Enhance Social Security With An Annuity

One of the biggest challenges faced by retired people and those on the verge of retirement is ensuring a safe, reliable and continuous flow of income after retirement. It is of utmost importance to ensure that the investments are safe, secure and offer a regular income so that you can maintain your lifestyle as it was before retirement.

You also will need to establish a realistic investment strategy that will not leave you feeling strapped for cash month after month.  We need to take advantage of every opportunity to maximize our money.

Workers used to just count on their employer to guarantee certain payment for the duration of their retirement. Now the responsibility is shifting to workers to manage their own money, either in 401(k) accounts through work or Individual Retirement Accounts on their own.

Despite the constant news coverage of impending doom, many, if not most Americans are still depending on their social security payments to support them through their retirement.

Another point to bear in mind also is longevity. Americans are living longer and longer. The good news is that life expectancy is going up and people are living much longer. Initially, most recipients of Social Security did not last all that far beyond 65. Now, people are routinely living well into their 80s or 90s. That is one reason why Social Security funding is a problem. But, it is also something you need to consider as part of your retirement plans. 

Social Security: Most people will have Social Security income during retirement and the Social Security Administration sends out a specific statement for your personal Social Security benefit at retirement. The only big decision for Social Security is whether or not to take it immediately or to wait until full retirement age or beyond.  Visit the Social Security website to view a chart from the Social Security administration that illustrates how your initial monthly benefit can change depending on your age when you start taking Social Security.

Source: Social Security Administration

As you will see, assuming a retiree has a full benefit of $1,000 per month at age 66, the actual benefit could be higher or lower depending on what age the retiree actually elects to start taking the benefit. Many articles I have seen recommend waiting until age 66 to get the full benefit.

That may not necessarily be the best choice for many people because you have to give up four years of Social Security benefits to get the higher amount. The reason it may not make sense for you to wait until full retirement age is that the crossover point could be about 12 years. That is, it takes 12 years at the higher benefit amount to make up the amount you missed by not taking benefits at 62.

For example, using the numbers in the chart, at age 62, you would get $750 per month for four years for a total of $36,000. On the other hand, if you wait until age 66 for full benefits, you would get an extra $3,000 per year ($250 per month). Without getting too fancy, in actual dollars it would take about 12 years to make up the money you missed by waiting.  However, if you are considering working part time you are limited by the amount you can make each year with sacrificing some social security benefits.

In addition, if you wait until age 66, this extra $250 per month may be what is needed to pay for precription drugs, in addition, inflation increases are determined by the payment amount so future increases may be larger.  If you plan to work until 66, it probably makes sense to wait to take benefits until that age. However, many people may want to take benefits at 62 just to bring in some income. That method will give you more money until the crossover point is reached in about 12 years.

Many folks will have some part-time or full-time employment income during the early years of retirement and that could impact your decision on when to take Social Security benefits among other things. For more on this issue, you can go to the Social Security Administration’s Retirement Benefit site.

Tough times in the markets are renewing interest in an old, reliable investment for retirement:  Annuities! Some important facts about today’s Annuities. Annuity insurers and investment fund companies are beginning to sell retirement plans with built-in annuities as a counter measure to the probability of Americans outliving their savings. People who stayed away from annuities and lost 40% to 50% of their life savings in 2008 should be upset.

An Equity-Indexed Annuity (EIA) has interest rates that are linked to growth in the equity market as measured by an index such as the S&P 500. The EIA owner enjoys the upside potential of equities but is not exposed to downside risk. Subject to fixed minimum guarantees, the value of an EIA can only increase due to market growth – it will never decline due to market movement. 

Another very popular rider is called Lifetime Income Rider.  This rider locks in market gains yearly. It also guarantees a 7.2% compounded return for your retirement value . When you start your lifetime withdrawals they can never stop even if you run out of principle. Your income can also continue at your death for your spouse and double if you enter a nursing home or become disabled.

These insurance products convert your cash into a stream of income that can be guaranteed to last the rest of your life just like social security.  With many retirees staring at double-digit losses on their portfolios, that kind of reassurance is attractive.

Unlike some investments that are complicated and expensive, income annuities are usually fairly straightforward.  An income annuity can function just like a social security pension, producing a predictable payout.  As the “immediate” part of the name suggests, the distributions start shortly after the money is invested. 

The trade-off with annuity is that in exchange for the guarantee payout, an investor gives up some control of the money. However, by saving the additional income derived from an annuity over time, the original amount can be rebuilt, yet your inome continues.  A real plus. 

Payouts largely depend on the investor’s age – the older the investor, the larger the checks – and the level of interest rates.  These annuities are worth considering for retirees who tap their portfolios to pay day-to-day expenses and stand a chance of using up their savings.

Shifting the Risk “You’re shifting the risk that you’ll outlive your money over to the insurance company”.  If you’re relying on your portfolio for living expenses, financial planners typically suggest withdrawing no more than 4% a year, to limit the risk of outliving your funds; in contrast, with an annuity, you’ll get a bigger starting payout.

For example, an immediate annuity would convert a $100,000 investment from a 65 year old couple into $604.69 dollars a month for life.  This policy comes with 100% joint survivorship, which means when one spouse dies, the survivor continues to receive the full payout. It is possible to get higher payouts for a lower survivor percentage. (Illustration: depends on company!)

Your principal is 100% protected from loss as long as you don’t withdraw more than 10% per year and hold your annuity for 7 to 10 years, depending on company and policy.