With rising healthcare costs, inflation, and longer life expectancies, retirement income planning has become more complex. For many retirees who rely on Social Security benefits, questions about whether these payments will be enough to cover their retirement expenses are common. While Social Security was never intended to be the sole source of retirement income, it remains a crucial part of the financial security plan for millions. Given that the average Social Security benefit in 2025 will be around $1,976 per month, many retirees are seeking additional ways to ensure their income lasts for the rest of their lives. One option often considered is annuities.
Annuities and Social Security have similarities in that both provide a steady income stream that can last for life. However, annuities come in various forms, and whether they are worth purchasing in addition to Social Security benefits depends on individual circumstances.
Why Add an Annuity to Your Retirement Strategy?
The main advantage of adding an annuity to your retirement strategy is diversification. Relying solely on Social Security can be risky, especially if the benefits do not fully cover living expenses. Annuities can serve as a supplement to your Social Security income, and the best part is that annuities provide income that can last for life. This helps reduce the risk of outliving your savings, which is a growing concern for many retirees.
However, annuities are not without their downsides. To purchase an annuity, you typically need to use a lump sum of money, which is then converted into a series of regular payments over time. Once you buy an annuity, the money becomes illiquid, meaning you can’t easily access it for emergencies. Therefore, financial experts often advise against using all your retirement savings to purchase an annuity, especially if you don’t have other funds set aside for unexpected costs.
Annuities can also be complicated. Some come with fees, surrender charges, and restrictive terms. Many offer additional features like inflation protection or death benefits, but these extra features come at a higher cost. If you are considering purchasing an annuity, it’s essential to fully understand what you’re buying, its features, and what it will and won’t do for your retirement planning.
When Do Annuities Make Sense?
Annuities might make sense in certain scenarios, even if you already receive Social Security benefits. One instance is if you expect to live a long life. If you have a family history of longevity or are in good health, an annuity can act as protection against outliving your savings. The longer you live, the more value you’re likely to get from your annuity purchase.
Annuities may also be a good fit for retirees who are risk-averse. Many retirees aren’t comfortable with the ups and downs of the stock market, and annuities provide a level of certainty and guaranteed income that stocks or mutual funds can’t offer. This certainty can be particularly appealing for retirees who prioritize peace of mind.
If you don’t have a pension or another source of guaranteed income, an annuity could help fill the income gap. While Social Security provides guaranteed income, it often isn’t enough to fully fund a comfortable retirement. In such cases, a fixed or immediate annuity might be a practical solution.
On the other hand, there are situations where an annuity may not be the best choice. If you have health issues that may reduce your life expectancy, the upfront cost of an annuity might not be worth it. Additionally, if your Social Security benefits, investments, or other sources of income already provide substantial income, locking up money in an annuity could limit your financial flexibility.
Some financial advisors also recommend delaying Social Security benefits instead of purchasing an annuity. For every year you delay claiming Social Security benefits past your full retirement age (up to age 70), your benefit increases by about 8%. This is a guaranteed return that is hard to beat, making it an attractive alternative to annuities for many retirees.
The Bottom Line: Do You Need an Annuity?
While purchasing an annuity in addition to Social Security payments is not always necessary, it can be a smart move depending on your financial situation. To decide if an annuity is right for you, evaluate your financial needs, income sources, health outlook, and risk tolerance. Annuities can provide stability and long-term protection, but they are not the right fit for everyone.
Before making any decisions, it’s highly recommended to speak with a financial advisor. They can help you understand the pros and cons of annuities based on your personal finances, ensuring that you make the best choice for your retirement. With careful planning, you can make the most of both Social Security and any other tools you use to fund your retirement.
