An annuity could be a smart retirement option, but you should know how it impacts your Social Security benefits before buying one.
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While saving is a crucial part of any retirement plan, the focus shouldn't be solely on saving enough money to live on after you stop working, especially right now. The emphasis should also be placed on creating a plan that can weather whatever the economy throws your way. After all, today's high living costs, market volatility and rising healthcare expenses make it crucial to lock in reliable monthly retirement income that won't disappear when stocks dip or inflation ticks up.
While Social Security benefits can provide a valuable foundation, that money likely won't cover everything in today's inflation-stretched environment. That's where annuities can be a valuable addition to your retirement plan. Whether fixed or variable, immediate or deferred, annuities are designed to deliver predictable payouts for life or a set period. But there's a lot of confusion surrounding how different retirement income sources interact, especially when it comes to Social Security.
That, in turn, raises an important question: Can you collect both Social Security and annuity payments without interference or penalties? Below, we'll examine what you should know if you're thinking about using an annuity to supplement your Social Security in retirement.
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Can I collect Social Security and an annuity?Yes, you can collect Social Security benefits while receiving annuity payments. Unlike some government benefits that have strict income limitations, Social Security has no restrictions that would prevent you from also receiving income from an annuity. This combination can provide a stronger financial foundation for your retirement years.
But while you can receive both, there are a few important things to consider, like the age at which you claim Social Security. If you start claiming Social Security before your full retirement age (currently 66 or 67, depending on your birth year), your monthly check will be smaller. Meanwhile, annuity income typically begins based on the terms of your contract. Some annuities start payments immediately, while others defer them for years.
Your Social Security benefits may also become taxable depending on your total income, which includes annuity payments. If your combined income exceeds $25,000 (if you're single) or $32,000 (if you're married filing jointly), a portion of your Social Security could be taxed. This is an important consideration if your annuity income is significant.
Not all annuities are created equal, either, and the type of annuity you own also matters. Qualified annuities, which are those funded with pre-tax dollars, will generate taxable income when distributed. This taxable income could potentially push your total income into a higher tax bracket, which might result in more of your Social Security benefits becoming subject to federal taxation.
Non-qualified annuities, which are purchased with after-tax dollars, have different tax implications. With this type of annuity, only the earnings portion of your annuity payments is taxable, not the return of your principal investment. This could result in lower taxable income compared to qualified annuities, potentially reducing the taxation of your Social Security benefits.
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How to maximize your income with Social Security and an annuityKnowing that you can collect both Social Security and annuity income is only part of the equation. The bigger question is, how do you make the most of them together? Here are a few key strategies that may help:
Delay Social Security if possible. If your annuity can provide sufficient income in your early retirement years, consider delaying Social Security until age 70. For each year you delay past your full retirement age, your benefit increases by about 8%. That means more guaranteed monthly income for life, which can make a big difference over the long haul.
Ladder annuities for flexibility. Instead of putting a large lump sum into a single annuity, some retirees use an annuity ladder strategy. This involves purchasing smaller annuities at different times or with different start dates (and often with different rates), which allows for more flexibility as your income needs evolve and helps you hedge against inflation or rising living costs.
Be mindful of income thresholds. Because your Social Security benefits may become taxable if your total income is too high, it's worth managing how much annuity income you withdraw each year. If your annuity allows for flexible distributions as opposed to fixed monthly payments, you might be able to keep your taxable income lower and reduce how much of your Social Security gets taxed.
Consult an expert. Everyone's situation is different. A retirement income specialist can help you map out the best way to structure your annuity and Social Security timing, particularly if you have other income sources like a pension, 401(k) or part-time work.
The bottom lineCollecting both Social Security and annuity income is not just possible; it's also a smart way to create a more stable and predictable financial future in retirement. But with rising living costs, increased longevity and the risk of outliving your savings, you'll want to make sure these income sources are working together as effectively as possible. By timing your Social Security wisely, choosing the right type of annuity and keeping an eye on your tax exposure, you can turn your retirement strategy into a dependable plan that lasts. And that kind of peace of mind is worth investing in.
Angelica Leicht