Using Annuities to Fund the Gap Before Claiming Social Security

Planning for retirement can be a complex web, with a dauntingly large number of variables that affect your income. What’s the best age to retire? How much should I save? When should I file for Social Security?

No one has all the answers, but a little understanding about Social Security can go a long way toward helping you answer some of those questions.

For people born in 1960 or later, the full retirement age for Social Security benefits is age 67. If you elect to file for Social Security at that age, you will receive your full benefit, which is based on your highest 35 years of earnings. If you file early (as early as age 62), your monthly benefit will be reduced, but if you delay filing, your benefit will be increased by 8 percent per year up to age 70. So, if your full benefit at age 67 will be $2,000 per month, at age 62, it would be reduced to $1,400 (a 30 percent reduction). And if you wait until age 70, would be increased to $2,480 (a 24 percent increase).

Social Security provides a benefit not provided by most retirement plans: the cost-of-living increase. Each year, a retiree’s benefit is increased to reflect an increased cost of living. By delaying filing, your larger monthly benefit translates to a larger cost of living increase each year to better help you keep up with inflation.

You can set up an online account with the Social Security Administration and get a projection of what your benefit will be at your normal retirement age, and ages 62 and 70. You can also review your earnings history to make sure it is correct.

If you choose to retire before your full retirement age, but want to delay filing for social security, how do you bridge the income gap? One very effective technique is to purchase a fixed immediate annuity that will provide guaranteed monthly payments up to the time you file for social security. The difference between age 62 and age 70 is eight years. You can purchase an annuity that will make 96 monthly payments of an amount you select. At the end of eight years, the annuity ends, but you begin to collect social security. With an immediate annuity, if you die before the end of the payment period, beneficiaries you name will receive the remaining monthly payments.

Assuming a 3.5 percent guaranteed return, the upfront cost of an annuity that would generate $1,400 per month for eight years would be slightly over $117,000. This money could come from savings you have earmarked for retirement, a qualified retirement plan or IRA, or proceeds for the sale of a home or business. If you think an immediate annuity might be a viable option for your overall retirement plan, be sure to do your research and consider the following:

  • The financial security of the carrier
  • Fees and other costs associated with the annuity contract
  • Suitability
  • Liquidity needs

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Published Date:August 14, 2019

Categories: It's Your Life