Using Immediate Annuities to Guarantee Retirement Income While Delaying Social Security Benefits

Social Security benefits

“Why not retire at 62? I’ve worked long enough. I’m ready to enjoy my money.” This is something we hear sometimes when a client asks about taking Social Security at age 62, and I admit, I agree. I don’t want to wait until 70 to retire either. Personally, I want some extra time to enjoy my money. But just because you don’t take Social Security at 62 doesn’t mean you can’t retire. You could instead use other income sources to fund your retirement, if you have them, and  defer taking those Social Security benefits until age 70, while getting a few extra retirement years in the deal.

The Benefits of Deferring Your Social Security

While you might be eligible to take benefits at age 62, some experts would recommend you don’t. That’s because the earlier you take them, the less you usually get. This is due to the calculation the Social Security Administration uses to determine your payment.

The Social Security Administration calculates your monthly benefit by taking the average earnings over 35 years, divided by the number of months in 35 years. The problem is if you don’t have 35 years of work to calculate — for example, you’ve only been working 32 years — then those last three years would be averaged in as zeros. For every year that you delay taking Social Security, up to age 70, your expected payment will increase by a percentage.


Source: “Delayed Retirement Credits.” The Social Security Administration.

While waiting until age 70 can maximize your benefits, you might still want to be able to retire at 62, or somewhere in between. Using other sources of income, such as an immediate annuity can help stave off the need to take those benefits, while providing you with an alternative stream of income.

How Immediate Annuities Can Be Used to Help Delay Taking Social Security Income

Immediate annuities are pretty simple, which is why many people use them to manage their retirement withdrawals. What happens is you pay a single lump sum premium to an insurance company, and the immediate annuity will pay out income for a certain period of time or for life, depending on the type you buy.

One of the benefits of these immediate annuities is that they’re comprised of a return of premium, as well as a certain amount of interest, assuming you purchase a non-qualified annuity. This means that only a portion of the amount of income you receive is taxable. In addition, the immediate annuity may pay more in income than the premium you paid, if you live long enough to collect these payments. When trying to use an immediate annuity to help stave off taking Social Security benefits, it’s often advisable to choose one that covers a fixed period of time, rather than the rest of your life. The reason for this is simple: The more consolidated the payment period, the larger the amount paid out.

In a way, the arrangement works similar to a loan, but you’re the one making the “loan” to the annuity company. It pools premiums it receives from annuity holders and invests them to earn revenue for its general fund and in exchange, pay you a fixed monthly amount for a period of time.

One benefit of using an immediate annuity is that it allows you turn a lump sum into an ongoing stream of income, and you have the benefit of not having to pay taxes on the total income received all at once because immediate annuities are usually purchased with after-tax dollars. In addition, if you start off with the annuity payments at age 62 and select the right payment period, you can use those immediate annuity funds until you reach full retirement age and then start collecting maximum Social Security benefits.

Items to Consider in Immediate Annuities

While immediate annuities can be helpful in providing you with income now to help you delay Social Security benefits, it’s important to remember they do come with limitations. One of the biggest concerns of an immediate annuity is in its liquidity. Most immediate annuities come with a free look period that extends from 10 to 30 days in which you can return the contract and get your premium back with no penalty. After that, and once income payments have started, you usually can’t get your money back except through income payments, over time

In addition, immediate annuities don’t generally offer a lot of death benefits to beneficiaries. As a result, if you die unexpectedly, the money could be lost. Annuities help insure against your longevity, so if you die prematurely, you could wind up losing out.

You also have to be aware of the insurance company’s financial stability. While most states require insurance companies to have guarantee funds to pay out annuities in the case they go bankrupt, there’s still a chance that you could lose some of your premium if the insurance company becomes insolvent. All annuity guarantees are backed by the financial strength and claims-paying ability of the issuing company.

If you’re ready to retire at age 62, you should consider whether or not it makes sense to delay taking Social Security until you reach age 70. An immediate annuity might be helpful in filling the gap. If this is something you’d like to do, then contact a Retirement HQ advisor to help you select the appropriate immediate annuity for your situation.