The topic is, does an annuity count as income? If an annuity is your only source of income, does it count for purposes of accruing a social security benefit, or is annuity income excluded?
The income that you're receiving from the annuity for lifetime income is considered ordinary income, not earned income, which is very important. Now you've got to think about social security and annuities. Number 1, social security, as I always tell people, is the best inflation annuity on the planet. Everyone who has a social security number in the United States already owns an annuity which makes me laugh because when people say, oh, I don't own an annuity, Stan The Annuity Man, America's Annuity Agent. You already own one, you annuity hypocrite, and it's a lifetime income stream. Pensions, annuities, are annuities, lifetime income streams, lifetime income annuities.
Still, with pensions and social security, you can add a lifetime income stream with an annuity, but it's taxed at ordinary income levels. Disclaimer. I'm not a tax expert. Unless it's a CPA or a tax lawyer, you should not receive tax advice from anyone else other than those two categories because those people specialize in tax advice. What I'm giving here is a a a 30,000-foot view of what you're going to take that 30,000-foot view advice, take it to your tax lawyer and CPA, validate it, and get the absolute answer from them.
But one of the questions I’ve gotten is, do annuity payments affect social security? It comes down to your specific situation and the income you are already receiving from other sources, so you can't say yes or no. It depends on your specific situation and the specific income you are receiving and from where that income is coming from.
One of the closing comments I’ve gotten is that someone is thinking of converting a 401K to an annuity for a lifetime income stream. That's a good thought, but we have to dig further. There’s only two questions that you have to ask yourself and answer. Number 1, what do you want the money to do contractually? Number 2, when do you want those contractual guarantees to start?
In this situation, they're thinking, “income from that 401K, turning those assets as growth assets and accumulation assets into decumulation lifetime income.” Now, I would have to ask, when do you want that income stream to start? Do you want it to start right now? That's fine. That's called a Single Premium Immediate Annuity, or if you say, you know what? I'm 59.5; I’m not sure I need the income right now; I might need it at the age 65. Then we're going to quote Deferred Income Annuities, Qualified Longevity Annuity Contracts income riders if it's a 401K type asset.
A couple of other things that I would have to ask you is, all right, you want income, and we'd have to determine whether it's right now or down the road, but do you have a specific dollar amount? In other words, do you want a $1,000 or $2,000 or $3,000 or $2,250 a month starting now or three years or five years or seven years? I'm trying to get to you that that you need to get very detailed with what you want to do. When I say annuities, we're talking about seven plus types if you want to dig in.
You have to come to me and say, I need this specific amount of income, or I'm thinking about taking this amount of the 401K and converting it into a lifetime income stream using a specific annuity type. I need you to think about not just; I need to convert the whole thing, no, and if anyone comes to you and say, let's take the whole 401K and let's take the whole 401K and lump it into this annuity. You got to say hold on there sparky agent. Slow down.
Remember, this is somewhat controversial, but I've said this in many of my videos, and this happens to be a fact, the annuity industry frowns upon you putting more than 50% of your investable assets into annuities. Now, are there some carriers that will allow more than that? Yeah, it's a case-by-case basis. I always like for people to use an as little amount of money as humanly possible to solve for the specific lifetime income goal. I'd rather you come at me and say, my projections, my spreadsheet, my boxes, all that, all my projections that I'm doing on the Excel spreadsheet or whatever you do, I need $2,000 a month either right now or five from now or seven years from now. Fantastic.
That leads us to the next question. How about inflation, Stan The Annuity Man? Well, the annuities don't perfectly solve for inflation; you can have increased to that income stream. Remember, you already own the best inflation annuity on the planet; that’s social security. But with commercial annuities, the annuities with the companies out here, non-governmental. Annuity companies don't give that increase away.
But I went on a rant, but I went on a rant for a reason. Annuities are customizable, meaning you have to talk about the specifics of what you're trying to achieve, and then shop all carriers for the best contractual guarantee, for your specific situation that solves your specific goal, and then provide you enough information to make your decision on your terms and on your timeframe.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.