Social Security + term life

[dandan14]

I'm curious to get thoughts on this. I'm helping some friends with social security / retirement planning. Both are age 60 hoping to retire in June 2020. Wife's PIA is slightly more than husband's PIA. I'm setting up their plan to start retirement at 62, but wait until much later to file SS -- living off of savings in the interim. If they wait until age 70, the SS payout would fully cover their cost of living.

It seems to me that the biggest risk to their plan is if one spouse dies very early. In that case, there will only be the one (bigger) check, instead of both SS checks.

It occurred to me that this might be a great use of a 10 year level term life insurance policy. That way, they can spend more in their pre-SS years, without worry of the later years being underfunded. I priced out an age 60 10-year 300k term policy for about $1k per year.

Thoughts?

Dan

[gmaynardkrebs]

I'm curious to get thoughts on this. I'm helping some friends with social security / retirement planning. Both are age 60 hoping to retire in June 2020. Wife's PIA is slightly more than husband's PIA. I'm setting up their plan to start retirement at 62, but wait until much later to file SS -- living off of savings in the interim. If they wait until age 70, the SS payout would fully cover their cost of living.

It seems to me that the biggest risk to their plan is if one spouse dies very early. In that case, there will only be the one (bigger) check, instead of both SS checks.

It occurred to me that this might be a great use of a 10 year level term life insurance policy. That way, they can spend more in their pre-SS years, without worry of the later years being underfunded. I priced out an age 60 10-year 300k term policy for about $1k per year.

Thoughts?

Dan

I would go out to 15, maybe even 20. If one dies at age 70 or 71, that could be 25 years living on one SS check for the survivor. Expenses may go down somewhat, but not by half.
EDIT: CORRECTION: They elect between their own check or that of the deceased spouse. There is no 50% reduction.

[Jablean]

They get the bigger currently. My dad is using my mom's higher amount even though they were divorced for 45 years they had been together for 10 which qualified him when she died last year.

[delamer]

Have you considered the option of the husband claiming at his FRA? That is frequently the best option — the spouse with the lower PIA claims earlier while the spouse with the higher benefit waits until 70.

Wouldn’t they each need life insurance under your plan? Also, what happens if one of them dies at 70? They will have spent down their assets and only have one SS benefit and no life insurance coming in.

It sounds like there is a disconnect between their expenses and their assets and income.

[Nate79]

That price for the term seems extremely low. Call me doubtful it would actually be that cheap but would be very interesting to hear what the actual quote turns out to be. Maybe they are in perfect health which is unusual at that age.

[BrainDrain]

I agree that two insurance policies would need to be purchased: one on each of them. You would also need to go beyond 10 yrs level term to protect this risk because the financial risk still exists once they’ve waited until age 70 to collect SS. I expect purchasing two 20 year level term policies at their ages would be much more expensive than the quotes the OP shared.

So called joint life aka first to die term policies may be an option to cover them both with one policy with the death benefit paid out upon the first of them passing. But the quotes I’ve seen for this rare product can often be higher than two individual them policies.

Truthfully the biggest financial risk is generally that people live too long, not short. I understand that with both spouses waiting until age 70 to maximize SS that if one of them were to pass it would be a hardship. But then you would have only the living expenses remaining for one of them, which may be 65-75 percent of their joint expenditures. That bridge between 55 percent of SS after one death (the person with the higher PIA has that benefit continue) to 65-75 percent should be able to be met with other assets assumimg they weren’t entirely consumed in the bridge between retirement at age 62 and 70.

[gmaynardkrebs]

They get the bigger currently. My dad is using my mom's higher amount even though they were divorced for 45 years they had been together for 10 which qualified him when she died last year.

As a spouse, you can claim a Social Security benefit based on your own earnings record, or you can collect a spousal benefit that will provide you 50 percent of the amount of your spouse's Social Security benefit as calculated at their full retirement age (FRA). However, I'm not sure if the rule is the same if the spouse never worked.

[David Jay]

They get the bigger currently. My dad is using my mom's higher amount even though they were divorced for 45 years they had been together for 10 which qualified him when she died last year.

As a spouse, you can claim a Social Security benefit based on your own earnings record, or you can collect a spousal benefit that will provide you 50 percent of the amount of your spouse's Social Security benefit as calculated at their full retirement age (FRA). However, I'm not sure if the rule is the same if the spouse never worked.

You are confusing spousal and widow(er) benefits. This is not a spousal benefit, this is widow(er) benefit. Same as your earlier comment above. There is no "50%" in the calculation for widow(er) benefit.

[JoeRetire]

It seems to me that the biggest risk to their plan is if one spouse dies very early. In that case, there will only be the one (bigger) check, instead of both SS checks.

That kind of risk can indeed be mitigated by life insurance.

It occurred to me that this might be a great use of a 10 year level term life insurance policy. That way, they can spend more in their pre-SS years, without worry of the later years being underfunded. I priced out an age 60 10-year 300k term policy for about $1k per year.

Is $300k enough? Is 10 years enough?

Would either be able to live the rest of their life on one SS check?

[gmaynardkrebs]

You are confusing spousal and widow(er) benefits. This is not a spousal benefit, this is widow(er) benefit. Same as your earlier comment above. There is no "50%" in the calculation for widow(er) benefit.

Got it. Thanks!

[dandan14]

Thanks guys -- you caught a couple of errors in my original thinking.

First, the biggest error was that yes, I should have planned 2 life insurance policies. Second, I wasn't I didn't age them up + 2 years from now when I priced it out. So fixing that, assuming average health, seems like almost a perfect 100:1 ratio at various levels of payout (200k = $2000/year for a same age couple).

Given that, I played around with the "right" number. I want to ensure that they are still ok, even in the worst case scenario -- which now would mean dying the day after the policy expires.
At the moment, 10 years for 200k seems seems to work.

[delamer]

Thanks guys -- you caught a couple of errors in my original thinking.

First, the biggest error was that yes, I should have planned 2 life insurance policies. Second, I wasn't I didn't age them up + 2 years from now when I priced it out. So fixing that, assuming average health, seems like almost a perfect 100:1 ratio at various levels of payout (200k = $2000/year for a same age couple).

Given that, I played around with the "right" number. I want to ensure that they are still ok, even in the worst case scenario -- which now would mean dying the day after the policy expires.
At the moment, 10 years for 200k seems seems to work.

So they spend down their nest egg to cover expenses until age 70, then begin to collect both their Social Security checks and their life insurance expires.

What happens if one if them dies at age 70+1 day?

The survivor now has just one Social Security check to live on, unless the nest egg has not been entirely spent down. It sounds like maybe it hasn’t, but since you haven’t provided numbers it is hard to tell.

[Darth Xanadu]

I believe OP intends to suggest they buy the life insurance when they retire at 62, so there will be potentially a 2-year span of dual SS income before the term is up on the insurance.

[gmaynardkrebs]

I believe OP intends to suggest they buy the life insurance when they retire at 62, so there will be potentially a 2-year span of dual SS income before the term is up on the insurance.

Not sure that solves the problem. There would still be a lot one one-check years left.

[Darth Xanadu]

I believe OP intends to suggest they buy the life insurance when they retire at 62, so there will be potentially a 2-year span of dual SS income before the term is up on the insurance.

Not sure that solves the problem. There would still be a lot one one-check years left.

I don't disagree, but it really depends on spending, size of SS payments, size of portfolio, etc. Hard to know without the details.

[dandan14]

I believe OP intends to suggest they buy the life insurance when they retire at 62, so there will be potentially a 2-year span of dual SS income before the term is up on the insurance.

Not sure that solves the problem. There would still be a lot one one-check years left.

Right....so I'm trying to find the balance of a policy that is cheap enough to be covered from cash flow while still providing enough death benefit. If spouse 1 dies, spouse 2 will have about a $6-$7k yearly deficit will will sip from remaining savings. I'm using TIPS to guarantee returns and remove all volatility. I could up the ante a bit on that to squeeze out more return, but I don't think it is necessary here.

[soccerrules]

so you are suggesting $20K in premiums (over 10 years) on the risk that one of them dies prior to 72.

What happens after 72 ? --then they really are kind of in the same situation. Lowish Nest egg and needing 2 SS incomes. When one of them passes the survivor will be in trouble, right ?

What is their AA on the nest egg ? Do you have them at 50/50 or something more bond-fixed focused? They may need to stay 60/40 from 62-70

I will say when I ran the numbers thru firesim my success of a 35 year retirement starting at 60 increased by 7 to 8% if i took SS at 62 and didn't wait until 70. I found that interesting since the general thought by many BHr's is to wait on SS until 70 for the larger benefits (especially for surviving spouse). I have 120+ months to mull this over

[gmaynardkrebs]

so you are suggesting $20K in premiums (over 10 years) on the risk that one of them dies prior to 72.

What happens after 72 ? --then they really are kind of in the same situation. Lowish Nest egg and needing 2 SS incomes. When one of them passes the survivor will be in trouble, right ?

What is their AA on the nest egg ? Do you have them at 50/50 or something more bond-fixed focused? They may need to stay 60/40 from 62-70

I will say when I ran the numbers thru firesim my success of a 35 year retirement starting at 60 increased by 7 to 8% if i took SS at 62 and didn't wait until 70. I found that interesting since the general thought by many BHr's is to wait on SS until 70 for the larger benefits (especially for surviving spouse). I have 120+ months to mull this over

Probably by claiming at age 62, you avoided drawing down your investment portfolio, which most people think have higher projected returns than SS. Let's hope so, but unlike SS, that is not guaranteed, and could backfire badly. There is little doubt that for the vast majority of healthy people, waiting until age 70 is the best choice. Increasing the equity allocation above 50/50, which will be recommended by every simulator on earth, shows exactly what is wrong with those calculators. IMO, it is not a good idea at all for this couple, who are not in a position to take more risk.

[dandan14]

so you are suggesting $20K in premiums (over 10 years) on the risk that one of them dies prior to 72.

What happens after 72 ? --then they really are kind of in the same situation. Lowish Nest egg and needing 2 SS incomes. When one of them passes the survivor will be in trouble, right ?

What is their AA on the nest egg ? Do you have them at 50/50 or something more bond-fixed focused? They may need to stay 60/40 from 62-70

I will say when I ran the numbers thru firesim my success of a 35 year retirement starting at 60 increased by 7 to 8% if i took SS at 62 and didn't wait until 70. I found that interesting since the general thought by many BHr's is to wait on SS until 70 for the larger benefits (especially for surviving spouse). I have 120+ months to mull this over

For the projection (and maybe in real life), I'm using TIPS. That way we have no return risk and can project cash flow perfectly without risk of inflation or stock market volatility.

[Nate79]

I would still caution that until you have actual quotes from life insurance companies after they have gone thru the medical review it is really difficult to predict what the premiums will be.

[delamer]

You also should consider the possibility that they will not be able to retire in 2 years with the lifestyle that they want.

Your life insurance solution is problematic, based on what you’ve told us.

Maybe if you posted details, you would get alternative ideas.

[gmaynardkrebs]

You also should consider the possibility that they will not be able to retire in 2 years with the lifestyle that they want.

Your life insurance solution is problematic, based on what you’ve told us.

Maybe if you posted details, you would get alternative ideas.

In particular, what's the thinking behind just 10 years term?

[dandan14]

[/quote]
In particular, what's the thinking behind just 10 years term?
[/quote]

I think you guys are right...surprisingly, a 20 year term for a 62 year old, is still not crazy expensive. It simplifies things, and actually allows me to push up the allowed expenditures another few thousand.

[dandan14]

For those asking for details, here is my google spreadsheet. Keep in mind that both J and K are same age.
https://docs.google.com/spreadsheets/d/ ... sp=sharing

[gmaynardkrebs]

For those asking for details, here is my google spreadsheet. Keep in mind that both J and K are same age.
https://docs.google.com/spreadsheets/d/ ... sp=sharing

Note that $200K won't be $200K in today's dollars due to inflation 15-20 years from now. Would an inflation adjusted deferred annuity be an option? I think I would be at least as concerned about longevity risk with them.They don't have a big cushion.

[curmudgeon]

Take a look at the scenario where the higher earner (or maybe oldest) defers taking SS until age 70. The other takes SS at 62. The deferred benefit will be nearly 1/3 larger than the FRA benefit, and that larger benefit will ALSO be the survivor benefit for the other spouse, replacing their smaller benefit, if the older were to die first.

By deferring one of the SS claims, this helps to limit the cash flow shortfall if one were to die substantially earlier than the other.

[BrainDrain]

]Note that $200K won't be $200K in today's dollars due to inflation 15-20 years from now. Would an inflation adjusted deferred annuity be an option? I think I would be at least as concerned about longevity risk with them.They don't have a big cushion.

The cheapest inflation adjusted annuity you can purchase is delaying SS. If both wait until 70, survivor would get 65 percent of joint SS income $37,371/$57,471. Surely the spending requirements will go down upon first death (Medicare B and D and supplemental premiums for one) and they can be supplemented by remaining nest egg which now only needs to support one person.

If the first dies early there’s more nest egg remaining to use for one person. If first dies later then they’ve benefitted from waiting to take SS.

[gmaynardkrebs]

]Note that $200K won't be $200K in today's dollars due to inflation 15-20 years from now. Would an inflation adjusted deferred annuity be an option? I think I would be at least as concerned about longevity risk with them.They don't have a big cushion.

The cheapest inflation adjusted annuity you can purchase is delaying SS. If both wait until 70, survivor would get 65 percent of joint SS income $37,371/$57,471. Surely the spending requirements will go down upon first death (Medicare B and D and supplemental premiums for one) and they can be supplemented by remaining nest egg which now only needs to support one person.

If the first dies early there’s more nest egg remaining to use for one person. If first dies later then they’ve benefitted from waiting to take SS.

Completely agree that waiting on SS is the right way. What I'm thinking is that I'd like to see some of that $400K annuatized. The OP is using TIPS for that, which is a reasonable alternative, but a deferred inflation adjusted annuity would allow them to have a little more spending money during their lifetimes. In addition, it might reduce the need for life insurance if they use 100% survivorship. Professor Zvi Bodie has several papers on this, and I believe an upcoming book. Might be worth a read.

[soccerrules]

In particular, what's the thinking behind just 10 years term?
[/quote]

I think you guys are right...surprisingly, a 20 year term for a 62 year old, is still not crazy expensive. It simplifies things, and actually allows me to push up the allowed expenditures another few thousand.
[/quote]

(I did not look at your spreadsheet)
I see your reasoning behind the life insurance "hedge". As another poster commented, the cost for the insurance policies will probably be higher than you expect. Maybe not decision alerting, but probably higher. The longer the term and the higher the death benefit just makes the cost rise. It is my understanding that there are at least 12-14 underwriting levels. In order to get the very top/ best rates (one typically quoted) an individual really need to be Superman or Superwoman. They don't give those rates out often. One consideration if you move forward with this plan is to decrease the DB initially and then over the term reduce the DB (as the need for funds lessens) which will also reduce the yearly cost.

[gmaynardkrebs]

One consideration if you move forward with this plan is to increase the DB initially and then over the term reduce the DB (as the need for funds lessens) which will also reduce the yearly cost.[/color]

Not a wise plan with level term, because while the premium per dollars insured remains the same over the years, your likelihood of collecting rises every year. I'm sure it would make the insurance company very happy though.

[soccerrules]

One consideration if you move forward with this plan is to increase DECREASE the DB initially and then over the term reduce the DB (as the need for funds lessens) which will also reduce the yearly cost.[/color]

Not a wise plan with level term, because while the premium per dollars insured remains the same over the years, your likelihood of collecting rises every year. I'm sure it would make the insurance company very happy though.

sorry edited -- i meant DECREASE. My plan is to consider "if" i keep my level term past FIRE I would decrease the DB greatly and perhaps keep it for a few more years as a way to leave something for the kids so they don't have to wait until we both pass to receive monies.

[gmaynardkrebs]

One consideration if you move forward with this plan is to increase DECREASE the DB initially and then over the term reduce the DB (as the need for funds lessens) which will also reduce the yearly cost.[/color]

Not a wise plan with level term, because while the premium per dollars insured remains the same over the years, your likelihood of collecting rises every year. I'm sure it would make the insurance company very happy though.

sorry edited -- i meant DECREASE. My plan is to consider "if" i keep my level term past FIRE I would decrease the DB greatly and perhaps keep it for a few more years as a way to leave something for the kids so they don't have to wait until we both pass to receive monies.

Whatever the initial amount, you are giving up the "best" years of the policy if you cancel all or part of it in the later years of the term, for reasons that should be obvious. If you think you will need less at some point, it would be better to do a buy separate policies of 10, 15 and 20, so you are not paying for insurance that you think you won't need after a certain age.

[soccerrules]

One consideration if you move forward with this plan is to increase DECREASE the DB initially and then over the term reduce the DB (as the need for funds lessens) which will also reduce the yearly cost.[/color]

Not a wise plan with level term, because while the premium per dollars insured remains the same over the years, your likelihood of collecting rises every year. I'm sure it would make the insurance company very happy though.

sorry edited -- i meant DECREASE. My plan is to consider "if" i keep my level term past FIRE I would decrease the DB greatly and perhaps keep it for a few more years as a way to leave something for the kids so they don't have to wait until we both pass to receive monies.

Whatever the initial amount, you are giving up the "best" years of the policy if you cancel all or part of it in the later years of the term, for reasons that should be obvious. If you think you will need less at some point, it would be better to do a term ladder of 10, 15 and 20, so you are not paying for insurance that you feel won't need as you age.

valid point

[SuzBanyan]

I don’t see the value of life insurance for this couple. The cost — $4300 for 20 years — is almost 10% of the $45k they plan to spend each year. They would be better off not spending that amount and allowing their nest egg to grow.

Here’s one suggestion:

K takes SS at 62= $11k
J takes SS at 70= $37K
They can live on $41k, so they need about $30k for 8 years= $240k. Balance in 401k is $160k.

After J reaches 70, they have $48k per year, which allows them to save $7k per year.

After first to die, the survivor has $37k per year and can probably live on $4k less each year than they did as a couple. If not, the survivor has more than $150K to make up the shortfall.

Even spending $45K per year without life insurance, this still works. It would work even better if they delayed retirement for at least 1 year to 63.

[delamer]

]Note that $200K won't be $200K in today's dollars due to inflation 15-20 years from now. Would an inflation adjusted deferred annuity be an option? I think I would be at least as concerned about longevity risk with them.They don't have a big cushion.

The cheapest inflation adjusted annuity you can purchase is delaying SS. If both wait until 70, survivor would get 65 percent of joint SS income $37,371/$57,471. Surely the spending requirements will go down upon first death (Medicare B and D and supplemental premiums for one) and they can be supplemented by remaining nest egg which now only needs to support one person.

If the first dies early there’s more nest egg remaining to use for one person. If first dies later then they’ve benefitted from waiting to take SS.

Spending requirements will likely go down, but maybe not proportionally to the income decline. Food, clothing, medical, maybe travel, maybe transportation will drop. But housing may stay the same, if the survivor does not move. Marginal tax rates are higher for single versus joint filers.

It really needs to be evaluated on a case-by-case basis

[Dottie57]

I think working longer is a better idea.

[dandan14]

For those asking for details, here is my google spreadsheet. Keep in mind that both J and K are same age.
https://docs.google.com/spreadsheets/d/ ... sp=sharing

Note that $200K won't be $200K in today's dollars due to inflation 15-20 years from now. Would an inflation adjusted deferred annuity be an option? I think I would be at least as concerned about longevity risk with them.They don't have a big cushion.

Since the SS payouts stay in "real" dollars, I've use the inflation variable to decrease the real value of the insurance payout as time goes forward.

[dandan14]

Take a look at the scenario where the higher earner (or maybe oldest) defers taking SS until age 70. The other takes SS at 62. The deferred benefit will be nearly 1/3 larger than the FRA benefit, and that larger benefit will ALSO be the survivor benefit for the other spouse, replacing their smaller benefit, if the older were to die first.

By deferring one of the SS claims, this helps to limit the cash flow shortfall if one were to die substantially earlier than the other.

I agree with that. Having the lower take at 62 and the higher claim at 70 is my current plan of attack.

[dandan14]

]Note that $200K won't be $200K in today's dollars due to inflation 15-20 years from now. Would an inflation adjusted deferred annuity be an option? I think I would be at least as concerned about longevity risk with them.They don't have a big cushion.

The cheapest inflation adjusted annuity you can purchase is delaying SS. If both wait until 70, survivor would get 65 percent of joint SS income $37,371/$57,471. Surely the spending requirements will go down upon first death (Medicare B and D and supplemental premiums for one) and they can be supplemented by remaining nest egg which now only needs to support one person.

If the first dies early there’s more nest egg remaining to use for one person. If first dies later then they’ve benefitted from waiting to take SS.

Completely agree that waiting on SS is the right way. What I'm thinking is that I'd like to see some of that $400K annuatized. The OP is using TIPS for that, which is a reasonable alternative, but a deferred inflation adjusted annuity would allow them to have a little more spending money during their lifetimes. In addition, it might reduce the need for life insurance if they use 100% survivorship. Professor Zvi Bodie has several papers on this, and I believe an upcoming book. Might be worth a read.

Interesting idea. I've read some of Bodie's work, but admittedly, it has been a few years ago. They will need a part of the nest egg to get them through the first 8 years (prior to age 70 when higher SS is claimed) -- but annuitizing a portion of it, may be a good idea over the TIPS. I'll see if I can model that out.

[dandan14]

One consideration if you move forward with this plan is to increase DECREASE the DB initially and then over the term reduce the DB (as the need for funds lessens) which will also reduce the yearly cost.[/color]

Not a wise plan with level term, because while the premium per dollars insured remains the same over the years, your likelihood of collecting rises every year. I'm sure it would make the insurance company very happy though.

sorry edited -- i meant DECREASE. My plan is to consider "if" i keep my level term past FIRE I would decrease the DB greatly and perhaps keep it for a few more years as a way to leave something for the kids so they don't have to wait until we both pass to receive monies.

Whatever the initial amount, you are giving up the "best" years of the policy if you cancel all or part of it in the later years of the term, for reasons that should be obvious. If you think you will need less at some point, it would be better to do a buy separate policies of 10, 15 and 20, so you are not paying for insurance that you think you won't need after a certain age.

Inflation decreases the death benefit automatically.

[gmaynardkrebs]

One consideration if you move forward with this plan is to increase DECREASE the DB initially and then over the term reduce the DB (as the need for funds lessens) which will also reduce the yearly cost.[/color]

Not a wise plan with level term, because while the premium per dollars insured remains the same over the years, your likelihood of collecting rises every year. I'm sure it would make the insurance company very happy though.

sorry edited -- i meant DECREASE. My plan is to consider "if" i keep my level term past FIRE I would decrease the DB greatly and perhaps keep it for a few more years as a way to leave something for the kids so they don't have to wait until we both pass to receive monies.

Whatever the initial amount, you are giving up the "best" years of the policy if you cancel all or part of it in the later years of the term, for reasons that should be obvious. If you think you will need less at some point, it would be better to do a buy separate policies of 10, 15 and 20, so you are not paying for insurance that you think you won't need after a certain age.

Inflation decreases the death benefit automatically.

That's true, and the premiums are declining at the same rate. What's not declining is the likelihood of the policy paying off, which is why I'm not canceling my few remaining term policies, even though I no longer need them. I'm hoping not to collect, however.

[dandan14]

Not a wise plan with level term, because while the premium per dollars insured remains the same over the years, your likelihood of collecting rises every year. I'm sure it would make the insurance company very happy though.

sorry edited -- i meant DECREASE. My plan is to consider "if" i keep my level term past FIRE I would decrease the DB greatly and perhaps keep it for a few more years as a way to leave something for the kids so they don't have to wait until we both pass to receive monies.

Whatever the initial amount, you are giving up the "best" years of the policy if you cancel all or part of it in the later years of the term, for reasons that should be obvious. If you think you will need less at some point, it would be better to do a buy separate policies of 10, 15 and 20, so you are not paying for insurance that you think you won't need after a certain age.

Inflation decreases the death benefit automatically.

That's true, and the premiums are declining at the same rate. What's not declining is the likelihood of the policy paying off, which is why I'm not canceling my few remaining term policies, even though I no longer need them. I'm hoping not to collect, however.

Oh, wait! You just made a great point. While the monthly/yearly premium isn't going down, it sort of is, because of inflation. So since my sheet does everything in "real" dollars, I need to decrease the cost of the insurance yearly, just like I do with the death benefit.
That should be a small positive in my projections, since it will reduce my (their) expense.