How Income Annuities Can Shape Your Pre-Social Security Years

Income annuities can supply guaranteed income in retirement in place of or in addition to Social Security. This strategy has advantages and disadvantages and is best for those who want to retire early or delay claiming Social Security benefits.

Rob Williams, Managing Director of Wealth Management at Charles Schwab
  • Written By
    Rob Williams, CFP®, RICP®, CPWA®

    Rob Williams, CFP®, RICP®, CPWA®

    Managing Director of Wealth Management at Charles Schwab

    Rob Williams, CFP®, RICP®, CPWA®, leads a team at Charles Schwab, providing invaluable financial insights and guidance. With an MBA from the University of California, Berkeley, and a B.A. from Princeton University, he's not only a Certified Financial Planner (CFP®), but also holds the prestigious designations of Retirement Income Certified Professional (RICP®) and Certified Private Wealth Advisor (CPWA®).

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    Jennifer Schell, CAS®

    Jennifer Schell, CAS®

    Financial Writer, Certified Annuity Specialist®

    Jennifer Schell is a professional writer focused on demystifying annuities and other financial topics including banking, financial advising and insurance. She is proud to be a member of the National Association for Fixed Annuities (NAFA) as well as the National Association of Insurance and Financial Advisors (NAIFA).

    Read More
  • Edited By
    Lamia Chowdhury
    Headshot of Lamia Chowdhury, editor for

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial editor at Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.

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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 15, 2024
  • 5 min read time
  • This page features 6 Cited Research Articles

Key Takeaways

  • Purchasing an income annuity is one strategy for bridging the gap between stopping work and starting Social Security benefits.
  • When considering an income annuity in your pre-Social Security years, think about how long you intend to receive income, your age and your other sources of retirement income.
  • Those who want to retire early or delay Social Security to get higher payments might benefit the most from an income annuity bridging strategy.

What Is Social Security Bridging?

“Social Security bridging” refers to delaying Social Security benefits by supplementing your income with other sources. Many financial advisors recommend this strategy to clients because it allows them to maximize their Social Security benefits.

Social Security pays working Americans guaranteed monthly income for life once they reach retirement age. You can start claiming benefits as early as age 62, but the earlier you start receiving benefits, the lower the monthly payment will be. Claiming your benefits at 62 instead of at “full retirement age” — which ranges from 66 to 67 depending on the year you were born — can reduce your benefit amount by as much as 30%.

For this reason, many retirees choose to delay claiming Social Security benefits as long as possible to receive a higher benefit amount. Benefit amounts increase by 8% each year you defer past your full retirement age. You can delay receiving benefits until age 70, which could increase your payment amount by as much as 24%.

However, most Americans cannot or do not want to work until age 70, so most people claim benefits earlier. If you want to retire earlier and delay claiming Social Security benefits, you’ll need another form of retirement income to bridge that gap.

Purchasing an Income Annuity for Social Security Bridging

According to the Wharton University Pension Research Council, deferred income annuities can fill the gap between working income and Social Security benefits, and this strategy can enhance overall financial wellbeing for people of all genders and educational backgrounds.

The Wharton research paper found that having access to deferred income annuities within 401(k)s helped retiring workers finance their retirement lifestyle while delaying the start of Social Security benefits.

Deferred income annuities convert a lump-sum premium into a stream of income that lasts for an amount of time specified in the contract. This type of annuity does not pay out right away, but the owner can choose a time in the future to start receiving the payments. These annuities tend to have higher payouts than immediate income annuities because the insurance company can invest the premiums during the deferral period, accumulating some value before paying out.

Many people who purchase income annuities do so to set up a lifetime income stream. However, suppose you buy an income annuity to supply income temporarily before claiming Social Security benefits. In that case, you may not need the payments from your annuity to last for the rest of your life.

Instead, you might want to purchase an income annuity with a period certain payout. Period certain annuities promise payments for a set period, usually between five and 20 years.

With a period certain income annuity, you can set up an income stream that starts when you retire and continues until you are ready to claim Social Security. The full value of your annuity will pay out over those years, so your payouts will be higher than if you chose a lifetime annuity.

For some retiring workers, a deferred income annuity with period certain can be an effective bridge to Social Security benefits, providing guaranteed income for the first years of post-work life.

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Is an Income Annuity Right for You?

An income annuity can shape your pre-Social Security years by supplying regular income payments even if you’re not working. The Social Security bridging strategy works best for people who want to retire before they’ll be eligible for Social Security benefits, or for those who want to defer benefits so they can maximize their payment amounts.

Before you purchase an annuity, consider what your goals and priorities are for your retirement. You might also think about what other sources of retirement income you could rely on, like a pension or an employer-sponsored retirement plan. It’s important to have a holistic understanding of your financial situation before making a major purchase like an annuity.

Case Study

To better understand how a deferred income annuity might fit into your retirement plan, let’s look at this hypothetical case study demonstrating the Social Security bridging strategy.

Case study icon

Name: Maria

Age: 65

Looking To Invest: $150,000

  • Wants to retire in two years but doesn’t want to claim Social Security early
  • Purchases a deferred income annuity with a 5-year period certain
  • Age 58 – 62: Income from Work
  • Age 62 – 67: Income Annuity
  • Age 67 – on: Social Security

Maria wants to retire when she’s 62 but would rather wait until she reaches full retirement age (67 for her) to start claiming Social Security benefits. Her financial advisor recommends a Social Security bridging strategy, so Maria can continue receiving regular income while she defers her benefits.

Maria purchases a deferred income annuity with a 5-year period certain payout. She establishes that payments will begin when she turns 62. The annuity will pay income each month for the next five years, after which Maria will have reached full retirement age and can claim the total amount of Social Security benefits she is eligible to receive.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: May 15, 2024
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