Bridging the gap to Social Security with an annuity: How it works

Claiming Social Security before your full retirement age can stunt your monthly payouts for the rest of your life. For people born in 1960 or later, full retirement age is 67, though you can claim Social Security benefits as early as age 62.

Waiting a few years makes a big difference. Claim benefits at age 62, and your Social Security checks will be 30 percent less than if you’d waited until age 67. You can receive even bigger monthly checks by delaying until age 70. At that point, you’ll get 124 percent of the full benefit.

If you want to retire early, this presents a challenge. After all, you don’t want to lock yourself into lower monthly checks for the rest of your life, but you want the reliable income Social Security provides.

So what can you do?

How to use an annuity as a bridge to Social Security: 3 steps

For early retirees, using an annuity is one way to bridge the years between leaving the workforce and claiming Social Security. It can help protect your retirement savings while giving you a steady “paycheck replacement” until you can reap a bigger Social Security check.

“When you’ve spent years working and are looking to stop, the uncertainty of no longer having a paycheck show up twice a month can cause some worry,” says Sean Williams, a certified financial planner and founder at Cadence Wealth Partners. “An annuity can alleviate potential anxiety by replicating that paycheck.”

Here are the three basic steps to create an annuity bridge to Social Security.

Step 1: Choose an annuity with a specific term

Annuities are often marketed as a way to provide income for the rest of your life. But these insurance products can also be structured to last a specific number of years.

So if you retire at 62 and want to claim Social Security at 70, look for an annuity with a set term of eight years. If you want to claim benefits at 67, get a 5-year annuity.

By choosing an annuity with a specific term, your monthly payments are higher than those from a lifetime annuity because the insurance company only pays out for a fixed term rather than your entire life. The shorter the term you select, the higher your annual or monthly payments will be.

Step 2: Explore single-premium immediate annuities

Annuities are insurance products that work similar to a self-funded pension: You give money to an insurer, and in return, the company promises to give you a series of payments over time.

But not all annuities are created equal, and these financial products can get complicated and costly, depending on the type.

Single-premium immediate annuities, or SPIAs, tend to be a straightforward, no-frills option that works well for the Social Security bridge strategy.

With an immediate annuity like a SPIA, payments start within 30 days to one year after funding the contract, and those payments continue for a specified term or for life. And since it’s a single-premium annuity, you make a one-time lump-sum payment to the insurer to fund the contract.

So the key to making this strategy work is finding a SPIA with a decent payout rate and a term that lasts long enough to fill your Social Security gap years.

A SPIA can simplify financial planning by providing consistent, predictable payments, ensuring funds are available every month. It can also serve as an alternative to building a bond or CD ladder and takes the guesswork out of managing withdrawals yourself.

“Annuities are fantastic for clients that want peace of mind,” says Williams.

Step 3: Get quotes

You can use different websites to obtain annuity quotes, such as blueprintincome.com or annuityadvantage.com. There are two ways to explore annuity quotes. You can enter the specific amount you have available to invest, such as $100,000, or you can work backwards and enter the monthly income you’d like to receive, such as $700 a month, to get an idea of how much you’d need to contribute.

We used quotes from Immediate Solutions, an online marketplace that lets you compare quotes from top-rated insurers side by side without entering a phone number.

The fee for income annuities is already factored into their payouts. For retail buyers using Income Solutions, there’s a one-time, flat fee of 2 percent. This fee is built into the quotes you see and is fully disclosed during the transaction process.

A 60-year-old female in Florida looking for an immediate income annuity with a 10-year term for her life only can expect to receive $1,014 to $1,059 per month if she deposits $100,000, based on quotes in January 2025.

If that same Florida woman deposited $200,000, she could expect to receive between $2,030 and $2,116 a month.

“A SPIA can be a great alternative to cash, but it all depends on the rate you’re receiving on the annuity,” says Williams. “If the yield on the SPIA is greater than a high-yield savings account, it can be a good alternative.”

Should you use a 401(k)-linked annuity to bridge the gap?

Immediate annuities require a lot of upfront cash. You might not have enough money in a savings or checking account to create a meaningful income stream during your gap years. After all, most people save for retirement in tax-advantaged retirement accounts, not regular savings accounts.

Thanks to the 2019 SECURE Act, it’s now easier for employers to offer lifetime income options in 401(k) plans. The act specifically encourages the inclusion of annuities in defined contribution plans and IRAs.

In most cases, annuities within 401(k) plans are combined with target-date funds. These funds adjust their mix of stocks and bonds based on your age and anticipated retirement date.

Big players have already debuted annuity-linked 401(k) products in recent years, such as BlackRock’s LifePath Paycheck.

With LifePath Paycheck, the target-date fund begins with a stock-heavy allocation early in your career. By age 55, about 15 percent of the fund is placed into an asset class called “lifetime income,” which grows over time. By age 65, the allocation to lifetime income hits 30 percent.

But starting at age 59½, you can opt to purchase an income annuity payable by insurers selected by BlackRock. So, this might be a way to bridge the Social Security gap if you retire, let’s say at age 60 or 62. However, the BlackRock offering is a lifetime annuity, so monthly payments will last the rest of your retirement instead of a few years.

Meanwhile, with Fidelity’s Guaranteed Income Direct Solution, income annuities offered as distribution options are selected by plan fiduciaries and issued by third-party insurers like Pacific Life, MetLife and Prudential.

One advantage of choosing an annuity through a 401(k) is simplicity and cost — it’s often cheaper and easier to navigate these products than retail options. Since 401(k) sponsors are fiduciaries, they’re legally bound to act in the best interest of plan participants. This means they’re required to ensure annuities meet standards for fees, portfolio composition and overall quality.

Keep in mind that annuity-linked 401(k) products can vary significantly. Unlike mutual funds or ETFs, they don’t come with standard regulatory filings or ticker symbols, which can make researching them more challenging. Plus, they’re still in the early stages of adoption and not yet widely available.

“Not all annuities are created equal, and the ease of flipping a 401(k) into an annuity through the provider might not be worth it,” says Williams.

Taxes are another important consideration if you’re buying an annuity inside a 401(k) or similar tax-advantaged retirement account.

If you buy an annuity with after-tax dollars, like money from a checking or savings account, most of the income you receive will be a tax-free return of your principal, while the rest will be taxable interest. However, if the annuity is part of a qualified retirement plan, such as a traditional IRA or 401(k), all payments are fully taxable.

So if you’re considering an annuity inside your 401(k), carefully review all the terms and make sure you understand how the funds are converted to an income stream. This might be a complex process, so tapping a financial advisor or giving your plan sponsor a call to hash out the details is a smart move.

Should you use your retirement savings as a bridge to Social Security instead?

Another strategy is using funds from a retirement account, such as a 401(k) or IRA, to pay for expenses during the gap years — leaving annuities out of the picture entirely.

It’s a valid strategy, but purchasing an annuity to bridge that gap instead offers a couple key benefits: simplicity and protection from a market downturn.

Financial advisors often suggest covering necessary retirement expenses — like food, housing, health care and transportation — with stable income streams such as Social Security, a pension, an annuity or a mix of all three. This helps reduce dependence on unpredictable financial markets or the challenge of managing money effectively into old age.

Relying solely on your retirement accounts to fill income during your gap years can be risky, especially during market downturns. For example, if you retired in 2021 at age 62 and delayed claiming Social Security until age 70, you’d have to draw from your retirement accounts in 2022 — a year when the market dropped by 20 percent.

If you simply left that money in your retirement account, the balance would have rebounded in 2023, and you’d continue to benefit from tax-deferred growth in your retirement accounts until required minimum distributions (RMDs) begin at age 73, or until you start claiming Social Security at age 70.

But there’s a case to be made for tapping into retirement accounts before age 70, especially if you have a healthy 401(k) balance. Using those funds, along with an annuity, to bridge the income gap can be a smart move. By using pretax retirement accounts to cover expenses in your 60s, you can help reduce your future RMDs at age 73, which are fully taxable.

Downsides of an annuity bridge

Using an annuity to bridge the gap to Social Security is really a strategy only the wealthy can afford.

While it can be an attractive option for workers with sizable savings, more than half of people ages 61 to 65 who haven’t yet claimed Social Security have no retirement accounts, according to 2023 research from the Schwartz Center for Economic Policy Analysis at The New School. Of those who do, the median level of savings is just $100,000 and 10 percent have $10,000 or less.

Lower-income workers may be poor candidates for other reasons. Social Security typically replaces a larger portion of income for lower-wage earners, and they likely can’t afford the trade-off of sacrificing the liquidity of their modest savings to purchase an annuity.

Finally, delaying Social Security past full retirement age isn’t always a great idea.

A general rule of thumb, known as the Social Security break even point, says it generally takes between 12 and 14 years to receive the same amount of money from delaying your payments as you would have received had you started claiming at age 62. So you should have a reason to expect you’ll live more than a decade past your claiming age to justify delaying Social Security until age 70, according to the Journal of Accountancy.

If you have health concerns or other reasons to believe your life expectancy may be shorter than average, it may make more sense to claim Social Security earlier.

Bottom line

Bridging the gap to Social Security with an annuity can be a smart strategy for early retirees with sufficient savings. It provides stable income and protects against market downturns. However, this approach isn’t for everyone and there are plenty of shoddy annuity products on the market.

Consulting with a financial advisor is another good idea. An advisor can analyze your personal situation, help you refine your early retirement plan and recommend whether an annuity makes sense for your portfolio.