What Is Universal Life Insurance?

Posted on 24. July 2013

By Steve Savant, syndicated financial columnist and host of the daily talk show, "The Business Insurance Zone"

What Is Universal Life Insurance?

Universal life insurance contracts differ from traditional whole life policies by specifically separating and identifying the mortality, expense, and cash value parts of a policy. Dividing the policy into these three components allows the insurance company to build a higher degree of flexibility into the contract. This flexibility allows (within certain limits) the policy owner to modify the policy face amount or premium, in response to changing needs and circumstances.
A monthly charge for both the mortality element and the expense element is deducted from a policy's account balance. The remainder of the premium is allocated to the cash value element, where the funds earn interest. Unlike traditional whole life policies, complete disclosure of these internal charges against the cash value element is made to the policy owner in the form of an annual statement.
Many universal life policies have several different provisions by which the accumulated cash value can be made available to a policy owner during life, without causing the policy to lapse. If a policy is terminated without the insured dying, there are various surrender options for the cash value.

Policy Variations

There are two primary types of universal life, based on the level of death benefits:

Type I universal life: Also known as option A, type I universal policies pay a fixed, level death benefit, generally the face amount of the policy.


Type II universal life: Also known as option B, type II universal policies generally pay the face amount of the policy plus the accumulated cash values. As the cash values grow, so does the potential death benefit.


Common Uses of Universal Life

Universal life policies are useful for policy owners who expect their needs to change over time. Within certain guidelines, a universal life policy can be modified by changing the death benefit or premium payments. Some common uses are:

Family protection: To provide the funds to support a surviving spouse and/or minor children, or to pay final bills such as medical or other estate expenses, as well as federal and state death taxes.
Business planning: Because of its flexibility, universal life insurance is often used for many different business purposes, such as insuring key employees, in split-dollar insurance arrangements, and funding nonqualified deferred compensation plans. Business continuation planning often involves using universal life as a source of funds for buy-sell agreements.
Accumulation needs: Some individuals will use the cash value feature of universal life as means of accumulating funds for specific purposes, such as funding college education, or as a supplemental source of retirement income.
Charitable gifts: To provide funds for a gift to charity.
Modified Endowment Contracts (MECs)

A life insurance policy issued on or after June 21, 19881 may be classified as a modified endowment contract (MEC) if the cumulative premiums paid during the first seven years (7-pay test) at any time exceed the total of the net level premiums for the same period.
If a policy is classified as a MEC, all withdrawals (including loans) will be taxed as current income, until all of the policy earnings have been taxed. There is an additional 10% penalty tax if the owner is under age 59½ at the time of withdrawal, unless the payments are due to disability or are annuity type payments.

A universal life policy can avoid treatment as a MEC through a well-designed premium payment schedule. Caution must be exercised when changes in policy premium payments or death benefits are made, or when making partial withdrawals, to avoid having the policy inadvertently classified as a MEC.

Additional Policy Elements

Universal life policies have a number of additional elements to consider:

Surrender charges: Most universal life policies have substantial surrender charges, if a policy is terminated. These surrender charges are generally highest in the early years of a policy, and decline over a period of time, usually from seven to 15 years.
Policy loans: Universal life policies typically permit the policy owner to borrow at interest a portion of the accumulated cash value. The rate charged on the borrowed funds is often lower than current open market rates. A policy loan will reduce the death benefit payable if the insured dies before the loan is repaid; a policy loan will also reduce the cash surrender value if a policy is terminated. If the policy lapses or is surrendered with a loan outstanding, the loan will be treated as taxable income in the current year, to the extent of gain in the policy.
Partial withdrawals: Most universal life policies allow a policy owner to withdraw a portion of the cash value, without terminating the policy. Such withdrawals reduce the amount of death benefit payable, and may be subject to current income tax, if the policy is classified as a MEC, or if the withdrawal exceeds cost basis for a non-MEC policy. Some contracts allow a policy owner to put the withdrawn funds back into the policy, but the insured may have to provide evidence of insurability to restore the original death benefit.
Surrender options: If a policy owner surrenders a policy, there are generally three ways in which the accumulated cash value may be received, including: (1) taking the accumulated cash value, less any surrender charges; (2) receiving a reduced amount of paid-up insurance; or (3) taking paid-up term insurance in an amount equal to the original face amount of the policy.

Optional Policy Provisions

A number of optional provisions, commonly referred to as riders, can be added to a basic universal life policy, generally through payment of an additional premium:

Waiver of premium: Suspends the monthly deduction for the mortality element of the policy, if the insured becomes disabled and is unable to work.

Accidental death: Pays the beneficiaries double (in some situations triple) the face amount of the policy if the insured dies in an accident.
Spousal or family term insurance: Allows a policy owner to purchase term insurance on a spouse or children.
Accelerated death benefits: An accelerated death benefits provision allows for payment of part of a policy's death benefit while an insured is still alive. Such benefits are typically payable when the insured develops a medical condition expected to lead to death within a short period of time.
1 Including a policy issued before that date, but later materially changed.

Steve Savant is a contributor to Back Room Technician, an Advisys company

Quick Overview of Social Security Benefits

Posted on 29. April 2013

Social Security is a system of social insurance benefits available to all covered workers in the United States. Begun in 1937, the Social Security system covers a wide range of social programs. The term "Social Security," as it is commonly used, refers to the benefits provided under one part of the system, known by its acronym, OASDI, or Old-Age, Survivors and Disability Insurance. OASDI benefits are funded primarily by payroll taxes paid by covered employees, employers, and self-employed individuals. Both the OASDI portion of the payroll tax, as well as that part of the tax that goes to finance hospital insurance, HI (Medicare), are provided for under the Federal Insurance Contributions Act, FICA.

To qualify for benefits, a worker must be either "fully" insured or "currently" insured. An insured status is acquired by earning "credits", based on the wages or self-employment income earned during a year. In 2013, an individual must earn $1,160 in covered earnings to receive one credit and $4,640 to earn the maximum of four credits for the year. A worker generally becomes fully insured by earning 40 credits, typically by working 10 years in covered employment.1 To be considered currently insured, a worker must have at least six credits in the last 13 calendar quarters, ending with the quarter in which he or she became entitled to benefits. All benefits are available if a worker is fully insured. Some benefits are not available if the worker is only currently insured. Special requirements apply to disability benefits.

The Available Benefits
• Worker's benefit: This is a monthly income for a retired or disabled worker.
• Spouse's benefit: Refers to monthly income for the spouse or former spouse of a retired or disabled worker.
• Widow(er)'s benefit: Refers to monthly retirement income for the surviving spouse or former spouse of a deceased worker.
• Child's benefit: A monthly income for the dependent child of a deceased, disabled, or retired worker. To qualify, a child must be under age 18, or 18 or 19 and a full-time elementary or high school student, or 18 or over and disabled before 22.
• Mother's or father's benefit: Monthly income paid to a surviving spouse who is caring for a worker's dependent child who is under age 16 or disabled before age 22. If under age 62, the spouse of a retired worker receives the same benefit.
• Parent's benefit: Monthly income paid to the surviving dependent parent or dependent parents of a deceased worker.

1 For those working less than 10 years, an alternative test to determine fully-insured status may apply

Delaying Retirement to Age 70½ Could Pay Off Big.

Posted on 22. April 2013

Age 65 has been the ideal retirement age in America for a long time, for more than 30 years. But life expectancy has increased by almost a decade. Living longer means you need more money to retire on. There's a new approach to retirement designed to coincide with Social Security and qualified plan required minimum distributions at age 70½. This new approach to retirement can substantially impact your retirement income.

Baby boomers began targeting age 66 for their retirement to coincide with full Social Security Benefits. But some discovered that delaying retirement four more years to age 70½ could payoff big. One example is a baby boomer electing to wait four years and take his Social Security Benefits at 70½, collecting $3,252 a month versus $2,369 a month at age 65. But the four year difference is $113,712.

One way to recapture that money is for his wife to take a partial benefit from his Social Security and he can receive a partial benefit from hers. The partial benefits could recapture some of the difference, while they're both still working. Keep in mind that the Social Security Benefit numbers in our example are based on both of them working until age 66. It will be more at age 70½.

Another reason to delay retirement to age 70½ is that you're forced to take RMDs (required minimum distributions) from your qualified retirement. Since you will have to take RMDs at 70½, waiting four more years will give your plan an opportunity to grow even more. But at age 70½ you may also elect to invest your RMDs in a single premium immediate annuity that earns interest and includes mortality credits for an income you can't outlive, to coincide with your lifetime Social Security Benefits. These tactics can make a dramatic difference in your total retirement income. Delaying retirement for four short years could payoff in the long haul.

How About More Money for Retirement?

Posted on 15. April 2013

Everyone's looking forward to retirement with places to go, people to see and things to do. But we'll still have bills to pay. Social security can help, but you all need more than its benefits can provide. And if you have retirement income from your 401(k) plan, that income will be taxed and may actually cause your social security benefits to be taxed! If that happens, you may not be able to go to all the places you want to go, see the people you want to see and do the things you want to do. All because of taxes!

Today there's a way for you save for retirement that can put more money in your pocket and let you keep more of your social security benefits. Plus, it allows you to access market returns without market risk. It's called Indexed Universal Life Insurance (IUL)*. Every month you can contribute to your IUL* using the strategy of dollar cost averaging that helps even out the highs and lows of the index. Many Americans use the S&P 500 index. There are many other American indices to choose from, as well as foreign indices.

Of course, like all retirement plans, IUL* has plan expenses too. But over time it could be the most cost effective way to save for your golden years. IUL*, with its tax advantages, market potential and safety, is a great way to save for retirement.

When you're looking forward to retirement, it's more than just paying the bills. It's about going places, seeing the people, and doing the things you want to do.

*Indexed Universal Life insurance (IUL) tax free income is predicated on a combination of withdrawals to basis and policy loans of gain from a maximum funded TAMRA compliant contract kept in force for the life of the insured.

How Can You Keep More Money Safe for Retirement?

Posted on 8. April 2013

It's not just how much money you make, it's how much money you keep. And keeping more of your money means keeping it safe. But keeping it safe from what?

There are four pickpocket factors that can reduce your retirement income: Retirement Plan Expenses, Ordinary Income Taxes, Inflation and Market Losses.

All retirement plans have expenses taken out during the plan's contribution and distribution periods. It's important to realize the total expenses paid over a lifetime can be significant, and drain your retirement plan, resulting in less income.

Ordinary income taxes can also rob a retiree from their income when they need it most. The tax deduction offered with 401(k)'s is a great savings plan if you're in a high tax bracket. But most Americans pay taxes at the marginal tax rate, so they may be inadvertently trading a small tax break today for a larger tax bill tomorrow. Qualified plan income like 401(k)'s, IRAs, and other pensions are taxed at ordinary income rates and are used to calculate whether your Social Security Benefits are taxed as well. Most Americans pay ordinary income tax on both resulting in less income.

Inflation devalues your dollar and reduces its purchasing power for necessary living expenses, extra nights on the town and out of town vacations. Savings accounts in CDs and money markets are safe, but don't return enough interest to beat inflation and maintain your money's purchasing power. Most advisors agree: you have to be in the market to beat inflation. But what about market risk? No one's forgotten the pain of the market meltdown of 2008.

Now there's a retirement plan that has access to the market returns that have the potential to beat inflation without the exposure to market losses. It's called Indexed Universal Life Insurance (IUL)* with tax-free income and policy expenses over the life of the plan that can be less than almost any other retirement plan. No other retirement plan addresses all four pickpocket factors to generate the most spendable income for retirement. It's not how much money you make, it's how much money you keep.

*Indexed Universal Life insurance (IUL) tax free income is predicated on a combination of withdrawals to basis and policy loans of gain from a maximum funded, TAMRA compliant contract kept in force over the life of the insured. 

 The Odds Are: You'll Be Living in the Here & Now

Posted on 1. April 2013

There are people who count on you to be there for them. Life insurance can be there in case you're not here. But the odds are you'll still be here. So protect the here and now with the new way to buy life insurance - with living benefits based on the odds of living.The odds are that you'll need disability before your beneficiaries need life insurance, because you'll still be here after a disability. The Social Security statistics on disability are overwhelming. Millions of Americans are receiving disability income. The odds are you'll need catastrophic care before your beneficiaries need life insurance, because you'll still be here after a catastrophic event. The data on catastrophic events occurring at least one time is surprisingly higher than you think and is enough to bankrupt a family.The odds are you'll need chronic care before your beneficiaries need life insurance, because you'll still be here when you have a chronic health problem. Sometimes a medical problem turns into a life changing chronic care need for ongoing assistance.The odds are you'll need long term care before your beneficiaries need life insurance, because you'll still be here and in need of ongoing care. The health care industry is spending billions of dollars preparing to care for the baby boomer generation as they enter their senior years.So the odds are you'll need the income from living benefits before your beneficiaries will need money from life insurance, but it's there just in case the odds change. So protect the here and now. Get the best of both worlds, whether you're here or not, and be ready to play the odds with life insurance with living benefits.

 Three Tax-Free Integrated Strategies for Retirement

Posted on 25. March 2013

There are three strategies to put more money in your pocket: creating a reverse mortgage, policy loans from an Indexed Universal Life Insurance contract, and Social Security with no earned income.

A reputable reverse mortgage is designed to generate tax-free monthly loan payments from a portion of the equity in your home. A qualified lender will assess your home's value and determine the amount of loan against you home's equity and design a conservative monthly payment to you. Policy loans from an Indexed Universal Life Insurance* contract can also generate tax-free monthly income from the equity in your policy. And remember, you still have life insurance. Some life insurance policies have living benefit riders attached to the contract as well. Both of these strategies will not be counted in the provisional income test for taxation on Social Security Benefits.

Using these three strategies can not only deliver tax-free income, but can give your 401(k) or IRA time to stay invested until 70½, when RMDs (required minimum distributions) start generating income. RMDs are taxable at ordinary income rates, but are also includable in the provisional income test for taxation on Social Security Benefits, so benefits may be taxed as well. But after 70½, the life insurance and reverse mortgage continues to deliver tax-free income.

The three strategies can make a dramatic difference in retirement income planning, especially with seniors who are taking their Social Security benefits at age 62 and have their homes paid off.

*Indexed Universal Life insurance (IUL) tax free income is predicated on a combination of withdrawals to basis and policy loans of gain from a maximum funded TAMRA compliant contract kept in force for the life of the insured.

 The Need for Retirement Planning

Posted on 18. March 2013

For much of the 20th century, retirement in America was traditionally defined in terms of its relationship to participation in the active work force. An individual would work full-time until a certain age, and then leave employment to spend a few years quietly rocking on the front porch. Declining health often made retirement short and unpleasant. Retirement planning, as such, typically focused on saving enough to guarantee minimal survival for a relatively brief period of time.

More recently, however, many individuals are beginning to recognize that for a number of reasons, this traditional view of retirement is no longer accurate. Some individuals, for example, are voluntarily choosing to retire early, in their 40s or 50s. Others, because they enjoy working, choose to remain employed well past the traditional retirement age of 65. And, many retirees do more than just rock on the front porch. Retirement is now often defined by activities such as travel, returning to school, volunteer work, or the pursuit of favorite hobbies or sports. This changed face of retirement, however, with all of its possibilities, does not happen automatically. Many of the issues associated with retirement, such as ill health, and the need to provide income, still exist. With proper planning, however, these needs can be met. The single most important factor in this changed retirement picture is the fact that we now live much longer than before. A child born in 1900, for example, had an average life expectancy of 47.3 years. For a child born in 2010, however, average life expectancy had increased to 78.7 years.1
Source: National Center for Health Statistics. Deaths: Preliminary data for 2010. January 11, 2012.

Planning for a much longer life span involves addressing problems not faced by earlier generations.
Some of the key issues include the following:

• Paying for retirement: Providing a steady income is often the key problem involved in retirement planning. Longer life spans raise the issue of the impact of inflation on fixed dollar payments, as well as the possibility of outliving accumulated personal savings. Social Security retirement benefits, and income from employer-sponsored retirement plans typically provide only a portion of the total income required. If income is insufficient, a retiree may be forced to either continue working, or face a
reduced standard of living. • Health care: The health benefits provided through the federal government's Medicare program are generally considered to be only a foundation. Often a supplemental Medigap policy is needed, as is a long-term care policy, to provide needed benefits not available through Medicare. Health care planning should also consider a health care proxy, allowing someone else to make medical decisions when an individual is temporarily incapacitated, as well as a living will that expresses an individual's wishes when no hope of recovery is possible.
• Estate planning: Retirement planning inevitably must consider what happens to an individual's assets after retirement is over. Estate planning should ensure not only that assets are transferred to the individuals or organizations chosen by the owner, but also that the transfer is done with the least amount of tax.
• Housing: This question involves not only the size and type of home (condo, house, shared housing, assisted living), but also its location. Such factors as climate and proximity to close family members and medical care are often important. Completely paying off a home loan can reduce monthly income needs. A reverse mortgage may provide additional monthly income.
• Lifestyle: Some individuals, accustomed to a busy work life, find it difficult to enjoy the freedom offered by retirement. Planning ahead can make this transition easier.

 When to Take Social Security Retirement

Posted on 11. March 2013

Benefits Research by the Federal government indicates that Social Security retirement benefits typically make up more than one-third of the income of Americans age 65 or older.1 Thus, the decision as to when to begin to take Social Security retirement benefits is an important one. Once you decide to begin receiving Social Security retirement benefits, the initial benefit will generally serve as the "base" amount for the rest of your life, subject only to adjustment for increases in the cost of living. The question is made a little easier to answer if you separate when you want to retire from when you want to begin receiving Social Security retirement benefits; these two events don't necessarily have to occur at the same time. An understanding of how your benefits are calculated, how they are taxed, and what happens if you continue to work after beginning to receive benefits, is also important.

Normal Retirement Age – "Full" Benefits
For many years, normal retirement age (NRA), the age at which "full" benefits – 100% of an individual's Primary Insurance Amount 2 (PIA) – are available was set at age 65. This is still true for those born in 1937 or earlier. However, for those born in 1938 or later, NRA gradually increases until it reaches age 67 for those born in 1960 or later.

Early Retirement – Reduced Benefits
Age 62 is generally the earliest age that someone can begin to receive Social Security retirement benefits. However, if retirement benefits begin before the "normal" retirement age, the benefit paid is reduced to reflect the income that will be paid over a longer period of time. The amount of the reduction varies with the year of birth. For example, an individual born in 1937 (NRA = age 65) who began receiving benefits at age 62 had his or her retirement benefit reduced to 80% of what it would have been had they chosen to wait until NRA. However, for a worker born in 1962, for who NRA is age 67, choosing to receive retirement benefits at age 62 results in an initial benefit reduced to 70% of what it would have been had the individual waited to age 67.

Delay Retirement – A Bigger Benefit
What happens if you decide to wait and take your retirement benefits later than your NRA? You get paid for waiting, in the form of a larger retirement benefit. For each year beyond your NRA that you delay receiving retirement benefits, up to age 70, your benefit is increased by a specified percentage of the PIA. The amount of the credit for each year of delay beyond NRA will vary depending on the year of birth. For example, an individual born in 1935 who delayed receiving benefits until age 70 had his or her benefit increased by 6% for each year (five years in this case) beyond the NRA of age 65. For those born in 1943 and later, delaying retirement increases their benefit by 8% per year for each year they wait beyond their NRA.

1 See, "Income of Americans Aged 65 and Older, 1968 to 2008." Congressional Research Service, 7-5700, RL33387, November 4,
2009, Table 7.
2 The PIA is calculated by the Social Security Administration based on a person's lifetime earnings record.

 Sources of Retirement Income

Posted on 3. March 2013

Most retirees derive their retirement income from three primary sources: Social Security retirement benefits, qualified retirement plans, and individual savings/investments.

Social Security retirement benefits are intended to provide only a portion of an individual's retirement income. Traditionally, retirement benefits began at age 65. For those born after 1937, however, normal retirement age, when full retirement benefits begin, will increase gradually, until it reaches age 67 for those born in 1960 and later. A reduced benefit is available, beginning at age 62. The monthly benefit amount is based on an individual's past earnings record. A worker can earn a larger retirement benefit by continuing to work past normal retirement age. Up to 85 percent of a retiree's Social Security retirement benefits may be taxable as ordinary income. Retirement benefits are subject to adjustment for inflation on an annual basis.

A retirement plan is considered to be "qualified" if it meets certain requirements set by federal income tax law. In general, employer or employee contributions to a qualified plan are currently deductible and the earnings are tax deferred until paid out of the plan. Mandatory distribution rules typically apply and taxable withdrawals before age 59½ may be subject to an additional 10% penalty tax.1

Employer-sponsored qualified plans: Employer-sponsored plans can generally be classified as either defined benefit or defined contribution. Defined benefit plans specify the benefit amount a participant will receive at retirement; an actuary estimates how much must be contributed each year to fund the anticipated benefit. The investment risk rests on the employer. Benefits are generally taxable.

Defined contribution plans, such as 401(k), 403(b) or SEP plans, typically put a percentage of current salaries into the plan each year. The retirement benefit will depend on the amount contributed, the investment return and the number of years until a participant retires. The investment risk rests on the participant. Benefits are generally taxable. • Individual qualified plans: Include the traditional Individual Retirement Account (IRA) and the Roth IRA. Contributions to a traditional IRA may be deductible and earnings grow tax deferred. Distributions from a traditional IRA are taxable to the extent of deductible contributions and growth. Contributions to a Roth IRA are never deductible and earnings grow tax deferred. If certain requirements are met, retirement distributions from a Roth IRA are tax free. 2 • Nonqualified retirement plans: An employer may set up a plan, often in the form of a deferred compensation plan, which does not meet federal requirements to be considered "qualified." Benefits are generally taxable when received. Such plans are often used as a supplement to qualified retirement plans. 1

Individual savings and investments are the third primary source of retirement income. An individual can choose to accumulate funds using a wide range of investment vehicles. The appropriate type of investment will depend on a number of factors such as an individual's investment skill and experience, risk tolerance, tax bracket, and the number of years until retirement. Below are listed some of the more commonly used choices.

Savings accounts: Including regular savings accounts, money market funds and certificates of deposit (CDs) at banks, savings and loans and credit unions. • Common stock: May also include other forms of equity ownership such as preferred stock or
convertible bonds. Stock can be owned directly, in a personal portfolio or indirectly through a mutual fund. • Bonds: Includes corporate, government or municipal bonds. Bonds can be owned directly, in a personal portfolio or indirectly, through either a mutual fund or unit investment trust. • Real estate: Individually owned investment real estate or indirect investment through a real estate investment trust or limited partnership. • Precious metals: Such as gold or silver, in the form of coins, bullion or in the common stock of mining companies. • Commercial deferred annuities: Commercial, deferred annuities are purchased from a life insurance company and can provide tax-deferred growth through a variety of investment choices.

Other Income Sources
• Immediate annuity: An "immediate" annuity is purchased from a life insurance company, typically with a single, lump-sum payment. Within one year after purchase, the annuity begins to make regular, periodic payments to the annuity owner.
• Continued employment: On either a full or part-time basis. Wage and salary income is usually taxable and before-normal-retirement-age. 3 earnings above a certain level may affect the amount of Social Security retirement benefits received.
• Home equity: If a home is completely paid for, a reverse mortgage may provide additional income, without giving up home ownership.

1 The rules and regulations surrounding qualified plans are complex. This discussion is intended to be only a brief, general description. State or local 2 law may vary. The discussion here concerns federal income tax law; state or local tax law may vary. 3 "Normal retirement age" is the age at which an individual is entitled to "full" Social Security retirement benefits – 100% of an individual's Primary Insurance Amount. Under current law, this age will vary from 65 to 67, depending on an individual's year of birth.

 On What is the Amount of a Social Security Benefit Based?

Posted on 23. February 2013

In general, a covered worker's benefits, and those of his or her family members, are based on the worker's earnings record. The earnings taken into account are only those reported to the Social Security Administration (SSA), up to a certain annual maximum known as the "wage base." The wage base is indexed for inflation each year and effectively places a cap on the amount of Social Security benefits a worker can receive, regardless of earnings. The wage base for 2013 is $113,700.1
Using a worker's earnings record, the SSA calculates a number known as the Primary Insurance Amount, or PIA. The PIA is the basic value used to determine the dollar amount of benefits available to a worker and his or her family.

Workers age 60 or older and who are not receiving Social Security benefits automatically receive a paper Social Security Statement each year which summarizes the worker's earnings as well as providing estimated retirement, disability, and survivors benefits. Workers turning age 25 will receive a one-time only statement with similar information. A paper statement can be requested by completing form SSA- 7004 and mailing it to the address shown on the form. Earnings information may also be verified by calling the SSA directly at (800) 772-1213; TTY (800) 325-0778, Monday through Friday, 7:00AM to 7:00PM. On the internet, the SSA can be found at

1 The wage base for 2012 was $110,100.
2 Reduced widow(er)'s benefits are available at age 60.
3 Disability benefits are subject to a very strict definition of disability. At normal retirement age (NRA), disability benefits cease and retirement benefits begin.
4 Unreduced benefits are available at NRA. For those born before 1938, NRA is age 65. For individuals born after 1937, NRA
gradually increases from age 65 to age 67. For example, for baby boomers born between 1943 -1954, NRA is age 66. A larger
retirement benefit is available to those who continue to work past NRA.
5 If one parent qualifies, the benefit is 87.5% of the PIA. If both parents qualify, the benefit is 75% of the PIA to each.

How to Evaluate Early Retirement

Posted on 16. February 2013

In recent years, cost-cutting and restructuring measures have forced a number of companies to offer
their employees early retirement packages. Although initially attractive, these packages require careful
analysis in deciding to either accept or reject an early retirement offer. Several key questions must be answered:

1. Do you want to retire?
2. If you don't want to retire, what happens if you reject the offer?
3. If you do want to retire, can you realistically afford retirement?

Common Elements in Early Retirement Packages

Early retirement offers are carefully structured and may include "sweeteners" such as:
• Cash: A cash bonus, either as a lump-sum or periodic payments, may be included. Consider your
cash-flow and income tax situation before deciding which to take.
• Defined benefit pensions: For companies with defined benefit retirement plans, retirement income
is often based on years of service, age at retirement, and a percentage of the highest three years
earnings. Any or all of these factors can be adjusted to give an employee a higher pension benefit.
• Defined contribution pensions: Employers who sponsor defined contribution plans such as 401(k)
or 403(b) plans may allow employees who take early retirement to keep their funds in the company
• Other fringe benefits: Some early retirement offers will include valuable benefits such as group
health or life insurance, counseling by financial professionals, and education or job placement
assistance, if the employee wishes to continue working.

Before the offer was made, what were your plans for the future? Were you already considering early
retirement or were you planning on working for a few more years? For some, continuing to work is not
only enjoyable, but it also helps in reaching goals such as putting a child or grandchild through college or
paying off a mortgage. For others, the freedom retirement offers to pursue more personal goals is a lifelong dream.

Sometimes remaining with your current employer is a realistic option, sometimes it isn't. Refusing an
early retirement offer may lead to promotions or salary increases that, in the long run, could result in a
higher retirement benefit. Also, working longer allows you to save more and reduces the number of
retirement years. Alternatively, rejecting an offer may result in being demoted or simply let go when your
position is eliminated. Often, you have only a very brief period of time to make this critical decision,
typically 60 to 90 days.

For most of us the key question frequently comes down to whether or not we can financially afford to
retire. There are a number of issues to consider when answering this question, focusing on how much
income you need and where it will come from:

• A longer retirement: Early retirement effectively means that your retirement will last longer. With
people living longer, some of us may spend as much as 1/3 of our lives in retirement.
• Taxes and inflation: When planning your income needs, be sure to keep the impact of both taxes
and inflation in mind. What will your marginal tax rate be in retirement? To offset inflation, your
income goal cannot remain level, but must increase each year.
• Lower pension and Social Security income: Early retirement often results in lower pension income
as well as reduced Social Security retirement benefits.
• Less time to plan and save: Early retirement leaves you less time to plan for the psychological
adjustment needed when you retire. It also leaves less time to save for what will likely be a longer
period of retirement.
• Health care: Medical care is expensive and as we age we typically need more of it. During our
working years, employer provided health insurance is an extremely valuable benefit. After retirement,
however, we are much more on our own. Medicare is generally available once you reach age 65, but
Medicare has specific limits. Often, additional medical insurance is necessary, but the individual
typically has to personally pay for this extra coverage.
• Continue working: Some of us, either because we enjoy working, or because we need the income,
will want to consider continued employment.

 Annuities in Retirement Income Planning

Posted on 4. February 2013

For much of the recent past, individuals entering retirement could look to a number of potential sources for the steady income needed to maintain a decent standard of living:

• Defined benefit (DB) employer pensions: In these plans the employer promises to pay a specified monthly amount for the life of the retiree and/or spouse.
• Social Security: Designed to replace only a part of an individual's working income, Social Security provides a known benefit for the life of a retiree and his or her spouse
• Defined contribution (DC) plans: Such as 401(k), 403(b), or 457 1 plans, which allow for contributions from the employee (in some cases from the employer as well) to a retirement account. The funds in the account, whatever they amount to at retirement, provide retirement income.
• Individual retirement plans: Such as Traditional IRAs or Roth IRAs. These are "individual" versions of employer-sponsored DC plans. The funds in the IRA at retirement, whatever the amount, are used to provide retirement income.

The saying that "life is what happens when you're making other plans" is particularly true when it comes
to retirement income planning, for several key reasons:

• Fewer employer pensions: Over the past several decades, many employers have changed from defined benefit to defined contribution plans. From 1985 to 2000, for example, the rate of participation in defined benefit plans by full-time employees of medium and large private firms dropped from 80% to 36%.2 A survey by the Bureau of Labor Statistics, published in 2011, found that only 28% of civilian workers in the U.S. participated in defined benefit pension plans. 3
• Social Security: Social Security is a "pay-as-you-go" system, with current workers supporting those already receiving benefits. As the baby boom generation begins to retire, the number of individuals remaining in the workforce to support them grows smaller. Although politically unpleasant, fiscal reality may force higher payroll taxes, reductions in benefits, or both.
• We're living longer: A child born in 1900 had an average life expectancy of 47.3 years. For a child born in 2010, however, average life expectancy had increased to 78.7 years. 4 With the stable, lifetime income stream from employer pensions and Social Security playing an ever shrinking role, retirement income planning demands that each individual accept a higher degree of personal responsibility for both accumulating and managing the assets needed to pay for retirement. And managing these assets has to be done in a world where constant inflation, fluctuating interest rates, and sometimes volatile financial markets are a fact of life.

With the stable, lifetime income stream from employer pensions and Social Security playing an ever shrinking role, retirement income planning demands that each individual accept a higher degree of personal responsibility for both accumulating and managing the assets needed to pay for retirement. And managing these assets has to be done in a world where constant inflation, fluctuating interest rates, and sometimes volatile financial markets are a fact of life.

1 These refer to the sections of the Internal Revenue Code which authorize these different types of
2 retirement plans. See, "Employee Participation in Defined Benefit and Defined Contribution Plans, 1985-2000." U.S. Bureau of Labor Statistics,
3 updated June 16, 2004.
4 National Compensation Survey: Employee Benefits in the United States, March 2011, Table 2.Source: National Center for Health Statistics: Deaths: Preliminary data for 2010, January 11, 2012.