The best deferred income annuity on the planet is delaying Social Security.

What will happen to Social Security under President-elect Donald Trump?

I suspect not much, so even as a fee-only adviser, I am continuing to sell annuities to clients whenever I can. I am not selling the ones being pitched by insurance companies but only the income annuity offered by the U.S. government via delaying Social Security.

Image: Bloomberg
Image: Bloomberg

I have found that clients who have accumulated assets all their lives are deathly afraid of spending down. Many ask me about buying a single premium immediate annuity that pays a fixed amount each year that the insurance company calls income, though one typically has to live nearly two decades just to get the principal back.

In the same meeting, they also tell me that they want to take Social Security at the full retirement age. That is natural because that income means that they need to draw from their portfolios to support their lifestyles.
But clients’ eyes light up when I tell them that I have an annuity called a deferred-income annuity.

In return for delaying payment for more than four years, the client can get an inflation-adjusted payment after that period for the rest of their lives, and it typically has a 100% survivor benefit as well. And unlike an annuity from an insurance company, this annuity is backed by the U.S. government.

Can it get better? Yes, this annuity is typically priced 40% to 50% less than those offered by insurance companies.

Delaying Social Security payments from 66 to 70, for example, increases the payment by 32%. That includes a cost-of-living increase, so it grows over time.

In one example, I calculated that delaying Social Security four years would increase the payment by $987 a month. To get that additional monthly amount, the client would have to give up about $126,000 in payments over those four years.

However, to buy an inflation-adjusted monthly annuity of $987 beginning in four years would cost about $235,500. Thus, this government annuity was priced 46% less than could be bought on the open market.
So, I reframed the decision to delay Social Security.

Clients can think of it as having taken payments at 66 but instead investing those payments in a deferred annuity to give them more income in a short period of time. They now feel free to spend this $126,000 from their portfolio over the next four years.

Of course, at least one of the two spouses must have a reasonably long life expectancy. And though there is always political risk with Social Security, this is arguably less than the risk from buying an annuity from an insurance company.

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