A 5-Year Income Annuity as a Bridge to Social Security: How It Works

What a period certain annuity is

An immediate annuity turns a lump sum into a stream of payments. The SEC describes it this way: "you make a single payment to purchase the annuity and typically start receiving income payments within one year of purchase," and the income may be for life or "some other set period of time" (Investor.gov, Annuities, checked October 14, 2026).

A period certain annuity is the "set period" version. It pays for a fixed number of years, for example 5, whether you live or die. If you die early, the remaining payments generally go to your beneficiary; confirm that in the contract. It is not lifetime income. When the period ends, the payments stop.

That makes it a different tool from a lifetime annuity. There is no bet on how long you live. You are buying a known schedule of payments, and much of each payment is your own money coming back.

Why a bridge to Social Security at 70

For anyone born in 1960 or later, full retirement age is 67 (20 CFR 404.409, checked October 14, 2026). Claiming before then cuts the benefit by 5/9 of 1% for each of the first 36 months early (20 CFR 404.410), so claiming at 65 means a 13.3% cut (24 months x 5/9%). Waiting past 67 adds 2/3 of 1% a month, or 8% a year, up to 70 (20 CFR 404.313), so 70 pays 124% of the full amount.

Put together: a hypothetical $3,000 monthly benefit at 67 would be $2,600 at 65 and $3,720 at 70, about 43% more for life than claiming at 65. Social Security also uses a deceased worker's delayed credits to raise the benefit of the surviving widow or widower (SSA, POMS RS 00615.690, effective December 6, 2023). For a married couple, that survivor effect can matter as much as the higher check itself.

The catch is the gap. Someone who stops working at 65 and waits until 70 needs five years of income from savings. That is the bridge. See the Social Security bridge strategy guide for the full planning picture.

A Treasury or CD ladder can do the same job

The simplest bridge is often a ladder: buy bonds or CDs that mature one each year, in the amounts you need. Treasury notes are sold in terms of 2, 3, 5, 7 or 10 years and "pay a fixed rate of interest every six months until they mature" (TreasuryDirect, Treasury Notes, checked October 14, 2026). Bank CDs are insured "to at least $250,000 per depositor, per ownership category" at each insured bank (FDIC, Understanding Deposit Insurance, checked October 14, 2026).

A ladder and a period certain annuity do nearly the same thing: fixed payments for fixed years. The ladder has three advantages. It can be held inside an IRA. Treasury securities can be sold before maturity if plans change (at the market price, which may be lower). And the backing is the U.S. government or federal deposit insurance, not one insurer.

The fair test for an annuity quote is simple. Ask what it would cost to buy a ladder of Treasury securities paying the same amounts on the same dates. If the annuity premium is higher, the ladder is the better deal for the same job.

The trade-offs of the annuity version

• Little or no liquidity. Many immediate annuities cannot be cashed in once payments begin. Ask in writing whether this one can, and at what cost.
• Insurer credit risk. The SEC notes that an insurer's obligations "are subject to its financial strength and claims-paying ability" (Investor.gov, Annuities). If an insurer fails, state guaranty associations step in, with most states covering annuity benefits up to $250,000 in present value per person, per insurer (NOLHGA, How You Are Protected, information as of June 1, 2025). See are annuities safe.
• Inflation. Level payments buy less each year as prices rise.
• The payout includes your own principal. A high-sounding payout rate is mostly your premium returned. Compare the total payments to the premium, not the rate to a CD rate.
• Seller pay. We found no recent public data on commissions for period certain annuities. Ask what the seller earns on this contract versus a deferred annuity.

Taxes: IRA money vs money outside an IRA

Inside an IRA. Payments are traditional IRA distributions, which are fully taxable as ordinary income unless you made nondeductible contributions (IRS, Publication 590-B, checked October 14, 2026). Spending IRA money from 65 to 70 also lowers the balance that later required minimum distributions (RMDs) are figured on, but any IRA withdrawal does that, not only an annuity. For anyone born in 1960 or later, RMDs start at 75 (26 CFR 1.401(a)(9)-2(b)(2)(vi)), so a 5-year bridge from 65 ends years before they begin.

If an IRA annuity is still paying once RMDs start, its payments are governed by 26 CFR 1.401(a)(9)-6, and the owner may elect to aggregate that annuity with other IRAs so the payments count toward the combined RMD (26 CFR 1.408-8(e)(1)(ii); final regulations, Federal Register, July 19, 2024, 89 FR 58886). Check the details with a tax professional.

Outside an IRA. Part of each payment is a tax-free return of what you paid. For a fixed period annuity, the IRS has you divide your investment by the total expected payments; that share of each payment is tax-free (IRS, Publication 939, checked October 14, 2026). On a hypothetical $216,000 premium paying $240,000 over 5 years, 90% of each payment is tax-free and 10% is taxable.

When it can make sense

A period certain annuity can be reasonable for someone who wants one contract, no decisions for five years, and does not need the money back, and when the quote is competitive with a Treasury ladder on the same day. It removes the need to sell investments during a market drop to pay bills.

Before signing, check the insurer and the seller with your state insurance department and the NAIC Consumer Insurance Search, and use the free-look period to review the contract. Read about sequence of returns risk and how an immediate annuity works first. A fee-only planner or tax professional can run the comparison without selling either option.

A plain example with numbers

Hypothetical: a 65-year-old retires with a $1,200,000 IRA in a 60/40 stock and bond mix and needs $48,000 a year for 5 years until claiming Social Security at 70. All rates below are hypothetical, not quotes. Payments are made at the end of each year.

The arithmetic: the ladder costs the present value of five $48,000 payments at 4%, which is $213,687. The rest, $986,313, stays invested untouched: $986,313 x 0.80 x 1.06 x 1.06 x 1.06 x 1.06 = $996,158. Drawing from the mix instead: $1,200,000 falls to $960,000 and $48,000 is sold (5% of what is left, at low prices), leaving $912,000; then each year grows 6% less $48,000, ending at $941,397.

In the down-market path, setting money aside left about $55,000 more at 70. In the steady 6% path, drawing from the portfolio came out about $15,000 ahead, because the set-aside money earned less than stocks. The benefit comes from not selling in a bad year, and the ladder delivers it as well as the annuity does.

Sources

The Retirement Literacy Foundation is a 501(c)(3) public charity. This page is general education, not tax, legal or investment advice. Nothing is sold here, no product is recommended, and RLF accepts no funding from financial companies. Rules and figures change; each one above shows its source and date. Check anything you plan to act on with your state insurance department or a qualified professional who is not paid on the product.