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[ Music ]
Welcome to Sound Insights from Prudential.
Where you'll hear from thought leaders
and industry experts discussing the life
insurance industry's most relevant topics
and trends.
Today you'll hear from Jim Mahaney, of
Prudential's Strategic Initiatives Group.
And Karen Hofmann, of Prudential's
Advanced Markets Team.
[ Music ]
> Welcome, and thank you for joining us
on Prudential's Sound Insights podcast.
I'm Karen Hofmann, Director in the
Advanced Markets Group at Prudential.
We know that the death benefit
from life insurance helps clients
to financially protect those
that depend on them most.
It's the main reason people
purchase life insurance.
Some policies may offer living benefits too.
For example, when it comes to
Social Security retirement benefits,
your clients also need your
professional guidance.
In this episode of Sound Insights, we're
focusing on a strategy that they can use
to delay Social Security to
increase their benefits later on.
It's done with life insurance.
I have the pleasure to be here with Jim Mahaney.
As Vice President of Strategic
Initiatives at Prudential,
his primary focus is on retirement-related
issues.
He's been an active and an
invited speaker to share ideas
on integrating retirement
savings and Social Security.
His work has been featured in the Wall Street
Journal, Kiplinger's Retirement Planning Guide,
the New York Times, USA Today,
Forbes, as well as the book,
"The Wall Street Journal
Complete Retirement Guidebook:
How to Plan It, Live It, and Enjoy It."
His paper, "Financial Planning Considerations
for Same-Sex Couples After Windsor,"
won the prestigious Retirement Income
Communications Award from Investment News
and the Retirement Income
Industry Association in 2014.
Together, Jim and I are going to
share our insights on how in addition
to providing a death benefit to the people
they love, your clients can use life insurance
to supplement their retirement
incomes before Social Security begins.
So, Jim, what are some recent highlights
relating to retirement planning?
> Hi, Karen.
Yes, it's great to be here on this podcast.
I would say in regards to retirement
planning, we all know people are living longer.
So, greater longevity.
And fewer people in the private
sector are retiring
with traditional defined benefit pension plans.
So along with not having pension plans, they
also lose the survivor benefit protection
that is required to be offered under
law with defined benefit plans.
So those are going away.
And also, as we're going to talk about, there
have been some changes to Social Security
in regards to claiming strategies
that will take effect in 2016.
> You've done a lot of research, Jim,
in the area of Social Security claiming.
Can you tell us more about that?
> Sure, happy to.
So about 12 years ago, we started looking
at different retirement income products
that might be developed to help provide
guaranteed lifetime income in a world
where defined benefit pension
plans were going away.
And all future retirees, at
least in the private sector,
would be retiring with 401K plans eventually.
And at the time, Social Security and the
financial planning community was really kind
of looked at as just a benefit
that one would want to take as soon
as they retired, or as soon as they turned 62.
Might even be before they retire.
And when we looked at it and started looking
at the flexibility that individuals would have
with 401K plans, it looked like Social
Security, instead of being minimized as part
of a retirement income plan,
it really should be maximized.
Or optimized, if you will.
And at that time also, delayed retirement
credits were scheduled to increase.
And those delayed retirement credits
are essentially the value that goes
with Social Security if you wait
after one's full retirement age.
Which used to be 65, it's
now 66 for current retirees,
and will be 67 for individuals
retiring in the future.
So we saw that also happening.
And then we also saw the emergence of a lot
more dual income workers within a marriage.
So a marriage where both spouses were working
and both spouses were earning their
own worker Social Security benefits.
And there was also little attention
really paid to the survivor benefit --
which we're going to talk about today
-- in regards to how that plays out.
How one should think about the survivor benefit
when it comes to Social Security claiming.
And then again, moving to this 401K
world where there's more flexibility,
less guaranteed lifetime income because
pensions are going away and few people choose
to annuitize their 401K balances.
So there's a need to protect not only oneself
when they retire, but potentially a spouse
down the road who would be a
survivor or widow down the road.
And we know that people are living
longer, especially a lot of females
who are living longer and might
easily live into their 90's or 100.
So how do we protect those folks
from running out of income?
We looked at Social Security
and said, you know what?
It shouldn't be minimized.
It really should be looked at and say
to a couple, this is how we might want
to customize one's Social
Security claiming strategy.
And integrate the other potential buckets
of retirement income money, including IRA's,
401K's, life insurance, mutual funds, etcetera.
> With all the work with a lot of financial
advisors, have you seen the thinking
in the financial planning community
involved in the last ten years
when it comes to Social Security planning?
> Oh, I think definitely.
I think the idea of coordinating
benefits between spouses has changed.
And a lot of advisors -- and I'm
sure many of them that are listening
to this broadcast -- are doing this now.
Thinking about how to coordinate
benefits between spouses.
And we're seeing more and more articles
and more and more writing about,
in the financial planning community,
the value of delaying Social Security.
Not only for a worker, but potentially for a
worker's spouse, or the higher earner's spouse
in the form of survivor benefits.
> Yes, I noticed recently
in the last few years,
more and more financial advisors are actually
wanting to become not necessarily experts,
but be able to help their clients more and more.
Because they're worried that their clients may
go to a financial advisor that would know how
to help them with their Social
Security claiming strategies.
So it really has become a very popular topic.
So tell me more about what you think
about the value our clients would get
delaying Social Security benefits.
> I think initially the discussion is really
more about retirement income risk tolerance
versus investment risk tolerance.
And what do I mean by that?
So I think in accumulation phase
when we work with clients we talk
about how much risk tolerance
does the client have.
In regards to loss of principal, if you will.
And when it becomes a retirement
income discussion,
I think the discussion really is more about,
what is the tolerance or risk tolerance
for the risk that retirement income runs out?
Or an adequate amount of
retirement income runs out?
So I think the real value of
delaying Social Security is
that it does create a higher
guaranteed lifetime income stream
that is backed by the U.S. Government.
And it's inflation-protected as well.
So even though inflation has been kind of mild
over recent years, it has had the propensity
in the past to rear its ugly head.
And it used to be recognized really as the real
enemy for retirees who were on fixed income.
When inflation was high, especially
in the 1970's, early '80s,
it really was hurting a lot of retirees.
And so the Cost of Living
Adjustment that is provided
under Social Security is very, very valuable.
The benefit increase in one given
year has been as high as 14%.
So when you create a higher Social Security
base benefit by delaying Social Security,
you're creating a higher income stream
because you're waiting, delaying.
But you're also creating a
higher base amount on which cost
of living adjustments will
be compounding over time.
So there's a real value in that.
And as I mentioned earlier, with defined
benefit pension plans going away,
we're losing the survivor protection
that was provided under those plans.
So if I have retired with a defined
benefit plan and I'm married,
my spouse has to be given the option
to get a survivor benefit in
the event of my death, right?
A qualified joint and survivor annuity.
But in a 401K world, when
an annuity is not offered
under the plan, that whole option goes away.
So we're losing that survivor
benefit protection.
Ironically, in an era where people are
living longer and women are living longer.
So the value of delaying Social Security
is not just for the worker themselves,
but in creating that higher survivor benefit.
So I would say just at a high level,
those are some of the highlights,
if you will, of delaying Social Security.
At least in my mind.
> Let's say if I was working
with a married couple,
would I suggest they should both delay benefits?
> That's a good question.
And one that does come up frequently.
And I guess my answer would be, not necessarily.
One of the options that people have with
Social Security really is when to take it.
And it can be customized based on not only the
retirement income risk tolerance, if you will,
but we also have our own self-knowledge,
self-awareness of our own health.
So that might play into it as well.
You know, how long do I expect to live?
How long is my spouse expected to live?
And another big part of this is, well -- and
I'll go back again to the survivor benefits.
So, Karen, if you and I are married and if I'm
the higher earner and I delay Social Security.
And when I die if my benefit at that point is
higher than yours, your benefit will drop off.
And you will step up to my benefit.
So in essence, the value of
delaying my benefit lives
on because I'm providing
that survivor benefit to you.
Now, conversely, if I delayed and you
didn't and if you died first, again,
your smaller benefit would die off as well.
So the value to delaying Social Security
for me as a higher earner lives on.
But it's just the opposite as the
lower earner with Social Security --
doesn't matter which one of us dies
first, that smaller benefit will die off.
So actuarially speaking, one
might decide that the value
of that smaller benefit is actually less because
it doesn't matter which one of us dies first,
that smaller benefit will die off.
There is an argument to be made that the spouse
with the lower benefit might want
to take Social Security earlier.
And delay the higher earner's benefit.
> Yes, staying with that thought, Jim.
I mean, we do a lot of client
seminars on this subject.
And I'm always surprised to hear how many --
especially women -- take their benefits early.
And I always ask them, you
know, why would you do that?
And I don't know if you've heard this when you
do this, but I'm always afraid that they do it
because they're always worried
about it going away.
As opposed to actually looking
at the real numbers
and actually having somebody put
these numbers together with them.
And actually thinking that I will be
living, as you just said, a longer lifetime.
So it would make more sense to be living
longer with a higher dollars amount, right?
Wouldn't you agree?
> Yes, I think so.
You know, no one knows what will
happen with Social Security benefits.
But I could say I've watched this process
play out in Washington when proposals
to change Social Security are made.
And it just seems very far-fetched
to really consider that any changes
to a worker benefit would be
made impacting those that are
on the cusp of retiring, or already retired.
History would tell us that when changes
are made to the Social Security system --
like major ones were made in 1983 --
they give individuals a long time
to see that impact over time.
So it gives people a chance to adjust
their plans, if you will, to save more,
etc. So it would seem very
hard to really comprehend
that Social Security cuts would be made
immediately to those who are on the cusp
of claiming their Social Security benefits.
> So let's move on to cost
of living adjustments.
You mentioned that earlier.
So how does that work when
delaying Social Security benefits?
> When someone is delaying, let's say, from
age 62 to age 70, the maximum of eight years
of delaying, the Cost of Living Adjustments
are being applied really behind the scenes.
And what do I mean by that?
Cost of Living Adjustments are
going to be paid on the base amount
of Social Security, and then
compounded over time.
So if my benefit at age 62, if I choose
to take a reduced amount at age 62,
the Cost of Living Adjustments will be
applied each year based on that age 62 amount.
And then be rolling forward
on a multiplier effect.
But if I wait from 62 to 70,
then when I do retire at age 70,
all those intermittent COLA's
are actually provided to me,
and I start at a much higher amount at age 70.
So -- and I think because it occurs behind
the scenes it's not really something
that people consider, especially when they
look at their statements and say, well,
this is how much I get at age 62
versus how much I get at age 70.
And because it's done in
real dollars, if you will,
it's not spoken in a language
that people understand.
So if I wait from age 62 to
70, another way of thinking
about it is, the benefits will increase 76%.
But if I consider cost of living
adjustments, which is projected --
you know, we don't know for sure, they
could be higher, could be lower --
but the Social Security Administration projects
them at 2.7% currently on a long-term basis.
So if we assume those Cost of Living Adjustments
occur at 2.7%, my benefit's going to more
than double when I initially
start it at age 70 versus age 62.
And then it's really the magic of
compounding interest that we see with Cost
of Living Adjustments as they compound over
time, as someone lives longer and longer
in retirement, when you start at that higher
base amount once you've delayed Social Security,
you get that compounding effect that's
going to be able to cover that tail risk.
That risk that you live a long time, or
your spouse lives a long time in retirement.
You need those higher Cost of Living
Adjustments to be compounding over time
to preserve that purchasing power.
If you live a retirement that lasts 25,
30, or even longer years of retirement.
> So you're saying that individuals
need to work longer if they want
to delay their Social Security benefits?
> Not necessarily.
What essentially I'm saying is that you have
these different potential retirement income
streams that can come from
different buckets of money.
You might have qualified money in a 401K or IRA.
You might have non-qualified money in the form
of annuities, mutual funds, life insurance.
And then you have Social Security.
What I'm essentially saying is that whenever
you do decide to retire, when you can afford
to retire, you might want to think about
sequencing those different income streams.
So you might want to take income from a
non-qualified source or a qualified source
and delay your Social Security
to get that higher base benefit
that can provide higher income to yourself
and potentially to a spouse down the road.
And not necessarily saying that
you have to work longer at all.
It's just saying you might think about
which income streams you tap in which order.
> One of the things I also get a lot of
questions on, but I also hear when I'm
out talking to the public is, you know, I
want to delay my Social Security benefit.
It's something I'm considering.
But what if I die next year?
What if I don't make it to 70?
How does that work?
> It's an emotional decision to do this.
Because just like 401K's, or I would
even say even more than 401K's,
we've been paying into the Social
Security system all our working lives.
So we've seen all those years
we've been working,
we've seen those taxes go into
the FICA line, if you will.
So we've been paying into
Social Security all these years.
And we all think, well, what if
I don't get enough out of it?
I guess I would argue to say again,
what is the real risk in retirement?
And what's your risk tolerance for
running out of money in retirement?
So the real risk really for most of us
is the potential of outliving our assets.
And that's what we need to be focused on.
So if we die before we are able to collect
Social Security, that risk goes away, right?
But I will also say again,
if somebody is married,
even if they're delaying their Social
Security and they don't collect themselves
because they passed away, that enhanced survivor
benefit can be passed on to a widow or widower.
So the value of delaying doesn't actually go
away, because the spouse will actually take