What your clients need to know about social security and VAs.
Retirement income planning, however, is much wider in scope than just product strategies and managing investments. When you can help your clients effectively manage their social security and pension benefits, it can have a greater impact on their quality of retirement than their return on investments. Too often, however, financial professionals only concentrate on the latter.
As your clients near retirement, it is not enough to limit your practice to the management of their investments. Effectively helping them with retirement planning requires a holistic approach. Financial professionals need to be able to help clients manage all sources of retirement income.
A good place to start is by helping your clients understand how and when they can take their social security benefits. A worker can choose to begin receiving benefits as early as age 62, but if they do so, they'll receive about 25 percent less than if they waited until full retirement age (age 66 or 67, depending on their birth year). If the client waits until they turn 70, they will receive almost 130 percent of what they would have received at full retirement age. At this point, you want to help your client determine their break-even age--typically between 79 and 81. This is the age at which waiting starts to become more attractive than starting early. Health and family history are factors in this decision.
For married clients, however, things are not so straightforward. For one, women live an average of five to six years longer than men, and the majority of women aged 75 to 84 are widows. In other words, the vast majority of husbands will die before their wives. It is important, then, to consider how a husband's social security benefits will impact his wife. How much a surviving wife gets from social security is tied to how much her husband was receiving. If a husband takes his benefits before normal retirement age (NRA), his 25 percent lifetime reduction will translate into a similar reduction in how much his wife is entitled to at his death.
Advising the husband to wait, if possible, until full retirement age or later to take social security benefits may allow for more flexibility for his spouse.
Another opportunity exists to help married clients maximize their social security benefits. If both are fully insured (having a minimum of 40 consecutive quarters of coverage) under social security, they can take advantage of a little-known option for married workers that can stretch their retirement income. The "file and suspend" provision of the Senior Citizens Freedom to Work Act of 2000 notes that "a spouse can take 50 percent of the other spouse's social security benefit if they themselves are of normal retirement age." So a husband can elect to receive half of his wife's benefit at normal retirement age when he defers his own benefit.
The value you provide your clients and prospects as they approach retirement will help determine the success of your practice. Learning how to help your clients manage all their income sources will help you become a sought-after resource in the retirement planning space.
A case study
Sally and Bob are married and both covered under Social Security. Bob is four years older than Sally and has a higher Social Security benefit. Here are the facts and what you can do to bring bob and Sally the most money possible for their situation.
* Sally is 62 years old, and her reduced benefit is $1,200 a month (from taking benefits before normal retirement age [NRA]). She would have received $1,500 at her NRA.
* Bob is 66 years old, and his benefit would be $2,000 if he began at 66 (his NRA).
* Bob elects to take 50 percent of Sally's benefit.
* Bob will get $750 per month (50 percent of what Sally would have received at her normal retirement age).
* Bob is "short" $1,250 per month, or $15,000 per year.
* Bob needs to replace $15,000 in guaranteed income. Bob and Sally deposit $375,000 of personal savings into a variable annuity with guaranteed income benefits. (While it is a good idea to replace guaranteed income with guaranteed income, some products require a waiting period before income benefits are available, so make sure your clients plan accordingly.)
* A 4 percent withdrawal of income on a variable annuity would replace Bob's $15,000 shortfall.
* Bob waits until he turns 70 to begin his benefits (his 50 percent of Sally's will end at this point).
* Bob's new monthly benefit is now $2,600 (approximately 130 percent of NRA).
* Bob's break-even age is between 80 and 81 years old.
* Sally's survivorship benefit will be higher because it is based on the higher benefit received by bob.
In short, this strategy increases Social Security guaranteed income for both Bob and Sally, while Bob is alive (assuming he lives past 80), and significantly increases Sally's Social Security survivorship benefit.
J. Michael Agan is assistant vice president of retirement income planning for AXA Distributors Advanced Markets. He can be reached at michael. firstname.lastname@example.org.
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|Author:||Agan, J. Michael|
|Publication:||Agent's Sales Journal|
|Date:||Sep 1, 2009|
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