Social Security is the foundation of the average person’s retirement plan. Social Security is an annuity that every qualified beneficiary receives, but it might not be enough to live off of in retirement.  Make sure you understand how Social Security works and how it will work with your other sources of income in retirement.

What is an annuity? 

An annuity is defined as a series of equal or increasing payments over a period of time. It provides protection against longevity. It provides an income you cannot outlive.  Social Security meets all the requirements.

Lifetime income 

A Social Security check is a life annuity.  With a life annuity, the period of time for increasing payments is the rest of your life, no matter how long you live. Your Social Security check will not stop until you die. 

Joint and Survivor Annuity

If you’re married, Social Security is a joint and survivor life annuity. Social Security payments stop upon the death of a single person. If your spouse is still living, they will continue to receive the larger  of the 2 checks after your death. 

For example, say married couple Bob and Sara are both collecting Social Security checks. Bob’s check is $3,000/month and Sara’s check is $1,500. If Bob dies first, Sara will start getting the $3,000 check, but her $1,500 will stop. 

Many couples are unprepared for the smaller Social Security check disappearing. Just because one person dies, half of the bills do not disappear. Life insurance, even a small amount, is a great way to supplement this loss of Social Security for the surviving spouse.  

Inflation Protection

Social Security also includes inflation protection, which most annuities give you the option to purchase. COLA, or the Cost-Of-Living Adjustment, makes sure that Social Security payments keep up with inflation. 

COLAs are determined by a complicated formula, but usually an increase is seen yearly, though there have been years where an increase has not occurred. In December of every year, Social Security will put out a COLA notice letting beneficiaries know if an increase will happen. 

For 2020, there was a 1.6% increase in Social Security, meaning everyone’s monthly check increased by this amount. 

How can the government provide an annuity? 

People who live into their 80’s and 90’s collect a lot more from Social Security than they paid in during their working years. 

For example, my Social Security benefit will be $3,958/month, or $47,496/year, once I turn 70. My Social Security statement shows that my employers and I have paid in $324,000 over my lifetime, which will continue increasing until I retire. If either my wife or I live past age 78, Social Security will pay out more to me than what was paid in. 

So how can this happen?  There are many people who die in their 40’s, 50’s, 60’s, and early 70’s. They have paid in for years and collect little or nothing before they die. These people’s contributions make sure that everyone who lives a longer life than expected continues to get their check. 

How do I make sure I have more money than just Social Security? 

Page 1 of your Social Security statement says, “Social Security benefits are not intended to be your only source of income when you retire. On average, Social Security will replace about 40 percent of your annual pre-retirement earnings. You will need other savings, investments, pensions, or retirement accounts to live comfortably.” 

While many people are not going to need 100% of their pre-retirement income, most people do need more than 40%. While savings, IRAs, and pensions might get you to the level of income you need, many people need a tax-efficient strategy for how to make sure they do not outlive this money. 

While a financial plan is usually the first step, annuities from a private insurance company will be able to provide you a monthly check to supplement your income that you cannot outlive. Seeing how well Social Security works as an annuity, it is not a bad idea to explore other products that send you a monthly check.  

If you think that you are going to need more than Social Security to live off of, Cardinal can help you.