In our first blog post, we noted how important it is that financial professionals consider the effect of the recent Social Security changes on those NOT grandfathered. We discussed Steve and Sandy, two 62-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.
This time we meet Tom and Tammy, local travel mavens. They are both age 57 and plan to retire at 67, their full retirement age (FRA). They plan to spend their early retirement years completing their travel "bucket list," with occasional detours to visit the grandchildren.
Tom and Tammy want to be prepared and are willing to plan now. As they both have parents doing well in their 90s, longevity risk hedging is high on their list. They planned to use Social Security benefits as a cost-of-living (COLA) longevity risk hedge. At FRA, Tom would claim and suspend his benefit, allowing Tammy to claim her spousal benefit. They would both receive deferred retirement credits (DRCs), thus increasing their COLA lifetime benefits.
To keep their target retirement date and travel plans they are concerned that one, or both, will need to claim at age 67, or even earlier.
Can Tom and Tammy still retire at FRA, meet their travel goals, and have the longevity risk hedge they need?
Social Security benefits may still be a good, COLA longevity risk hedge for Tom and Tammy. Unfortunately, it also may be riskier than it originally was. As Tom and Tammy are not grandfathered, therefore cannot elect the claim-and-suspend strategy; their Social Security choices are simple. Let's look at three different strategies they might consider and potential issues with each strategy.
1. One claims. One waits.
Either Tom or Tammy can claim Social Security benefits at age 67, creating cash flow to help support their travel goals. As their benefits are similar, the outcome will be similar. The remaining person can claim at age 70, gathering DRCs. One benefit will have a higher lifetime payment with a COLA.
Potential issue: They may need to take income from other assets, as one Social Security benefit may not be enough to meet their travel goals.
2. Both claim at 67.
Tom and Tammy could both claim Social Security benefits at age 67 and use their other assets to provide income later in life. As they will not receive DRCs, their ultimate benefits may be lower. However, their cash flow at age 67 will be higher. This might work well.
Potential issue: They will likely still need a longevity risk hedge to provide predictable income later in life.
3. Both wait to claim.
Both Tom and Tammy could wait and claim Social Security benefits at age 70. They would both receive DRCs, which would provide them with a nice longevity risk hedge. They will need an income bridge for the years before they claim, and would use some of their assets earlier than planned. They also are concerned about leaving a legacy, and they worry about ways they can create temporary, and flexible, predictable income.
Potential issue: If leaving a legacy is important, some options for creating temporary income may not be appropriate.
One possible way for Tom and Tammy to create temporary, predictable income is with a fixed indexed annuity (FIA) with a guaranteed minimum withdrawal benefit (GMWB) rider. As some FIAs also allow credits while the owner is waiting to take income, these products can create a higher future guaranteed income base. Keep in mind, GMWB credits stop after a withdrawal is taken. When Tom and Tammy claim Social Security benefits, they can stop taking income from the FIA, allowing the FIA contract value to potentially grow and add to their legacy plan. They choose a Joint version of the rider, making sure that they can both benefit as needed.
Another point to consider is that if circumstances change during the next 10 years, Tom and Tammy have additional flexibility. Because the FIA is a type of fixed annuity, they will have a lump sum available to produce income via a single premium immediate annuity (SPIA), or simply by taking distributions as desired. And, hopefully, their assets will continue to grow and provide a legacy for their children.
Next time, we will meet Lori and consider how to create a flexible solution for an 'almost' retiree.
Federal laws and Social Security rules are subject to change at any time. For more details, go to www.ssa.gov.
Guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company.
Annuities are long-term investments designed for retirement.
Typically, riders are optional and available for an additional cost. Product features and availability may vary by state and firm.
Annuity withdrawals and other distributions of taxable amounts, including death benefit payouts, will be subject to ordinary income tax. For non-qualified 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.
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