The annuity combo: friends with benefitsBlog added by William Meyer on August 6, 2014
William Meyer

William Meyer

Joined: June 24, 2014

Social Security is an annuity — plain and simple. How the recipient chooses to annuitize the contract with their insurance provider (in this case the government) will go a long way in determining retirement success or failure.

This represents a significant opportunity for a simple call to action; agents and advisors should explain to clients exactly how Social Security acts as an annuity, and how they might build a guaranteed income plan around it.

A good explanation comes from Steven Sass of the Center for Retirement Research at Boston College. He notes that households that are now retiring need to transform their 401(k) and IRA savings into retirement income.

“One way is to delay claiming Social Security to increase their monthly benefit, using savings to pay current expenses while they wait,” Sass writes. “In effect, they are buying an annuity from Social Security: The savings used is the ‘price’ and the increase in their monthly benefit the annuity income it ‘buys.’”

He concludes that buying an annuity from Social Security in this manner is generally “the best deal in town,” especially in today’s low interest-rate environment.

See also: The impact of health costs on Social Security: another reason for an annuity

All well and good, but what if clients need more?

Building an annuity ladder is one answer, with Social Security as one of its rungs.

An annuity ladder is an investment strategy that involves the purchase of immediate annuities over a period of time in a manner that guarantees income while hedging against interest-rate risk. A study from MassMutual a few years back found that a portfolio incorporating stocks, bonds and incremental purchases of annuity income benefits over time via annuity laddering produces more guaranteed lifetime income, develops more liquidity to address other retirement needs, and builds more long-term wealth than other commonly adopted retirement income strategies.

Likewise, creating a guaranteed floor of income with annuities to help cover non-discretionary expenses frees clients to be more aggressive elsewhere in the portfolio. Putting an annuity combo together with Social Security results in a floor of reinforced, high-quality hardwood as opposed to the cheap linoleum of some other strategy.

My point here isn’t to advocate for annuity laddering or floors per se. Rather, it’s simply to illustrate a few of the many retirement income strategies that arise from the combo, one that puts Social Security together with an annuity from a private insurer, and how the topic of Social Security can open the door for just such a conversation.

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