Retirement planning isn’t just about how much you’ve saved. It’s about whether your income can last as long as you do.
For Canadians without a large defined-benefit pension, life annuities are one of the few tools that can guarantee income no matter how long you live. They’re often misunderstood, sometimes dismissed, and frequently confused with investments.
This guide explains what life annuities really are, how they differ from CPP, and when guaranteed income matters most inside a smart, lifecycle-based retirement income plan.
What Is a Life Annuity?
A life annuity is a contract with an insurance company where you exchange a lump sum of savings for a guaranteed income stream that pays for as long as you’re alive.
Payments typically start immediately and continue:
Regardless of market performance
Regardless of interest rate changes
Regardless of how long you live
Once purchased, the payment amount is fixed (unless you explicitly choose inflation protection).
At its core, a life annuity converts part of your savings into something that behaves like a personal pension.
💡 Did You Know?
A life annuity is not an investment — it’s insurance against outliving your life expectancy.
When you buy a life annuity, you’re not trying to beat the market or maximize returns. You’re transferring longevity riskto an insurance company.
If you live longer than expected, the insurer pays you more than you contributed
If you pass away early, the insurer keeps the remaining value
Why Life Annuities Exist at All
Life annuities exist to solve one problem: longevity risk — the risk of outliving your money.
Retirees aren’t trying to plan income to a specific age. They’re trying to ensure a minimum level of income lasts forever.
That is exactly what a life annuity is designed to help with.
Are Life Annuities Indexed to Inflation?
Most life annuities in Canada are not indexed to inflation by default.
A standard life annuity pays a fixed dollar amount
That payment does not increase
Inflation gradually erodes purchasing power over time
Unlike CPP, Life Annuities Are Usually Fixed
Both CPP and life annuities provide lifetime income — but they behave very differently:
CPP payments increase each year with inflation
Most life annuities pay the same amount forever
Inflation-Indexed Life Annuities (Optional)
Some insurers offer inflation-indexed life annuities, but the trade-off is clear:
Lower starting income
Higher cost for long-term protection
Many retirees accept fixed payments because:
CPP and OAS already provide inflation-adjusted income
The annuity is designed to secure essential expenses
Investments from a portfolio remain the primary inflation hedge
A Practical Example: Life Annuity at Age 70
At age 70, imagine a retiree already receiving CPP and OAS, which provide inflation-indexed lifetime income.
Even with those benefits, there is often a gap between:
Guaranteed income received, and
The minimum income needed to cover essential expenses
The retiree allocates part of their savings to a life annuity.
What changes:
The annuity pays a fixed amount for as long as the retiree is alive
There is no end date
Market performance no longer affects that portion of income
Living longer increases the cumulative total amount received
This creates a permanent income floor that does not rely on portfolio withdrawals.
The Insurance Logic Behind Life Annuities
Life annuities work because insurers pool longevity risk across thousands of people:
Some annuitants pass away earlier than expected
Others live far longer than average
The pool allows payments to continue for life
This is the same principle that makes CPP work.
A life annuity doesn’t exist to predict your lifespan — it exists so you don’t have to predict when you will be gone.
Life Annuities and the Go-Go, Slow-Go, and No-Go Years
A common mistake is assuming the role of a life annuity is to cover your retirement income gap immediately.
That’s rarely the goal.
In reality, life annuities are most valuable later in retirement, when health, energy, and flexibility decline.
💡 Did You Know?
A life annuity is just a tool — not a philosophy, not a strategy, and not a verdict on your investing skill.
Like any tool:
It solves a specific problem (longevity risk)
It works best in a specific context (later retirement years)
It can be useful in small amounts — or not at all
Dismissing annuities outright is no different than dismissing bonds, cash, or insurance. Don’t confuse tool selection with belief.
Go-Go Years: Your Portfolio Does the Heavy Lifting
In the Go-Go years (early retirement):
Spending is higher
Travel, experiences, and flexibility matter most
Adaptability is a major advantage
During this phase:
Your investment portfolio does roughly 95% of the heavy lifting
Withdrawals are dynamic and responsive
Market volatility is manageable
Locking in too much guaranteed income too early can reduce optionality later on. Your portfolio net value and construction establishes all the boundaries for your portfolio here. Did you have enough money to retire? Did you plan a bucket strategy to minimize the impact of a bad year? Is the income capable of keeping up with inflation?
Your health and energy are going to drive how long you can spend at this level.
Slow-Go Years: Risk Tolerance Softens
In the Slow-Go years:
Spending becomes more predictable
Activity levels decline
Emotional tolerance for volatility decreases
This is often when retirees begin to layer in life annuities — not to replace the portfolio, but to reduce dependence on it.
No-Go Years: Where Life Annuities Earn Their Keep
In the No-Go years:
Health and mobility decline
Decision-making becomes harder
Market stress feels more threatening
This is where life annuities shine. Their purpose is not growth — it’s certainty.
Combined with CPP and OAS, a life annuity helps:
Close the income gap that matters most
Reduce reliance on portfolio withdrawals
Ensure essential expenses are covered with minimal effort
💡 Did You Know?
Many DIY retirees build retirement models that assume Go-Go spending, portfolio control, and flexibility will last forever.
To manage the fear of running out of money, these models often:
Rely almost entirely on portfolio withdrawals at every age
Assume constant decision-making ability and risk tolerance
Dismiss annuities as “bad investments” because they don’t maximize returns
What’s often overlooked is that life annuities aren’t designed for the Go-Go years at all — they’re designed for the No-Go years, when adaptability is lowest, and certainty matters most.
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Choosing When to Start a Life Annuity
One of the most important annuity decisions is when to start it.
There is no universal right age, but in practice, many life annuities are purchased around age 70 — and that’s driven by actuarial math.
Why Age 70 Is Common
Insurance companies price life annuities using average life expectancy.
For Canadians in their late 60s or early 70s, actuaries often assume:
An expected lifespan of around 83 to 85
With a wide distribution around that average
From the insurer’s perspective:
Paying until ~85 is the expected case
Paying into the 90s and beyond is the risk
That risk is pooled across thousands of annuity holders — and that risk is exactly what you’re buying protection against.
The Decision Is Ultimately Personal
Actuaries work with averages. You don’t live an average life. A life annuity isn’t a bet that you’ll live long — it’s protection in case you do.
When deciding when to start a life annuity, retirees should consider:
Personal health and family longevity
Lifestyle and activity levels
Existing longevity protection (CPP, OAS, pensions)
How much guaranteed income is needed later in life
If you expect:
Shorter-than-average lifespan → annuities may feel less attractive
Longer-than-average lifespan → annuities become increasingly valuable
Pros and Cons of Life Annuities
Pros | Cons |
|---|---|
Guaranteed income for life | Usually irreversible |
Removes longevity risk | No liquidity once purchased |
Immune to market crashes | Fixed payments lose purchasing power over time |
Simple and predictable | No growth upside |
Complements CPP and OAS | Embedded insurance costs |
How Life Annuities Fit an Investing Journey
Life annuities are not meant to replace investing — they are meant to support it.
A resilient retirement income structure looks like this:
CPP & OAS → Inflation-protected lifetime base
Pensions → Inflation-protected lifetime base
Life annuity → Fixed, guaranteed income floor (skip if you have a good pension)
Investment portfolio → Growth, flexibility, inflation hedge
This structure allows:
Essential expenses to be covered by guarantees
Investments to remain invested longer
Less pressure to sell during market downturns
The Retirement Income Floor — One Table That Ties It All Together
This table summarizes how income sources naturally shift throughout retirement, and where a life annuity fits best.
Retirement Income by Life Stage
Retirement Phase | Primary Income Source | Role in the Plan | Key Risk Managed |
|---|---|---|---|
Go-Go Years | Portfolio | Growth, flexibility, lifestyle spending | Market volatility (manageable) |
Slow-Go Years | Portfolio + CPP | Gradual shift toward stability | Sequence risk begins to matter |
No-Go Years | Portfolio + CPP + Life Annuity | Guaranteed income floor for life | Longevity risk, cognitive decline |
Portfolio (All Phases) | Investments | Inflation hedge, discretionary spending | Purchasing power erosion |
Here are two models with the same retirement numbers, one with a life annuity and the other without.
What you’ll notice from the life annuity model:
→ Higher guaranteed income floor
→ Higher portfolio value
The model uses a bucket strategy with an equity portfolio to provide safety during the bad years. The required monthly income resets at different life stages.
Retirement with Life Annuity
Retirement without Life Annuity
Final Takeaway
Life annuities are not about maximizing returns. They are about eliminating the risk that matters most in retirement.
Used thoughtfully, they allow you to:
Lock in a permanent income floor
Reduce dependence on markets later in life
Build a retirement plan that works no matter how long you live
Think of a life annuity as buying more CPP — with your own savings.