Three Legged Stool



Retirement income is made up of what we refer to as a three-legged stool. You have Social Security, you have a pension, and you have your personal savings. When you look at Social Security, we seek to optimize this benefit. What we mean by optimization is simply this, we want to get as much out of Social Security and join that like a puzzle fitting together with the other investments—like your IRAs, 401Ks, Roth IRA, annuities, and life insurance. We want all that to work together in congruency, thus creating an optimized income strategy.

Now, you can claim Social Security at age 62, but it will cost you a 24% penalty. Typically, retirement age is somewhere between 65 and 66. Some choose to retire at age 70 to increase their Social Security benefits. There’s really no point in waiting after age 70. If you defer taking your benefit it will increase by 8% simple interest from your full retirement age up to age 70.

At this point, there are several options to choose from. Go ahead and take your benefit at age 62. Maybe you question your longevity due to illness, and you just don’t see yourself being around for many years. So you want to consider taking your benefit early so you can go ahead retire and get what we refer to as a guaranteed source of income called Social Security. Depending on when you take your Social Security income that will determine how much you receive.

Let’s say that the monthly income needed is $5,000 a month, and Social Security’s going to pay for the husband and wife combined, $3,000 a month. So, you have a $2,000 retirement shortfall. Using your personal savings you would need to come up with $2,000 additional monies each month, to hit your $5,000 monthly budget. Now, if you can’t go in your personal savings, you will have to either alter your lifestyle, live on less, or go back to work and get another job.

With our planning strategies, we can literally nail down, almost to the dollar, what you’re going to get depending on when you elect to take your benefits. This brings us to what’s called a break-even point. There’s a point in time when you would have pulled out of Social Security the same amount of money. So, no matter which strategy you took you’re going to end up with about the same amount of money. It doesn’t matter if you take it at 62 or 70 you would have drawn out the almost exact amount you picked.

Let’s say you live well into your 90s, maybe even a hundred. You’re making a lot more income through deferring Social Security at age 70 and surpassing that break-even point. Now your Social Security is really paying off. What about the people who don’t have longevity in their future and may never reach 90 years old to enjoy that benefit. That’s why for some, it’s better to elect it early. For others, it’s better to wait to full retirement age, and for others it’s better to wait until age 70. We’re able to look at an income and expense analysis, and take Social Security optimizing the strategy that’s going to best fit the individual family. Each family’s going to be a little bit different. The key is to have tax efficient income.

Take for example, an IRA or 401k—every dollar that you take out of those plans, are 100% taxable. Social Security is a tax advantage income because if under $44,000 a year; married, filing jointly; you count 50% of your Social Security income toward your taxable bucket.

If you make over $44,000; married, filing jointly; then 85% of your benefit is accounted for taxes; not 100%. When a person has a spouse that is much different in age, say 10 years or 15 years, which is common these days—by mortality tables, if that man lives out his natural life, he’ll probably die long before the wife will. The wife could potentially live 15 to 20 years in retirement after her husband’s deceased. If he waited till age 70 to elect the higher income on Social Security, and he dies at 85 with the wife in her young 70s, she can switch over to his benefit; having much more tax advantaged income.

It’s worth sitting down for a few minutes and really taking an educated approach at optimizing your Social Security to find the congruency between it, and the other investments that you have.

It is also important to have an inflation plan, considering anywhere from 2% to 3% inflation. Most people have no clue how to plan for inflation. For example, if you’re living on $5,000 a month—factor in roughly 3% inflation, so in 10 years from now, you’re going to need about $6,600 a month to buy the same goods and services that you’re buying right now.

When we sit down with clients and start developing an income plan, the first thing that we do after we figure out Social Security, is to figure out the budget. We need to account for inflation, because things are going to cost more. If you’ve not accounted for inflation, when you get into your mid to late 70s, or early 80s, you’re going to feel the financial squeeze of not having done so. Remember you can’t go back and work another 30 or 40 years and redo all this. Unfortunately, like the song by the Doors, “No one here gets out alive.”

Here are the facts, we’re all going to die—that’s just life. When one person is gone, we need what’s called spousal income replacement. The worst thing in the world that could happen, is for a couple in retirement, after things go well for 10 or 15 years, to have the husband die suddenly. If proper planning has not been done, this could leave the wife with next to nothing. I remember a story where a divorced man had taken the highest payout on his pension. He remarried, and was happily married for close to 20 years. His second wife was almost 10 years younger. She found out the hard way that he had taken the highest payout with his pension, and there were no spousal continuation benefits. She was a teacher, so she didn’t really have a Social Security benefit, and she had a very low pension herself. That household went from about $6-7,000 a month in income down to about $1,200. They had absolutely no spousal income replacement plan, and the widow really had a hard way to go for a while. Eventually, she passed away, but there was probably about 8 years that she lived well below what she had been accustomed to.

Having a spousal income replacement plan is key. Longevity protection is having a written plan and having income streams, maybe multiple income streams that can fund your retirement for you and your spouse. That way you don’t worry about running out of money. That’s why we have the Fast Track system. Instead of you trying to figure out all these regulations with Social Security, the different strategies on inflation planning, and spousal income replacement, you can set sail with our help.

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