I'm an Annuities Pro: This Is How You Can Cover the Income Gap While Your Social Security Benefits Grow

When should you start taking Social Security benefits? For many retirees, that can seem like a no-win choice.

While delaying taking benefits gives you a higher benefit amount, many retirees can't afford to or don't want to delay receiving benefits until age 70.

But there is a proven, safe way to boost income while waiting for your benefits to begin: buying an income annuity that guarantees monthly income for either a set number of years or your lifetime.

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Delayed benefits and your break-even point

There are three ages to be aware of. At 62, you can start taking reduced benefits, which are about 30% less than if you wait until 67, which is the full retirement age for people born in 1960 or later. Each year you delay past 67, up to age 70, you'll get a greater monthly payment.

If you wait until 70, you'll get about 24% more each month than if you took benefits at age 67. The difference between starting at 62 and 70 is huge: about 77% higher starting at 70.

The difference is locked in, so future cost-of-living adjustments (COLAs) will be applied to the higher base benefit.

Delaying payments has a cost, though, because you're giving up income for anywhere from one to eight years, and it takes time for the higher delayed benefits to catch up.

The break-even age varies from about 79 to 82 (give or take). For example, someone who started taking benefits at 70 will likely have received slightly less income by age 80 than someone who started at 62.

By age 83, however, the person who waited until 70 will be comfortably ahead, and the gap will keep growing. The break-even age for delaying benefits from age 67 to 70 is about 82.

If you're married, you also need to consider your spouse, and that's another argument for delaying benefits for the higher earner.

The Social Security Administration points out, "If you are the higher earner, and you delay when you start your retirement benefit, it will result in higher monthly benefits for the rest of your life. If you die first, it will result in higher survivor protection for your spouse."

Therefore, most people who are in poor health and unlikely to live past 80 shouldn't delay taking benefits unless the spousal benefit is the major concern.

But if you do have a good life expectancy, delaying benefits reduces the risk of running out of money as you age. By delaying, you sacrifice current income in return for a higher income in the future, plus bigger COLAs.

How income annuities can plug the gap

An income annuity generates more income than just about any other vehicle, partly because each payment includes both interest income and return of your principal.

Even the latter is valuable because it's hard to find a liquid deposit that would let you withdraw that much from your account penalty-free each month while earning a competitive interest rate.

While most people buy lifetime annuities, you may choose a set income term from five to 20 years. This is called a "period certain income annuity."

Here's an example. Jane, age 63, retires and invests $200,000 in a seven-year immediate annuity so she can delay taking Social Security until 70. She lists her husband as the beneficiary so he will continue to receive any remaining payments if she dies before the seven years are up.

Today, Jane can buy an immediate annuity that will pay $2,776.77 per month, including $2,379.69 in tax-free return of principal and $397.08 of taxable interest.

After seven years, the annuity will end and have no cash value. But it will have done its job to provide substantial guaranteed income, most of it tax-free, to fill the income gap until her Social Security benefits begin.

Another option for Jane is to choose a MYGA (multi-year guarantee annuity), a type of fixed-rate annuity.

If she placed $200,000 in a seven-year MYGA, she could earn up to 5.75%, which would produce $11,500 of taxable income each year from a contract that allows the owner to withdraw interest without penalty.

Additionally, many MYGAs allow the owner to withdraw up to 10% annually, without penalty, so she'd have flexibility if she needs more money. (Some of these annuities pay a slightly lower interest rate.) Ask your adviser about the liquidity provisions of the annuity you're considering.

A MYGA produces less income but preserves her principal. If Jane receives all the interest the annuity produces but doesn't touch the principal, she'll get her $200,000 back after seven years.

Annuities are issued by life insurance companies and thus are not guaranteed by federal deposit insurance, so review the issuer's A.M. Best financial strength rating before buying.

Life insurers are tightly regulated by the states where they're domiciled and have a strong track record of meeting their obligations.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356. The firm also offers an income annuity quoting service. There are no fees or charges for the firm's services; 100% of the client's money goes to work for them in their annuity.

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