"What it allows you to do is purchase a guaranteed source of cash flow for retirement," says Jamie Golombek, managing director for tax and estate planning at CIBC Wealth Advisory Services.
With an annuity, you pay an insurance company up front in exchange for a promise that they pay you a set amount for the rest of your life or for however long the contract specifies.
The downside is that they can be expensive.
What has been good for homebuyers has created challenges for retirees looking for a secure source of income. Low long-term interest rates in recent years have driven the cost of annuities up.
Crystal Wong, senior regional manager at TD Wealth Financial Planning, said the high cost has put off some investors.
"The premium cost is expensive in a low interest rate environment," she said. "They are not as attractive as some of the other alternative investments that we offer individuals that are looking for income."
But she said for some conservative investors looking for peace of mind, an annuity might be part of the answer.
Steve Krupicz, assistant vice-president Regional Actuarial and Underwriting Consultants at Manulife, says investors may want to look at annuities for the conservative portion of a diversified portfolio.
"If you're looking for a secure, stable income to cover your base living expenses and you're concerned about longevity, that's what annuities are for," he said.
An alternative to an annuity is a systematic withdrawal plan that would see you slowly cash in your investments and spend the proceeds. However, a withdrawal plan can still carry some risk.
If the market crashes and you sustain heavy losses, you will likely have to make changes to your plan and you could also live longer that you planned and eventually deplete your resources.
There are downsides to buying an annuity.
You won't have the money in your nest egg to pay for an emergency or other large purchase down the road and you may also die sooner than you thought, in which case you may have had more money left over for your heirs if you had not bought an annuity.
Golombek said for those reasons, an annuity should only be a portion of your portfolio.
"You want to make sure you've got money if the roof breaks on your house or you need to move into a higher level of medical care or a kid needs help," he said.
"You don't want to tie up your entire life savings in an annuity. But I think for a portion of your savings, for the right client, it can be a good solution."Suggest a correction