Is Social Security The Only Possible Source of Guaranteed Income as a Retiree?

There’s a reason the decision to claim Social Security is such an important one. Your filing age will help determine how much money the program pays you every month. And seeing as how your Social Security benefits are guaranteed for life, there’s a lot riding on that choice.

Think about it this way. You could start off your retirement with a $2 million IRA. That’s a lot of money.

But what if the stock market experiences a prolonged slump early on in your retirement? You could end up having to sell assets at a loss just to cover your income needs.

A few years later, your IRA might be down to just $1.2 or $1.3 million — when you might still need it to last another 20 years or longer. So unfortunately, even if you save well and manage your retirement plan withdrawals carefully, that money could end up running out in your lifetime — especially if you live longer than expected.

But you should know that Social Security isn’t necessarily your only option for guaranteed income in retirement. There’s another investment you could choose that’s guaranteed to pay you for life. But it’s important to understand the benefits of it as well as the drawbacks.

Don’t write off an annuity

Just as Social Security is set up to pay you benefits for life, so too is an annuity. An annuity is a contract you sign with an insurance company. You make a lump sum payment or series of payments, and in exchange, you can secure guaranteed income for the rest of your life — however long it ends up being.

There are different types of annuities you can choose from. A fixed annuity will guarantee you predictable payments for the rest of your life. A variable annuity won’t give you fixed payments, but it might do a better job of keeping pace with inflation.

Understand the benefits and drawbacks

If you’re thinking of buying an annuity so you have more guaranteed income in retirement on top of Social Security, here are some pros and cons you should know about.

The pros:

• A steady stream of retirement income, and predictable payments with a fixed annuity
• There’s no concern about outliving your payments
• There’s no market risk to worry about with a fixed annuity

The cons:

• Costly fees and commissions to set an annuity up
• Ongoing fees that you end up paying for
• Confusing contracts that can be hard to understand
• Hefty surrender charges and long surrender periods
• Some annuities don’t do a good job keeping up with inflation

Ultimately, Social Security does not have to be your only guaranteed source of retirement income. An annuity could be a nice supplement. But before you invest in one, make sure you really understand what you’re signing up for.

You may come to the realization that an annuity isn’t right for you. If so, another option may be to delay your Social Security claim to age 70 for the largest monthly benefits you can get. Having more money come your way from Social Security each month could also take the pressure off of your savings, lessening the likelihood that you’ll end up outliving your nest egg.