The annuity is return of income (that’s why taxes are low) also life expectancy. Since the insurance company know X amount of males will die and X amount will live the payout is also based on this. Also working in favour here is our high taxes. If taxes were low and goodies like OAS and age amount were not taken away from us then the annuities may not look as good.

When you get the book I promised there will be another great idea… I show you that you can lower taxes and have more more in retirement with less risk…assuming non-registered money.

The distribution is not as simple as say a 4% distribtion. Taxes are much lower and the payout is guaranteed (annuity). Remember 2008? The balanced portifolio lost about 20%. If you were in your 60’s there maybe a chance you’d never recover since you are pulling out money every month.

As an aside, getting an annuity at age 60 (male) for $100,000 would pay $6,600 per year and only $1824 would be taxable. For life, guaranteed.

FT, take a another look at my example below… for the annuity story below.

Back to Back Annuity (insured annuity)
This example compares GIC vs a life annuity with a matching life insurance policy.

Example:

?Current GIC rate 3.25% (five year rate lock-in)
?65 year old male purchases $100,000 non-reg annuity and $100,000 life insurance policy
?Tax bracket 31.41% ($40,970 up to $65,345) Ontario

Insured annuity GIC
Gross income $8,165.28 $3,250
Taxes payable $742.90 $1,012.37
Life insurance $3,240 $0
Total net $4,182.38 $2,237.63

After taxes are considered, a GIC of over 6% is needed to equal the annuity. At higher tax brackets, a GIC paying over 8% is needed! Also, under the annuity strategy, he pays less tax as he is showing less taxable income and is less susceptible to OAS claw backs and age amount (age 65) claw back.

You will note waiting five years later the payout increases and the taxes payable drops!

Great question! Assuming the 60 is going to be around awhile,buying an annuity at age 65 (five years from now) is the better idea. Lets assume rates remain low, the…. taxes…. one pays more than offsets the the low interest rates. In fact a 6% GIC rate is needed to beat it (for most situations).

With interest rates this low, isn’t this a bad time to buy an annuity?

Would he like to have less risk, pay less taxes and have more money?

Part of this answer would be to read my story on insured annuities.

http://www.milliondollarjourney.com/how-annuities-work.htm

Cheers!

I enjoyed “The Investment Zoo”

Are you speaking about the Connolly Report?
Is there a direct link you can provide to this report?

Also, I will probably buy the Investment Zoo for summer patio reading.
I’ve heard about it, but based on your post in this blog, you have convinced me to buy it.

Cheers Barry,
Mark

First, I would look at the ‘mark’ to be your own personal number, whether that is $1M, $800k, $1.5M whatever. The mark, for me, would be less important than the cash flow it could generate. Once it has sufficient buffer to be able to provide me with cash flow necessary to retire, then I’ve done it. Whether I choose to retire or not at that time then becomes a choice I could literally make every day.

Depending on how old I feel and what I want to do, I could decide to keep working. That would give me even more flexibility to stay the course and perhaps I would make new investments in a more conservative way to mitigate risk of a downturn. If on the other hand I decide I want to stop working, then I would be wise to fortify my position by moving some investments from equities to less risky investments. Hopefully I was prescient enough to do this gradually before that day. I probably would delay this transition if my equities are in a trough and wait until they returned to more normal values.

But one thing I try to keep in mind – if I retire at 55 for example, I still have to think of a 30+ year time horizon for my investments. That is a long term view by most anyone’s standards.

You will also hear a lot of talking heads, elite members of the chattering class on TV, spout all kinds of well honed arguments as to why oil will reach 1000 dollars a barrel, or else the Dow is headed to 36000 or 1000, or else Gold is going to $2000, or inflation is going to make the seventies like a tea party, or we’re headed to a Depression. It ultimately ends as white noise because nobody knows, only believes. What you have to figure out is how to find the best way to avert a loss of income in case any of the above may be true.

My answer is a belief in the portfolio I outlined in the above previous post(s). If that’s suitable for you, great. Before you change your mind I will strongly encourage you to study, not just read, everything Tom Connolly writes on his website as a primer. Imagine, this is a man who says, “if you can’t afford to buy this book go into a bookstore and read pages 96 -97 and 214. ”
When I read that I thought this guy isn’t trying to con you. He’s the real deal.
Study the books he suggests. His favorite is “The Investment Zoo” written by Stephen A. Jarislowsky whose life has been extraordinary. I’m sure it’s in your local library. I borrowed a copy and scanned it.

I failed to mention two other stocks I own … Metro and CNR.

Thanks for the insight on your “chips”. This is the year I’m starting to work my way out-of index and equity mutual funds, into DRIPs of CDN companies.

I got ENB now, got a couple thousand in that, and trying to put a few thousand more during 2009.

Later this year, I’m going to try and buy BMO, a put a few thousand into that.

I figure that’s a good starting point. Like you, I want to amass a few hundred thousand in CDN divident payers over the next 20 years, and then retire with a steady stream of dividend income.

Hopefully I’m following the same path you did, since your $47 K/year seems pretty nice and comfortable. Congratulations and well done.

Thanks for your insight Barry!

Are you sure they are available at the Toronto library. Took a quick look via the online catalog and did not seem to find anything under his name. Perhaps I was looking in the wrong spot?

I sound like him? Wow – now that was a compliment. I can tell you I spent over 20 years investing until one day I was walking along the southern coast of Turkey and suddenly he made sense to me. Imagine that.

I think Tom is brilliant, and just love the fact he figured it out himself and shares the information with others. It’s so refreshingly “unprofessional” I just love his “down to earth” commentary “. Example: “sorry no more subscriptions … me and Louise put the whole report together on our kitchen table”. No mutual funds, no bonds, no outside of Canada investments. Just income machines like the CDN banks and the others he follows on a list. For example. If you had 500 grand only in CIBC in 1996 you would have earned a $16,000 dollar income. Today if you never touched the principal that same capital figure morphed to 900 grand by Dec, 2008 and a $55,000 income because of all the dividend hikes!! Sure a year back the base figure was 1.6 million but look at that income … and it’s tax efficient. You have to be very very patient and be able to tune out media noise, the “all the rage” investment flavors of the month and cyclicals. It’s tough and at times gut wrenching but in the long run …

14. Diversification didn’t help anyone last year. Tell me the risks of investing in Canada as opposed to China and the US? You want to invest in China, go ahead but their markets are not very transparent. But you might do better than me. The US … not interested. Think about it. Which country is in better shape: south of the border or here? Canada’s government debt load is 29% of GDP and the US?? Remember when Dick Cheney said “deficits don’t matter” … I thought smoking pot was illegal down there. And just look at the growing tax efficient income from Canadian companies which raise their dividends on a regular basis like Fortis – 36 consecutive years! Everything I bought I understand … and that’s important … to me.

You have to honestly understand who you are and what kind investment you can tolerate. Sit in a room quietly and figure that out. Watch BNN and monitor your emotions. Stick to it and learn. I have a friend who is a confirmed trader and he couldn’t stand what I do, although he sees merit in it. And he is successful most of the time. I don’t think he would be successful at what I do.

I believe we are in a secular bear or range bound market which will see swings yo yoing for years until personal, public, and corporate debt is paid down. Companies with lots of cash flow, manageable good debt, intelligent management and profitable operating budgets will thrive in this market. As the baby boomers age they will be looking for income generating investments if they continue to invest in stocks. Which ones do you think they would choose?

Banks: BNS, TD, RY, BMO
One Insurance Company: Power Financial
Utilities: Atco, Canadian Utilities, Fortis, Emera
Pipelines: Enbridge and Trans Canada Corp

RioCan – bought this well managed REIT as the one distribution (don’t read dividend here as it is taxed differently) oriented entity and Encana (only energy company) as the only “growth” investment.

You can dispute how “blue” they are … but I bought most of them when they were cheap. BMO at 26 bucks for example at almost a 11% dividend. That’s key – buy when they are cheap (P/E under 10 if you are patient). Same with the preferreds … I bought after the 30-40% decline which brought value not seen since 1993 – 94. Hence the nearly tax free income of $47,000 with lots of cash for more buying …

I don’t own income trusts or mutual funds. Stick to tax efficient dividend paying stocks with a history of raising their dividends. Many of the above raised theirs in the spring. The banks were fabulous income generators until the credit crunch last year. In BC the Dividend Tax credits offshoots your other income too (interest, capital gains tax). It’s incredible and legal. Every province is different.

Banks are the soundest in the world according to Davos “World Economic Forum”. The UK and US rank 40th and 44th I think. Anyway, Cdn Banks were in worse shape in the eighties with the Latin American debt explosion. During 1984 to 1994 they had to liquidate 40 billion worth of debt (includes Olympia and York default) and no dividend cut except National Bank. We were also a country with an ever increasing government debt with high interest payments which strangled us… one third of the federal budget was just interest on that debt! Canada is today well positioned to save our financial sector if the case was necessary but compared to other countries we are not in the same pickle … and with every resource the world (read China and India) wants. The future looks fantastic when we get over the multi year deleveraging which will keep the stock market in a up and down “range bound market” for … god knows how long. Last time 1966 to 1982. Study the period … and learn. Stock market went nowhere … but select dividend paying companies just kept pumping the income out.

Another excellent book is Katsenelson ” Active value investing in range bound markets”