What You Love About Social Security You'll Find in Some Annuities

There's a lot to love about Social Security. If you don't agree now, you'll likely agree in the future. According to the Social Security Administration (SSA), "Social Security is the major source of income for most people over age 65." It also lifts millions of people out of poverty -- nearly 29 million in 2022.

But Social Security benefits aren't sufficient for most people. As of December 2023, the average monthly Social Security retirement benefit was $1,905, or close to $23,000 for the year. Most of us will want and need additional income streams, and a good kind to consider is an annuity -- which has lots to love about it, too.

Image source: Getty Images.

Social Security and annuities -- the similarities

Here are some things that Social Security and certain annuities have in common:

• Both offer dependable income that typically arrives every month without fail.
• Both can help retirees sleep better, knowing that guaranteed income is arriving regularly.
• Both can offer certainty as to how much to expect: Social Security benefits are well-defined and generally remain unchained throughout a year, while fixed annuities feature fixed payouts (as opposed to other kinds of annuities, such as variable ones).
• Both can protect retirees from the effects of inflation, at least partially. Social Security increases its benefits paid to retirees in most years via cost-of-living adjustments -- or "COLAs." Annuities don't generally address inflation, but many of them permit you to add on regular increases of a certain amount, such as 2% or 3% every year. (To add such a feature, you'll probably have to pay a bigger premium or accept smaller payments.)
• Both offer income that requires no oversight, which is especially welcome as we age and become less able to manage investments.

The basics of annuities

Buying an annuity typically involves handing an insurance company a hefty sum in exchange for receiving regular payments for a certain period. Here are more things to know about annuities:

• There are different kinds of annuities. Fixed annuities are the most straightforward kind, offering specified payments for a specified period, while variable and indexed annuities can be more complex and sometimes risky and/or problematic, due to fees and restrictive terms.
• Annuities can pay you for a certain period or for the rest of your life -- and even for the rest of your spouse's life, too.
• Annuity payments can start arriving immediately or, in the case of deferred annuities, after a number of years. (For example, you might buy a deferred annuity now that starts paying at age 70, 75, or 80.)
• You may be able to buy an annuity with money from a tax-advantaged retirement account or from your savings.
• Some hybrid annuities feature long-term care benefits, offering stepped-up payments for care if and when you need it.
• You'll generally get a better deal (i.e., more income) buying an annuity when interest rates are high. So, with many expecting interest rates to start coming down this year or next year, it's worth thinking hard about annuities sooner rather than later.
• Since annuities aren't protected by the FDIC or a similar agency, you'll want to only buy from highly rated insurers. Better still, you might split your purchase across a few insurers, to play it safer.
• Some annuities can work as long-term care insurance, too -- paying more than the usual benefit if and when you need long-term care. (There are also hybrid life insurance policies addressing long-term care.)

What can you get from a fixed annuity?

What kind of income can you expect from an annuity? Well, you'll be offered different sums from different insurers, but the table below can give you a general idea of what certain people might get from immediate fixed annuities for an outlay of $200,000.

Source: immediateannuities.com.

You'll note that women get quoted lower rates. That's because they tend to live longer, so the insurance company will likely have to make payments for longer.

It's important when making a good retirement plan to estimate how much income you'll need in retirement and how you'll get it. Social Security will be an important generator of reliable inflation-protected income, and one or more annuities might serve you similarly well, too. Once you have your plan, be sure to stick to it -- saving sufficiently and investing effectively for many years.