Passing It On: Making the most of Social Security benefits

| January 20, 2021

Most Americans take Social Security between age 62 and 65. But the demographic and longevity information does not support that decision. A man who makes it to age 65 has a life expectancy of age 86. A woman who makes it to age 65 has a life expectancy of age 89. For a married couple who makes it to age 65, there is a 50 percent chance that one of them will live until age 95. The break-even age, whether you take Social Security benefits at age 62 or age 70, is around 80 years old. So, most Americans are missing out on many years of much higher income, and  also missing out on a way to provide the surviving spouse with a much higher income after the first spouse dies.

Considered from another angle, is my Social Security inheritable? If you defer Social Security benefits until age 70, get one Social Security check, and then die, what then? The answer: You receive a Social Security death benefit of $255 paid as a lump sum to a qualifying spouse or child, and all future income stops.

If you don’t like the idea of losing your Social Security benefit when you die, especially when you already have enough income and would rather leverage your Social Security benefit for your family, how do you make your Social Security inheritable? Let’s look at an example.

Sue and her husband have substantial investments and have now retired with a large pension that supports their lifestyle. Sue’s Social Security at age 65 is $2,400 per month, which creates a tax liability of approx. $4,800 annually. Because Sue has more than adequate income to meet her needs, she wants to create a tax-free inheritance to benefit her spouse and children at her death. To do so, Sue sets aside $400 per month to pay her tax liability on Social Security benefits, and uses the other $2,000 per month to purchase a $24,000 per year cash value life insurance policy. Using conservative whole life guaranteed assumptions, in 10 years Sue has created a $450,000 tax-free death benefit for her family that will continue to grow over time. Had Sue elected to invest her Social Security money, it would require earning a net after tax 11.18% compounded annual rate of return to turn $24,000 annually into $450,000 in 10 years. 

In addition to the death benefit, Sue’s policy provides a “living benefit” when needed for a chronic illness or long-term care. In other words, Sue could be the beneficiary of her own life insurance policy while still alive, when certain conditions are met. This is especially important, since having access to capital allows Sue to maintain control over where she will receive long-term care. Forty percent of people who died from COVID-19 in the U.S. lived in nursing homes and Sue, like most people, would prefer to remain at home if long-term care is needed. 

Another option Sue will have is to access tax-free withdrawals from her life policy that can support her retirement lifestyle or provide gifts to family. For a married couple over age 65, joint life expectancy predicts that one spouse will live beyond age 92. Tax free income can be a handy source for family holidays and birthday gifts.