Social Security replacement annuity -- Is there such a product?

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PaulF
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Social Security replacement annuity -- Is there such a product?

Post by PaulF »

Most annuities offer a survivorship option, but, as we all know, Social Security does not. When one member of a couple dies, the survivor loses the household income from spouse's SS; for households that rely on SS to a large extent, this loss is serious. Of course, one could carry life insurance to mitigate that risk, but this is expensive for older people.

It seems to me that what is needed is hybrid life insurance/annuity product. It would replace the lost SS income, but only for the beneficiary's lifetime. (For most couples, the expected lifespan of the survivor will be fairly low.)

Is there any such product that I am simply unaware of?

Or can anyone propose a realistic scheme for creating one from existing products? What springs to mind is an array of term life insurance policies, priced such that the payout at time of death is sufficient to purchase a SPIA for the survivor. One would choose, say, a 1-yr term, a 2-yr term, a 3-yr term, etc., so that the payout decreases over time (reflecting decreased cost of a SPIA as the survivor ages). I have not priced this idea out, but, at first blush, it seems overly complex and likely to be expensive.

This seems to me to be a need the insurance industry should have recognized!
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Re: Social Security replacement annuity -- Is there such a product?

Post by dm200 »

PaulF wrote: Sun May 19, 2019 3:16 pm Most annuities offer a survivorship option, but, as we all know, Social Security does not. When one member of a couple dies, the survivor loses the household income from spouse's SS; for households that rely on SS to a large extent, this loss is serious. Of course, one could carry life insurance to mitigate that risk, but this is expensive for older people.
It seems to me that what is needed is hybrid life insurance/annuity product. It would replace the lost SS income, but only for the beneficiary's lifetime. (For most couples, the expected lifespan of the survivor will be fairly low.)

Is there any such product that I am simply unaware of?

Or can anyone propose a realistic scheme for creating one from existing products? What springs to mind is an array of term life insurance policies, priced such that the payout at time of death is sufficient to purchase a SPIA for the survivor. One would choose, say, a 1-yr term, a 2-yr term, a 3-yr term, etc., so that the payout decreases over time (reflecting decreased cost of a SPIA as the survivor ages). I have not priced this idea out, but, at first blush, it seems overly complex and likely to be expensive.

This seems to me to be a need the insurance industry should have recognized!
Depending on the details, there is a partial survivor ship feature of Social Security. My wife, for example, gets monthly SS based on my income over the decades. If I die first, she will get my, much higher, SS monthly income instead of her lower income.
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Re: Social Security replacement annuity -- Is there such a product?

Post by dm200 »

Perhaps, at the death of the first spouse, purchase an annuity to provide the lifetime income needed or desired.
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Re: Social Security replacement annuity -- Is there such a product?

Post by onthecusp »

dm200 wrote: Sun May 19, 2019 3:26 pm Perhaps, at the death of the first spouse, purchase an annuity to provide the lifetime income needed or desired.
I think that is the best plan if the assets are there to make the purchase. The combined life insurance paying out as an annuity sounds attractive, but the life insurance is going to get more expensive at about the same rate the annuity is getting less expensive. It would also be a complex product rife for the kind of games they play with whole life insurance.

How about a joint single premium deferred annuity? It is not a nice neat solution as it will start paying either before or after the "ideal time", but it might be a relatively inexpensive bump in later income if there are other funds to get through any lull.
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Re: Social Security replacement annuity -- Is there such a product?

Post by Dottie57 »

dm200 wrote: Sun May 19, 2019 3:26 pm Perhaps, at the death of the first spouse, purchase an annuity to provide the lifetime income needed or desired.
This.
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Re: Social Security replacement annuity -- Is there such a product?

Post by Spirit Rider »

dm200 wrote: Sun May 19, 2019 3:19 pm Depending on the details, there is a partial survivor ship feature of Social Security. My wife, for example, gets monthly SS based on my income over the decades. If I die first, she will get my, much higher, SS monthly income instead of her lower income.
You are missing the point. If she is receiving a spousal benefit, she is receiving 50% of your benefit. The two of you are receiving 150% of your benefit, but when either of you die the surviving spouse will only receive 100% of your benefit.

This means the income for the surviving spouse will drop by one third. Yes, the food bill will be lower and the Medicare Part B/D premiums and Medigap will only apply to one person. However, in many circumstances that surviving spouse can not survive financially on 1/3 less. Most of the fixed expenses will not change. The property taxes will not change, it takes the same to heat and cool the home, etc...
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Re: Social Security replacement annuity -- Is there such a product?

Post by PaulF »

Dottie57 wrote: Sun May 19, 2019 7:15 pm
dm200 wrote: Sun May 19, 2019 3:26 pm Perhaps, at the death of the first spouse, purchase an annuity to provide the lifetime income needed or desired.
This.
With what money?

I thought it was obvious, but I was looking for a solution that hedged or transferred risk (in exchange for an up-front premium). You know, like insurance. Unless I have missed something, your solution seems to be "Make sure you have enough money that the death of one spouse is not a problem." Similar to "Make sure you have enough money that if your house burns down, you can rebuild it."
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Re: Social Security replacement annuity -- Is there such a product?

Post by PaulF »

dm200 wrote: Sun May 19, 2019 3:19 pm Depending on the details, there is a partial survivor ship feature of Social Security. My wife, for example, gets monthly SS based on my income over the decades. If I die first, she will get my, much higher, SS monthly income instead of her lower income.
As it happens, my wife's and my SS payouts will be within a whisker of each other's. So, upon death of first spouse, the household SS income will fall to 49.9% to 50.1% of what it was before.
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Re: Social Security replacement annuity -- Is there such a product?

Post by littlebird »

Spirit Rider wrote: Sun May 19, 2019 7:42 pm
dm200 wrote: Sun May 19, 2019 3:19 pm Depending on the details, there is a partial survivor ship feature of Social Security. My wife, for example, gets monthly SS based on my income over the decades. If I die first, she will get my, much higher, SS monthly income instead of her lower income.
You are missing the point. If she is receiving a spousal benefit, she is receiving 50% of your benefit. The two of you are receiving 150% of your benefit, but when either of you die the surviving spouse will only receive 100% of your benefit.

This means the income for the surviving spouse will drop by one third. Yes, the food bill will be lower and the Medicare Part B/D premiums and Medigap will only apply to one person. However, in many circumstances that surviving spouse can not survive financially on 1/3 less. Most of the fixed expenses will not change. The property taxes will not change, it takes the same to heat and cool the home, etc...
But it may be possible to buy/rent smaller premises that have lower taxes and cost less to heat and cool.
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Re: Social Security replacement annuity -- Is there such a product?

Post by Dottie57 »

PaulF wrote: Sun May 19, 2019 7:51 pm
Dottie57 wrote: Sun May 19, 2019 7:15 pm
dm200 wrote: Sun May 19, 2019 3:26 pm Perhaps, at the death of the first spouse, purchase an annuity to provide the lifetime income needed or desired.
This.
With what money?

I thought it was obvious, but I was looking for a solution that hedged or transferred risk (in exchange for an up-front premium). You know, like insurance. Unless I have missed something, your solution seems to be "Make sure you have enough money that the death of one spouse is not a problem." Similar to "Make sure you have enough money that if your house burns down, you can rebuild it."
At some point you need to have the money to purchase insurance. Money will have to be involved and it won’t be cheap. Either before death of a partner or after.
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Re: Social Security replacement annuity -- Is there such a product?

Post by earlyout »

PaulF wrote: Sun May 19, 2019 7:51 pm
Dottie57 wrote: Sun May 19, 2019 7:15 pm
dm200 wrote: Sun May 19, 2019 3:26 pm Perhaps, at the death of the first spouse, purchase an annuity to provide the lifetime income needed or desired.
This.
With what money?

I thought it was obvious, but I was looking for a solution that hedged or transferred risk (in exchange for an up-front premium). You know, like insurance. Unless I have missed something, your solution seems to be "Make sure you have enough money that the death of one spouse is not a problem." Similar to "Make sure you have enough money that if your house burns down, you can rebuild it."
If there is no money to buy an annuity what money will be used to buy the desired life insurance? The cost of an annuity or the total of the premiums for the life insurance probably aren't that much different since you are looking for the same benefit for essentially the same risk.
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Re: Social Security replacement annuity -- Is there such a product?

Post by longinvest »

I would just spend one of the two SS pensions, the bigger one. I'd invest the other in the portfolio.

Actually, the second SS pension would simply reduce portfolio withdrawals. There's no reason to withdraw X from investments just to reinvest Y, instead of only withdrawing (X - Y).
Last edited by longinvest on Sun May 19, 2019 8:51 pm, edited 1 time in total.
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Re: Social Security replacement annuity -- Is there such a product?

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (annuity).
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Re: Social Security replacement annuity -- Is there such a product?

Post by Spirit Rider »

littlebird wrote: Sun May 19, 2019 7:57 pm But it may be possible to buy/rent smaller premises that have lower taxes and cost less to heat and cool.
All things in life are possible, but many people do not want their spouse to be forced to move after their death. A financially secure retirement is one that doesn't rely on what is possible with major sacrifice.

The retirement universe is not populated with Bogleheads with massive portfolios. The problem the OP is looking to solve exists with many if not the majority of people in this country on SS with little else.
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Re: Social Security replacement annuity -- Is there such a product?

Post by Nate79 »

This is what savings or a portfolio is for. Insurance is for an unexpected risk that you can not handle with your assets. One spouse dying and leaving the other spouse with less SS is very highly probably. So save up the money and if the spouse needs to make up the income difference then they should sell their portfolio or buy an annuity.
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Re: Social Security replacement annuity -- Is there such a product?

Post by PaulF »

earlyout wrote: Sun May 19, 2019 8:07 pm The cost of an annuity or the total of the premiums for the life insurance probably aren't that much different since you are looking for the same benefit for essentially the same risk.
You may be right on that. I was (am?) thinking that by pooling risks across a group, individuals (well, couples) could incur a small, known expenditure and possibly avoid a large liability (that only occurs for a fraction of them). You know, insurance.

Here is why I was (am?) thinking it is different, and that I am NOT "looking for the same benefit for essentially the same risk." For each year that goes by, the risk of dying goes up (so the life insurance component should grow more expensive). However, the expected payout period for the survivor goes down (so the annuity component should grow cheaper).

I am working on "mathing this out" with a spreadsheet, pricing deferred annuities and life insurance. The thing is, I bet an actuary at an insurance agency could design this over a weekend!
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Re: Social Security replacement annuity -- Is there such a product?

Post by Jags4186 »

PaulF wrote: Sun May 19, 2019 9:23 pm
earlyout wrote: Sun May 19, 2019 8:07 pm The cost of an annuity or the total of the premiums for the life insurance probably aren't that much different since you are looking for the same benefit for essentially the same risk.
You may be right on that. I was (am?) thinking that by pooling risks across a group, individuals (well, couples) could incur a small, known expenditure and possibly avoid a large liability (that only occurs for a fraction of them). You know, insurance.

Here is why I was (am?) thinking it is different, and that I am NOT "looking for the same benefit for essentially the same risk." For each year that goes by, the risk of dying goes up (so the life insurance component should grow more expensive). However, the expected payout period for the survivor goes down (so the annuity component should grow cheaper).

I am working on "mathing this out" with a spreadsheet, pricing deferred annuities and life insurance. The thing is, I bet an actuary at an insurance agency could design this over a weekend!
What you want is whole life insurance. It is expensive, the return is poor, but when one spouse dies the other will receive a lump sum payment they can then use to buy a SPIA. Of course you could have just *saved* the money and have a big pile of money to do with whatever you want. Social Security is expensive, 12.4% of your salary up to the limit. The return for the average person is pretty good considering it is both a pension and a disability insurance program. Getting a similar level of additional insurance is going to cost you similar amounts.
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Re: Social Security replacement annuity -- Is there such a product?

Post by PaulF »

Nate79 wrote: Sun May 19, 2019 9:12 pm Insurance is for an unexpected risk that you can not handle with your assets. One spouse dying and leaving the other spouse with less SS is very highly [probable].
I certainly agree with you that to the extent that this scenario is probable, it makes it less like insurance and more like saving up for a known (or expected) expenditure.

However, my premise is that the couples that die within a few years of each other will subsidize those that die at significantly different times.
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Re: Social Security replacement annuity -- Is there such a product?

Post by PaulF »

Jags4186 wrote: Sun May 19, 2019 9:28 pm
PaulF wrote: Sun May 19, 2019 9:23 pm
For each year that goes by, the risk of dying goes up (so the life insurance component should grow more expensive). However, the expected payout period for the survivor goes down (so the annuity component should grow cheaper).
What you want is whole life insurance. It is expensive, the return is poor, but when one spouse dies the other will receive a lump sum payment they can then use to buy a SPIA.
AFAIK, whole life insurance has a constant payout, right? Whether you die at 80 or 105, a given policy pays the same amount, right? (Obviously, the annual premium differs with time.) Assuming I have this correct, whole life is mismatched in that the liability one is hedging against decreases in time, but whole life's payout does not decrease with time.'

Is there a way with whole life to concomitantly dial down the payout and the premiums? If so, I agree that would solve the problem.
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Re: Social Security replacement annuity -- Is there such a product?

Post by Jags4186 »

PaulF wrote: Sun May 19, 2019 9:37 pm
Jags4186 wrote: Sun May 19, 2019 9:28 pm
PaulF wrote: Sun May 19, 2019 9:23 pm
For each year that goes by, the risk of dying goes up (so the life insurance component should grow more expensive). However, the expected payout period for the survivor goes down (so the annuity component should grow cheaper).
What you want is whole life insurance. It is expensive, the return is poor, but when one spouse dies the other will receive a lump sum payment they can then use to buy a SPIA.
AFAIK, whole life insurance has a constant payout, right? Whether you die at 80 or 105, a given policy pays the same amount, right? (Obviously, the annual premium differs with time.) Assuming I have this correct, whole life is mismatched in that the liability one is hedging against decreases in time, but whole life's payout does not decrease with time.'

Is there a way with whole life to concomitantly dial down the payout and the premiums? If so, I agree that would solve the problem.
SS increases with inflation, whole life doesn’t. Therefore the payout does decrease in real terms every year you get older. Not sure why you’re looking for such a complicated product. How about just save money?
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Re: Social Security replacement annuity -- Is there such a product?

Post by PaulF »

Jags4186 wrote: Sun May 19, 2019 9:46 pm
SS increases with inflation, whole life doesn’t. Therefore the payout does decrease in real terms every year you get older.


Good point on the inflation angle. I will think about this. But is seems to me that insurance devalues payouts at ~3% p.a., but the probability of death increases at, say, ~10% p.a. above age 70.
Not sure why you’re looking for such a complicated product. How about just save money?
Perhaps that is what people said to Benjamin Franklin when he established this funny "fire insurance" concept.
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Re: Social Security replacement annuity -- Is there such a product?

Post by dodecahedron »

PaulF wrote: Sun May 19, 2019 7:51 pm
Dottie57 wrote: Sun May 19, 2019 7:15 pm
dm200 wrote: Sun May 19, 2019 3:26 pm Perhaps, at the death of the first spouse, purchase an annuity to provide the lifetime income needed or desired.
This.
With what money?

I thought it was obvious, but I was looking for a solution that hedged or transferred risk (in exchange for an up-front premium). You know, like insurance. Unless I have missed something, your solution seems to be "Make sure you have enough money that the death of one spouse is not a problem." Similar to "Make sure you have enough money that if your house burns down, you can rebuild it."
In year of death, the surviving spouse gets to file a final MFJ tax return. Perhaps it would make sense for the survivor to take a significant withdrawal from the tax-deferred account and/or sell off more securities in a taxable account in that final year and use the proceeds to purchase an annuity.
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Re: Social Security replacement annuity -- Is there such a product?

Post by Jags4186 »

PaulF wrote: Sun May 19, 2019 11:13 pm
Not sure why you’re looking for such a complicated product. How about just save money?
Perhaps that is what people said to Benjamin Franklin when he established this funny "fire insurance" concept.
Insurance is to protect against an unlikely event happening. You’re trying to protect against a 100% certainty—someone dying. The reason why there is no product that meets your description is because it would be so expensive that A) no one would buy it and B) people who could afford to buy it don’t need it. A whole life insurance premium of a significant value at age 70 might be $20,000-$30,000/yr. Well if you can afford to spend $20,000-$30,000/yr on premiums you could simply not pay the premiums and have $1667-$2500/mo of extra money. Surprise, that is what Social Security pays for most people.
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Re: Social Security replacement annuity -- Is there such a product?

Post by student »

Jags4186 wrote: Mon May 20, 2019 6:52 am
PaulF wrote: Sun May 19, 2019 11:13 pm
Not sure why you’re looking for such a complicated product. How about just save money?
Perhaps that is what people said to Benjamin Franklin when he established this funny "fire insurance" concept.
Insurance is to protect against an unlikely event happening. You’re trying to protect against a 100% certainty—someone dying. The reason why there is no product that meets your description is because it would be so expensive that A) no one would buy it and B) people who could afford to buy it don’t need it. A whole life insurance premium of a significant value at age 70 might be $20,000-$30,000/yr. Well if you can afford to spend $20,000-$30,000/yr on premiums you could simply not pay the premiums and have $1667-$2500/mo of extra money. Surprise, that is what Social Security pays for most people.
+1.
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Re: Social Security replacement annuity -- Is there such a product?

Post by Nate79 »

There are no shortcuts in life - no magic wand that will somehow turn your ability to not save (for something that is highly likely to happen) into a magical product that will pay an income stream. There is a reason that life insurance is extremely expensive when you are older. The cost of such an expensive product could have been invested and instead pay for an income stream if one spouse dies. Buying an income stream to make up whatever shortfall exists is very easy - these products exist. But you need to have some money to buy the products. Plan and live below your means, save as much as possible.
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Re: Social Security replacement annuity -- Is there such a product?

Post by whomever »

I wish SS allowed a '100% survivor' benefit like most pensions or annuities. It wouldn't cost SS any extra for my wife and I to each take a reduced benefit that would continue for the survivor.

(I don't understand all the 'it would be hard or expensive' posts - almost every pension plan and annuity provider does this as a matter of course)
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Re: Social Security replacement annuity -- Is there such a product?

Post by student »

whomever wrote: Mon May 20, 2019 7:05 am I wish SS allowed a '100% survivor' benefit like most pensions or annuities. It wouldn't cost SS any extra for my wife and I to each take a reduced benefit that would continue for the survivor.

(I don't understand all the 'it would be hard or expensive' posts - almost every pension plan and annuity provider does this as a matter of course)
I thought SS already allows this. https://money.cnn.com/retirement/guide/ ... index2.htm "If you have already reached full retirement age (somewhere between 65 and 67 based on your date of birth; if you aren't sure, check your latest Social Security annual statement), you're entitled to 100% of your deceased spouse's benefit." What is not allowed is for one to double dip on one's own benefit and the deceased spouse's benefit.

There is a cost of it unless other parts get changed too. My understanding of '100% survivor' benefit from annuity is if one chooses this option, then the monthly payout will be lower. Are you suggesting SS allows such an option to get a lower monthly payout? If so, I agree with your assessment.
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Re: Social Security replacement annuity -- Is there such a product?

Post by Jags4186 »

whomever wrote: Mon May 20, 2019 7:05 am I wish SS allowed a '100% survivor' benefit like most pensions or annuities. It wouldn't cost SS any extra for my wife and I to each take a reduced benefit that would continue for the survivor.

(I don't understand all the 'it would be hard or expensive' posts - almost every pension plan and annuity provider does this as a matter of course)
Realistically think about how this would go down. If all of a sudden every single Social Security eligible person (practically everyone) had the option to take a reduced rate but allow someone else to benefit on their passing...wouldn’t every single person get married and choose this option since it would be more beneficial than a single payment? And if that was the case the average payout would drop so that the expected payout is the same as it is today.

I think this thread shows how people out plan themselves. If you simply saved the money you would use to buy this “product” you’d eliminate the need for the product.
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Re: Social Security replacement annuity -- Is there such a product?

Post by cherijoh »

whomever wrote: Mon May 20, 2019 7:05 am I wish SS allowed a '100% survivor' benefit like most pensions or annuities. It wouldn't cost SS any extra for my wife and I to each take a reduced benefit that would continue for the survivor.

(I don't understand all the 'it would be hard or expensive' posts - almost every pension plan and annuity provider does this as a matter of course)
As a single person, I think married couples already get a fantastic deal with SS. A pension plan doesn't pay a spousal benefit while the annuiant is still alive like SS does for low earning spouses. In addition, married couples already receive a generous 100% survivor benefit with no zero reduction in their monthly benefit relative to what a single person with the same earnings history is entitled. Married couples already cost SS a whole lot more than singles.

The solution to your dilemma is to save a portion of the combined SS benefit while you are both alive. Also investigate whether your local government offers benefits for low income seniors like reductions in property taxes, subsidized housing, or meals on wheels.

SS was never designed to be the single retirement income source that it has turned out to be for many lower income people. It was designed as a social safety net that along with pensions and individual savings that made up the "3-legged stool". I don't want to get this thread locked, so I won't bring up potential future legislation, but in the current environment, I would rate your suggestion a non-starter if you are looking for the government to subsidize it. Commercial immediate annuities already fill the niche of pooled guaranteed lifetime income streams - the rub of course being the need to come up with a lump sum to fund one.
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Re: Social Security replacement annuity -- Is there such a product?

Post by longinvest »

longinvest wrote: Sun May 19, 2019 8:31 pm I would just spend one of the two SS pensions, the bigger one. I'd invest the other in the portfolio.

Actually, the second SS pension would simply reduce portfolio withdrawals. There's no reason to withdraw X from investments just to reinvest Y, instead of only withdrawing (X - Y).
Maybe I need to explain, as nobody seems to have noticed my suggestion.

Let's say that both spouses are 65. The couple has a $1,000,000 portfolio with a 50/50 stocks/bonds allocation. Both retire and immediately claim their Social Security pensions (SS) of $18,000 and 23,000 (annually).

The couple's retirement income consists of their SS pensions plus portfolio withdrawals. At age 65 with a 50/50 stocks/bonds portfolio, the VPW Table allows for taking a 4.8% withdrawal; that's $48,000.

SPEND BOTH SS PENSIONS

They take the $48,000 withdrawal at age 65 and combine it with the two pensions. Total retirement income, at age 65, is (($48,000 + $18,000 + $23,000) / 12) = $7,417/month. The $7,417 is used to pay taxes and expenses (essential, discretionary, gifts).

a) If one spouse dies during the year, monthly retirement income drops to (($48,000 + $23,000) / 12) = $5,917/month. That's a 20% drop.

b) If both spouses survive and the portfolio gains 3% during the year in a 2% inflation world, total retirement income at age 66 is:
  • SS pensions at age 66 (2% inflation): $18,360 and $23,460
  • Portfolio size before withdrawal at 66: (($1,000,000 - $48,000) X (1 + 3%)) = $980,560
  • VPW Table percentage at age 66 with a 50/50 stocks/bonds portfolio: 4.9%
  • Portfolio withdrawal at age 66: ($980,560 X 4.9%) = $48,047
  • Total retirement income at age 66: (($48,047 + $18,360 + $23,460) / 12) = $7,489/month.
If one spouse dies during the year, at age 66, retirement income falls 20% to $5,959 per month.

SPEND THE BIGGEST SS PENSION AND USE THE OTHER TO REDUCE PORTFOLIO WITHDRAWALS

They take a ($48,000 - $18,000) = $30,000 withdrawal at age 65 and combine it with the two pensions. Total retirement income, at age 65, is (($30,000 + $18,000 + $23,000) / 12) = $5,917/month. The $5,917 is used to pay taxes and expenses (essential, discretionary, gifts).

a) If one spouse dies during the year, an additional portfolio withdrawal is taken from the portfolio (up to $18,000) to bring back monthly retirement income to $5,917/month. Total retirement income remains unaffected.

b) If both spouses survive and the portfolio gains 3% during the year in a 2% inflation world, total retirement income at age 66 is:
  • SS pensions at age 66 (2% inflation): $18,360 and $23,460
  • Portfolio size before withdrawal at 66: (($1,000,000 - $30,000) X (1 + 3%)) = $999,100
  • VPW Table percentage at age 66 with a 50/50 stocks/bonds portfolio: 4.9%
  • Portfolio withdrawal at age 66: (($999,100 X 4.9%) - $18,360) = $30,596
  • Total retirement income at age 66: (($30,596 + $18,360 + $23,460) / 12) = $6,035/month.
If one spouse dies during the year, at age 66, an additional withdrawal of up to $18,360 is taken to bring back monthly retirement income to $6,035 per month, leaving total retirement income unaffected.

ANALYSIS

The fact is that, at age 65, the couple's finances can only sustain a $5,917/month retirement income (before taxes) if one of the two spouses dies. By only spending the biggest SS pension, the couple acknowledges this. This effectively prepares the couple, financially, for the death of one spouse.

By offsetting portfolio withdrawals with the other SS pension, the couple slightly increases future portfolio withdrawals in a sustainable manner.

It's a simple and effective solution.
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dm200
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Re: Social Security replacement annuity -- Is there such a product?

Post by dm200 »

cherijoh wrote: Mon May 20, 2019 8:19 am
whomever wrote: Mon May 20, 2019 7:05 am I wish SS allowed a '100% survivor' benefit like most pensions or annuities. It wouldn't cost SS any extra for my wife and I to each take a reduced benefit that would continue for the survivor.

(I don't understand all the 'it would be hard or expensive' posts - almost every pension plan and annuity provider does this as a matter of course)
As a single person, I think married couples already get a fantastic deal with SS. A pension plan doesn't pay a spousal benefit while the annuiant is still alive like SS does for low earning spouses. In addition, married couples already receive a generous 100% survivor benefit with no zero reduction in their monthly benefit relative to what a single person with the same earnings history is entitled. Married couples already cost SS a whole lot more than singles.

The solution to your dilemma is to save a portion of the combined SS benefit while you are both alive. Also investigate whether your local government offers benefits for low income seniors like reductions in property taxes, subsidized housing, or meals on wheels.

SS was never designed to be the single retirement income source that it has turned out to be for many lower income people. It was designed as a social safety net that along with pensions and individual savings that made up the "3-legged stool". I don't want to get this thread locked, so I won't bring up potential future legislation, but in the current environment, I would rate your suggestion a non-starter if you are looking for the government to subsidize it. Commercial immediate annuities already fill the niche of pooled guaranteed lifetime income streams - the rub of course being the need to come up with a lump sum to fund one.
The "deal" for married folks is the situation (like ours) where one spouse pays in to the SS system, but the other spouse does not (or pays in very little, relatively). The couple, then, gets the full benefit on the spouse that paid in the most - and half of that benefit for the spouse that paid in little or none.

However, higher income married folks where both spouses pay in a lot, really do not get a "deal". My guess is that, as more married folks are both employed, the mix changes. Today, as well, I believe fewer people are getting married (except for same sex couples) - so that will affect the dynamics of the SS system.

The SS system, by design, pays out relatively more (in relation to amounts paid in) for lower income folks than higher income ones.
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Re: Social Security replacement annuity -- Is there such a product?

Post by student »

Jags4186 wrote: Mon May 20, 2019 7:28 am
whomever wrote: Mon May 20, 2019 7:05 am I wish SS allowed a '100% survivor' benefit like most pensions or annuities. It wouldn't cost SS any extra for my wife and I to each take a reduced benefit that would continue for the survivor.

(I don't understand all the 'it would be hard or expensive' posts - almost every pension plan and annuity provider does this as a matter of course)
Realistically think about how this would go down. If all of a sudden every single Social Security eligible person (practically everyone) had the option to take a reduced rate but allow someone else to benefit on their passing...wouldn’t every single person get married and choose this option since it would be more beneficial than a single payment? And if that was the case the average payout would drop so that the expected payout is the same as it is today.

I think this thread shows how people out plan themselves. If you simply saved the money you would use to buy this “product” you’d eliminate the need for the product.
Correct. However, I assume the reduced rate will be appropriately determined. Some annuities can be joint for anyone of any age and the actuarial calculation determines the reduced rate.
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Re: Social Security replacement annuity -- Is there such a product?

Post by dm200 »

I believe, as well, that some annuities can take into account poor health issues that reduce the recipient's life expectancy. This would increase the lifetime payment amount.
student
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Re: Social Security replacement annuity -- Is there such a product?

Post by student »

dm200 wrote: Mon May 20, 2019 11:35 am I believe, as well, that some annuities can take into account poor health issues that reduce the recipient's life expectancy. This would increase the lifetime payment amount.
Interesting. On a related note, TIAA does not distinguish between male and female when computing payout. I think it was due to a lawsuit.
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Re: Social Security replacement annuity -- Is there such a product?

Post by cherijoh »

dm200 wrote: Mon May 20, 2019 10:01 am
cherijoh wrote: Mon May 20, 2019 8:19 am
whomever wrote: Mon May 20, 2019 7:05 am I wish SS allowed a '100% survivor' benefit like most pensions or annuities. It wouldn't cost SS any extra for my wife and I to each take a reduced benefit that would continue for the survivor.

(I don't understand all the 'it would be hard or expensive' posts - almost every pension plan and annuity provider does this as a matter of course)
As a single person, I think married couples already get a fantastic deal with SS. A pension plan doesn't pay a spousal benefit while the annuiant is still alive like SS does for low earning spouses. In addition, married couples already receive a generous 100% survivor benefit with no zero reduction in their monthly benefit relative to what a single person with the same earnings history is entitled. Married couples already cost SS a whole lot more than singles.

The solution to your dilemma is to save a portion of the combined SS benefit while you are both alive. Also investigate whether your local government offers benefits for low income seniors like reductions in property taxes, subsidized housing, or meals on wheels.

SS was never designed to be the single retirement income source that it has turned out to be for many lower income people. It was designed as a social safety net that along with pensions and individual savings that made up the "3-legged stool". I don't want to get this thread locked, so I won't bring up potential future legislation, but in the current environment, I would rate your suggestion a non-starter if you are looking for the government to subsidize it. Commercial immediate annuities already fill the niche of pooled guaranteed lifetime income streams - the rub of course being the need to come up with a lump sum to fund one.
The "deal" for married folks is the situation (like ours) where one spouse pays in to the SS system, but the other spouse does not (or pays in very little, relatively). The couple, then, gets the full benefit on the spouse that paid in the most - and half of that benefit for the spouse that paid in little or none.

However, higher income married folks where both spouses pay in a lot, really do not get a "deal". My guess is that, as more married folks are both employed, the mix changes. Today, as well, I believe fewer people are getting married (except for same sex couples) - so that will affect the dynamics of the SS system.

The SS system, by design, pays out relatively more (in relation to amounts paid in) for lower income folks than higher income ones.
No, high income taxpayers don't get a deal with SS, but that goes back to my point that the program is designed to provide a social safety net for the less fortunate -- not a source of adequate retirement income for all. I'm always amazed at people who live "large" (big house, late model cars, lots of "toys") and then are surprised when they are made aware of how large a nest egg they need to assemble to maintain that standard of living into retirement.
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Re: Social Security replacement annuity -- Is there such a product?

Post by PaulF »

I was unsure where the idea arose that I was seeking some magic wand that allowed people to avoid saving. Then, I realized that the fault was mine: In trying to steer people to the risk-pooling aspects of my idea, I implied there was not a pot of money available to buy either a conventional annuity or my hybrid product. I do realize such a policy would not be cheap.

(For the record, we expect to retire in our mid-50s with a large nest egg and pensions, which were garnered by many years of living well below our means and saving assiduously. Even if SS didn’t exist, my standard of living will increase when I retire. I am not really the target audience for my own hypothetical product.)

Of course, ALL married households will suffer a death, so I agree that this aspect is not a proper target for insurance, but should instead be addressed by saving. However, what I was trying to point out was this: married couples that rely on SS face the risk that they die at much different times. The product I had in mind would allow people to pool that risk, and thus lessen the burden on the unlucky ones (at the cost of everyone giving up some upside earlier).

On the whole, however, I think Jags4186 nailed it. First-to-die joint universal life insurance would do the desired feat, and, after some checking, apparently it is possible to get a policy where you can lower the payouts (and premiums) over time. But, yes, I agree that the downsides of universal life are enough to put most people off. Me for example: even having realized this scheme, I do not intend to go out and buy such a policy.
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Re: Social Security replacement annuity -- Is there such a product?

Post by dm200 »

No, high income taxpayers don't get a deal with SS, but that goes back to my point that the program is designed to provide a social safety net for the less fortunate -- not a source of adequate retirement income for all. I'm always amazed at people who live "large" (big house, late model cars, lots of "toys") and then are surprised when they are made aware of how large a nest egg they need to assemble to maintain that standard of living into retirement.
While I, generally, support giving lower income folks a higher retirement return, I strongly believe that is (or should be) everyone's responsibility. That is why I am glad that Federal employees now participate in Social Security. There are many employees of certain entities that do not pay SS taxes. I believe they should do so.
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Re: Social Security replacement annuity -- Is there such a product?

Post by depressed »

PaulF wrote: Mon May 20, 2019 12:29 pm I was unsure where the idea arose that I was seeking some magic wand that allowed people to avoid saving. Then, I realized that the fault was mine: In trying to steer people to the risk-pooling aspects of my idea, I implied there was not a pot of money available to buy either a conventional annuity or my hybrid product. I do realize such a policy would not be cheap.

(For the record, we expect to retire in our mid-50s with a large nest egg and pensions, which were garnered by many years of living well below our means and saving assiduously. Even if SS didn’t exist, my standard of living will increase when I retire. I am not really the target audience for my own hypothetical product.)

Of course, ALL married households will suffer a death, so I agree that this aspect is not a proper target for insurance, but should instead be addressed by saving. However, what I was trying to point out was this: married couples that rely on SS face the risk that they die at much different times. The product I had in mind would allow people to pool that risk, and thus lessen the burden on the unlucky ones (at the cost of everyone giving up some upside earlier).

On the whole, however, I think Jags4186 nailed it. First-to-die joint universal life insurance would do the desired feat, and, after some checking, apparently it is possible to get a policy where you can lower the payouts (and premiums) over time. But, yes, I agree that the downsides of universal life are enough to put most people off. Me for example: even having realized this scheme, I do not intend to go out and buy such a policy.
For what it's worth: I think I understood the product you were proposing, and I see where it would be a non-magic, good potential product (I think you were jumped on a little harshly). For a retired couple who have a mortgage, mortgage life insurance (paying the balance of the mortgage) might serve some of the need you have identified.
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Re: Social Security replacement annuity -- Is there such a product?

Post by neilpilot »

Here's the SS replacement annuity that I found meets our needs. Apparently it's most common to take SS benefits at 62. As the spouse with the larger SS benefit, I've decided to delay my SS until 70. My SS benefit next year, at 70, will be 132% of my PIA, or 176% of what I would have collected if I had started at 62.

So in fact I've "purchased" a SS replacement annuity that will provide survivor benefits to my spouse, in our case, in excess of the combined benefits had we both started at age 62. My replacement annuity was at a competitive price when compared to the market price of alternative annuities, and comes with a COL rider to boot.
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Re: Social Security replacement annuity -- Is there such a product?

Post by 2pedals »

End of life expenses can be very large for some. Finally the hardship caused by emotional stress can be heart breaking. For some, saving money with limited resources during the couples go-go healthy times may not make much sense because it is the experiences in life that matter the most. After a significant other is gone that time can not be made again. The survivor may need to economize but this may not be such a bad thing if they lived an enjoyable life together as a couple.
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Re: Social Security replacement annuity -- Is there such a product?

Post by Nate79 »

The point about the "magic" product to solve this issue is that it costs money. People need to save and have money to pay for any type of product that will make up a funding gap in retirement. You are either going to pay an insurance company or you are going to fund it yourself by selling securities every month to make up the shortfall. If you are paying an insurance company there is a high cost (because insurance companies are expensive, sales charges, high expense products) and low return (they invest in bonds so their return is always low).
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Re: Social Security replacement annuity -- Is there such a product?

Post by whomever »

" In addition, married couples already receive a generous 100% survivor benefit with no zero reduction in their monthly benefit relative to what a single person with the same earnings history is entitled. Married couples already cost SS a whole lot more than singles."

(this was one of several similar comments)


Ummmm.... not seeing it. It's true enough for couples with dissimilar earnings (and thus dissimilar benefits), but my better half's and my benefits are within $20 a month or something like that. OK, if the high earner dies first, the survivor will get an extra $20 a month over what we'd get if single. What a windfall!

At least we stayed married. Imagine a high earner who marries a series of spouses, divorcing each after 10 years and a day. She could have several ex-hubbies collecting benefits :-)

"Realistically think about how this would go down. If all of a sudden every single Social Security eligible person (practically everyone) had the option to take a reduced rate but allow someone else to benefit on their passing...wouldn’t every single person get married and choose this option since it would be more beneficial than a single payment? And if that was the case the average payout would drop so that the expected payout is the same as it is today."

1)Not everyone opts for survivor benefits for pensions and annuities currently. I expect the same decisions would be made for SS.
2)There isn't any reason it wouldn't be revenue neutral, assuming SSA has decent actuaries. Annuity and pension providers aren't giving any freebies when they offer survivor benefits.
3)We know couples who are collecting pensions but didn't opt for survivor benefits. I'm not sure why - perhaps they think that living expenses will drop when one dies. My spouse and I, though, prefer having the same expected payout spread out more evenly, and have both opted for survivor benefits for our respective annuities. SSA offering the same option isn't some kind of scam or charity - it just lets people spread exactly the same lifetime expected payout(s) in a less lumpy fashion. Actuaries really can figure out how to make the expected lifetime payouts equal. That's what they do.
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Re: Social Security replacement annuity -- Is there such a product?

Post by basspond »

Spirit Rider wrote: Sun May 19, 2019 7:42 pm This means the income for the surviving spouse will drop by one third. Yes, the food bill will be lower and the Medicare Part B/D premiums and Medigap will only apply to one person. However, in many circumstances that surviving spouse can not survive financially on 1/3 less. Most of the fixed expenses will not change. The property taxes will not change, it takes the same to heat and cool the home, etc...
Can someone name me a product that provides an annuity for a person that has never (or very little) paid into the product but can receive it once someone else (who doesn’t pay extra for this option, and in fact pays lower maintenance fees) starts receiving the annuity? Then once the someone else dies this person receives 100% of the annuity without having to opt for less annuity to receive a survivorship benefit? How could any company survive paying out on this product?

One of my parental units died with no SS with only a 75% survivorship annuity. The survivor’s payments are still more then enough to cover their expenses.
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Re: Social Security replacement annuity -- Is there such a product?

Post by basspond »

PaulF wrote: Sun May 19, 2019 7:56 pm
dm200 wrote: Sun May 19, 2019 3:19 pm Depending on the details, there is a partial survivor ship feature of Social Security. My wife, for example, gets monthly SS based on my income over the decades. If I die first, she will get my, much higher, SS monthly income instead of her lower income.
As it happens, my wife's and my SS payouts will be within a whisker of each other's. So, upon death of first spouse, the household SS income will fall to 49.9% to 50.1% of what it was before.
Great point. We were blessed that we were both able to work and still spend time with our kids. Just another example of getting something for nothing yet people only see the perceived negatives.
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Re: Social Security replacement annuity -- Is there such a product?

Post by littlebird »

Spirit Rider wrote: Sun May 19, 2019 8:44 pm
littlebird wrote: Sun May 19, 2019 7:57 pm But it may be possible to buy/rent smaller premises that have lower taxes and cost less to heat and cool.
All things in life are possible, but many people do not want their spouse to be forced to move after their death. A financially secure retirement is one that doesn't rely on what is possible with major sacrifice.

The retirement universe is not populated with Bogleheads with massive portfolios. The problem the OP is looking to solve exists with many if not the majority of people in this country on SS with little else.
If it’s an important objective that the spouse not move home ( which may at one time have housed 4 or 5 family members) then planning can be done for that objective. As a new widow, I would have had no objection to moving to a smaller residence if my finances required it. Many of my neighbors have done so, with perfectly acceptable results. It may have been the preference of the deceased that his spouse be able to live forever in the manner to which she has become accustomed, but if he has not made provision for that to happen, then compromises must be made.
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Re: Social Security replacement annuity -- Is there such a product?

Post by randomguy »

Jags4186 wrote: Mon May 20, 2019 6:52 am
PaulF wrote: Sun May 19, 2019 11:13 pm
Not sure why you’re looking for such a complicated product. How about just save money?
Perhaps that is what people said to Benjamin Franklin when he established this funny "fire insurance" concept.
Insurance is to protect against an unlikely event happening. You’re trying to protect against a 100% certainty—someone dying. The reason why there is no product that meets your description is because it would be so expensive that A) no one would buy it and B) people who could afford to buy it don’t need it. A whole life insurance premium of a significant value at age 70 might be $20,000-$30,000/yr. Well if you can afford to spend $20,000-$30,000/yr on premiums you could simply not pay the premiums and have $1667-$2500/mo of extra money. Surprise, that is what Social Security pays for most people.
I disagree. You are not protecting against death. You are protecting against untimely death and the lifespan differences it can cause. Imagine you and the spouse are both getting 25k/year of SS. On average you need like 50-75k (one dies at 82, the other at 84) to cover the gap. If your buying a product at 65, that is probably like 25-40k. Thats pretty affordable. As an individual it is easy to take that 25k and invest in a way that will give you the 50k at 82. But that is just the average case. You also need protection agains the case where one spouse dies at 65 and the other lives to 100k. Now you need like 500k at 65 instead of 25k. What you want is a way to pool your risk of early death which is exactly what life insurance is for. The goal of this product is to get the cost down to the 25k range instead of the 500k range (i.e. about what it costs to buy a 25k inflation adjusted annuity at 65).

I am unaware of any product that does this directly. Indirectly maybe you could do something like a ladder of term life insurance (something like 100k that expires at 70, 100k at expires at 75, and 100k that expires at 80 and say last 50k at like 85) and a deferred annuity that kicks in at 85. If someone dies before 85, you use the life insurance payouts to buy an annuity. Now you don't get good inflation protection (I am unaware of any product that will pay out in X years in todays dollars) , figuring out how much you need (i.e. if your spouse dies at 76 is 150k enough or too much?) will be hard, and so on. You would have to price it out to see how it does

I have a feeling that for most people the best option is to keep term life insurance to like 75-80 and then count on your investments growing enough to make up the difference. Making it 10 or so years gets you that income AND decreases the life span of the other person.
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Re: Social Security replacement annuity -- Is there such a product?

Post by randomguy »

longinvest wrote: Mon May 20, 2019 8:42 am

The fact is that, at age 65, the couple's finances can only sustain a $5,917/month retirement income (before taxes) if one of the two spouses dies. By only spending the biggest SS pension, the couple acknowledges this. This effectively prepares the couple, financially, for the death of one spouse.

By offsetting portfolio withdrawals with the other SS pension, the couple slightly increases future portfolio withdrawals in a sustainable manner.

It's a simple and effective solution.

I am willing to bet most people would rather live on 7400 when both are a live and 5900 when one is dead than 5900 when both are alive and 7400 when one is dead. Pushing off spending to old age is not what a lot of people are looking to do. I am pretty sure the OP is looking for a scheme where you live on say 7000 no matter who is alive.
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Re: Social Security replacement annuity -- Is there such a product?

Post by longinvest »

randomguy wrote: Fri Aug 23, 2019 10:24 pm
longinvest wrote: Mon May 20, 2019 8:42 am

The fact is that, at age 65, the couple's finances can only sustain a $5,917/month retirement income (before taxes) if one of the two spouses dies. By only spending the biggest SS pension, the couple acknowledges this. This effectively prepares the couple, financially, for the death of one spouse.

By offsetting portfolio withdrawals with the other SS pension, the couple slightly increases future portfolio withdrawals in a sustainable manner.

It's a simple and effective solution.

I am willing to bet most people would rather live on 7400 when both are a live and 5900 when one is dead than 5900 when both are alive and 7400 when one is dead. Pushing off spending to old age is not what a lot of people are looking to do. I am pretty sure the OP is looking for a scheme where you live on say 7000 no matter who is alive.
The OP was looking for a solution to avoid a drop in total retirement income after the passing of one spouse.

But, as now we're discussing a larger set of objectives, I'll note that my post provided two scenarios:
  1. Spending starts at $7,417/month before taxes while both spouses are alive and drops to $5,917/month if one spouse dies during the first year of retirement.
  2. Spending starts at $5,917/month before taxes while both spouses are alive and stays unchanged at $5,917/month if one spouse dies during the first year of retirement.
In general, the survivor gets to pay more taxes than the couple, as all taxable retirement income gets taxed in the hands of a single person (the survivor). So, in scenario 2, the survivor will most likely experience a reduction in after-tax total retirement income despite the unchanged pre-tax amount. This could be less or not than the reduction in expenses due to the departure of the other spouse.

The drop in total retirement income of scenario 1 is approximately 20% before tax, and most likely bigger in after-tax terms.

A couple could choose one of these two scenarios or any of the intermediate scenarios in between. A couple could, for example, spend the biggest of the two SS pensions and half of the other. This would dampen of the drop in pre-tax total retirement income to a milder 10% (from $6,667/month before taxes while both are alive to $5,917/month if one spouse dies during the first year of retirement).

All of these scenarios share the feature that the survivor doesn't gets more income (before tax) after the passing of the other spouse. In other words, each spouse remains more valuable, financially, when staying alive. That's a fundamental survival principle that I like to keep in my financial plan.

As I said in my previous post, it's a simple and effective solution.
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randomguy
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Re: Social Security replacement annuity -- Is there such a product?

Post by randomguy »

longinvest wrote: Sat Aug 24, 2019 8:35 am
As I said in my previous post, it's a simple and effective solution.
It is simple and ineffective. If you are willing to live on 1 SS check you don't need this scheme. If are you not willing to live on 1 SS check, this scheme does nothing to protect you. If you spouse dies 1 year into retirement, you are basically in the same spot as if you would have spend the whole SS check. It is only when you get average life spans (i.e. one spouse lives 10+ years) where you start normalizing income. But the price you pay for that is lower income during those first 10 years.
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Re: Social Security replacement annuity -- Is there such a product?

Post by JGoneRiding »

There are deferred annuities were you are basically saving the money for future annuity spend down. This can be done inside of a IRA. Or you can lump sum a deferred annuity that will have a guaranteed future pay out. This isnt generally rec.

The best option is to decide you need to save x% and invest it to either buy a spia when spouse 1 passes or have to spend as you wish after spouse 1 passes.
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