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June 25, 2008 Annuities Help Defer and Accumulate Social Security
- How can annuities help you generate the income you need in the 21st century, when Social Security benefits will not be enough to provide for a longer, more active retirement?
Thank you for tuning into 21st Century Income TV. What I want to talk about today—I read a very interesting editorial in this week’s Barron’s. The editorial spoke about extending Social Security benefits—meaning taking Social Security at the last possible moment as opposed to taking it at the first chance, which is at age 62. I’m going to relate that to a product people often hear about called annuities. So, let me explain.
Often, we hear about annuities, buying deferred annuities. The argument for buying a deferred annuity is that the income that you earn is tax-deferred while you are working or until age 59 and a half. But what it’s really presented as is a way to convert the balance into lifetime income from the insurance company.
So what really happens when you buy an annuity?
What happens when you buy an annuity is you are saying to the insurance company, “Here is my money,” and you are giving up control of that money in exchange for the insurance company paying you at some future date a sum of money for as long as you live. That’s actually quite similar to Social Security: Social Security pays you an income for as long as you live.
So why buy an annuity?
So one of the things we have been thinking about is that these annuities, deferred annuities, are, of course, quite expensive. There are quite a number of various fees built into them. You are giving your money to the insurance company in exchange for getting this lifetime income; the cost of that is quite a lot of fees.
We’re thinking here, in working with clients, that maybe you need to restructure or rethink your personal investments so that when you retire—let’s assume you retire at age 62—so at age 62, your personal investments are structured in a way that will give you the level of income you require to not take your Social Security. Doing so, you are able to hold off taking Social Security until the last possible moment. The benefits could be as much as a third higher than if you retire at age 62. So by doing that, you are increasing your retirement benefit later.
If you recall, one of the things we always talk about here on 21st Century Income is dangers, strengths and opportunities of living in retirement in the 21st century. The biggest danger is that you may live for many, many decades and you are going to need a very high sustainable source of income that goes out well into the future.
A way to do that in a cost-effective manner could be to delay taking Social Security until the last possible moments. That requires you, of course, to rethink your investment program between the age of 62 and the age you take those social security benefits. Thank you.
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