By Michael J. Prestwich
June 29, 2011 -- I met a successful annuity producer at a trade show who uses Social Security to get new clients.
He holds free public information seminars monthly in his local library and advertizes them in the local paper and in the newsletter of a large employer. He opens the seminar by introducing himself as a life insurance agent who specializes in helping his clients create a foundation of safe, guaranteed, lifetime income.
He puts everyone at ease (including any regulators that may be attending) by stating up front that he makes his living by earning commissions by selling life insurance and annuity products, that he will not discuss any products during the seminar, and that they are not obligated to share any personal information, even their name. About half the people who attend set appointments.
Everything you need is on the Social Security website, ssa.gov. The major factors your clients should consider are:
· Their current salary.
· The age they want to retire.
· Their health/life expectancy.
· Their income needs.
· Their available assets.
· Their spouse’s salary and life expectancy, if applicable.
Normal Retirement Age. The Normal Retirement Age, or NRA (sometimes called the full retirement age), is age 66 for those born between 1943 and 1954. It is age 65 for those born in 1937 or earlier and age 67 for those born in 1960 or later. Everyone else will fall somewhere in between.
Benefit Calculation. The retirement benefit you'll receive if you retire at your full retirement age is called your primary insurance amount (or PIA). See the Social Security website for the exact formula, but for clients born between 1943 and 1954 there is about a 25 percent benefit reduction for those who retire four years early at age 62. Conversely, there is roughly a 33 percent benefit increase for those who wait until age 70. For example, if your client’s Social Security benefit (PIA) would be $1,000 at age 66, their benefit would reduce to about $750 if they began at age 62, and $1,333 if they waited until age 70. About two-thirds of Social Security recipients take their retirement benefit before they reach their NRA. This means that they will receive benefits for a longer period of time, but it may cost them dearly if they exceed the average life expectancy.
Break Even Point. Social Security is no different than other lifetime income plans in that there is no way to know how to receive the maximum unless you can accurately predict how long your client will live. For most people the break-even points are as follows:
· Age 62 (early) vs. Age 66 (NRA) , break-even age is about age 77.
· Age 62 (early) vs. Age 70 (late), break-even age is about age 79.
· Age 66 (normal) vs. Age 70 (late), break-even age is just under age 81.
Stated differently, a person with a $1,000 monthly benefit at their NRA who expects to live until age 85 could receive the following representative amounts:
· Age 62 to Age 85 (23 years): $750 x 276 months = $207,000.
· Age 66 to Age 85 (19 years): $1,000 x 228 months = $228,000.
· Age 70 to Age 85 (15 years): $1,333 x 180 months = $240,000.
The above does not take into account any future cost of living increases, which would make the differences even more dramatic.
The Marriage Dilemma. Married recipients may be penalized when both are eligible for Social Security benefits because of the family maximum formula. The rules are complex so your clients should have the Social Security Administration calculate their income before they begin receiving Social Security benefits. For example, John and Mary are both age 66, and both have a PIA of $1,000. If they were single each would receive $1,000 per month, but since they are married, together they receive a total of $1,500 per month. This is calculated as follows: $1,000 for John and $500 for Mary (the greater of 50 percent of Mary’s benefit or 50 percent of John’s benefit).
The 62/70 Strategy. Spousal benefits can outweigh the perceived benefits of being single, however, because of age and income differences. Let us assume that John is four years older than Mary and both a PIA of $1,000. They could retire at John’s age 66 and receive $1,375 ($1,000 from John and half of $750 per month for Mary) or they could maximize their income with the 62 / 70 Strategy. Using this strategy they retire at John’s age 66. They apply for Mary’s $750 monthly benefit, but delay John’s income until age 70. When John turns 70 receives $1,333 from Social Security, but since Mary’s benefit will reduce to 50% of John’s income ($667), they receive a total monthly benefit of $2,000. This is the same benefit as two single people living together would receive, but the advantage for Mary is that after John’s death she will receive John’s higher income ($1,333) for the rest of her life.
Assuming that John lives 20 more years and Mary lives 30 more years (four years younger, and females generally outlive males by six years), the payouts are approximately:
· Age 62/66: $1,375 x 240 months + $1,000 x 120 months = $450,000
· Age 62/70: $667 x 48 months + $2,000 x 192 months + $1,333 x 120 months = $576,000
Again, the above does not take into account any future cost of living increases.
John and Mary will likely benefit handsomely from Social Security’s spousal benefits and the 62/70 strategy. The catch is that John and Mary must use savings, pension or retirement plan income to fill in the $708 income difference ($1,375 - $667) during the 48 months while John waits to turn 70. However, this $34,000 income difference during this four-year period is minor compared to the $125,000 higher expected payout. The annuity producer who introduced me to this concept generally sells a single premium immediate annuity with a 48 month payout to cover this four-year time frame. This concept is a perfect door-opener to helping new customers use annuities to lay the foundation of a safe, guaranteed, lifetime income.
In summary, each one of your clients faces a different situation when the decision comes to start their Social Security retirement benefit. Informed guidance can put thousands of dollars in their pockets. When people who considered starting their benefits too early realize that you have saved them from making a huge financial mistake, they will reward you with their business and referrals.
Michael J. Prestwich sold his first annuity in 1975. After seven years he started ImagiSOFT, Inc. which develops life insurance and annuity illustration, marketing, and compliance software.
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