Critical Resets for Clients Who Are Not Grandfathered by Social Security Changes – Part 3/3

February 14, 2017

Let's meet Lori, my WAR (Women of Age Riding) colleague. Lori just turned 62, and plans on retiring later this year.

In our first two blogs, we noted how important it is for financial professionals to consider the effect of the recent Social Security changes on those NOT grandfathered. In our first blog post, we discussed Steve and Sandy, two 61 year olds, and how they used a deferred income annuity (DIA) to create a longevity risk hedge to replace their planned Social Security claiming strategy.

In our second blog post, we met Tom and Tammy, and learned how a Fixed Income Annuity (FIA) might provide a flexible income bridge. Now we meet Lori, my WAR (Women of Age Riding) colleague. Lori just turned 62, and plans on retiring later this year and is looking to have a sound retirement plan in place.

Lori just acquired Baxter, a well-schooled horse, and plans to use her early retirement years to improve her riding skills, and perhaps even do some showing. She needs higher income in her early retirement years to pursue her riding. She is concerned about having income later in life – her mother lived to be over 100. Her ex-husband is a year older than she is, and she planned to claim as an ex-spouse when she attains her full retirement age (FRA).

Unfortunately, she was too young to be grandfathered for that option. She has competing concerns – having enough income before she claims Social Security, and having enough income later in life.

Can Lori and Baxter still make it to the show ring, and be confident that she'll have enough income if she lives as long as her mom?

As Lori is on her own, her Social Security options are simple – claim or not. Her only choices involve when she claims. Let’s look at three different strategies she might consider and potential issues with each strategy.

        1. Claim at 62.

Lori can claim her Social Security benefit as early as age 62. As she will not continue working, she will not have the Earning Test. But she will have a permanent pay cut. Using other assets, she will need to plan her longevity risk hedge carefully.

Potential issue: This may limit her income options in her early retirement years.

        2. Claim at FRA.

Lori could claim at FRA, and receive her full benefit. She will still need some income in her earliest retirement years, and will reduce the value of her Social Security benefit as a longevity risk hedge.

Potential issue: This will help with cash flow, however, withdrawals from other assets may be needed to cover the cost of improving her riding skills and showing her horse and may impact her longevity risk hedge.

        3. Claim at age 70.

By waiting until age 70, and receiving Deferred Retirement Credits (DRCs), Lori will permanently have a higher benefit. But she will need to use her assets to produce income for her early years AND still be able to produce some additional predictable income later in life. She is also concerned that her IRA Required Minimum Distributions (RMDs) will create more income than she needs at that time, and drain her IRA faster than desired.

Potential issue: IRA assets might be used as an income bridge in the early years, but predictable income in the later years may still be an issue.

With competing concerns, Lori might not be able to both enjoy her new horse as planned, and meet her retirement income goals.

Consider an Alternate Strategy

One possible solution for Lori involves using a combined strategy. First, Lori uses some non-qualified assets to purchase a variable annuity with a Guaranteed Minimum Withdrawal Benefit (GMWB) optional rider that provides guaranteed lifetime income for her life.

She will use this, as well as some of her IRA, as an income bridge until age 66. She also purchases a Qualified Longevity Annuity Contract (QLAC) with some of her IRA assets to generate guaranteed income payments that begin at age 85. When she reaches age 66, she will reduce the distributions from the non-qualified annuity, allowing that asset to potentially grow. She has the QLAC to provide guaranteed income later in life. (If needed, she could start the payments as early as age 80.)

Lori now feels confident that she can start her training program, and get ready for next spring's show season. She and Baxter can enjoy time together, and Lori can still feel comfortable that she will have additional resources to supplement her income in later years.


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