Delaying Social Security is a good idea, if possible, because the longer you wait, the greater the benefits. However, what do you live on between retirement and beginning to receive your benefits? One way is looking carefully at the world of annuities, according to CNBC in “Here’s one way to get guaranteed income while delaying Social Security.”
If assets are available, some financial advisors recommend that, rather than taking gradual amounts out of retirement accounts including IRAs, 401(k)s, pensions, savings, etc., the money be used to purchase a single premium immediate annuity, also known as a SPIA.
Annuities offer guaranteed income, either for a set time period or for life, vary widely in their features but, can be tricky to understand and are also expensive. Annuities are also polarizing — people either hate them or they love them.
SPIAs are a bit more straightforward than other annuities. They make up only a fraction of annuities sold every year, $9.7 billion versus $233.7 billion last year, as reported by the LIMRA Secure Retirement Institute.
The SPIA may be part of the retirement income puzzle, but there are cautions from financial advisors. For one thing, it’s a place to secure a payout over a period of time and not a tool for asset growth.
In exchange for guaranteed income over a set period of time, which could be for the rest of your life, you hand over a lump sum to an insurance company. There’s no set up fee, and it comes with no annual expenses. However, once the transaction is done, you can’t get your money back. You have an income stream, but that’s it. If you or a family member have an emergency, you have no flexibility to get that money back. There are rare exceptions, where insurance companies allow for a limited emergency withdrawal.
Also, the annuity’s income is taxed. Therefore, if you use the money from a tax-deferred account, like an IRA or 401(k), you’ll pay taxes on the income as you receive it over the life of the annuity. If the funding comes from sources that are not tax advantaged, you’ll pay taxes only on the portion of the SPIA that was not taxed through what the insurance company calls an exclusion. Don’t forget that liquidating funds from a brokerage account will generate tax liabilities as well.
Some financial advisors recommend going with an old-school Certificate of Deposit (CD) or U.S. Treasury bonds, which are backed by the government. The yields are low, but they are secure.
Before deciding to buy an annuity, consult with an experienced estate planning attorney and your financial advisor to understand the benefits as well as the risks of owning an annuity.
Reference: CNBC (April 4, 2019) “Here’s one way to get guaranteed income while delaying Social Security”