Insurance Can Play a Part in Retirement Income Planning

Employees should start their retirement income planning sooner rather than later. They may have limited sources of retirement income. The timing of Social Security can make a difference, and their biggest worry is long-term care needs. These were some of the recommendations from Stephen Locko, executive vice president and chief operations officer at ISN Network, a firm that provides back office support to financial professionals.

Locko told attendees of the National Tax-Deferred Savings Association (NTSA) 403(b) Summit that employees need protection for their retirement income. Planning should include addressing market risk, taxes and inflation, but also health care expenses, long-term care and legacy plans. “You don’t want to dip into your retirement accounts to cover health and long-term care costs,” he said.

Locko noted that most employees have hardly or not at all saved specifically for health care in retirement. “Most people think Medicare will take care of everything,” he said. “They need education.” Employees can use insurance to supplement retirement income and protect against health and long-term care costs, according to Locko. “Insurance is where you can really provide a lot more benefit to employees.”

Life insurance can protect against loss of income when one spouse in a couple dies and may also provide extra income when needed. Long-term care insurance can protect against having to dip into retirement savings for these costs. ISN research found 38% of individuals will incur long-term care costs of between $25,000 and $250,000, Locko said.

Social Security planning is becoming a big business, Locko noted. When planning for retirement income, employees need to know what Social Security pays and when.

Deferring taking Social Security benefits until age 70 essentially gives employees an 8% simple return on what they would have received at normal retirement age (now 66), Locko said. “You can’t get that return anywhere else,” he says. And, employees should not start taking Social Security benefits while still employed full-time, because their benefit will basically be cut in half, he added.

According to Locko, the most common strategy being touted for a married couple is for one spouse to file for benefits but suspend taking them and the other to take the spousal benefit based on the spouse who filed. Then when the first spouse starts taking the benefits, the second spouse will file for his or her own.

This produces much more benefit for the couple, but when one spouse dies, one check goes away, Locko noted. Individuals need to plan for replacing that second check, and this is another place where insurance can come into play.

Locko also pointed out that for governmental employees, 30% in 12 states get no Social Security benefit, and 27 states have government offsets to public employees’ Social Security benefits. This also affects spouses and beneficiaries. Pensions and defined contribution plan savings may not be enough.

Insurance helps reduce the risk of running out of money in retirement, he said. Even if already in retirement, individuals can use their required minimum distributions (RMDs) to purchase insurance products, he suggested.