Tens of millions of people rely on Social Security to give them the income they need in retirement. For many, however, Social Security isn't enough, and that's especially true later in retirement when many people's financial needs go up. All too often, seniors spend down their assets early on after they retire, only to discover later that higher medical expenses and other costs leave them struggling to make ends meet.
There's a strategy you can use that will let you supplement your Social Security income later in your retirement years with an additional guaranteed monthly payment. It comes with some trade-offs, but for many, the benefits from the strategy will outweigh the potential risks. As long as you've been setting something aside for retirement during you career, using what's known as a deferred income annuity can provide a second source of retirement income in a way that won't necessarily drain your finances right now but will provide the support you need in the future.
How deferred income annuities work
When most people think about annuities in retirement, they start with immediate annuities. Buying a single-premium immediate annuity lets you create a stream of monthly income that starts right away, as soon as you purchase the annuity product. You can set up immediate annuities with a range of options, including the right to receive payments for the remainder of your life or for as long as both you and a spouse or other loved one are still living.
The problem with immediate annuities is that it takes a lot of money to produce a respectable monthly payment. Based on recent rates, even spending $100,000 on an immediate annuity might give you just $550 in monthly income if you're a 65-year-old man, and less than $475 a month for a couple age 65.
Deferred income annuities have different characteristics that can boost monthly payments further. Rather than starting to make monthly payments right away, deferred income annuities wait to pay out until an age in the future, such as 80 or 85. Only then do you start receiving monthly checks.
The benefits of deferred income annuities
The big advantage of deferred income annuities is that waiting can dramatically increase the amount you receive once you reach the target age. For instance, a 65-year-old man who has $100,000 to spend on a deferred income annuity that will start paying out at age 80 will receive about $2,125 per month based on current quotes. That's almost four times as much money as the immediate annuity pays out.
In addition, once you purchase the deferred income annuity, you know exactly what that future payout will be. The responsibility for investing in order to produce that money is with the insurance company, and if you live beyond your life expectancy, then your insurer will be the one to pick up the extra tab from extended monthly payments.
The risks of deferred income annuities
The least desirable thing about deferred income annuities is that you can end up spending your money and getting nothing in return. If you pass away before you hit the age you've selected for the deferred income annuity to start making payouts, then you won't necessarily receive a penny. You can choose options that will give you a guarantee that your heirs will receive something from the policy after your death if it hasn't yet started paying out, but it'll dramatically reduce the income you can get from it. In the example above, an option that would pay the original $100,000 to your heirs, would cut the payout by nearly $450, to just over $1,680 per month.
Another downside is that deferred income annuities take away your ability to invest your own money in a way to produce greater growth. Some retirees like having market risk taken away from them, but others value the potential to see their investment capital earn better returns that can finance an even better lifestyle later in their retirement.
Make your move
As you can see, whether a deferred income annuity is right for you is partially a matter of personal preference. If you're risk averse and want to lock in your income prospects during retirement, then deferred income annuities can help you boost your future income in exchange for part of your retirement nest egg. That's a trade than many retirees are comfortable making.