Purchasing an Annuity To Delay Social Security

Workers who delay collecting Social Security benefits when they first become eligible at age 62 until their full retirement age of 66 to 67 — or even until the benefits max out at age 70 — can expect to receive a higher monthly benefit.

However, for those who want to retire at 62 or before full retirement age, delaying Social Security might mean being without income for those gap years.

One option these workers can explore is rolling over a portion of their tax-deferred retirement accounts into an annuity so they can receive guaranteed monthly income throughout the gap years before their Social Security benefits begin.

Let’s take a closer look at the benefits of delaying Social Security, how to bridge the gap with an annuity and the pros and cons of the entire process.

Social Security is a federal government program that pays benefits to workers who have retired, people with disabilities and the surviving spouses and children of workers who have died.

To collect Social Security retirement benefits, a worker must have paid taxes into the Social Security trust fund during their working years.

Individuals who qualify for Social Security retirement benefits can begin receiving checks from the government at 62. However, they can also choose to delay the receipt of those benefits until their full retirement age (between ages 66 and 67, depending on their date of birth) or even until they are 70.

The longer you delay receipt of Social Security retirement benefits, the larger the monthly benefit you can expect to receive becomes. You achieve the maximum possible benefit amount by delaying until age 70.

For example, if Robert starts claiming Social Security benefits at 62, his monthly benefit will be less than if he had delayed until his full retirement age of 67. That payment amount at 67 will in turn be less than if he had further delayed receipt until age 70.

Despite the higher monthly amount Americans can earn by delaying retirement until their full retirement age or later, data shows that most start collecting Social Security retirement benefits at 62 — even though taking Social Security benefits at 62 instead of full retirement age can mean leaving as much as 30% of their potential benefit amount on the table. For those with a full retirement age of 67, that adds up to about a 54% reduction if collecting benefits at 62 instead of 70.

According to Suzanne Shu, professor of marketing at Cornell University, reasons include misunderstanding the system (treating it like a 401(k) or IRA), fear that they will die before enjoying benefits if they don’t start as early as possible (a fear that is generally unfounded) and simple impatience.

Some may be laid off before their full retirement age. Others may get tired of work and call it quits. Certain emergencies — the disability of a family member, for example — may also necessitate early retirement. The desire to fulfill a long-buried passion like charity or mission work may spur some into early retirement.

In these scenarios, it’s easy to understand why taking Social Security early is tempting.

Still, to maximize their retirement benefits, many people look for ways to delay collecting Social Security. And no matter their reason for leaving the workforce, they still need a source of income between retirement and receipt of Social Security checks.

Recently, a strategy has been proposed and increasingly employed which involves the annuitization of retirement accounts within those gap years. Since an annuity provides guaranteed income within a period of time (irrespective of market performance), the funds in a 401(k) or IRA can be partially or fully rolled over into an annuity to provide the retiring worker with consistent monthly income during the gap years.

With this strategy and the safety net of guaranteed income provided by an annuity, the retiring worker can more comfortably delay retirement until full retirement age or 70, thereby increasing their monthly Social Security benefits.

Suppose Robert has $80,000 in a 401(k) and he wants to retire at 67 (his full retirement age) instead of at 62 to get the extra 30% Social Security monthly benefit. He can roll over that 401(k) into a fixed annuity. With a fixed interest rate of 4%, Robert can expect a monthly income of $1,470.74 for the five gap years. And after those five years, he can start enjoying his higher Social Security benefit for the rest of his life.

What are the pros and cons of using an annuity to bridge the gap years and delay Social Security?

In the end, deciding whether to purchase an annuity to delay Social Security is a decision you must make together with your financial advisor. Their familiarity with your unique situation will qualify them to suggest the best path for you to tread.