Retirement Alternative: Social Security Annuity

Aug 23, 13 • Money & Finance
funding retirement

Retirement Funding Options

 

Social Security is income retirees have earned throughout the course of their working lives. Use this benefit to make your retirement years as relaxing as possible.

 
By: James Lowe

Retirees are increasingly trying to find ways to earn income off their savings to supplement their 401(K) balances and Social Security benefits. The state of California, in an attempt to do just that, passed legislation last year known as the Secure Choice Retirement Savings Program. This government-run plan, which Marketwatch jestfully referred to as “Pensioncare,” would allow private sector workers to contribute 3 percent of their yearly earnings into an investment pool administered by the government. Several other states are contemplating similar plans, but the fact government would be running privately-funded retirement plans creates numerous political and bureaucratic issues that are sure to derail them before they get started. The alternative for retirees is to creatively utilize their Social Security.

Option For Retirees

A 2012 study by the Center for Retirement Research at Boston College proposed three options for retirees to use their savings as a source of income. The first is to put their savings into bank accounts and Treasury bills, and live off the interest. But record-low interest rates for the past three-plus years renders this plan impractical. The second option is to invest in exchange-traded funds and bonds, and live off the gains. But the stock market is extremely volatile, while a sudden inflation or interest rate spike would diminish the value of bonds. The third option is to purchase a commercial annuity from a private company. A nominal annuity would provide retirees a set amount of income per month based on the offered rate. For instance, if you invest $200,000 into an annuity at a 3.9 percent rate, it would pay out $7,800 per month. This amount will remain constant as long as some sort of inflation-protection is part of the annuity.

Boston College then covers a fourth option, which is “purchasing” a Social Security annuity. This will require you to have living expenses for an entire year from your savings. Selling an annuity you previously purchased for a lump sum of cash can set you up for this option.

Social Security Annuity

Retirees can claims their inflation-protected Social Security benefits anytime between the ages of 62 and 70. The longer retirees wait to begin claiming their benefits, the more they get. This is where the “purchase” of a Social Security annuity begins. A retiree, for instance, knows she can collect $14,000 per year, already inflation-adjusted, if she starts collecting benefits at age 62. But if she waits one additional year, she will collect $14,938due to the 6.7 percent increase (based on numbers provided by Boston College) gained by waiting. She could then pull the $14,938 out of savings (or from selling a previously-owned annuity) and use it for living expenses that year, knowing she will get that amount back in Social Security benefits the following year. This retiree has basically purchased an annuity with a 6.7 percent inflation-adjusted rate.

The average five-year guaranteed annuity rate is around 3 percent as of July, according to AnnuityRateWatch.com. This means you are getting more than double the return by using the Social Security annuity method for retirement. This plan will work for only one year, as once you start collecting benefits, they do not stop. The best way to utilize this plan is to wait as long as possible to start collecting Social Security and get the highest possible return on investment.

Social Security is income retirees have earned throughout the course of their working lives. Use this benefit to make your retirement years as relaxing as possible.

About the Author:
James Lowe is a financial analyst for a large firm on the East Coast. He loves his three kids and his dogs, and writing helps him de-stress after a long work week.

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Tips to Live Comfortably on Social Security

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