What to do with an extra $70,000 to fund retirement

I’d like her to do something with the $70,000 to generate interest or income—or even to have a plan to draw it down. And whatever option is chosen needs to be risk-free, as she is very risk-averse. 

The interest on a GIC is negligible. Is an annuity a better option? Or is the $70,000 simply not enough to do anything with? 

FPAC responds:

Although this question may sound simple, it provides a great example of how complex retirement income planning can be. It sounds as though your goal is to find a solution that provides income to supplement your mother’s standard of living while she is alive, versus creating a financial legacy upon her passing. 

FP Canada projections tell us that, at 79, a Canadian woman in good health has about a 50% chance of living to age 92, but a 10% chance of living eight more years beyond that, to age 100. 

As a starting point to anchor our calculations, let’s say your mother wanted to withdraw $450 per month from her $70,000. Ignoring any interest she might earn, that would provide 155.6 months (13 years) of income, to her age 92—that is, to average life expectancy. 

The GIC option

In today’s ultra-low interest-rate environment, the GIC is a solution that’s intended to preserve capital, versus generate income. 

If your mother put the $70,000 in a one-year GIC, with a rate of 1.5%, she might earn about $1,050 (equal to $87.50 per month), and the $70,000 would remain untouched. She could get a higher rate—as much as 1.8%—if she bought a five-year GIC, but she’d need to wait until the end of the five years to get the $6,531 she earned over the GIC term (equal to $108.85 per month). You can check current GIC rates here. Keep in mind that if she’s able to put the $70,000 into her TFSA, none of the interest she receives would be taxable. The yearly interest is also unlikely to keep pace with inflation.  

The annuity option

Another option would be to use the funds to buy a prescribed annuity. A prescribed annuity is designed to generate income for your mother while she’s alive—but doesn’t preserve the capital used to generate the income. Instead, the $70,000 would be transferred to a life insurance company in exchange for monthly lifetime income. 

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