How Do Annuities Affect Social Security Retirement Benefits?

Annuities and Social Security can both provide valuable guaranteed income for retirees. Learn how to utilize both types of income in your retirement plan and ensure you can maximize your retirement income plan.

Stephen Kates, CFP®
  • Written By
    Stephen Kates, CFP®

    Stephen Kates, CFP®

    Principal Financial Analyst for

    Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

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  • Edited By
    Savannah Pittle
    Headshot of Savannah Pittle, senior editor for

    Savannah Pittle

    Senior Financial Editor

    Savannah Pittle is an accomplished writer, editor and content marketer. She joined as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

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  • Financially Reviewed By
    Marguerita M. Cheng, CFP®, CRPC®, CSRIC®, RICP®
    headshot of Marguerita M. Cheng, CFP

    Marguerita M. Cheng, CFP®, CRPC®, CSRIC®, RICP®

    CEO of Blue Ocean Global Wealth

    Marguerita M. Cheng, CFP®, CRPC®, CSRIC®, RICP®, is the chief executive officer at Blue Ocean Global Wealth. As a CFP Board of Standards Ambassador, Marguerita educates the public, policymakers and media about the benefits of competent and ethical financial planning. She is a past spokesperson for the AARP Financial Freedom campaign.

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  • Updated: May 29, 2024
  • 6 min read time
  • This page features 3 Cited Research Articles

Key Takeaways

  • Annuities do not impact the amount of retirement benefits you can receive from Social Security.
  • Depending on the type of annuity you own, it may impact the taxability of your Social Security benefits by raising your taxable income.
  • To best understand the taxability of your annuity or Social Security benefits, speak with a financial advisor or tax advisor.

The Impact of Annuities on Your Social Security Retirement Benefits

Prior to 401(k)s becoming the dominant vehicle for retirement, the traditional view of how to create a retirement plan was referred to as a three-legged stool: Pension, Social Security and personal savings. The world has changed a lot in the last 4 decades and pensions are a relative rarity for most workers. However, for those that can save for it, it is possible to recreate the benefits of a pension through an annuity contract. Annuities offer the same lifetime income people valued from company-sponsored pensions. With an annuity, you have far more control and flexibility over when and how to start receiving income.

Creating dependable, guaranteed lifetime income is a viable solution for retirees who don’t want to risk running out of money or are wary of depending on income from market-based investments. While it is not usually advisable to put all your money into an annuity, it can be beneficial to cover your essential expenses with guaranteed income from a combination of pensions, Social Security and annuities.

Social Security retirement benefits are based solely on your earned income throughout your career and the age at which you file for benefits. Retirement withdrawals or annuity income will not impact this benefit amount because they are not viewed as wages, but these sources may impact the amount of taxable income you receive.

While annuities will not impact the amount you are eligible for from your Social Security retirement benefits, they can impact Supplemental Security Income (SSI) meant for individuals who are blind, disabled or over age 65 with certain financial qualifications. If you or someone you know are receiving or expect to receive SSI benefits and think an annuity may increase your income above eligibility thresholds, it is important to speak with the Social Security Administration and a qualified attorney to discuss options for maintaining your benefits.

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As the saying goes, “it’s not what you make, it’s what you keep.” First, it is important to understand what kind of tax treatment you can expect from your annuity income. Different annuity treatments will yield different taxability.

Important Annuity Terms

Qualified Annuities
A type of annuity that is funded with pre-tax dollars. This type of annuity will create taxable income for the participant whether money is withdrawn as a distribution or as annuitized payments.
Nonqualified Annuities
A type of annuity that is funded with post-tax dollars. The growth on the principal will still be taxable as income depending on the way it is being paid out.
When you annuitize your nonqualified annuity, the payments will be taxed proportionately to the amount of growth relative to the principal in the contract at the time it was annuitized. Example: If 75% of your annuity value was from post-tax contributions and 25% was growth, then only 25% of each payment will be taxable as income.
When your annuity is not annuitized, you are able to withdraw money as a distribution. This is most common with deferred annuities. The taxability of the money will be handled Last Out, First Out (LIFO). This means that all distributions will be taxable until all the growth is used up, and then the principal can be withdrawn tax-free.

For the purposes of understanding how this will impact Social Security, we still must understand the thresholds that impact Social Security taxability. Social Security retirement benefits are partially taxable when an individual or couple exceeds certain income thresholds.

Social Security Taxability Per the IRS:

For individual filers, if your combined income* is:

  • Between $25,000 and $34,000, you will owe taxes on up to 50% of your Social Security benefits or
  • Greater than $34,000, you will owe taxes on up to 85% of your Social Security benefits

For joint filers, if your combined income* is:

  • Between $32,000 and $44,000, you will owe taxes on up to 50% of your Social Security benefits or
  • Greater than $44,000, you will owe taxes on up to 85% of your Social Security benefits

*For the purposes of these calculations, the IRS defines “combined income” as the following:

Combined Income = Adjusted Gross Income + Nontaxable Interest Income + 50% of your Social Security Benefits

How Social Security Determines Earnings

Social Security calculates an individual’s prospective benefits by tracking the highest 35 years of income over their working life. To be eligible for Social Security benefits, an individual has to be 62 years of age and worked and paid into the program for 10 years or more.  If you are not eligible, but a spouse is, you can receive payments based on their benefits.

The IRS uses a calculation called “Average Indexed Monthly Earnings (AIME)” to calculate the proper Primary Insurance Amount (PIA) for each eligible person. The PIA is the amount of Social Security benefits owed each month at Normal Retirement Age (NRA). To find your Normal Retirement Age, please visit the page explaining that subject.

The calculation for AIME can be complicated but an example of someone retiring in 2024 is shown on the SSA website. If you would like to understand your own Social Security benefits, you can log into or make an appointment with an SSA representative to ask questions.

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Receiving Annuity Payments and Social Security Benefits at the Same Time

Social Security income is often only a portion of the income most people need in retirement. These benefits were meant to supplement but not replace all income planning. According to information compiled by the Social Security Administration, Social Security retirement benefits typically only make up approximately 40% of an individual’s pre-retirement income. Most financial advisors recommend that people plan to live on 85% of their pre-retirement income so there remains a significant gap in income when someone depends only on Social Security.

To close the gap left between required income and Social Security benefits, most retirees need to depend on their savings to produce income. For those retirees that are wary of market volatility or expect they may live a long time and don’t want to run out of money, an annuity can provide a solid income foundation. It is strongly recommended that retirees cover their essential expenses with guaranteed income. Essential expenses could be anything that you can’t or won’t live without such as food, heat, shelter and health care. However, it is possible to purchase more income to create a stronger stream of income throughout your or your and your spouse’s lives.

For those retiring prior to 70, taking income from a portfolio or annuity may allow you to delay filing for Social Security benefits. Waiting longer to receive your benefits can increase the monthly benefits you ultimately receive. For each year after the Normal Retirement Age, your monthly benefits will increase by approximately 8%. Before taking advantage of this strategy, speak with someone from the Social Security Administration and a financial advisor to determine if this strategy is appropriate for your personal situation.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: May 29, 2024
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