Using Annuities As a Guaranteed Cash Flow Strategy in Retirement

Retirement Income & Tax Planning, Calgary

Fixed Income Part of a Retirement Plan



What happened to bonds?


The traditional model of creating a retirement portfolio using a 60/40 mix of equities and bonds is broken. You end up with 40% of your portfolio adding little in the way of returns, in fact, it may be having a negative drag on your portfolio. This means that the other 60%, which is in equities, has to do all of the work.


Governments all around the world have lowered their key lending rates to zero and in some cases sub-zero, especially during the pandemic. Because of their enormous debt, they want the rates to remain low for a long time. Corporate bonds refer to the issuing of debt by larger corporations that need to raise money to expand their businesses.


For example, they can issue a 20-year bond that pays a semi-annual interest payment. This interest payment is based on their credit rating. The better their credit rating the lower interest they have to pay. In order to receive a higher interest rate on a bond, you have to buy bonds from less credit-worthy issuers, who could default on their debt obligations. You may be familiar with the term 'high-yield bonds' which refers to bonds that are higher risk and often called junk bonds.


Greg Taylor, chief investment officer at Purpose Investments, an investment firm out of Toronto, says the "60/40 allocation method doesn’t work because markets have evolved, and the two portions no longer fit together as tightly as they once did."

Keep in mind that this isn't set in stone and a repricing may take place in the future.

I wrote this blog in December 2020, and I am now updating it as a lot has changed. Because of the enormous debt loads of countries in the developed world and the printing of more money they have driven inflation to 40-year highs. In order to combat inflation central banks are raising interest rates at a rapid pace. This has an impact on the yields on short-term debt like treasuries, but also an impact on bond prices, which as a result have seen bond prices collapse. In 2022, we saw a major correction in both stocks and bonds at the same time, which is an anomaly. The typical balanced portfolio was down about 15-18%. There has been a slight rebound in 2023, but the bond market is dismal.

Michael Campbell recently wrote about the G7's Debt Problem:

The G7 group of nations has a sovereign debt problem. Debt levels have reached positively spooky heights:

Japan – 259.43 percent of GDP
Italy – 150.03 percent of GDP
United States – 128.13 percent of GDP
Canada – 112.85 percent of GDP
France – 112.80 percent of GDP
United Kingdom – 95.35 percent of GDP
Germany – 68.60 percent of GDP


Anyone retiring with less than $1 Million of accumulated savings could and should be incorporating some annuities into their portfolio as a replacement for bonds, especially if they do not have other pensions. Because of everything happening in the bond world, annuity payouts have not been this high for years. In fact, payouts are about 12-14% higher now than they were in February 2022.


An annuity is simply the exchange of a lump sum of money for a regular monthly income stream that is guaranteed for as long as you live.


At the present time, the 30-year Government of Canada bond yields close to 3.5%. Two years ago it was only 1.26%. This meant that you would need to have, and need to tie up a million dollars for the next 30 years to get paid $12,600/year. No one is going to do this, but it is the risk-free rate of return and now serves as the baseline for retirement income planning. 


There’s an alternative to the traditional strategy of using bonds for the fixed-income part of your portfolio during retirement.


A single female age 65 could use $237,000 instead of needing a million dollars and buy a lifetime annuity that will pay $12,600 for the rest of her life with a guaranteed period of 19 years. That was in December 2020. Today, August 2023, that same $237,000 would generate $16,165/year of income. That's an increase of $3565/year or 28.29%. In just 2.5 years. And, the guarantee only needs to be 15 years to ensure you or your beneficiary will get 100% of your money back.


Currently, a 65-year-old couple using $267,000 with a 16-year guarantee can get $17,082/year.

For every additional year past year 16, their average annualized rate of return increases. 


Based on our Annuity Rate Calculator we can calculate what the internal rate of return is for an annuity. Basically, in the above scenario, the couple's rate of return after 25 years is 3.99%; and after 30 years it is 4.85%. There is also the added protection of having that monthly income protected in the event that the insurance company were to go under. In Canada, we have Assuris, which protects the first $5000 of monthly income at 100%, and 90% for higher amounts.


So basically, an annuity can eliminate or greatly reduce the need to use bonds altogether, and with the guarantee added, there’s no way they can lose their money. Either they or their beneficiary will receive all of the money, but the probability is very high that the retiree will get much more based on life expectancy. There's a 50% probability that one member of a 65-year-old couple will live past 95.


Why tie up too much of your nest egg to creating fixed income when you can use much less of your money to buy an annuity and have money left over to invest where you can accept more risk and get a much higher rate of return?


Let’s take the example of the couple and say they still have $733,000 of savings to work with. Now they can put $100,000 of that money into a more conservative or balanced fund that is designed to generate lower volatility returns in the 3-4% range. This can even be accomplished using a fund that focuses on private equity as opposed to public markets. They can keep $33,000 in cash and the remainder of their money, $600,00, can have a greater degree of equity exposure for growth because they have a longer time horizon before needing the money.


Using and maximizing a TFSA is the best investment account for your ‘growth-oriented money’ because the growth is tax-free. Without growth, a TFSA is of no value. RRSP or RRIF withdrawals can come from your ‘balanced income-oriented fund.


Typical 65-year-old single female retiree.


OAS: $8220

CPP: $8400

Annuity $15,720

Total: $32,340 (Guaranteed income for life)


If she were to take $8,000/year from RRSP/RRIF then she would have $40,340 of taxable income for the year and would qualify for all of the tax credits available. It’s the perfect number. If she wants or needs additional income then draw it from her TFSA, on a tax-free basis. Her tax bill is approximately $3800 for the year - that’s less than 10%.



Typical 65-year-old couple.


OAS: $16,440

CPP: $16,800

Annuity: $16,728

Total: $49,96 (Guaranteed income for life)


If they add $24,000 from RRSP/RRIFs then they now have $73,968 of annual income and because they can split this income and take advantage of tax credits their total tax bill is only $4376 with the age 65 tax credit amount. They may have other tax credits from donations and medical expenses.



During retirement, you do not have payroll deductions or ongoing retirement saving commitments. You actually have much more after-tax and after-expense disposable income in your pocket.


The purpose of retirement savings is to create retirement lifestyle income, not to leave an inheritance or die with a large bank account balance. If you want to leave an inheritance, then it is best to use another strategy. Most retirees are so afraid of running out of money that they hold back on their spending and end up with too much leftover or not enough time to enjoy it.


What you are trying to avoid is overspending and becoming a burden to others or underspending and becoming the richest person in the graveyard.



The idea that you have to preserve your retirement capital is unfounded, especially if you have less than $1 Million of savings to work with in the first place.


When it comes to managing your retirement income portfolio you need to look at your BIG picture and your total income from all sources, both guaranteed and non-guaranteed. How much risk you need to take on is dependent on how much guaranteed and non-guaranteed income you need. Anyone retiring with less than $1 Million of accumulated savings could and should be incorporating annuities into their portfolio as a replacement for bonds.




Retirement income planning is about looking at all of your various sources of income and then determining the most tax-efficient order for taking that income with as little market risk as possible. This is what we do for our clients. If you are uncertain about how to do this or you lack confidence in your current advisor’s ability to do this for you, then schedule a meeting with us.


Click Here to learn more about our process for creating your financial roadmap for retirement, getting your total financial house in order, and living your ideal lifestyle.


Retirement Income, Investment & Tax Planning for Those 55+,


Willis J Langford BA, MA, CFP


Nancy R Langford CRS




Share This Post:

Related Posts

Latest Testimonial

If you are nearing retirement, newly retired, or well into that stage of life and need some honest, reliable financial advice and tax planning services, I highly recommend Willis and Nancy Langford at Langford Financial. I have been working with them since the fall of 2020 and am really happy I made the switch.

I needed much better advice than I was getting from my new bank rep as I was actively preparing for retirement. I found Langford Financial online and booked a review meeting. I was happy that I was sent a complete list of all the information that would be needed prior to my initial meeting so I arrived prepared.

From that initial meeting, I decided to have Willis prepare a retirement plan for me. After we reviewed everything he had prepared, I felt much more confident in what was to come financially during retirement and how I could manage it. That's when I decided to transfer my investment portfolio from my bank to Langford Financial so they could manage it with and for me. I felt they really had my best interests at heart.

It was a pleasant surprise that their approach combined both income planning for retirement and tax planning for both the immediate future and well into retirement. This has proven to be very helpful as it has ended up saving me a lot of money (a lot!) by using credits that had been missed by the company I previously used to prepare my taxes.

I really like working with Willis and Nancy. They are very quick to answer any questions I have and can accommodate virtual or in-person meetings based on what is needed. They also produce a regular newsletter that I really enjoy. It has lots of tips in it and some very good in-depth information that helps me make better decisions---or at least ask better questions!

Moving to Langford Financial was a great decision for me. It has lead to better financial planning and decision-making and much greater peace of mind for me at this time of life.
Sharon Stroick
Full Service Client Since 2020

Contact Us

Questions? Comments? Call us today at 587-755-0159 or fill out the form below:

Have Questions? Call Us Today At

Call Us

Join Our Newsletter