In the October 2016 issue of Broker World Magazine, Impact was mentioned in the article “What’s New in Agency Technology Best Practices: Accelerated Underwriting, Cloud and DOL”. Impact’s PlanFacts platform can help agents and advisors with their DOL Best of Interest requirements. Click here to read the article.
Leibow’s career spans more than 29 years with an extensive background in distribution technology and back office systems. He previously worked for Genworth Financial, Mutual of Omaha and VP of Operations at Diversified Underwriters Services, Inc. As COO of Integrated Insurance Technologies, Ken built the largest life insurance data exchange hub in the industry, processing over 1 million policies a year and 30 billion dollars of annuities. Innovation in Quoting & Illustration tools, CRMs, Agency Management Systems, eApp platforms, and ePolicy Delivery are some key initiatives implemented by Ken during his career.
Impact has always maintained a start-up mindset with its staff and Leibow knows what it takes to thrive in our environment.
“Impact’s success and longevity is due entirely to the talent and enthusiasm of our staff. Ken’s skills, experience, and energy perfectly complement our team. His deep industry knowledge will help us tap new market opportunities and broaden the market for our existing products and services. I’m excited to have him on board as a member of our senior leadership team,” — Heather Vaartjes, President and COO, Impact Technologies Group, Inc.
by Gretchen K. Smith, CLU, ChFC
Less than 20% of retirees today have the traditional 3-legged stool, requiring some new strategies.
Good retirement income planning looks at all the resources a person has available for retirement, intending to utilize the available income efficiently and provide for the retirement lifestyle desired.
Traditionally, retirement planning revolved around the 3-legged stool concept with Social Security, a company pension and personal savings providing retirement income. Times have changed – less than 20% of future retirees can count on a pension.1
In this changing environment both Social Security retirement benefits and personal savings become even more important. Social Security maximization is the latest buzzword in financial planning, with nearly 10,000 baby boomers turning 65 each day.
Googling “Social Security maximization” returns thousands of hits from many sources, showing that it’s important to many: planners, financial institutions and future retirees. Changes in the ability to utilize maximization strategies in the recent Bipartisan Budget Act of 2015 has increased the need for planning.
When do retirees tend to start benefits? Studies show the two most popular ages are age 62 and Full Retirement Age (or FRA). In 2013, 36% of men and nearly 40% of women turning 62 claimed benefits.2 An additional one-third tend to claim between 65 and FRA. Only 4% of women and 2% of men in 2013 were age 70. According to this study, close to 90% claim at or before FRA. The trend to file early seems to be on the decline since 2005, but is still a significant proportion of retirees. Reasons vary, but the need to educate retirees on claiming ages and strategies remains.
A Typical Example
Let’s look at a typical married couple in their mid-50s. Bill is 55 and Maria is 54. Both work and have Social Security benefits at full retirement age of $2371 and $2000, per month. According to the life expectancy tables used by Social Security, Bill should live to 80 on average and Marie to age 83.
Using Social Security maximization software3, we enter their information. To get the maximum total benefits we find that Maria should file for benefits at age 66 and Bill should wait until age 70.4
But what if they live longer? Bill’s parents are both over 80 and healthy, and most of his relatives live into their mid-80s. Maria has several grandparents who lived to be 90. We can adjust their ages to 85 and 90. In that case, the software suggests that both wait until age 70 to maximize their potential benefits.
The difference between both starting Social Security at the earliest age (62) and waiting until age 70 is substantial, nearly one-half million in total benefits received over their lifetimes. Social Security planning is important to a retiree’s success in retirement.
Social Security is only one part of planning. Retirees also must consider their investments, the effect of taxes, and how to use all their resources together as a whole. A retirement cash flow plan must use resources effectively, not only Social Security but also assets, pensions and other incomes to provide a desired retirement lifestyle.
Let’s look at our retirees’ lifestyle requirements for income (Figure 15). Maria and Bill estimate $8000 a month for expenses in today’s dollars and inflation at 2.5%. They have an estimated $690,000 in various accounts with a 5% average rate of return before taxes. Bill and Maria each earn $95,000 a year and plan to retire at age 65. Putting this all together, we find they are reasonably well off, but will run out of money in their 80s with a shortfall in today’s dollars of close to $50,000 (present value calculated at 5%.)
We can optimize further (Figure 2). A good cash flow analysis considers cash flow, taxation and the order in which assets are utilized. We find that Bill and Maria can start benefits earlier, at Bill’s age 69 and Maria at 68. The calculation results suggest the optimal order to use assets, which in turn cuts the shortfall to just under $39,000, most of it occurring after Bill’s assumed death at 85.5
What if Maria lives longer, say to 95 or 100? We can measure the amounts needed at Bill’s death and find it is somewhere between $300,000 to over $1,000,000 depending on when Bill dies and how long the survivorship period lasts between deaths. Solving the survivorship needs is one way to solve the shortfall throughout their retirement.
Life insurance can provide the funds for the survivor’s cash needs. Total Social Security benefits will decrease after Bill dies, as well as pensions may cease or be reduced. The life insurance death benefit provides a source of funds for the surviving spouse, and may also provide additional income during the policy holder’s lifetime.
Since Bill is more likely to die first, we have selected a 10-pay whole life policy on Bill’s life, with surrenders and loans providing a tax-free6 annual income starting at age 65 of $32,000 a year. Ten annual premiums of $56,430 will be paid using some of the existing assets and salaries.7
Look at the results (Figure 35): assuming death at ages 85 and 90, the life insurance erases the shortfall and leaves over $300,000 to heirs at Maria’s death. If she lives longer, the deficit is smaller than without the life insurance. If Bill dies earlier, Maria’s survivorship needs are met.
If Maria dies before Bill, the policy has a substantial cash surrender value that Bill could use as needed to supplement his other income sources. Plus, they have turned some of their assets into a $32,000 a year supplemental income source and at the same time reduced overall lifestyle needs.Retirement income planning is a complicated and fluid process. Just maximizing Social Security is a start, but many other factors can affect cash flow. The type of asset used can produce different taxation, including what percent of Social Security benefits are subject to tax.
Originally published in Life Health Advisor:
- “From 1980 through 2008, the proportion of private wage and salary workers participating in DB pension plans fell from 38 percent to 20 percent (Bureau of Labor Statistics 2008; Department of Labor 2002).” Source: The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers, United States Social Security Administration 2009
- Trends in Social Security Claiming, May 2013 by Alice H. Munnell and Anqi Chen, Center for Retirement Research at Boston College.
- Social Security Pro (SSPro) is a maximization software program offered by Impact Technologies Group, Inc. www.impact-tech.com
- Assumes an annual 2.5% Cost of Living adjustment, close to the historical average of 2.8% annually for benefits.
- The values in this case study were obtained by using Cash Flow Decisions, a retirement income software program offered by Impact Technologies Group, Inc. www.impact-tech.com
- Under current federal tax law, surrenders up to basis, then loan proceeds are not subject to income tax.
- Male age 55, non-smoker, sample whole life policy with dividends reinvested annually.
Social Security Pro has a new Total Benefits Intensity Grid for clients too young to use ‘File Restricted’ and ‘File and Suspend’ strategies. The Bipartisan Budget Act eliminated the File and Suspend strategy for married individuals born after May 1, 1954 and eliminated ‘File and Suspend’ for any one born after May 1, 1950 and filing for benefits between now and May 1, 2016. For those individuals, Social Security Pro will continue to display its patented Social Security grid that indicates the best strategy for each age combination. However, for those not eligible for those strategies, Social Security Pro displays the new Total Benefits Intensity Grid.
The new Grid, similar to the previous one, calculates all the benefits for each age combination. The cell for each age combination indicates its relative value by showing darker green for the higher values and a lighter green for the lower values. Instantly, you and your clients will see the age combinations that will provide the greater incomes, and the ones that will not. The very highest age combination is shown with a star. Change any variable, and all values re-calculate and the resulting values are displayed.
The new graphic makes it easy to determine if a slight adjustment in filing ages will make a significant difference, or just a little. You and your clients will quickly see that it is not just a matter of the longer you wait the more you get. The differences may be tens or even hundreds of thousands dollars. This is a perfect beginning to the retirement planning process.
The new graph is just one part of the Impact’s entire update of Social Security related products. All changes for the new law that was signed into law November 2, were in place the morning of November 6. The products updated in addition to Social Security Pro, were Social Security Explorer, Social Security Lead Gen, Cash Flow Decisions, and Retirement Road Map.
Cash Flow Decisions, which contains a version of Social Security Pro within it, becomes even more valuable for incorporating Social Security claiming strategies into the total retirement plans of the clients. It optimizes Social Security, while considering taxation of the Social Security benefits and the other retirement income—including required minimum distributions from IRAs and 401(k) Plans, and it determines the best order of asset distributions considering all of these items. It also shows how the retirement income floor can be increased with annuity income, and that permanent life insurance is the best tool for protecting against longevity risks.
Using Take a free trial, start retirement planning by determining how and when to take Social Security benefits. Then using Cash Flow Decisions, coordinate all retirement income into the best retirement plan.
The Bipartisan Budget Act of 2015 makes significant changes to Social Security planning. There are many articles that go into the details of the changes (this article from Michael Kitces for example), but the legislation most affects ‘restricted application’ and ‘file and suspend’ filing.
The changes for restricted applications apply to those who attain age 62 in any calendar year after 2015. Your clients who are at least 62 years of age by the end of 2015, will still be able to utilize a restricted application.
‘File and suspend’ however, is another story. The new legislation eliminates the most common application of the ‘file and suspend’ strategy unless your clients can take advantage of it within the next 180 days (the exact date for the expiration of the ‘file and suspend’ strategy is not yet available, but will be after April 30th 2016).
From a Congress that has been stalemated for years, this legislation came out of the blue and passed with unbelievable speed. We know the urgency you have to get proposals in your client’s hands that reflect these changes. Impact plans to have its software modified and deployed on Wednesday November 4th.
The loopholes Congress has targeted are the ‘file and suspend’ and ‘restricted application’ filing strategies. The changes for restricted applications will apply to those who attain age 62 in any calendar year after 2015. Thus, it appears that today’s retirees who are at least 62 years of age by the end of 2015, will still be able to utilize a restricted application. ‘File and suspend’ however is another story. The new legislation will eliminate the most common application of the ‘file and suspend’ strategy.
Impact has always been one of the first, usually the first, to revise its products to reflect changes to regulations and legislation. Not only do we quickly implement the changes needed, we also look for hidden opportunities to help you assist your clients.
Impact is immediately working on software changes that will reflect the legislation as it currently stands and we’ll be constantly monitoring any additional changes required as it moves through Congress. We’ll have further details when the final legislation becomes law.
A Social Security claiming strategy is not complete unless Social Security benefits are considered within the context of the client’s other retirement cash flow. Cash Flow Decisions provides an easy, effective way to provide that context. Now, with the upcoming release of Cash Flow Decisions, advisors will have an effective tool to demonstrate life insurance as a valuable solution to survivorship needs in retirement as well as the role annuities play in providing security.
“I am always amazed by the brilliance of computer software designers. They can take the most complicated financial planning decisions and reduce them to a one-click — or one-swipe — tool. Social Security claiming decisions have benefitted greatly from such programs.”
— Mary Beth Franklin
That’s a quote from Mary Beth Franklin’s article, “Software evolving beyond Social Security maximization” in InvestmentNews. When the financial engineers at Impact first created their tools for Social Security maximization they immediately realized there was more work to be done. “We invented the best tools available for helping advisors analyze and present Social Security maximization strategies to their clients. Now we’re creating the best technologies to put Social Security in context,” says Heather Vaartjes, Impact’s COO. After over a year of research, design, and engineering, version one of Cash Flow Decisions was released in early August. Now, just two short months later Impact is preparing to release version two.
Often the biggest gap in a client’s retirement income will occur after a spouse dies. The gap is usually bigger the longer the surviving spouse lives. That’s exactly what life insurance is designed for—to provide for survivors. Yet, most advisors ignore the value of life insurance in retirement planning. Cash Flow Decisions not only shows the life insurance need to cover survivorship, it will also demonstrate how repositioning assets to acquire life insurance can provide income and survivorship protection.
Current subscribers to Subscribe to Cash Flow Decisions will receive the new release automatically.