Want to Delay Social Security? Buy an Annuity First

Annuity products could emerge as saviors in helping to rescue retirees from the "tsunami" of financial insecurity "washing upon our shores."

Indeed, in 2024 more Americans will turn 65 than at any other point in history, a milestone requiring urgent attention and collective action, Jason Fichtner, a senior lecturer and associate director of the Master of International Economics and Finance program at Johns Hopkins School of Advanced International Studies, argues in an interview with ThinkAdvisor.

Partial annuitization, short-term annuities, trial annuities and annuities as a default option in 401(k) plans are strategies to provide Americans with protected income in retirement to add to Social Security benefits, says Fichtner, who served in the Social Security Administration as acting deputy commissioner and was chief economist and associate commissioner for retirement policy.

Early Social Security claiming — which decreases an earner's monthly benefit for the rest of their life — was widespread before the coronavirus pandemic hit, but COVID-19 has "exacerbated" that trend, Fichtner says. About 4 million people have retired early — before full retirement age — because of job loss or income reduction as a result of the virus.

Rather than taking the regrettable route of claiming Social Security early, people can use annuitization to bridge the gap between leaving the workforce and taking benefits at full retirement age, or even at the maximum age of 70, Fichtner maintains.

In the interview, he notes that some employers have already started to include annuities as a default option in their retirement plans.

A report he wrote, published last month, "The Peak 65 Generation — Creating a New Retirement Framework," calls for urgent action from government, the financial services industry, employers and consumers to address the reality that "as many as 50% of households [are] at risk of not having enough money to maintain their standard of living in retirement."

The consequences of inaction, he points out in the interview, land heavily on younger generations: Millennials and Gen Zers would have "less protected income from Social Security and at the same time, be paying higher taxes into the system."

A nonprofit group that educates consumers on annuities — the Alliance for Lifetime Income, which published Fichtner's report — is helping to make employers and employees aware of the value and importance of the protected income annuities provide.

ThinkAdvisor recently interviewed Fichtner, speaking by phone from Washington, D.C. At the Social Security Administration from 2007 to 2009, he led its shift away from guidance indicating the best strategy was to take Social Security at age 62 to recommending delaying claiming for as long as practical to manage the risk of outliving one's money.

Still, he remarks in the interview, "people are focused so much on market returns and not on risk management in retirement."

Here are excerpts from our conversation:

THINKADVISOR: Why chiefly did you write the report, "The Peak 65 Generation — Creating a New Retirement Security Framework"?

JASON FICHTNER: To [emphasize] that we need to talk about protected income in retirement right now. The worst outcome [will be] if we do nothing. If we just put our heads in the sand and continue on the path we're on, it will lead to increased payroll taxes and retirees getting a reduction in benefits that's permanent and which will last for future generations.

They'll be born into a world where they're paying higher taxes and getting lower benefits — and having a less secure retirement. We can't wait any longer to change the conversation about how to help people have protected income in retirement and how we can build that over their working years.

What effect is the COVID-19 pandemic having on Americans' retirement?

COVID is exacerbating premature retirement. It's estimated that 4 million people are being forced to retire early as a result of the pandemic because they've lost their jobs or their income has been scaled back.

If they claim early, what's the impact on their Social Security benefits?

People are claiming at 62 thinking there's no penalty, when there actually is: a reduced monthly benefit for the rest of their lives.

What's one way to help earners have a more financially secure retirement?

A strategy that uses partial annuitizing or a trial annuity because annuities can fill the gap for more protected income.

What exactly is "protected income?"

Social Security benefits. In the past, a lot of retirees had Social Security plus a pension — a defined benefit plan — which was also protected income. But now, with [employers' switch] to a defined contribution plan, there's been only one source of protected income: Social Security. Annuities can fill the gap, however.

Please discuss partial annuitization.

You can give yourself additional protected income on top of Social Security by partially annuitizing some of your assets. One idea is to bridge the gap with a short-term annuity that would get you through the few years till you can claim at your full retirement age or at age 70 [for the maximum benefit].

So someone between 62 and 67 can [buy] an annuity that lasts up to five years to get the protected income they would have if they'd waited to start receiving Social Security.

What's a trial annuity?

It tries to overcome the "annuity puzzle": Although people benefit economically from annuities, they don't purchase them. A trial annuity is a great idea from both a marketing perspective and for financial security.

The idea is that when people try out the annuity, they'll see the benefit of receiving this protected income on a monthly basis and will want to keep the annuity going.

What's an example?

It can [be for] a 10-year [term], say. You'll have a two-year trial period in which you start getting that protected monthly income. At any point in those first two years, you can cancel at no cost and without fees, and get the rest of your money back.

Would this product be available only through employers?

It could be created, or adapted, and offered by insurance companies, and made available as a direct sale as well.

There are several different types of annuities. Which one are you referring to?

It's not one size fits all. Everybody has different needs in retirement. It's the role of financial advisors and employers to sit down with employees and talk about the need to save while they're working and discuss products that are available to provide additional protected income in retirement.

Advisors should talk about the risks that exist in retirement, given the client's health history and risk tolerance.

How can advisors overcome the stigma attached to annuities that comes from folks' unwillingness to give up a lump sum for a lifetime stream of monthly income?

It doesn't have to be a full annuitization. It can be partial annuitization. Advisors need to listen to their clients. If the demand for annuities increases, the supply will increase.

Some FAs inform their clients that they simply don't offer annuities.

If an advisor isn't talking about annuities, the client is probably with the wrong advisor and needs to find another one.

Can annuities become part of the target-date funds retirement scenario?

The majority of people with 401(k) plans are invested in ETF target-date funds. If we include annuities as part of the target-date funds plan design, employees will have an annuity option default: When they retire, that option will be there.

That's where we need to start going because people are focused so much on market returns and not on risk management in retirement. Some companies are including annuities as part of target-date fund [plans] as a default option.

Have many employers in general tried to make annuities available as a default option?

A lot of insurance companies and employers are exploring different options for including annuities in plans; and many are starting to roll them out in some way, shape or form. Slow adoption is happening.

What's been the reaction?

[February 2021] research by [TIAA], an Alliance for Lifetime Income member, showed that 86% of plan sponsors who offer an annuity option consider them highly valuable for employees, and over half of employees are highly interested in them or already own one.

Any obstacles to including annuities in employer retirement plans?

There are still a lot of regulatory issues that need to be tangled with. And one of the biggest problems continues to be miscommunication and misunderstanding about annuities by both consumers and the employer-plan market. That's something to overcome.

You mentioned risk management a moment ago. Please expand upon its importance.

In retirement, your goal is not to try to get the largest, greatest return on your assets — it's trying to make sure that you minimize risk. That's risk management. We need to make sure that people have protected income so they can afford the consumption they want in retirement.

We've done a really good job helping people save for retirement. We're not doing a really good job telling them how to protect that money so they can spend it in retirement efficiently, safely and securely.

In your report, you stress that "more Americans will turn age 65 in 2024 than at any point in history" and that this milestone requires the "urgent attention and collective action of policymakers, the financial services industry, employers and consumers." What would the consequences be if your call goes unheeded?

We could be looking at a point where Millennials and Gen Z's will have less protected income from Social Security and at the same time, be paying higher taxes into the system. That's not a recipe for success. So this isn't about just baby boomers.

It's about other generations as well and making sure they have a protected, secure financial retirement. The Social Security trust fund will be insolvent by the early 2030s. That means even less benefits than today for future generations.

From 2007 to 2009, you were the Social Security Administration's chief economist and associate commissioner for retirement policy. Are you frustrated with what the administration is doing, or not doing, today?

Do you have a couple of hours! I think the agency has made marked improvement to help people understand Social Security. But one of the things I'd like to have happen, which I think they can do without legislation, is to change the nomenclature.

I don't want to see [the term] "minimum eligibility age" again! It sends the wrong message. I'd rather they call it "minimum benefit age" and use "maximum benefit age" for when people reach 70.

What's an important change you spearheaded while you were at the administration?

About 75% to 80% of the financial press had been telling their readers that the best strategy was to claim benefits at age 62 because they'd be ahead for the next 14 years.

No one ever said that [after] 14 years, you're going to be behind for the rest of your life! I looked at all the Agency's messages in brochures [etc.], and saw that we were literally saying that 62 was the default claiming age. That was a disservice.

What did you do about that?

We completely changed our messaging, working with the media, Capitol Hill, advisors, the industry — including Fidelity and Vanguard — and AARP. We changed it to say that you should try to delay claiming Social Security for as long as possible.

Take it if you need it; but otherwise, the best strategy is to delay if you're trying to minimize your risk of running out of money in retirement.

Pictured: Jason Fichtner