By: Gary Ryan J.D., LL.M.
After World War II, most women were staying home to raise their children. When they did go to work, it was generally at a lower wage than their husbands were earning, plus a woman’s number of years working full time was less.
Upon reaching retirement age, each participant in the social security system (male and female) is entitled to their Primary Insurance Amount (PIA), or half of the higher earning spouse, whichever is greater. However, if the higher earning spouse (generally the man) dies, the surviving spouse has the option to select 100% of the husband’s benefit or her own benefit, whichever is greater. It’s important to note that after the first spouse dies, one of the Social Security checks stops coming in! We call this phenomenon The Lost Social Security Check – but it doesn’t have to be devastating.
Social Security was established to provide a safety net for the elderly during their retirement years. Social Security was never intended to be their only source of income. To illustrate further, consider that planning for your retirement is like a typical four-legged stool. Each leg of the stool supports the seat, which for this illustration is retirement. Now, what are the four legs?
- Social Security – the income from Social Security generally provides from roughly 28% to 54% of a person’s retirement income needs, though higher earning workers could see their ratio fall below 28%.
- Corporate (Employee Benefit Plans) – if a worker is covered under an employer retirement plan then that income generally provides a large share of the person’s retirement needs. However, past experience has shown that corporate benefits are not available during retirement or are substantially reduced, because of two reasons. First, most corporate retirement plans were terminated over the past thirty years because of the expense and the availability of a 401(k) plan. Secondly, most corporate retirement plans had retirement formulas based upon the number of years the person worked and the average income earned in the last five or ten years before their retirement date. With workers changing jobs frequently, the payout, if any, could be substantially reduced or eliminated. The affect of companies establishing 401(k) plans, rather than pension plans, was that the investment risk was shifted to the worker and away from the company.
- Personal Assets - money saved while working, either in stocks or bonds, 401(k)s or IRAs, are important in meeting the retirement needs or goals. Generally, the disadvantage with this retirement stool is the affect of personal income taxes. The tax burden either reduces the amount available to invest or reduces the spendable amount of income received from 401(k)s or IRAs.
- Working –today we are seeing many retirees trying to supplement their retirement needs by extending their retirement date or working part time.
Let’s look at an example of a couple who are retired and are living off the retirement income they are entitled to, including both social security checks. The Smiths, Bob and Mary, are age 67 and 66 respectively. Bob is receiving a monthly social security check of $ 1,200 and Mary is receiving a check of $ 800. Combined, the Smith’s are receiving $2,000 each month from Social Security. Now, what happens if Bob dies suddenly? Mary can receive the greater of her $ 800 per month check or 100% of Bob’s $1,200 check. Mary loses 40% of the combined social security checks when Bob dies, even though she probably needs the entire amount to continue her lifestyle.
Is there a way that Bob and Mary can protect themselves from this loss of income? And more importantly, how can you best plan to protect yourself from the lost social security check? The answer is “Yes!”
The Smiths can each purchase an individual life insurance policy. To replace the $ 1,200 social security monthly check, Bob would need to purchase a life insurance policy with a face amount of $ 480,000*. Mary would need to purchase a life insurance policy with a death benefit of $ 320,000*. The estimated annual premium for both policies would be approximately $25,000**.
A better approach, however, is for the Smiths to purchase a reversionary annuity policy that only pays out a monthly income for life (a 10-year period certain is also available). Upon the death of the surviving spouse, the payment stops. Bob would need to purchase a policy that costs $ 272.28 per month to replace his $ 1,200 per month Social Security check. Mary would need to purchase a policy for $ 99.44 monthly to replace her $800 per month Social Security check. So, for less than $ 375 per month, Bob and Mary can replace the “Lost Social Security Check” for much less than the approximate $ 25,000 annual premium in a traditional life plan.
Considering this illustration, perhaps you too should investigate how to avoid The Lost Social Security Check.
*Assuming 3% yield
**Assuming standard non tobacco rates / no lapse Index Universal Life policies