Annuities for Retirees: Are They a Good Option?

Are annuities for retirees a good option? Nes wants to learn more about annuities and how they work. But before I answer that question, first Bruce asks how he can calculate his exact social security benefits. If you have a question for me that you would like answered on the show, you can email me or leave a voicemail so we can all hear your voice. Let’s dive in to learn the answers to our listener questions. 

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Outline of This Episode

  • [1:22] How can Bruce calculate his exact social security benefits upon retirement?
  • [4:21] How is your social security benefit calculated?
  • [7:31] Are annuities a good option for retirees?
  • [8:47] Understand what annuities are
  • [13:57] What are the drawbacks to annuities?
  • [17:44] What are good alternatives to annuities?

How can Bruce calculate his exact social security benefits upon retirement?

Bruce was nice enough to chime in with a voicemail question for us. He knows that the Social Security retirement calculator assumes that he will keep working all the way up until full retirement age and he would like to know how to calculate his benefits if he chooses to stop working at age 62. If he stops working early his benefits will stop vesting at the same rate and so his benefits will actually be less. The best solution is still using the calculator on the SSA.gov website. You can play with the numbers a bit to try and achieve the best calculation. Listen in to hear what I tell my local community college class in Bismarck.

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How is your Social Security benefit calculated?

When you receive your Social Security benefits statement in the mail it will tell you how much you are likely to receive at full retirement age. But if you stop working early you will no longer be vesting, therefore the benefit amount will be less. If you stop the trajectory you are on then it will change. Your Social Security benefit is based on your 35 highest-earning income years. And is adjusted for inflation. If your highest earning years have been quite recent or if you have received consistent raises it will assume that your income will keep going up until retirement age. Have you used the SSA benefits calculator to estimate your Social Security benefit?

What are the drawbacks of annuities for retirees?

Nes asks if annuities are a good option for retirees. I am really not a fan of annuities. It is important to remember that an annuity is an insurance product that protects your investment. There are a number of drawbacks to them and little benefit to the customer. The person that benefits the most from an annuity is the salesperson. Most annuities come with a shocking number of fees. They are there in the fine print of the agonizingly detailed contract. Annuity contracts are also very confusing and challenging to get out of. If you need your money early there are surrender charges of 15% or more. Have you ever considered getting an annuity?

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What are good options for retirees instead of annuities?

When people are looking into annuities they are usually interested in turning their money into a monthly cashflow. But instead, there a number of options you can consider that aren’t annuities. One option is to make the most of your Social Security benefits. Very few people defer their Social Security benefit, but if you defer until age 70 you will end up with 132% of your original benefit at full retirement age. Every year you wait you’ll receive and 8% increase. You can also learn about safe withdrawal rates and dynamic spending strategies. When you educate yourself as an investor you’ll be much better off than being stuck in an annuity that you can’t get out of.

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