If there is one thing politicians of either party don’t want to touch, it’s the Social Security income stream guarantee that assures retired Americans will never run out of money. People that receive Social Security payments are also known as “voters.”
Lifetime Income is...Lifetime Income
The advertisement might say “I Hate Annuities,” but it will never say “I Hate Social Security payments.” To be consistent, it should...but it never will.
Both annuities and Social Security provide a lifetime retirement income stream that you can never outlive. They are one in the same from a structure standpoint. Both are transfer of risk strategies that have no ROI (Return on Investment) until you die.
In the world of personal finance, employer sponsored retirement plans, 401 k plans, other types of retirement plans (403bs, 457s), mutual funds, stocks, bonds, etc...people transitioning to retirement start to care more about lifetime income than growth. The “401k vs. annuity” transition from growth only to income only is a direct reflection of over 10,000 baby boomers reaching retirement age every single day. It’s a demographic tidal wave that can’t be denied.
So what is a Social Security Annuity? Is there such a thing? The answer is yes. Your Social Security Annuity is a guaranteed lifetime income stream backed by the full faith and credit of the U.S. Government. In essence, it’s a government issued annuity.
I always tell people that even if you think you hate all annuities, you already own the best inflation annuity on the planet. That annuity is called Social Security. The inflation component attached to your Social Security benefit payments is a political gift voted on by Congress. They raise it when they want to raise it. They raise it when they want to please the voters.
An inflation adjustment on an annuity is called a COLA, which stands for Cost of Living Adjustment. COLAs can be attached at the time of application, and you can choose the annual percentage that you want the income to grow by. For example, you can choose a 3% COLA which will increase your income stream by 3% every year for as long as you live. Sounds great in theory, but that increase isn’t given away like your Social Security payment increase.
Annuity companies “have the big buildings” for a reason. They don’t give anything away. When you attach a COLA to an annuity contract, the income stream is drastically lowered when compared to the same annuity without a COLA.
How is my Social Security Annuity calculated?
So now that we have factually established that your Social Security payments is actually an annuity structure, it’s important to know that your income stream is primarily determined by your life expectancy at the time you start the payments. The older you are, the higher the payments. The younger you are, the lower the payments. It’s really that simple.
Everyone is aware that if you wait until you turn 70, the income stream will be higher than if you turned it on at age 65. By the way, Deferred Income Annuities (DIAs) work exactly the same way.
Annuity Gap Fill
Variable Annuities and Indexed Annuities are the current hot selling industry products. The types of annuities that work like Social Security is a Single Premium Immediate Annuity (SPIA), and its sister product...a Deferred Income Annuity (DIA). Both are structured the same, but product type is determined by when the income starts. SPIAs start as soon as 30 days from the policy issue date and can be deferred up to 1 year. DIA income starts 13 months from the policy issue date and can be deferred up to over 40 years. Both are classified as fixed annuities/life insurance products, and are regulated at the state level. SPIAs and DIAs have no surrender charges, no contribution limits, and contractually solves for long term payments/lifetime income.
Annuities like SPIAs and DIAs should be used with your Social Security payments to create the majority of your guaranteed income floor. That combined income of Social Security and annuity payments is your personal pension plan whenever you reach that full retirement age.
To fill in your needed income gap, take your annual Social Security payments and all other income sources (dividends, pensions, RMDs, rental income, etc.) to come up with the total monthly amount that will hit your bank account. Then whatever that “gap” of income is, you reverse engineer a quote to contractually hit that specific dollar amount.
For example, if you determine that your “income gap” is $2,345 per month, you can run a quote on an annuity calculator to find out how much money it would take to guarantee that $2,345 per month for the rest of your life. Annuity quotes are customizable, so you can set them up exactly to fit your specific goals.
Purchasing An Annuity
Your Social Security annuity payment guarantees are already “baked into the cake” on what the government will pay, but you are going to have to shop all private annuity carriers for the highest contractual guarantee for your specific situation. Life
Insurance companies issue annuities, and pay income for life that is primarily based on your life expectancy at the time payments start. Those annuity companies pay income that is a combination of return of principal plus interest, with interest rates playing a secondary pricing role.
To fund your annuity purchase, you can use your retirement savings inside of your IRA (qualified money/tax deferred) or money that is outside of your IRA (non-qualified money). You can even use Roth IRA assets to purchase an annuity. The taxation of the income stream guarantees will be based on the type of account used to purchase the annuity.
So when you combine your Social Security guarantees with annuity lifetime income payments, you definitely need to consult with a tax professional to make sure your overall financial plan is in order. Before implementing any annuity combination strategy with Social Security, answer questions like:
*Does an annuity affect Social Security benefits?
*Is my Social Security annuity taxed?
*How does an annuity affect my Social Security benefits?
*Is pension considered income for Social Security?
*How do early withdrawals from my other plans affect things?
*How will an additional income stream affect my income tax?
I would encourage you to go to the Social Security site and use their Social Security Annuity Calculator.
If you continue to hear people say that they hate all annuities, then you can assume that they hate their Social Security payments. That’s as ridiculous as saying you hate all restaurants or all trucks. Social Security and annuities are the same, and that’s a good thing.