calculations.

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About Author

Alexandra Macqueen  Alexandra Macqueen CFP®, regularly consults to businesses, organizations and other planners on retirement income planning, annuity analytics, and other personal financial topics. Follow her on Twitter at @moneygal.  

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