Should You Buy an Annuity While You Have Social Security? Here’s What Experts Say

With rising costs and questions surrounding the sustainability of the Social Security program, more are questioning whether to buy an annuity alongside Social Security. An annuity and Social Security both provide guaranteed income in retirement, but they work in different ways and serve distinct purposes.

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If you’re considering an annuity while you’re on Social Security, here’s what experts have to say.

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Annuity vs. Social Security

An annuity and Social Security are similar in that they both provide guaranteed income that is periodically adjusted for inflation.

“A key difference is that with annuities, you can also use the products to accumulate wealth as you save for retirement,” David Byrnes, senior vice president and chief distribution officer at Security Benefit, a leader in the U.S. retirement industry, wrote in an email.

Annuities also come in various forms, and they can be more complex than Social Security.

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“Fixed index annuities, for example, offer a variety of index accounts that allow savers to earn interest credits based on the performance of financial markets,” he added. “You don’t have actual exposure to market volatility, interest is earned tax-deferred and principal is guaranteed.”

On the other hand, Social Security is a government-backed program that provides retirement benefits based on your earnings history. Payments are guaranteed for life, and unlike annuities, you don’t need to purchase Social Security. You do, however, need to qualify by working and paying into the system through payroll taxes.

How Much Extra Income Could Both Provide?

According to Byrnes, how much income both could provide depends on the type of annuity, the amount of money to purchase and other specifics in the contract.

“Some fixed annuities are still paying around 5% for example, so now is a great time to lock in a rate,” he wrote. “Fixed Index Annuities credit interest based on the movement of financial market indexes that could potentially provide even higher returns.”

For your Social Security payouts, the amount you receive depends on factors such as your lifetime earnings, when you start claiming benefits and whether you continue working in retirement.

Is It Right for You?

An annuity can provide a big boost to your income in retirement.

“Let’s take the example of a 65-year-old collecting $2,000 monthly in Social Security. A $100,000 immediate annuity might reasonably bring in about $500 in monthly income for the rest of her life, representing a 25% income boost,” explained Rich Jacoby, CEO at GoldenCrest Metals. “That’s a hugely appealing bonus for a retiree, supplying them with a guaranteed income that they don’t run the risk of outliving.”

However, Byrnes stated that with annuities, you need to determine what you want to accomplish, such as supplemental income or wealth accumulation. You also need to consider timing based on when you want to retire.

But there are drawbacks to consider.

“One potential drawback of adding annuity income alongside Social Security benefits is that the extra income could make more of one’s Social Security taxable,” explained Aaron Brask, financial planner at Aaron Brask Capital. “Other sources of income could move one beyond thresholds that trigger more tax on their Social Security benefits. This phenomenon is known as the Social Security ‘tax torpedo,’ and it can generally affect people with annual incomes in the range of $35,000 to $75,000.”

When you purchase an annuity, you’re also committing to the insurance carrier for a certain time.

“Specifically with income annuities, once you ‘trigger income,’ meaning you begin distributions, you are bound to the terms within the contract,” according to Krisstin Petersmarck, president and founder of New Horizon Retirement Solutions.

If lifetime income is part of the contract and you trigger income, you are contracted until you die, she added. Also, annuities typically only offer a certain percentage — 7% to 10% — you can withdraw without a penalty each year, Petersmarch explained.

“Additionally, there is a surrender schedule so if you decide you want your money back before the contract term is fulfilled, you will pay a surrender charge,” she added.

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