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Life Insurance as an Alternative to a Non-deductible IRA – Reason #5: Maximizing Social Security Income

The coming tax season is a perfect time to help your high-income clients assess the options available for their additional savings.

In a series of 6 back-to-back blogs we illustrate 5 key reasons why cash value life insurance can be a powerful savings vehicle when compared to other retirement income sources, especially a non-deductible IRA:

  1. Replacing the Post-Retirement Income Gap
  2. Diversifying Taxes at Retirement
  3. Cushioning a Market Downturn
  4. Guarding Longevity
  5. Maximizing Social Security

Today we flesh out Reason #5

As clients plan for retirement income, there are many factors to consider – what the cost of healthcare will be, changing tax and inflation rates, how to time taxation and distributions – amongst a myriad of factors. One factor that is often glossed over is assessing when to start taking Social Security (SS) Income.

Delaying SS income provides the largest benefit payout with benefits increasing by as much as 8% for each year you defer after “Full Retirement Age” (FRA), up to age 70. Note that delaying SS income to after age 70 does not provide any additional benefit. However, if clients do not have sufficient income to delay, or if health and longevity is a concern, delay may not make sense.

Full Retirement Age (FRA) is defined as follows:

1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943-53 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

The amount of SS income can be reduced or increased based on when a participant claims benefits. Generally, the categories are as follows: “Early” (age 62-67), “Full Retirement Age” (age 66-67) or “Delayed Retirement” (age 66-70). SS Benefits will be further reduced if clients claim SS income before FRA, or in the year of FRA, and are still working.

SS Income Based on Age/Status and Earned Income1

1 “Annual earnings limit” refers to the limit on the amount that can be “earned” by someone taking Social Security income before there is a reduction in SS benefits. The “annual earnings limit” is published by the SS Administration annually and is based on when SS is taken (Early, FRA or Delayed). In 2019, the annual “earned income limit” for “early retirement” SS claimants is $17,640 ($1,470 per month). The limit ‘in the year of FRA’ is $46,920 ($3,910 per month).

How Life Insurance Can Create a Bridge to Higher Social Security Income

Cash value life insurance can help create a bridge of supplemental income to help clients get to age 70 and maximize their social security income. For example, if a female age 45 today takes early retirement and claims social security benefits at age 62, her benefit check will be $13,956 per year forever, regardless of how long she lives. However, if she can wait and take benefits between age 62 and 67 she will receive a larger payout. Her FRA is age 67 so if she can at least wait until age 67 she will get no reduction in her benefit. However, if she has sufficient other income and can wait until age 70, she can increase her SS income benefit by 20%. When designed properly and distributions are taken on a tax-advantaged basis, life insurance cash values can provide the income she would have otherwise received at age 62, to get her to age 70. Take a look:

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In case you missed it…

Life Insurance as an Alternative to a Non-deductible IRA? 5 Reasons Why – Intro

Reason #1: Replacing the Post Retirement Income Gap

Reason #2: Diversifying Taxes on Retirement Income

Reason #3: Cushioning a Market Downturn

Reason #4: Guarding Longevity

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