For millions of Canadians who are nearing retirement age, there’s one question that looms over every financial discussion: how do you generate income that doesn’t run out? Senior families have an average after-tax income of about $74,200 a year, according to Statistics Canada’s latest retirement income survey, but those figures only tell part of the story. Escalating costs, longer life spans, and capricious markets have made it increasingly difficult for retirees to feel firmly footed in retirement.
And that’s where the debate begins: To what should you turn for guaranteed cash flow — investments, pensions, or something else like a life annuity? To help you determine how those stack up against the best retirement income options Canada publishes, we’ll be outlining each. Although no one answer is right for everybody, a wise combination of stability, growth and flexibility can have a huge effect.
Understanding Life Annuities And Their Role In Retirement Security
A life annuity is an agreement between you and an insurance company in which you give the insurer a lump sum of cash, and in return, it promises to provide you with payments for life. Upon purchase, the insurer pays a set income at regular intervals (for example: monthly, quarterly or annually) until death or a period certain (if greater than the life of an annuitant). It can’t be gamed, altered or distorted by Wall Street and is the purest form of financial predictability.
Not subject to investment performance like self-managed savings, the annuity payment is steady no matter the market. In an era of unpredictable interest rates, this stability can be invaluable. Many retirees buy annuities after rolling over their RRSP into a Registered Retirement Income Fund (RRIF) or when they sell investments to convert their uncertain assets into a guaranteed-for-life cash flow.
Several leading insurers and the Canadian government argue that annuities are becoming an exponentially bigger part of today’s retirement plans, given the decreasing number of Canadians with traditional defined benefit pensions. For those who prioritize peace of mind over portfolio ups and downs, the life annuity is a product with serious appeal.
Comparing Life Annuities To Other Income Options
Canadian retirees typically draw income from three key sources—public pensions, employer plans, and personal savings. Each offers different benefits and risks when compared with life annuities.
1. Public Pensions: Canada Pension Plan (CPP) And Old Age Security (OAS)
CPP and OAS are the backbone of retirement incomes for most Canadians. They are inflation-indexed and government-backed, providing certainty but not much flexibility. The average monthly payment in 2024 under CPP was a little more than $770, and the maximum benefit was just under $1,360. OAS tacked on another $713 a month for those over 75.
Combined, these programs help with basic living expenses, but little more than that. For the majority of retirees, their public pensions cover less than half of the income they need to maintain their standard of living, and private savings are therefore necessary.
2. Registered Savings: RRSPs, RRIFs, And TFSAs
Registered plans such as RRSPs, RRIFs and TFSAs allow Canadians to decide how and when they want to spend their money. They also grow on a tax-deferred, or in some cases, tax-free basis, depending on the type of account. The downside is the amount of market risk you take and the self-control needed to manage withdrawals so they last.
There is a real risk of outliving your savings, or the so-called longevity risk. Market downturns or unexpected expenses may cause even a well-diversified investment portfolio to plunge. Life annuities are designed to counteract this by converting all those potential threats into lifetime income, no matter how long you live.
3. Employer Pensions: Defined Benefit Vs. Defined Contribution
Traditional defined benefit pensions are increasingly rare outside the public sector. They pay a set monthly income for life, much like an annuity. In the case of defined contribution plans, investment returns and contributions during your working years count more.
However, by converting some savings into a life annuity at retirement, the security that defined benefit retirees receive as of right can be approximated for workers with DC pensions.
4. Non-Registered Investments
Non-registered savings, such as stocks, mutual funds, and bonds, offer liquidity and growth potential. However, they also expose retirees to market swings and tax implications. Many Canadians balance these with annuities to lock in at least a portion of their income, reducing pressure on investment withdrawals.
Where Life Annuities Excel
Guaranteed Lifetime Income
Annuities are attractive for their predictability. Income payments flow for life after the contract starts — regardless of how long you live and what happens in the markets. That guarantee is increasingly important, as Canadians live longer, with average life expectancy now over 82 years. That’s a retirement that lasts 25 to 30 years, not out of the ordinary.
An annuity serves to erase the fear of — oops, I ran out of money at age 85 or 90. This is what brings many retirees peace of mind — that they will always have enough to cover their needs.
Protection From Market Volatility
Early in retirement, they’re particularly susceptible to market declines, a risk that is known as sequence-of-returns. If your portfolio falls at the same time you begin withdrawals, it’s difficult to recover. A life annuity protects you from this risk by transferring it entirely to the insurer.
As the insurer aggregates longevity and investment risks across thousands of policyholders, it can continue to make regular payments even when markets crash.
Simplicity And Structure
Annuities simplify retirement income planning. You no longer need to constantly adjust investments, track dividends, or worry about withdrawal timing. For many older adults, reducing financial stress is as valuable as maximizing returns.
Where Life Annuities Have Drawbacks
While annuities provide unmatched security, they’re not perfect for everyone.
Limited Liquidity
Once you purchase a life annuity, the principal is typically locked in. That means you can’t withdraw a lump sum for emergencies. This lack of flexibility can be an issue if you face sudden medical costs or need funds for long-term care planning.
Inflation Risk
Unless indexed, annuity payments remain fixed. Over the decades, inflation can erode purchasing power. Some annuities offer inflation protection, but they start with lower payments, forcing retirees to balance short-term needs with long-term stability.
Interest Rate Sensitivity
Annuity payouts depend heavily on interest rates at the time of purchase. Buying during a low-rate environment results in smaller payments. Many Canadians now ladder annuities—purchasing them gradually as rates change—to capture better yields over time.
Integrating Insurance And Debt Into Retirement Planning
The Role Of Long-Term Care Planning
A good retirement plan needs to plan for health care expenses. Research indicates that close to half of Canadians older than 65 will need some form of paid long-term care during their lifetime. That makes long-term care planning essential. Though a life annuity provides predictable income, it does not necessarily take care of escalating long-term care costs. Or for later years, consider pairing annuities with insurance products — like long-term care insurance or coverage against critical illness — that can provide a safety net.
Managing Debt In Retirement
More Canadians are retiring in debt than ever before. One in three retirees is still carrying the debt of a mortgage or credit card balance, according to a 2024 poll. Some even contemplate using retirement balances to pay down credit card debt, a move that can diminish future income potential. A smarter course is typically to restructure debt well before you retire. This kind of ensured income from an annuity makes it possible to meet expenses without having to liquidate investments at a loss.
Understanding The Canadian Insurance Claim Process
When retirees rely on insurance policies—whether life, disability, or long-term care—they need confidence in the Canadian insurance claim process; delays or confusion can impact cash flow when it’s needed most. Keeping policies organized, understanding claim steps, and communicating with insurers regularly ensures smoother outcomes.
The Value Of A Loan Protection Insurance Policy
If you have any remaining loans or credit lines when you retire, a Loan Protection Insurance Policy can protect your estate from being encumbered. His enhanced insurance plan pays off the debt on his death, disability or critical illness to lessen the financial burden for his family. It’s not a replacement for savings or a pension, but an added layer of security that stacks up with other best retirement income options Canada has.
Balancing Life Insurance And Retirement Income
Not everyone thinks of insurance as part of income planning in retirement, but it often is. The best Life Insurance Policies can offer protection and possible liquidity. Whole life or universal policies build cash value over time, which can be used later through policy loans or withdrawals.
And that cash value can cover costs not addressed by an annuity — for example, emergencies or one-time expenses — while you continue receiving your guaranteed income payments. Some retirees also apply the proceeds from life insurance to pay taxes that are owed on estate transfers, thus protecting yet more money for their heirs.
Evaluating Which Option Offers The Most Security
What security means is different for personal priorities. For others, it’s the security of a regular paycheck; for still others, it’s the ability to stay flexible and take time off over an interest in medical care, travel or legacy goals. When considering life annuities versus other income options, ask yourself:
- Is there a need for predictable income to cover basics, including housing, groceries and health care?
- Do you have other assets that might offer liquidity or growth?
- How much do you worry about running out of your savings or a big drop in the market?
- Is there a spouse relying on your income, and is it critical to have joint annuity coverage?
- Are you ready for the expense of planning for long-term care or changing health needs?
For retirees who value certainty, it makes sense to set aside some retirement savings for a life annuity. And for those who can tolerate risk and are seeking more robust growth, investments and flexible withdrawals could be a better fit.
Practical Framework For Decision-Making
- Define Your Income Floor. Identify how much income you need monthly to cover essential expenses.
- Calculate Public Pension Income. Subtract CPP and OAS payments from your required total.
- Decide What To Guarantee. Use annuities to fill the gap between guaranteed income and your minimum lifestyle cost.
- Diversify. Keep a mix of liquid assets, such as TFSAs and non-registered accounts, for emergencies or discretionary spending.
- Integrate Insurance. Evaluate whether adding the best Life Insurance policies, a Loan Protection Insurance Policy, or long-term care insurance strengthens your overall financial position.
- Review Annually. Interest rates, health status, and market conditions change. Adjust allocations as your circumstances evolve.
This structure ensures you balance financial security with flexibility—a key to long-term peace of mind.
The Psychological Advantage Of Income Stability
Money is more than numbers; it’s emotion. People with predictable income in retirement tend to report a higher quality of life than those who are solely dependent on draw-down plans. And the peace of mind that accompanies a regular influx of annuity cash can be calming and help with budgeting, forcing you into better spending habits.
It’s why many financial planners, including me, suggest converting around 25–40% or more, based on a unique individual situation of your retirement savings, into a guaranteed lifetime income stream. If the rest remains invested for growth, having that solid core beneath you enables you to take joy in retirement without dreading financial upheaval.
Final Thoughts
There is no one-size-fits-all recipe for the perfect retirement plan — but there is one stark reality: Security comes from preparation, not chance. A life annuity delivers a predictable income for life, protecting you against the risks of longevity and the markets. Other tools — public pensions, savings, insurance and debt management, to name a few — fill in the remaining gaps to create a well-rounded plan.
No matter what your focus is – long-term care planning, preserving protection with a Loan Protection Insurance Policy, securing coverage through the best Life Insurance policies – there’s one goal: comfort in retirement that lasts.
The sturdiest retirees are not simply interest-rate chasers; rather, they design systems for predictably making income flow, no matter what kind of life they face. Of all the best retirement income options Canada still offers, a well-constructed blend with annuities at its core remains one of the most tried-and-true routes to real financial security.