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.

 

Federal laws and Social Security rules are subject to change at any time. For more details, go to www.ssa.gov.

Investors should carefully consider a variable annuity's risks, charges, limitations, and expenses, as well as the risks, charges, expenses, and investment goals of the underlying investment options. This and other information about Pacific Life are provided in the product and underlying fund prospectuses. These prospectuses should be read carefully before investing.

Guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company.

Optional riders are available for an additional cost. Product features and availability may vary by state and firm.

In order for the contract to be eligible as a QLAC, certain requirements under Treasury Regulations must be met, including limits on the total amount of purchase payments that can be made to the contract. Compliance with the QLAC purchase payments limit is the owner’s responsibility, and failure to adhere may result in the contract no longer being considered a QLAC, and would subject the value of the QLAC to required minimum distribution requirements that may not be accessible through the contract. In addition, there are restrictions on annuity payout options that can be elected under a QLAC contract, and the commutation, payment acceleration, and inflation protection features are not available. Changes to marital status may require a change to the annuity payout option and/or payments in order to maintain the QLAC status.

Annuity withdrawals and other distributions of taxable amounts, including death benefit payouts, will be subject to ordinary income tax. For nonqualified contracts, an additional 3.8% federal tax may apply on net investment income. If withdrawals and other distributions are taken prior to age 59½, an additional 10% federal tax may apply. A withdrawal charge and a market value adjustment (MVA) also may apply. Withdrawals will reduce the contract value and the value of the death benefit benefits, and also may reduce the value of any optional benefits.

Picture of Pacific Life Annuities

Pacific Life offers a broad and diversified range of products and solutions designed to help individuals and families achieve asset growth, sustainable retirement income, and long-term financial independence. We also help businesses manage and fulfill their long-term retirement plan commitments to employees.

Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.

Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. 

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.

No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency