The underlying reason for this result is that Social Security would terminate when one spouse dies, yet the leveraged benefit that flows from the early claim would have been realized or is continuing for the survivor.
The outcomes in Table 1 show that not all leverage options work well for all beneficiary scenarios. For single beneficiaries, Option D (IUL) appears to be less effective than Option E (long term care). For couples, a joint annuity (Option C2) provides less benefit than a combination of two single policies (Option C1). This means that advisors need to assist their clients in assessing the effectiveness of each potential leverage option in the context of their unique retirement needs and risks. Since both universal life and long-term care are insurance related, underwriting requirements may prevent some clients from using these options.
Despite the disparity in benefits, the outcomes for the couple with lower benefits in Scenarios 3 and 3A track the outcomes for the couple with higher benefits in Scenarios 2 and 2A. This means that the strategy would work for beneficiaries with varying income.
The results for Options A and B indicate that, if a market investment can achieve a return that is 1 percent to 2 percent above COLA, the strategy would work with these options. In this case, Option A represents a 2 percent return above the 3 percent COLA, and is positive across all beneficiary scenarios. Option B amounts to a tax-adjusted return of 3.6 percent, which also shows positive results until age 100 in some scenarios. While Options A and B may incur market risks, a return of 1 percent to 2 percent above COLA is reasonable and should be achievable.
Conclusion
The results of our study confirm that the proposed leverage strategy would enhance retirees’ income consistently to age 100 and would provide more certainty and clarity for clients regarding Social Security. As part of the client’s best interest standard under the new DOL fiduciary rule, advisors may need to apply this strategy to ensure that clients have an opportunity to assess the full potential of their benefits before making any decision on claiming Social Security.
Eva L. Levine, JD, CFP, RIA, is the principal of Plenaris Advisory, based in San Jose, Calif. The firm offers comprehensive financial planning in the San Francisco Bay Area.