Broker Check

Should You "Buy" an Annuity from Social Security?

June 08, 2012

More and more people are deciding to delay Social Security to age 70 in order to receive the highest possible benefit. But what if you retire before then? Does it make sense to withdraw funds from retirement and investment accounts to meet your spending needs before Social Security starts? Many people would say no. It seems intuitively rational to start Social Security early and "save" personal assets for later. But this is not always the best move, especially for married couples where the surviving spouse steps into the deceased spouse's benefit and continues to receive that benefit for the remainder of her life.

In the Issue Brief "Should You Buy an Annuity from Social Security," Steven Sass from the Center for Retirement Research at Boston College compares the Social Security claiming decision to the purchase of an annuity. The amount you would take out of your personal accounts to meet spending needs before age 70 is the "cost" of the annuity. He then asks, how would that "purchase" compare to the "cost" of buying a commercial annuity through an insurance carrier?

Sass found that Social Security is the best deal in town. For example, consider a retiree who could claim $12,000 a year at age 65 and $12,860 at age 66—$860 more. If he delays claiming for a year and uses $12,860 from savings to pay the bills that year, $12,860 is the price of the extra $860 annuity income. The annuity rate—the additional annuity income as a percent of the purchase price—would be 6.7% ($860/$12,860). Commercial annuity rates are lower than that because they have marketing, management, and risk-bearing costs (people who buy commercial annuities tend to live longer, and this actuarial adjustment must be factored into the price).

Also, today's low interest rates make it hard for investors to beat the Social Security benefit formula, especially if you are trying to maintain the same low risk profile. 

For the full Issue Brief, go to