Social Security Q&A: Should We Buy Annuities to Supplement Social Security?

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Question: My wife and I are in our early 40s. We both earn more than the annual contribution/tax limit and expect to receive similar payments in the higher range of whatever payments the government can afford when we retire.

If we are going to consider Social Security as an important part of our retirement savings, my concern is, if I understand the spousal benefit properly, when one of us dies this will cut our total Social Security income in about half (basically from two checks to one). While the survivor will have less food and medical costs to cover, I wouldn’t expect their expenses to go down that much.

We are worried about our ability to support ourselves in retirement. I was wondering if there are any annuities or other approaches you recommend people consider to cover this risk.

For example, I was wondering if we can buy an annuity that would start paying when the first person dies and goes until the second person dies. I know we could buy two longevity annuities, which pay if each person is alive at some age. But I don’t really need it if we are both alive.

I wonder if I am complicating this since it seems like a common problem many people would have in their planning and I don’t see anything written about it.

Answer: You can buy joint survivor annuities that pay the same amount until the last spouse dies. This achieves what I think you want, namely more income per person when one spouse is alive. But, given how much money the Federal Reserve has printed in the last six years, and how much they will be forced to print through time to help pay our bankrupt government’s bills, I wouldn’t buy any annuity that’s not fully indexed against inflation. By fully indexed, I mean that if prices rise by X percent, your annuity payment is increased by X percent. Graded annuities, which start lower, but rise at a fixed rate (e.g., 3 percent) through time, aren’t the same as a fully inflation-indexed annuity. I understand that The Principal Life Insurance Company sells such annuities, and other insurers may as well.


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