Many fixed-income investors are acquainted with the concept of “laddering,” whether it be ladders of guaranteed investment certificates (GICs), or bonds with different maturities. Maturity dates are staggered over (typically) one to five years, so each year some money comes due and can be reinvested at prevailing interest rates. This minimizes the likelihood of investing the whole amount at what may turn out to be rock-bottom interest rates, only to watch helplessly as rates steadily rise over time. Buyer’s remorse results: “Why didn’t I wait to invest?”
The same applies when it comes time for retirees or near-retirees to annuitize. At the end of the year you turn 71 you must decide whether to convert your RRSP into a RRIF, cash out and pay tax (few do this), or thirdly to annuitize.
READ: RRIF or annuity: Which one is right for you?
Mind you, as Warren Baldwin, a senior vice president with T.E. Wealth points out, the analogy is not perfect, since GICs mature and annuities do not. Even so, annuity returns are also affected by low interest rates today. This interest-rate risk may explain why annuities are relatively unpopular, despite providing longevity insurance that guarantees you won’t outlive your money.
Fortunately, annuitization isn’t an all-or-nothing decision. You can convert some of your RRSP to a RRIF and some to a registered annuity. You can take a leaf from the GIC laddering concept and buy annuities gradually over five, ten or even more…