Want to Delay Social Security? Buy an Annuity First

Annuity products could emerge as saviors in helping to rescue retirees from the “tsunami” of financial insecurity “washing upon our shores.”

Indeed, in 2024 more Americans will turn 65 than at any other point in history, a milestone requiring urgent attention and collective action, Jason Fichtner, a senior lecturer and associate director of the Master of International Economics and Finance program at Johns Hopkins School of Advanced International Studies, argues in an interview with ThinkAdvisor.

Partial annuitization, short-term annuities, trial annuities and annuities as a default option in 401(k) plans are strategies to provide Americans with protected income in retirement to add to Social Security benefits, says Fichtner, who served in the Social Security Administration as acting deputy commissioner and was chief economist and associate commissioner for retirement policy.

Early Social Security claiming — which decreases an earner’s monthly benefit for the rest of their life — was widespread before the coronavirus pandemic hit, but COVID-19 has “exacerbated” that trend, Fichtner says. About 4 million people have retired early — before full retirement age — because of job loss or income reduction as a result of the virus. 

Rather than taking the regrettable route of claiming Social Security early, people can use annuitization to bridge the gap between leaving the workforce and taking benefits at full retirement age, or even at the maximum age of 70, Fichtner maintains.

In the interview, he notes that some employers have already started to include annuities as a default option in their retirement plans.

A report he wrote, published last month, “The Peak 65 Generation — Creating a New Retirement Framework,” calls for urgent action from government, the financial services industry, employers and consumers to address the reality that “as many as 50% of households [are] at risk of not having enough money to maintain their standard of living in retirement.”

The consequences of inaction, he points out in the interview, land heavily on younger generations: Millennials and Gen Zers would have “less protected income from Social Security and at the same time, be paying higher taxes into the system.”

A nonprofit group that educates consumers on annuities — the Alliance for Lifetime Income, which published Fichtner’s report — is helping to make employers and employees aware of the value and importance of the protected income annuities provide.

ThinkAdvisor recently interviewed Fichtner, speaking by phone from Washington, D.C. At the Social Security Administration from 2007 to 2009, he led its shift away from guidance indicating the best strategy was to take Social Security at age 62 to recommending delaying claiming for as long as practical to manage the risk of outliving one’s money.

Still, he remarks in the interview, “people are focused so much on market returns and not on risk management in retirement.”

Here are excerpts from our conversation:

THINKADVISOR: Why chiefly did you write the report, “The Peak 65 Generation — Creating a New Retirement Security Framework”?

JASON FICHTNER: To [emphasize] that we need to talk about protected income in retirement right now. The worst outcome [will be] if we do nothing. If we just put our heads in the sand and continue on the path we’re on, it will lead to increased payroll taxes and retirees getting a reduction in benefits that’s permanent and which will last for future generations.

They’ll be born into a world where they’re paying higher taxes and getting lower benefits — and having a less secure retirement. We can’t wait any longer to change the conversation about how to help people have protected income in retirement and how we can build that over their working years. 

What effect is the COVID-19 pandemic having on Americans’ retirement?

COVID is exacerbating premature retirement. It’s estimated that 4 million people are being forced to retire early as a result of the pandemic because they’ve lost their jobs or their income has been scaled back.  

If they claim early, what’s the impact on their Social Security benefits?

People are claiming at 62 thinking there’s no penalty, when there actually is: a reduced monthly benefit for the rest of their lives.

What’s one way to help earners have a more financially secure retirement?

A strategy that uses partial annuitizing or a trial annuity because annuities can fill the gap for more protected income.

What exactly is “protected income?”

Social Security benefits. In the past, a lot of retirees had Social Security plus a pension — a defined benefit plan — which was also protected income. But now, with [employers’ switch] to a defined contribution plan, there’s been only one source of protected income: Social Security. Annuities can fill the gap, however.

Please discuss partial annuitization.

You can give yourself additional protected income on top of Social Security by partially annuitizing some of your assets. One idea is to bridge the gap with a short-term annuity that would get you through the few years till you can claim at your full retirement age or at age 70 [for the maximum benefit].

So someone between 62 and 67 can [buy] an annuity that lasts up to five years to get the protected income they would have if they’d waited to start receiving Social Security.    

What’s a trial annuity?

It tries to overcome the “annuity puzzle”: Although people benefit economically from annuities, they don’t purchase them. A trial annuity is a great idea from both a marketing perspective and for financial security.

The idea is that when people try out the annuity, they’ll see the benefit of receiving this protected income on a monthly basis and will want to keep the annuity going. 

What’s an example?

It can [be for] a 10-year [term], say. You’ll have a two-year trial period in which you start getting that protected monthly income. At any point in those first two years, you can cancel at no cost and without fees, and get the rest of your money back.

Would this product be available only through employers?

It could be created, or adapted, and offered by insurance companies, and made available as a direct sale as well.