Buying an Annuity from the SSA

HumbleDollar has hosted a lot of interesting and useful discussion recently about the benefits of buying an annuity to provide guaranteed income to a retiree. Once you have decided to purchase an annuity, you are faced with the complicated choice of what annuity to buy. In 2012, Boston College’s Center for Retirement Research published a paper that posited that delaying your Social Security benefits and using other resources to fund your lifestyle was akin to purchasing an annuity from the Social Security Administration (SSA). Their take was that “buying an annuity” from the SSA was the “best deal in town.” I wrote an article about this a few years ago, and I thought it was worth rolling out again.

Since 2012 interest rates have risen and commercial annuities have become more attractive. Additionally, the SSA’s full retirement age, or FRA, has continued to rise. The last cohort to reach FRA at 65 was in 2003. In 2027, the FRA will max out at 67. Future retirees planning to wait to FRA before claiming their SS retirement benefits will be faced with a 3-year period if they choose to wait until the maximum claiming age of 70.  Funding a 3-year bridge may appear easier than the previous 5-year gap.

One thing I’ve learned from preparing tax returns for lower incomes retiree is the importance of SS retirement benefits (another great topic on HumbleDollar). I, and others, have observed that there are many retirees whose sole retirement income comes from SS. The stark reality is that these retirees would benefit most from delaying their SS benefits, and increasing their benefits by some 8% per year of delay.

I tend to think of this decision in three groups. At one end you have retirees in desperate financial situations. They may need their SS benefits as soon as possible to live. At the other end you have folks with more than enough financial resources to retire. For them the decision on when to claim SS is much less important. They can do what they want. For a large group of retirees, SS is important but not necessarily time critical. If they have enough retirement funds to consider purchasing an annuity, they might want to consider using some of their resources to purchase one from the SSA.