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[ Music ]Welcome to Sound Insights from Prudential.

Where you'll hear from thought leadersand industry experts discussing the life

insurance industry's most relevant topicsand trends.

Today you'll hear from Jim Mahaney, ofPrudential's Strategic Initiatives Group.

And Karen Hofmann, of Prudential'sAdvanced 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 benefitfrom life insurance helps clients

to financially protect thosethat 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 toSocial Security retirement benefits,

your clients also need yourprofessional guidance.

In this episode of Sound Insights, we'refocusing on a strategy that they can use

to delay Social Security toincrease their benefits later on.

It's done with life insurance.I have the pleasure to be here with Jim Mahaney.

As Vice President of StrategicInitiatives at Prudential,

his primary focus is on retirement-relatedissues.

He's been an active and aninvited speaker to share ideas

on integrating retirementsavings and Social Security.

His work has been featured in the Wall StreetJournal, Kiplinger's Retirement Planning Guide,

the New York Times, USA Today,Forbes, as well as the book,

"The Wall Street JournalComplete 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 Newsand the Retirement Income

Industry Association in 2014.Together, Jim and I are going to

share our insights on how in additionto providing a death benefit to the people

they love, your clients can use life insuranceto 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 privatesector are retiring

with traditional defined benefit pension plans.So along with not having pension plans, they

also lose the survivor benefit protectionthat 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, therehave been some changes to Social Security

in regards to claiming strategiesthat 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 lookingat different retirement income productsthat might be developed to help provideguaranteed lifetime income in a world

where defined benefit pensionplans were going away.

And all future retirees, atleast in the private sector,

would be retiring with 401K plans eventually.And at the time, Social Security and the

financial planning community was really kindof looked at as just a benefit

that one would want to take as soonas they retired, or as soon as they turned 62.

Might even be before they retire.And when we looked at it and started lookingat the flexibility that individuals would have

with 401K plans, it looked like SocialSecurity, 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 goeswith Social Security if you waitafter one's full retirement age.

Which used to be 65, it'snow 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 lotmore dual income workers within a marriage.

So a marriage where both spouses were workingand both spouses were earning theirown 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 401Kworld where there's more flexibility,

less guaranteed lifetime income becausepensions 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 spousedown the road who would be a

survivor or widow down the road.And we know that people are livinglonger, especially a lot of femaleswho are living longer and mighteasily 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 sayto a couple, this is how we might want

to customize one's SocialSecurity claiming strategy.

And integrate the other potential bucketsof retirement income money, including IRA's,401K's, life insurance, mutual funds, etcetera.

>> With all the work with a lot of financialadvisors, have you seen the thinkingin the financial planning community

involved in the last ten yearswhen 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 listeningto this broadcast -- are doing this now.

Thinking about how to coordinatebenefits between spouses.

And we're seeing more and more articlesand more and more writing about,

in the financial planning community,the value of delaying Social Security.

Not only for a worker, but potentially for aworker'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 actuallywanting to become not necessarily experts,

but be able to help their clients more and more.Because they're worried that their clients maygo to a financial advisor that would know how

to help them with their SocialSecurity claiming strategies.

So it really has become a very popular topic.So tell me more about what you thinkabout the value our clients would get

delaying Social Security benefits.>> I think initially the discussion is really

more about retirement income risk toleranceversus investment risk tolerance.

And what do I mean by that?So I think in accumulation phase

when we work with clients we talkabout 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 tolerancefor the risk that retirement income runs out?

Or an adequate amount ofretirement income runs out?So I think the real value ofdelaying Social Security isthat it does create a higher

guaranteed lifetime income streamthat 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 propensityin the past to rear its ugly head.

And it used to be recognized really as the realenemy for retirees who were on fixed income.

When inflation was high, especiallyin the 1970's, early '80s,

it really was hurting a lot of retirees.And so the Cost of Living

Adjustment that is providedunder Social Security is very, very valuable.

The benefit increase in one givenyear has been as high as 14%.

So when you create a higher Social Securitybase 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 costof living adjustments will

be compounding over time.So there's a real value in that.

And as I mentioned earlier, with definedbenefit 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 optionto get a survivor benefit in

the event of my death, right?A qualified joint and survivor annuity.

But in a 401K world, whenan 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 Securityis 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 workingwith 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 withSocial Security really is when to take it.

And it can be customized based on not only theretirement 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 -- andI'll go back again to the survivor benefits.

So, Karen, if you and I are married and if I'mthe higher earner and I delay Social Security.And when I die if my benefit at that point ishigher than yours, your benefit will drop off.

And you will step up to my benefit.

So in essence, the value ofdelaying my benefit liveson 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 diesfirst, that smaller benefit will die off.

So actuarially speaking, onemight decide that the value

of that smaller benefit is actually less becauseit 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 wantto take Social Security earlier.

And delay the higher earner's benefit.>> Yes, staying with that thought, Jim.

I mean, we do a lot of clientseminars on this subject.

And I'm always surprised to hear how many --especially women -- take their benefits early.

And I always ask them, youknow, why would you do that?

And I don't know if you've heard this when youdo this, but I'm always afraid that they do it

because they're always worriedabout it going away.

As opposed to actually lookingat the real numbers

and actually having somebody putthese 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 processplay out in Washington when proposals

to change Social Security are made.And it just seems very far-fetched

to really consider that any changesto a worker benefit would be

made impacting those that areon 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 timeto see that impact over time.

So it gives people a chance to adjusttheir plans, if you will, to save more,

etc. So it would seem veryhard to really comprehend

that Social Security cuts would be madeimmediately to those who are on the cuspof claiming their Social Security benefits.

>> So let's move on to costof living adjustments.

You mentioned that earlier.So how does that work when

delaying Social Security benefits?>> When someone is delaying, let's say, fromage 62 to age 70, the maximum of eight years

of delaying, the Cost of Living Adjustmentsare 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 amountof Social Security, and then

compounded over time.So if my benefit at age 62, if I chooseto 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 forwardon a multiplier effect.

But if I wait from 62 to 70,then when I do retire at age 70,

all those intermittent COLA'sare 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 somethingthat 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 inreal dollars, if you will,

it's not spoken in a languagethat people understand.

So if I wait from age 62 to70, 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 projectsthem at 2.7% currently on a long-term basis.

So if we assume those Cost of Living Adjustmentsoccur at 2.7%, my benefit's going to more

than double when I initiallystart it at age 70 versus age 62.And then it's really the magic of

compounding interest that we see with Costof Living Adjustments as they compound over

time, as someone lives longer and longerin retirement, when you start at that higher

base amount once you've delayed Social Security,you get that compounding effect that'sgoing 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 wantto delay their Social Security benefits?

>> Not necessarily.What essentially I'm saying is that you havethese different potential retirement income

streams that can come fromdifferent 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 wheneveryou do decide to retire, when you can afford

to retire, you might want to think aboutsequencing those different income streams.So you might want to take income from anon-qualified source or a qualified source

and delay your Social Securityto get that higher base benefit

that can provide higher income to yourselfand potentially to a spouse down the road.

And not necessarily saying thatyou have to work longer at all.

It's just saying you might think aboutwhich income streams you tap in which order.

>> One of the things I also get a lot ofquestions on, but I also hear when I'mout 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 wouldeven say even more than 401K's,

we've been paying into the SocialSecurity system all our working lives.

So we've seen all those yearswe've been working,

we've seen those taxes go intothe FICA line, if you will.

So we've been paying intoSocial Security all these years.And we all think, well, what ifI 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 SocialSecurity and they don't collect themselves

because they passed away, that enhanced survivorbenefit can be passed on to a widow or widower.

So the value of delaying doesn't actually goaway, because the spouse will actually take

over that enhanced benefit amount.And I would also say, Karen -- and you'regoing to talk about it a little bit later --

but if one is worried about dyingtoo soon before they can collect,that loss can easily be mitigated

through the purchase of life insurance.>> So here's one of the areas that I know

that you've done a lot of research on.And I know you wrote a wonderful white

paper that we have at Prudential.Let's talk about some of the areas thatit's really misunderstood when it comes

to Social Security planning andSocial Security claiming strategies.

What are the top ones that you wouldlike to share with our audience?

>> Well, I think the top one really that'smisunderstood at this point is the tax benefits,

if you will, to creating larger streamsof Social Security income in retirement.

So let me explain.And it's a difficult concept

to really get across.It's difficult to write about.

We've attempted to do that in thepaper that you've referenced, Karen.But the thinking traditionally, whenit comes to saving for retirement,

especially in a 401K plan, is that I want toput in pre-tax money today into my 401K plan.

And I'll get a deduction for that.The amount of the earnings year toyear are going to be tax-deferred.

And then when I retire and Istart taking that money out,

I'll be in a lower tax bracket in retirement.So that's beneficial to me because I

was able to take the deduction todaywhen I'm in a higher tax bracket.

And take the money out down the road whenI retire and be in a lower tax bracket.

And the conventional thinking has alwaysbeen you want to defer the taxationof your savings as long as possible.

But in our research, we've reallyfound that this wasn't the case.

And the reason we found it wasn't thecase is, we really did an analysis

on how Social Security benefits are taxed.Because right out of the gate, if you retireand you just have Social Security benefits

that are being paid to you,they're not going to be taxed.

They're going to be able to be taken tax-free.But it's the other income such as

IRA withdrawals or 401K withdrawals

that actually trigger the taxationof Social Security benefits.

So what in essence happens is that whenindividuals take out their IRA withdrawals,if you will -- let's assume just for simplicity

that we saved in a 401K for a number of yearsand rolled it over to an IRA, and

then we're taking IRA withdrawals.Those IRA withdrawals aretaxed as ordinary income.

And people understand that going in, becauseagain, they were taking the deduction up front,

they understand it's going to betaxed to them when they take it out.

But not only do they paythe tax on that IRA dollar,

but for a lot of people the IRA withdrawal willforce the taxation of a Social Security benefit

that otherwise would havebeen received tax-free.

So what you see is a very high marginal tax rateof what can be over 50%, between the Federal

and State taxes on that onedollar of IRA withdrawal.

So, high marginal tax rate.So what in essence that means is that for a lot

of people who actually have saved in their 401Kand they look at their balance

of, say, $500,000.It might seem like a lot of money, but if you're

ending up paying each year a marginal tax rateon those future withdrawals of that $500,000

at a rate of over 50%, or let's say 50%,that means it's only worth $250,000 of after-tax

income to you in your pocket as a retiree.So this is what was dubbed the "tax torpedo."

And we really looked at thatclosely and said, oh, my goodness.So people are really going to pay a

high marginal tax rate on their IRA'sbecause the forcing of Social Security.

What if they take their IRA withdrawalsfirst, and wait to take Social Security?

So they're taking a higheramount of Social Security

after age 70, what would be the impact there?And we were able to show that even though

people might be paying higher taxesin those initial years when they're taking IRA

withdrawals, the amount of taxes down the roadwhen they're taking higher Social Security

amount could be drastically reduced.And from our research, we found

that people earning up to $90,000of after-tax income might beable to benefit by a strategy

where they sequenced taking theirwithdrawals from their IRA's,

and wait to take Social Security.And this, obviously, if you're

paying less taxes in retirement,that means you have higherafter-tax income to enjoy.

The money can potentially last longerbecause you're not paying taxes on as much.

And we really thought that this ideaof understanding how the taxation works really

would benefit a lot of potential clients.Because not only are they getting the

benefits of higher guaranteed lifetime includefrom Social Security, but they're

going to be paying less taxesover the lifetime of all

their retirement income.>> Right, and isn't that what we all want?

To pay less taxes, right?>> Sure.

>> So here's the question.This is the big question.

A lot of us, myself included, have beentrying to get our hands and our headsaround some of these new changes.

Very recent changes that have still actuallyhaven't even gone into effect, some of them.

Could you discuss the recent legislativechanges and the grandfathering of these changes

to Social Security claiming strategies?>> Sure. So let me back it up.

I talked about the research thatwe started about 12 years ago.

So we created the idea thatmarried couples should look

at ways to coordinate their benefits.And when we looked more closelyat the way the rules were written,there were some changes made in

2000 under President Clinton.And the real intent was to make

it more attractive for seniorswho had reached their full

retirement age, for them to work.So the earnings tax, which reduces the amount

of Social Security that a retiree can keepbecause they're working,was eliminated for those

that had reached their full retirement age.It still is in effect, as most people willknow, prior to the full retirement age.

So if you work prior to age 66, your SocialSecurity benefits can be temporarily reduced.

They actually do a re-set once you reachfull retirement age on those benefits.

But those full retirement agebenefits, what you've reached there,you can work as long as you want.

And one of the outcomes of that, whenI read the way the rules were written,was that an individual could actually

suspend their benefit once they reached fullretirement age.

And that suspending a benefit at fullretirement age doesn't impact any other benefits

that are paid on an auxiliarybasis based on that benefit.

What I mean by that is that if I'm a worker,Karen, and you're a stay-at-home spouse

and you're my wife, you can receive aspousal benefit essentially equal to half

of mine at your full retirement age.Even if you never worked, willget my Social Security benefit,

and you'll get a spousalbenefit based on my work record.And you can file for that benefit

at any point once I as the husbandand the worker have filed for that benefit.

So if I file for a benefit,it triggers the eligibility

for you to file for a spousal benefit.And if I were to suspend my benefit,

then it doesn't affect your abilityto keep earning the spousal

benefit based on my work record.So it occurred to me that what people should

consider doing is if we want to encourage peopleto delay Social Security, especially because

the spousal benefit doesn't keep getting largerthrough delayed retirement credits at full

retirement age -- meaning if you wait, Karen,past your age 66 full retirement age on your

spousal benefit, it's not getting larger.So if I'm delaying my benefit and you'renot getting your spousal benefit based

on my work record, it's not growing for you.My benefit's growing.

But your spousal benefit isn't growing.>> Assuming, Jim, that I don't

have my own worker record, right?This is just assuming that I only

qualify for a spousal benefit?>> Yes, let's assume that for now.

I mean, it's a great question.But for simplicity, yes, let's assume that.So if you're just getting a spousal benefit

based on my work record, and if I were to file

for my benefit and suspend it,my benefit could grow larger.

But that would trigger the eligibility for youto take a spousal benefit

based on my work record.So I have to be full retirement age to do that.

You don't necessarily have to be age 66.You could be as young as 62 and take a

spousal benefit based on my work record.So I coined this as File and Suspend.

And it became a strategy thatmarried couples could use.

And I thought it was good, because itencouraged me to delay my Social Security

so that would provide moreguaranteed lifetime income to me.But it would also create a potential

survivor benefit to you, Karen, as my spouse.So that will help protectyou if you live a long life.

So with File and Suspend, it actuallyis going away as of April 30, 2016.

So the government deemed it a loophole, thatit wasn't intended, and they're phasing it out.

So what that means is, if you have a clientwho has reached full retirement age and wants

to file for benefits, or at leastfile for spousal benefits by April 30,

they can file and suspend their own benefit.And that will trigger the eligibility of a

spouse who would have to be at least age 62on that date to file for her or his spousalbenefits based on the worker's record.

So April 30th is the lastday one can file and suspend.

And then that goes away.So before I go to the other option, do

you have any questions on that, Karen?>> Well, is the delay -- I mean, does it makesense any more at that point for somebody

that wanted to delay to actually file and delay?

What I was thinking is, theycould just wait to file.

You don't necessarily have to fileand delay, you just now file later

on when you're ready to file, right?>> Yes, exactly.

But I think what has changed is that, againusing our example if you're my spouse,

if I do decide to delay my Social Security,your spousal benefit is not growinglarger past your full retirement age.

So at least actuarially speaking -- andI know people don't think that way --

but your benefit's not growing by waiting.Even though mine is.

And when you could file and suspend,you didn't really have to deal with that

because you could take your benefit right away.But I do agree, if there is value in delayingSocial Security, and we think that there is

for a lot of people, then I wouldjust wait to file for my benefits

when I'm ready to file for my benefits.And there's no need to file and suspend.

>> But a spouse, if they wanted to take aspousal benefit, you would have to file it.The primary worker does have to file for

the spouse to get a benefit, correct?>> That's exactly right.

Exactly right.>> And then the other strategy, I think this

was the Restricted Application strategy.Sometimes I've heard it called "double dip."

Great coin.Can you explain how that is going away?

Or how is that being grandfathered?>> Sure. This was another strategy that

emerged a few years ago, I think about 2007;it was part of a Wall Street Journal article.

And the strategy was offered byan individual who used to work

at the Social Security Administration.So going back to your pointabout the spousal benefit.

So if you think about how the spousal benefitworks, generally speaking, again using you

and I as an example, you as my spouse, you'reeligible for a spousal benefit based on half

of my benefit at full retirement age.So if my full retirement age benefit is $2,000,Karen, and you're filing for a spousal benefit

at your full retirement age, then yourspousal benefit is half of mine, it's $1,000.

So it's one-half of my benefit.So together as a couple we get $3,000.

But in real life the way it works isthat most spouses have worked some.

So if you have earned, let's say,$800 on your own worker record,

and using the same example my benefit's $2,000,the potential spousal benefit is still $1,000.

But the way it works is actually youget your worker benefit first, $800.

And then the $200 difference, if you will,between your potential spousal benefit

and your worker benefit, that $200 is paidto you in the form of a spousal benefit.

So it's actually made up of two components.And they actually could startbeing paid at different times.

Again, you would only be eligible totake a spousal benefit when I file.So potentially if you file for your

own worker benefit when you're 62and I as your husband haven't

filed for my worker benefit,you're not going to get a spousal benefit if

one's due you until you actually become eligiblefor that spousal benefit when I file.

The reason I say that as background, if you filefor a benefit prior to your full retirement age,

the Social Security Administration deemsyou filing for all available benefits.

What that means is that if, again, Karen,if you were age 63 and you were entitledto both a worker benefit of $800 and aspousal benefit of $200 because I filed,

you can't tell the SocialSecurity Administration,

"I only want one benefit, not the other."So they would deem you as filing

for all available benefits.They would give you the worker benefit andthe spousal benefit and pay both of them.

However, at full retirementage, you could actually say

to the Social Security Administration, "Wait,I don't want to take my own worker benefit.

I will just take a spousal benefitbased on my husband's work record.

He has filed.I will file for that benefit and delay my own."

And reason that this was sucha powerful strategy is that --

and when you hit full retirement age andyou become eligible for a spousal benefit,if you haven't filed for a worker benefit,

that amount is not coming off the bottom.So in my earlier example,

I said you are eligiblefor a potential spousal benefit of $1,000.

And if you earned $800 on your own workerbenefit, you would be eligible and paid $200of the difference between your $800 worker

benefit and the $1,000 potential benefit.When you hit full retirement age and you

say, "I don't want my $800 worker benefit,I want that to grow and get larger,"

then you actually are entitledto the full spousal benefit of $1,000.

And the $800 would grow withdelayed retirement credits

and be slightly higher when you turned age 70.And again, if you're a higher earner,

this could be a quite powerful strategy

because you could get a muchhigher spousal benefit from age 66,your full retirement age, to age 70.

And watch your own worker benefit grow 32%higher, plus cost of living adjustments.

And then switch to that.>> And then living longer at the sametime, especially if you're the female,

it could be a lot biggerthan if it wasn't taken.

>> Much bigger, exactly.And again, when you're receiving Social

Security income while delaying a benefit,that eases the pain for a lot of people.So your question to me a few minutesago, what happens if I die right away?

When you're getting Social Security incomein the forms of one of these strategies,

in the interim while you're delaying a benefit,it eases that pain, it makes it a lot easierfor clients to delay their Social Security.

So the Social Security officehas changed the rules on this.

Or rather, I should say the law was changed.And now to do the filing of Restricted

Application to just the spousal benefit,you have to have reached age 62as of December 31 of last year.

So you have to be 62 by December 31, 2015 tobe able to file for a Restricted Application

when you reach full retirement agesometime over the next four years.

So this goes away for anybodywho hasn't reached age 62 prior

to January 1st of this year, of 2016.>> So let me just clarify.If they have not reached

62 by the end of last year,then that is never available

to them at this point?>> That's correct.

>> Okay.>> But it is still available if

you have, and if you're married.And I would also add if you're divorced.

You could actually file a Restricted Applicationbased on a spousal benefit that you earned

if you were married for ten years.You can get a spousal benefit basedon your former spouse's work record.

Doesn't matter what he or shedoes, or his or her spouse does.Doesn't matter if you're divorced

and you were married for ten years,you could potentially get a spousal benefit.

And for a lot of divorced people,it could be very, very valuable.

Because, you know, finances might not be inas good shape and you really need to stretch

and get as high of lifetime incomepayoff from Social Security as possible,

so you might want to take a spousalbenefit first, delay your own to age 70,

and then flip to that higher worker benefit.But again, that's only available, Karen,

if you've turned age 62 priorto January 1st of 2016.

>> Jim, I just had a thought.How does this affect widows?

Do any of these new changes, you know, therestrictions to spousal benefits and the Fileand Suspend, does this have anything to do

with somebody collecting awidow or a widower's benefit?

>> It's a great question.So the spousal benefit goes

away if you're widowed.And what you become eligible

for is a survivor benefit.And there are strategies

available to widows and widowers.

And, for example, you might beable to take a survivor benefit

at age 60, which is the earliest age.And delay your own worker benefit to age 70.

And flip to that higher benefit.Conversely, you could take a worker benefit

at age 62 and flip to a survivor benefitat your full retirement age, based onyour deceased spouse's work record.

It doesn't get bigger than full retirement age.It doesn't grow to age 70; that'swhy I mentioned flipping that.

So those strategies are still available, andthey weren't affected by these changes, Karen.

So it probably would be beneficial for a lotof individuals who enter their retirement years

with both a potential survivorbenefit and worker benefit

to see how to maximize those benefits.I think the one warning I

would throw out there is that,especially because the survivor

benefit could start as early as age 60,is that the earnings test

will impact those benefits.Again, taking benefits prior to

full retirement age could affect it.But those strategies still are

available and should be looked at.So we talked a lot about

income with Social Security.What do you see as other income supplement

options that retirees have if they wishto delay their Social Security benefits?

>> So if a retiree wanted to look at delayingfor many of the reasons we've already discussed,you've actually mentioned some of these already.

There are other options forfunding or supplementing --

let's just call it supplementing that delay.So number one, it could be just-- you mentioned this earlier.

I think I mentioned it earlier-- we could just work longer.

That's not always a greatoption, for various reasons.

They could use personal savingsto supplement during that delay,start drawing on pension income,tapping into deferred annuities

or any other investments, mutual funds.Again, depending on what they have

accumulated during that periodof time, they have those options.

Bearing in mind, of course,we've got to look at the taxes

and the tax strategies thatyou mentioned before.

The fourth option, whichis something fairly new,

but a lot of pre-retirees are definitelytalking to their financial advisors about this,is tapping in or accessing the accumulated

cash value of a life insurance policy.>> I see. And what's the primary advantage

to using life insurance as a supplement?>> Big one.

Huge one. Primary advantageis really the tax advantages.We keep talking about taxes,

but this is probably oneof the best in terms of tax advantages.

Especially if you're accessingthe accumulated cash value.

So like IRA's that you had mentionedbefore, and some of the other investments,

it could be taxed as ordinary income, itcould be a capital gains tax, dividends.

Maybe even tax-free, if we're looking at muni's.But what the advantage is with lifeinsurance is the tax advantages.

So for example, as you said, it's really notwhat you're getting from your investments.

A lot of times it's whatyou're keeping after taxes.

Or in a lot of cases, not paying in taxesthat can help supplement that lifestyle.

So I want to point out that accessing the lifeinsurance policy's accumulated cash value has

to be done correctly, up to certainlimitations imposed by the IRS.

Generally is tax-free --again, if it's done correctly.

And what do I mean by that?A withdrawal from the accumulated cash value

would mean the original return of basis,which is premiums put into the policy.

And then generally after that it's policy loans.So in addition to the tax advantage

access to the accumulated cash,one of the biggest advantages --

and you just mentioned this --we have the ability to have lifeinsurance, and there also has

to be a reason to have life insurance.A need for the death benefit protection.

Which, as we've already discussed,there usually is.

So in other words, to use the life insurancepolicy as a retirement supplement, you know,

my biggest point here is, there stillmust be a death benefit need, okay?

The other thing I like to mention whenI'm talking to financial advisors is,

how do those withdrawals and loans really work?And how do they impact the death benefit?

And tax consequences.Because you just heard mesay, "generally tax-free."

Generally.So any withdrawal of the accumulated cash value

will immediately reduce the death benefit,dollar for dollar.

So if you are going to use this strategy,and you are going to withdraw from basis

or premiums first with no taxconsequences, it's very important to pointout that the death benefit will be reduced.

Now, loans on the other hand will notimmediately reduce the death benefit.

And they are not taxable.However, if the policy ever is terminated orlapses for any reason, this will cause gainover the premiums paid into the policy.

And that's taxed as ordinary income.So it's very important when you're

designing this supplemental incomefor Social Security, that those are explained.

And that the policyholder, the client,understands these consequences.

If an insured were to die with a policy loanoutstanding, that loan will still be repaid

from the death benefit; thus lowering the deathbenefit again received by a spouse or heirs.

So that's very important tomention that to the client.

Also, let's not forget there's intereston those loans to be considered.

They can be paid, or theycan be added to the loan.

So that's to be considered, but someof those interest rates are low

but I can't speak for everybody.The other thing I like to say

is, be careful when you do borrowagainst a life insurance policy that you

borrow more than the accumulated amount.Because this could also cause the policy to

lapse, and now your client's getting a tax bill.The other thing is, if you over-fund a

policy in what we call a "MEC", or "MEC" it,then just remember, withdrawals are treated

as first-in, first-out and taxed justlike an annuity, as ordinary income.

With a 10% tax penalty ifthe client is under 59-1/2.The other thing is, costs.

Life insurance policies containfees and expenses.

There's cost of insurance, there's admin fees,there's premium loads, there's

surrender charges.And a lot of these charges and fees may

have an impact on the policy values.If premiums or performance of the policy

is insufficient over a period of time,the life insurance policy again could lapse.

Which may require additionalout-of-pocket premiums to keep it in force.

So there's downsides, but there's alsoa lot of upsides to using this strategy.

>> And I've heard the acronym LIRP, L-I-R-P.How does the LIRP program work?

And how does this differ fromother types of retirement programs?

>> Good question.Great question.

So LIRP -- yes, we like touse acronyms, of course.

But this is something that we callLife Insurance Retirement Plan.

We use the word "Life Insurance"because it is a life insurance policy.

It's best, I would say, to set thisup with a client who is younger.

At least 15 years or more to retirement.We like to say they need some time

for the policy values to grow.Or, you know, have time to

"cook," I like to use that word.This is not for the client who hasfive years to go to retirement,

or is planning to access the cash in the policyin a very short period oftime; that does not work.

It does not work for a client who'srated, so health is a thing to consider.

Because again, that would havean impact on the desired income.

And also another thing is,we like to look for clients

that do believe their life expectancywill be greater than, let's say, age 80.

Comparing this with other types ofqualified plans is what I like to do.

So let's compare it to sortof 401K's and IRA's and Roths.

So with a LIRP, there's really no dollar limit.I mean, there is but there isn't,and I'll get to that in a minute.

But there's no dollar limit set by the IRS thatcan go into the plan like there is with 401K's,

and 403B's -- you're limited to $18,000.You're limited to how much you canearn if you put money into a Roth.

You're limited to the amountof money that you earn as well

as how much you can deduct with an IRA.The only limitation usinga life insurance policy is

that we do not want the policy to become a MEC.Meaning we don't want to over-fund it

because then we'll have tax consequences.But the real design of the LIRP ishow we design it, how we build it.

So what do I mean by that?So typically when you're talking to clients

about life insurance, right, again the need hasto be there for the death benefit.

But what do we normally do when we'redesigning a life insurance plan for a client?

We try to find the highest death benefit, right?And the lowest premium for the client.

That's typically how we do it.In this particular design, we try to

have the lowest death benefit possible.

And the reason why we do that is we want tokeep the cost of insurance charges lower.

Which means more cash value accumulationto supplement their delay strategyand any other retirement income.

So later on when the client stops takingwithdrawals and loans from the policy --

let's just say they did thisbetween the ages of 66

and 70 when their delayed Social Securitykicks in -- and you've designed it correctly,

there should be and hopefully will be a residualdeath benefit for that surviving spouse.

And as you mentioned earlier in our example,you know, you and I are married, Jim.

You pass away first, I pickup your higher check, right?

I lose my lower check.My expenses may not go down a lot.My income needs may still be there.

At least now I have that death benefit that'sstill left in the policy available to me,

generally tax-free, that Ican use to now supplement

that check that I no longer am getting.if we have clients that are concerned aboutchronic illness, or even terminal illness later

on that may have a huge impact on theirfinancial plan, they also have the option

to add a chronic illness rider to the policy.Basically, that allows the death benefitto be accelerated up to 2% per month,or the IRS per diem which is currently$340 a day, around $10,000 a month,

to be used to pay for chronic care.If our clients cannot meet two of six

ADL's, or have a cognitive impairmentthat is expected to be permanent.

This gives them the extra peace of mind.So for the right client, in addition to being

able to supplement their Social Security delay,

be able to provide additional death benefit to asurviving spouse, they still have the option now

to tap into the accelerated death benefitto use if they need it for chronic care.So it's a huge benefit for clients that

are worried about needing chronic care.And so overall, this strategygives them win, and a win,and a win in lots of differentvarious shapes and forms.

>> I see. And what intrigues me about theidea of the LIRP is that we know that a lot

of people are behind in theirretirement savings, Karen.

And when you mentioned being about 15 yearsout, there's probably a lot of clients

that are behind in their savings.Either they were paying for college,or weren't in a position to save a lot.

So the whole idea of, how do you catchup to be able to retire when you want to?

Again, I talked about how a lotof people when they're saving

in their 401K will actually be paying a veryhigh marginal tax rate on those dollars.

So what I find intriguing is that it might makesense for clients who do still want to retire

at a given point in time, to take alook at funding their income stream,

bridge their retirement fromthe point they retire

to delay Social Security withlife insurance withdrawals.

And that way, you know, they actually cantake the higher Social Security amount,

provide a higher survivor benefit to a spouse.And like you said, there still might be some

death benefit payable to a spouse down the road.So you're kind of again taking

care of that tail risk.Which might allow you to take more additional

retirement income earlier in retirement,

because you've taken care ofthat tail risk for a spouse.

So it just has been intriguingto me when I hear about it.

>> It gives them more options.>> Right.

>> This just gives them more optionsthan they would have had in the past.

>> Having those options andflexibility is so important.

Because we don't know what's going to happen.And things might change.

So it's great.So if people that are listening,

if financial advisors wantto learn more, what's their next step, Karen?

>> Then can go to our website, Prudential.com.If they are working with somebody from

Prudential, I would suggest that they reachout to their Prudential contact for more

information on what we've just discussed today.>> Yes.

>> Thank you, everybody, forlistening to Sound Insights.

I hope you've found this valuable.And we hope you'll join us again.

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