Many investors consider annuities when they are planning their retirement investing.

There are basically three types of annuities:

Term-certain annuities are payable to you, or your estate, for a fixed number of years. Your estate will receive the payments even if you die. You could outlive this type of annuity.

Single-life annuities are payable to you for as long as you are alive. These annuities may come with a minimum number of years of payments. If you die while the minimum payment period is still underway, future payments would go to your estate.

Joint and last survivor life annuities are payable as long as you, or your spouse, are alive.

Historically low interest rates work against annuities

An annuity may be worth considering for part of your assets, depending on your age, your investment experience the time you want to devote to your investments, your desire to leave an estate to your heirs and other aspects of your retirement investing.

But a key drawback to annuities is that annuity rates are closely linked to interest rates, which are at historic lows. In addition, annuities have no liquidity. If interest rates and inflation move up, your annuity payments would remain fixed and you would lose purchasing power. Plus, you would have no way to rearrange your portfolio. This is why we generally advise against investing in annuities, particularly when investors ask us about retirement investing.

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There are better options than annuities for your retirement investing

Many investors find that they are able to generate returns that beat current annuity rates over time, if they invest conservatively in the kinds of high-quality investments that we recommend our Canadian Wealth Advisor newsletter, well balanced across the five main sectors of the economy (Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance and Utilities).

Part of that return will come in the form of dividends from Canadian stocks, which qualify for the dividend tax credit and are consequently taxed at a lower rate than annuity or pension payments. The remainder would come in the form of capital gains, which are taxed at half the rate of annuity or pension payments, and are only taxed in the year you sell. That’s something to consider as part of your retirement investing.

You could choose from the many “safety-conscious” stocks we recommend in Canadian Wealth Advisor. (These are particularly well suited to retirement investing.) Or, if you want to invest in equities through mutual funds, you could pick up to five funds that Canadian Wealth Advisor rates as Conservative.