Annuity or Savings Plan?

Investopedia.com said something very true, which is that most of us hope to live until a ripe old age, but longevity can have perils. Among them is the risk of outliving your money. I don’t know about you, but I think my money should outlive me, not the other way around. A good way to ensure that there is money coming in when we get older is to invest in an annuity or a savings plan.

An annuity is a contract with an insurer whereby you agree to pay the company a certain amount, either in a lump sum or through installments. In turn, the company makes a lump sum or series of payments to you at some future date. Sometimes those payments last for a specific time period like 10 years but annuities also offer lifetime disbursements. It is a great safety net for when we get older.

A savings plan is a flexible, affordable retirement investment plan which allows you to accumulate cash for long-term needs. The plan's maturity date should be between 50-70 years and at that time, you can get a tax-free lump sum and invest the remainder. The interest accumulated on this plan is very encouraging to say the least. The returns are even better if left until 60+ years.

Both options are key elements in retirement planning because they allow you to contribute toward your future cash flows. These plans can be subscribed to through some commercial banks and most insurance companies. The signup process is short and the agents are usually very helpful and knowledgeable. An annuity or a savings plan is beneficial even before retirement age because a percentage of the annual contribution is deductible for tax purposes. Isn’t that great? 

If you haven’t done so, I would definitely recommend that you put one or both of these plans in place. Your future self will thank you later.

Shares Anyone?

 I love dividends! If you know me, this is something I say frequently when talking about money, and I will continue to say it because dividends are great, but what is it? A dividend is a portion of the profits of a company which is paid to the shareholders (usually annually). These shareholders would have purchased a share of or shares in the company, which is a part of a company’s equity or capital. Shares can be bought in all public companies, companies listed on the stock exchange and in some companies where an individual is a member e.g. Credit Unions. 

Now a thought may be why should you buy shares? I consider shares a great investment. They need to be left at least 2-3 years to experience the benefits – however, the dividend payment is usually greater than the interest paid by a bank and as a result this is a great way to get a good return. In addition to dividend payments, the value of shares increases over time and as a result the can be profitable when eventually sold.

Consider this, shares are an investment that require little or no additional work once the purchase is made. It is recommended that you do you due diligence on the company or credit union you will invest in. Once that’s done, sit back and watch your money work for you.

Plan for your Retirement

Unfortunately, retirement planning is not high on the to-do list of most young people today. This topic is often considered to be too far away for talking about early in life and that in my opinion is not true. My parents were very wise and frugal as they moved through life. They saved and planned for everything and now that they have retired, they are enjoying the benefits. I want my story to be similar, possibly with an earlier retirement age than what my parents had 😉. To accomplish that, there must be a plan.

After working hard, retirement should be enjoyed. Here are a few ideas to assist in preparing for that hopefully relaxing phase of life:

1.      Invest in an Annuity or a Savings Plan – This will ensure that there is money coming in when the plan matures. They can be set for various ages and I like the idea of having a plan mature about every 5 years starting at 50. (More on this topic in a later post)

2.      Pay off your mortgage – If you have one now, it is beneficial to not have such an expense when retired as you will have more need for your funds when you move from a salary to a pension

3.      Eliminate other debt – Pay off loans for vehicles or personal loans as far as possible before retirement. The mental freedom alone is worth it especially at that age.

4.      Save toward a vacation – Nothing feels better than knowing that you have worked hard and can enjoy the fruits of your labour.

These steps may seem simple, but over a lifetime of preparation the cumulative effects can be amazing and lead to the blissful retirement you always imagined.

Saving vs Investing

Some may use these words interchangeably but there is a difference in the meaning that we should understand and appreciate. Investing is putting money towards a profitable return whereas saving is setting aside a portion of current income for future use. Saving is great for short term to medium term projects and would even be appropriate for some long-term projects according to personal situations. Investing on the other hand requires a plan.

It is said that an average saver is better than a good investor who does not save. The two concepts go hand in hand but knowing which one to do when is important. How would we know which one is appropriate at a particular time?

When should you save?

• When a return on your money is not as important as the thing you are saving for.
• When you do not have an emergency fund
• When preparing for a big expense or recovering from a financial crisis

When should you invest?

•  When you understand the risk and reward - the chance of higher profits/returns also brings the chance of deeper losses and this assessment must be made and deemed acceptable in advance
• When you want a long-term arrangement, for instance, more than 2-3 years.
• When you desire a higher return than the average bank’s interest.

Whatever the choice, the goal is important. Consider carefully the task at hand, the level of return you hope to generate (if any) and the risk you are willing to take. Make the choice and then reap the reward.