Should retirees in their early 70s partly annuitize?

How much you “pensionize” will depend on pre-existing pension assets, such as DB pensions, CPP and OAS, as well as your health and needs for liquidity. That, Milevsky says, is why “retirement income” is such a difficult and challenging problem to solve. “But having at least a little bit of annuities is a no-brainer… which makes you look good and smart at the bridge club.”

Protracted inflation makes former annuity fan more cautious

Oddly, another retirement expert—Fred Vettese, author of (Wiley, 2016) and other financial books—is somewhat less keen on annuities “now that interest rates are up” than he was when rates were closer to 2%. (Vettese has been a fan of annuities in the past.) The reason for the change of heart, Vettese says, is that “I had implicitly assumed that inflation was dead and we now know better.”

While inflation seems to be subsiding from the highs reached in 2022, “it seems almost inevitable [it] they will spike again, although the timing and the precise reason are unknowable at the present time.” Vettese suggests that for older retirees, aged 70 and higher, “there is still some reason to include annuities in one’s decumulation strategy, although I would limit any purchase to about 25% of one’s RRSP or RRIF.” 

While you might think inflation-indexed annuities would be the best of all worlds, Vettese says “the insurers were always reluctant to provide indexed annuities. Things likely haven’t changed. If they were available, the price would be prohibitive.”

Milevsky agrees these would be much better but are also more expensive: “After all, you are paying for an additional layer of insurance: price insurance and longevity insurance.” However, he adds, “I really don’t think every single dollar of income that a retiree receives in retirement must be inflation-adjusted—increasing every year by exactly the CPI. After all, CPP and OAS are inflation-adjusted automatically, and some expenses do decline or even disappear as you get older.” (CPI stands for the consumer price index.)

Also, Milevsky says, inflation hedging can take place with assets rather than income. “You can buy assets whose value keeps up with inflation, even if the income itself isn’t linked in a direct and transparent manner to an inflation index such as the CPI.”

Birenbaum suggests the portion of your RRIF that isn’t converted to annuities and is therefore still invested in securities (stocks, bonds, ETFs, etc.) should have some element of inflation hedging. 

As financial blogger Dale Roberts and others have blogged, this might include dividend-aristocrat stocks or exchange-traded funds (ETFs), where the underlying holdings regularly raise their dividends. It can also include: real asset funds, like Purpose’s Diversified Real Asset Fund (PRA); gold or precious metals bullion or stock funds; commodities; energy stocks; and similar plays.