Because it is a decision that’s usually final, deciding if you should start taking your Social Security benefit at age 62, age 70, or somewhere in between can be challenging.
One tool that could make that decision easier is an annuity, which could allow you to start claiming your benefit earlier while offsetting some or all of the reduction in benefit amount.
What Advantages of Delaying Benefits Can an Annuity Provide?
First, let’s think about some of the reasons someone might want to delay taking their Social Security benefit until 70:
- To get the maximum benefit amount possible;
- To try to get ahead of inflation; and
- To increase the survivor benefit for their spouse
Here’s how an annuity can help with all of these:
- The income that the annuity provides may allow you to retire earlier than you had originally planned;
- The income from the annuity can act as a hedge against rising inflation; and
- The surviving spouse will continue to receive lifetime income
That last point is particularly important for couples where both spouses are collecting benefits. Should one of the spouses pass, the surviving spouse will only be able to collect their benefits plus survivors’ benefits, if applicable, reducing the total income.
An annuity can provide the surviving spouse with a source of income that compensates for the reduction in benefits, help him or her continue to maintain their lifestyle.
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Some Types of Annuities
There are many types of annuities and they can be categorized in several different ways.
One way is when payments begin: immediate or deferred.
As its name implies, an immediate annuity starts paying out as soon as you buy it. A deferred annuity does not begin paying out for a certain period of times, usually between five and 10 years.
Another way to categorize annuities is by how payments are made:
Fixed annuities are straightforward. Similar to a bank certificate of deposit, the insurance company guarantees a specific yield for the annuity you purchase.
Indexed annuities pay guaranteed income PLUS additional income that is tied to a specific investment index such as the S&P 500. This gives the annuitant the chance to benefit from market performance.
Variable annuities are contracts that can vary in value based on the performance of its underlying investments. There is a higher risk factor in this type of annuity since the income is not guaranteed.
How to Pick the Right Annuity
It can be hard to pick the right annuity and though they can provide valuable benefits, these complex and often expensive financial products are not for everyone.
If you’re considering buying an annuity of any kind, you should make sure it fits into your financial plan and that you understand exactly what you’re buying. Be sure to speak with your financial advisors before making any major decisions or request a consultation with one of ours to get a no-cost second opinion. Click here to get started.