The Dilemma of Found Money

The Dilemma of Found Money

When an older person receives a large sum of money, whether from a life insurance payout, the sale of a home, or as a beneficiary of an estate, it often arrives at a stage of life when financial decision making becomes more complex, not less. Many times, obtaining a lump sum is considered “Found Money”. The assumption is freedom and security. The reality can be quite different.

One issue is decision pressure. A large lump sum demands action. Unlike a steady pension or guaranteed income stream, cash just sits there, and that creates anxiety. Many older individuals feel compelled to “do something” with the money, often without the experience or appetite for managing investments. This is where mistakes begin.

If that lump sum is invested in search of growth or income, it becomes exposed to volatility. A downturn early on, especially in retirement, can permanently damage the sustainability of those funds. This is known as sequence-of-returns risk, and it hits older investors hardest because they don’t have time to recover.

Another overlooked issue is spending risk. A lump sum has no built-in discipline. It’s surprisingly easy to overspend, whether helping family, making large purchases, or simply adjusting to a higher lifestyle. Without a structured income plan, what looks like a large amount can erode far faster than expected.

Equally risky is investment advice from friends or immediate family. It usually comes with good intentions, but not with professional accountability. A neighbour might suggest a “great stock.” A relative may recommend a private deal or speculative opportunity. These suggestions are rarely aligned with the older person’s actual needs, namely, stability, income, and capital preservation.

There’s also a social pressure component. Saying “no” to a friend or family member can be difficult, especially when the relationship matters. This can lead to decisions that are made to maintain harmony rather than protect financial security.

The common thread is lack of structure and oversight. The money becomes exposed to risks that are neither measured nor controlled.
Another issue might emerge. With a sudden increase in available cash, some older individuals find themselves drawn to environments they may have previously avoided, particularly casinos. Slot machines, in particular, are engineered to be simple, fast, and emotionally engaging. What starts as harmless entertainment can become habitual spending. The danger isn’t just addiction, it’s the steady, unnoticed erosion of capital. Unlike a planned withdrawal strategy, gambling losses are unpredictable and often underestimated.

A Practical Solution:

One of the most effective ways to deal with these “Found Money” risks is to remove a portion of the uncertainty altogether.
By allocating part of the lump sum to an annuity, an older individual can convert capital into a predictable monthly income that continues for life, regardless of market conditions or how long they live. This immediately addresses several of the core problems outlined in the dilemma of found money.

First, it eliminates longevity risk for that portion of the funds. The income does not run out.

Second, it removes market risk. Once the annuity is in place, there are no ongoing investment decisions or exposure to volatility tied to that income stream.

Third, it creates spending discipline. Instead of drawing down a lump sum unpredictably, the individual receives a consistent monthly payment, much like a pension. This makes budgeting simpler and more sustainable.
Just as important, it reduces decision fatigue. A significant portion of the financial burden is handled upfront, rather than requiring constant oversight later in life.

At the same time, not all of the funds need to be committed. A balanced approach allows a portion of the lump sum to remain accessible for liquidity, emergencies, or discretionary spending. This preserves flexibility while still securing a reliable income base.

Turning part of that lump sum into guaranteed monthly income can provide exactly that: stability, clarity, and peace of mind, while still leaving room for flexibility where it matters.

ALDA – A NEW Tax Deferral To Age 85 Annuity

ALDA is the acronym for the Canadian Advanced Life Deferred Annuity. Now you are able to use this annuity to defer registered taxable income to your age 85.

ALDA was touted by the government in 2019 as the biggest change in Canadian retirement planning in quite some time. An ALDA, specifically designed for registered funds was projected to be available starting in 2020. The reality is, Canadian insurance companies did not rush to embrace ALDAs, and it wasn’t until December 2023 that the first ALDA became available.

ALDA is a Canadian Government approved life pay annuity that allows individuals to defer part of unlocked registered funds such as registered retirement savings plans [RRSP], registered retirement income plans [RRIF] and deferred profit-sharing plans [DPSP] up to the age of 85.

ALDA permits an individual to defer up to 25 per cent to a maximum of $170,000 [2024] of an individual’s aggregate registered investment accounts to be used to purchase an annuity that begins payments at the very latest by the end of the year in which they turn 85. Going forward, ALDA limits are indexed to inflation. ALDA purchases are rounded to the nearest $10,000.

ALDA withdrawals are fully taxable, and upon death any remaining funds in such an account would become fully taxable to the owner’s estate. Alternate beneficiaries could trigger a qualified transfer of registered funds if made to surviving spouse, common law spouse or financially dependent child or grandchild. Any subsequent withdrawals in their hands are fully taxable.

Traditionally, owners of RRSPs must elect before the end of December of their 71st year of age and choose which investment vehicle they intend to use to begin periodic withdrawals from their registered investments. The choices are to simply de-register their plan and pay tax on the lump sum received, a registered retirement income plan or a registered annuity.

An ALDA could be an important option for the right retiree. For those retirees with significant registered savings, being able to defer up to 25 per cent of those savings up to age 85 would reduce minimum required RRIF withdrawals during one’s 70s up until age 85 when the ALDA would start. After this deferral period, annuity payments are guaranteed payable for life.

There are no fees for an ALDA. Full purchase price is returned if death takes place before the first payment. After first payment, death triggers a return of the difference between purchase price and payments received.
Obtain a free ALDA quote by reaching out to annuity broker, John Beaton at john@annuitybrokers.ca.

How annuities can be used to deter unexpected retirement hardships

In today’s world, you will inevitably encounter swindlers and scammers who will test you and determine quicky whether or not they can exploit you financially. If it’s determined that you are an elderly person, these trickers assume that you likely have sufficient savings that they can steal, and they will think endlessly of ways to get their hands on it. You may already know someone who has fallen victim to scam phone calls or “get rich quick” schemes.

Scammers and swindlers are not the only robbers that elderly folk face when it comes to their finances. You must be aware that, presumably, there are two other bandits hiding in your future and they are preparing to slip undetected into your life and remain undetected until they steal your independence and ability to maintain financial security. These bandits are dementia and Alzheimer’s disease. Statistics indicate that nearly a quarter of North Americans over the age of 65 experience some form of diminished mental capacity, putting them at risk for poor financial decision-making and exploitation.

Additionally, you could encounter pressure from your adult children or grandchildren to help solve their financial needs. Ever been asked to co-sign a loan? It is difficult to say no to your own, but you must consider the impact it could have on your own future needs. Putting the needs of your children ahead of your own while you are entering – or are already in your retirement stage of life may cause you to run out of the money needed to support yourself.

Lastly, other family members or well-meaning friends may urge you to devote your money to a hot, “can’t lose” investment, helping you to augment your retirement income.

Any of these issues can derail your retirement income. When you provide some of your retirement funds to others as a loan or gift, you need to make sure you can afford to use those funds for that purpose.

Insulate yourself against all the above by turning some of your retirement savings into an annuity sufficient to provide level and stable long-term guaranteed income to cover your basic needs for the future. Then, if you want to help your children or allot part of your income into that hot investment, you can do so without worrying about your own financial well-being. As you know, lifelong annuities pay for your lifetime and cannot be cashed out. In any event, get expert advice before transferring funds out of your control.