RPF0343-Friday_QA
00:00:00.000 | It's Friday here at Radical Personal Finance, and on Fridays, we do live Q&A.
00:00:22.720 | Welcome to the Radical Personal Finance podcast.
00:00:24.280 | My name is Joshua Sheets, and I'm your host.
00:00:25.280 | Thank you for being with me.
00:00:26.280 | This is the show where we work hard to give you the tools and tactics and strategies and
00:00:32.000 | information and inspiration that you need to live a rich life now while also building
00:00:37.160 | and then pursuing your plan for financial freedom in 10 years or less.
00:00:41.320 | Fridays is where you ask me questions.
00:00:43.400 | We open up the phone line, and you can ask me anything that you want.
00:00:54.600 | Most Friday Q&A calls are a benefit which is open to patrons of the show at a certain
00:00:58.800 | level of subscription.
00:00:59.800 | For details on that, go to RadicalPersonalFinance.com/patron.
00:01:04.960 | If you sign up as a patron of the show, you can call in, and you can ask me anything that
00:01:08.640 | you want.
00:01:09.640 | It might be a good and relatively inexpensive way for you to – well, if you want to get
00:01:16.240 | my opinion or advice on something, this is a good way to do it.
00:01:18.680 | So let's go immediately to Paul in Hawaii.
00:01:22.240 | Paul, go ahead and let me know what's on your mind, and let me know how I can serve
00:01:25.160 | you today, please.
00:01:26.160 | Thanks, Josh, and aloha.
00:01:30.680 | My wife is looking to retire, and she'll reach full retirement age in about a year.
00:01:37.280 | We're looking then at delaying Social Security until 70, and I wanted to see what the break-even
00:01:43.240 | point would be from taking Social Security at 70 versus 66.
00:01:48.640 | All right.
00:01:50.280 | So this one is interesting, and I will be able to give you some generalized advice,
00:01:56.120 | but I'll also – ultimately, I'm going to point you to a book and the very best book
00:02:01.960 | that is written on this subject.
00:02:03.640 | The reason I'm pointing you to a book is because it's not a simple answer.
00:02:06.960 | There are many extenuating factors, and it'll be more that I can do just simply off the
00:02:11.240 | cuff with my – I'll practice in this area every day.
00:02:15.760 | I can give you a generalized idea, but the book that you need is a book called Social
00:02:19.800 | Security Strategies, and the authors are William Reichenstein, R-E-I-C-H-E-N-S-T-E-I-N, and
00:02:28.720 | William Meyer, and I will link it in the show notes for today's episode for any other
00:02:32.920 | listeners.
00:02:33.920 | But this book, Social Security Strategies, is the best resource that I have found to
00:02:37.840 | help people walk through this decision tree and to pull out some of the misconceptions
00:02:44.040 | that people have about their different situation and give some useful ideas.
00:02:51.760 | This really is the best place to go, and if you're going through this situation and
00:02:58.240 | you'd like to work your way through it yourself, go first to this book, Social Security Strategies.
00:03:03.240 | Now, there are a couple of different extenuating factors that you'll want to consider.
00:03:08.080 | The first is going to be the idea of the payment, and as you said, we often talk about, "Okay,
00:03:13.720 | what's the break-even point?"
00:03:15.320 | We'll get to that in a minute, but some of the other ideas can often be even more
00:03:20.480 | important, so we'll get to those in just a couple minutes.
00:03:24.600 | So she is currently—how old right now?
00:03:27.680 | William Meyer, MD 65.
00:03:29.920 | And how old are you?
00:03:30.920 | William Meyer, MD I'm 67.
00:03:33.120 | Okay.
00:03:34.120 | So you guys are similar in age, and that is important because when it comes to different
00:03:40.400 | strategies, there's a dramatic difference of strategy you would pursue if you're similar
00:03:43.760 | in age versus if you are significantly different in age.
00:03:47.960 | Next question.
00:03:48.960 | With regard to your earnings record and her earnings record, the first ideal question
00:03:54.920 | is do you know what her primary insurance amount is and what your primary insurance
00:03:59.320 | amount is on your Social Security earnings record?
00:04:01.560 | William Meyer, MD Yes.
00:04:03.000 | Okay.
00:04:04.000 | What are those numbers, please?
00:04:05.000 | William Meyer, MD Okay.
00:04:06.280 | I drew at 62 for medical reasons.
00:04:10.040 | At 66, her numbers will be $1568.
00:04:15.120 | At 70, it will be $2169.
00:04:17.120 | That's what they're estimating right now.
00:04:19.240 | Okay.
00:04:20.240 | And what is your current Social Security benefit?
00:04:22.880 | William Meyer, MD $1500.
00:04:25.760 | $1500.
00:04:26.760 | Okay.
00:04:27.760 | So the key with—it's going to be difficult for me to answer the question because I can't
00:04:33.560 | do it off the top of my head.
00:04:34.800 | This is more of kind of a consultation where you've got to go through and look at some
00:04:38.280 | different strategies.
00:04:39.280 | Let me just give you a couple of things to think about and I'm just going to frankly
00:04:42.120 | just refer you right to the Social Security Strategies book that I mentioned for you.
00:04:46.640 | The key with thinking about the benefit is to think partly about the actual benefit amount.
00:04:54.160 | Now, there is a compelling case to be made for waiting until full retirement age and
00:05:01.280 | also for late retirement age.
00:05:03.800 | When you actually look at the increase of the benefits—let me pull this up here.
00:05:10.120 | I'll read this to you here so you get an idea.
00:05:16.720 | So here we go.
00:05:17.720 | I'm just going to read you a couple of paragraphs from the very beginning here of the Social
00:05:22.960 | Security Strategies book which is going to partly answer your age question and it will
00:05:28.200 | be useful for you to consider this.
00:05:32.480 | Someone who begins benefits at full retirement age receives full benefits, that is, the primary
00:05:37.120 | insurance amount.
00:05:38.880 | Someone who begins benefits before attaining full retirement age receives reduced benefits
00:05:43.560 | while someone who delays benefits until after the full retirement age receives a higher
00:05:49.360 | level of benefits.
00:05:51.040 | So the reductions and increases for someone with a full retirement age of 66 are important
00:05:57.440 | because this affects most individuals who will be deciding when to begin Social Security
00:06:01.240 | benefits in the next several years.
00:06:04.200 | If this individual begins Social Security benefits before attaining full retirement
00:06:08.760 | age, the reduction is 5/9 of a percent per month for the first 36 months plus 5/12 of
00:06:17.400 | a percent per month for months 37 through 48.
00:06:21.720 | So if benefits are begun at 62, 63, 64, or 65, the reduction is 25%, 20%, 13.33%, and
00:06:32.760 | 6.67% respectively below the primary insurance amount.
00:06:37.860 | If benefits are begun at 63 years and one month, then the reduction is 19.44% where
00:06:43.680 | the latter is 35 months times 5/9 of a percent reduction per month.
00:06:48.040 | Now that's a bunch of numbers that are very hard for listeners to follow in audio form,
00:06:52.920 | but it's important that people actually look at the actual numbers because they change
00:06:58.000 | depending on how early you take the benefit.
00:07:00.360 | Now to your situation, Paul, let's continue here.
00:07:03.880 | If benefits are begun after the full retirement age, the increase is 2/3 of a percent per
00:07:10.740 | month for each month benefits are delayed until age 70.
00:07:15.880 | So if benefits are begun at 67, 68, 69, or 70, the increases in benefits called delayed
00:07:23.880 | retirement credits are 8%, 16%, 24%, and 32% respectively above the primary insurance
00:07:33.000 | amount.
00:07:34.180 | If benefits are begun three months after attaining full retirement age, then the delayed retirement
00:07:39.140 | credit is 2%.
00:07:41.060 | That's three months times 2/3 of a percent per month.
00:07:44.300 | So the monthly benefits level is 102% of the primary insurance amount.
00:07:49.420 | This example and a prior one emphasizes that someone does not need to wait a full year,
00:07:54.140 | for example from 63 to 64 or 66 to 67, to get a higher benefit amount.
00:07:59.880 | The benefit amount increases each month that benefits are delayed from age 62 to 70.
00:08:05.780 | For someone with a full retirement age of 66 and primary insurance amount of $1,000,
00:08:11.860 | the levels of benefits if started at 62 through 70 would be $750 at 62, $800, $866, $933,
00:08:24.020 | $1,000 at 66, $1,080, $1,160, $1,240, and $1,320 at 70.
00:08:37.420 | All amounts are adjusted for annual cost of living adjustments.
00:08:41.360 | So one of the key things to recognize is that there is a substantial increase in actual
00:08:47.700 | benefits by waiting from the full retirement age up through the age of 70.
00:08:54.260 | To duplicate these results with any other kind of investment is very, very difficult.
00:09:01.040 | Just compare this example here of going from $1,000 a month of benefit at 66 to $1,320
00:09:08.220 | a month of benefit at age 70 and go back and run the math on how much of an investment
00:09:14.740 | account you would need to have to approximate that result of a 32% increase over four years.
00:09:23.620 | So four years of delay and a 32% increase in benefit.
00:09:27.700 | As the author points out here, that's very, very valuable because of the increase but
00:09:33.180 | also because of the fact that that increase now benefits from all of the cost of living
00:09:42.620 | adjustments going forward into the future.
00:09:44.740 | So those things are – it's an extremely valuable benefit.
00:09:48.220 | Now it's not necessarily the biggest thing that you have to focus on but most people
00:09:54.140 | should probably delay for as long as possible.
00:09:57.660 | Now, Paul, tell me a little bit more about your other financial situation, other resources,
00:10:01.420 | things like that, please.
00:10:03.420 | We've got a fully paid four-house.
00:10:08.340 | So we have no mortgage.
00:10:09.340 | We have no debt.
00:10:10.340 | We've got about 300K in IRA and 401K.
00:10:17.940 | And that's emergency fund about 80K.
00:10:21.540 | And that's kind of our situation right now.
00:10:23.380 | Okay, great.
00:10:24.380 | So the good thing is you are in great shape as far as no debt and you have some assets
00:10:30.700 | which is fantastic.
00:10:32.800 | With regard to your income, you're living on your social security income and then her
00:10:36.700 | earned income up until now, are you currently taking income from the investments?
00:10:42.100 | No.
00:10:43.500 | No, we're putting about 30%, 40% towards savings each month.
00:10:53.100 | So our expenses are very much in line.
00:10:56.340 | Great.
00:10:57.340 | Awesome.
00:10:58.340 | So the reason the amount of assets are important is if you had – if you have millions and
00:11:04.900 | millions of dollars of assets, then the social security benefit is not going to be a major
00:11:10.600 | part of your or your wife's retirement picture.
00:11:14.980 | If you have fewer assets, then the social security benefit begins to form a really important
00:11:21.600 | foundation of the overall plan of how you're actually going to receive income.
00:11:33.860 | You mentioned that you took social security early for health reasons.
00:11:36.740 | Do you expect to live to a normal age or do you expect to die early?
00:11:43.300 | Probably a normal age.
00:11:44.300 | I'm going to say probably a normal age.
00:11:46.080 | And is your wife in good health?
00:11:47.980 | Does she expect to have a long life expectancy?
00:11:50.380 | Yeah, she has some good family genes.
00:11:53.260 | Okay.
00:11:54.260 | So under these circumstances, you asked in your original question about break-even point.
00:11:59.260 | And the basic break-even points are pretty easy to calculate.
00:12:07.420 | I'm just looking here in the book here to read you a paragraph.
00:12:12.560 | So if we were just talking about a single person and the way that these strategies are
00:12:20.640 | broken apart is strategies for single people versus strategies for couples.
00:12:24.640 | I'm going there in just a moment.
00:12:26.640 | But if we were just going for a single person, here would be the implications here as far
00:12:31.600 | as the break-even point.
00:12:32.800 | Let's consider the implications for single individuals who are only concerned about maximizing
00:12:37.600 | expected cumulative lifetime benefits.
00:12:40.720 | If a 62-year-old expects to live to age 77, i.e. die in the month of his 77th birthday,
00:12:47.560 | he maximizes cumulative benefits by starting benefits at age 64.
00:12:52.200 | The reductions in benefits for starting benefits before the full retirement age are five-ninth
00:12:56.920 | of a percent per month for the first 36 months and five-twelfths of a percent per month for
00:13:02.220 | each additional month benefits begin before age 63.
00:13:08.440 | Since five-ninth of a percent is larger than five-twelfths of a percent, the benefit of
00:13:13.560 | delaying benefits one more month increases at age 63.
00:13:17.200 | This pattern encourages individuals to delay the start of benefits until at least 64 unless
00:13:22.080 | they are confident they will not live to at least 77.
00:13:28.000 | Now let's consider the implications for singles of delaying the start of benefits beyond full
00:13:31.800 | retirement age.
00:13:33.240 | The break-even age between starting benefits at age 66 and 67 is 79.5 years.
00:13:40.620 | This relatively low break-even age reflects the two-thirds of a percent per month delayed
00:13:46.400 | retirement credits for delaying the start of benefits beyond the full retirement age.
00:13:51.520 | Because this two-thirds of a percent is larger than the five-ninth of a percent reduction
00:13:55.900 | in benefits for starting benefits before full retirement age, the break-even age between
00:14:00.320 | starting benefits at 66 and 67 is lower than the break-even age between starting benefits
00:14:06.320 | at 65 and 68.
00:14:08.360 | If a 62-year-old expects to live until 82 and a half, then she would maximize expected
00:14:13.540 | lifetime benefits by delaying benefits until age 68.
00:14:16.880 | However, if she is also concerned about longevity risk, she may rationally opt to delay benefits
00:14:22.180 | beyond age 68.
00:14:24.600 | So skipping down here, the break-even ages are 80 or lower for delaying Social Security
00:14:29.560 | benefits one more year at ages 62, 63, 64, 65, and 66, but the break-even ages are above
00:14:36.840 | 80 for delaying benefits one more year at ages 67, 68, and 69.
00:14:41.840 | Therefore, it is easier to justify delaying the start of benefits from age 62 to 67 than
00:14:47.360 | from age 67 to 70.
00:14:49.960 | So this is very wordy, but the reason I'm reading it is to demonstrate this is partly
00:14:54.160 | why I can't just answer the question for you without more detailed analysis, but I do encourage
00:14:58.860 | you to go to Social Security strategies and get the book and read through it carefully.
00:15:03.680 | Now when you get to couples strategies, one of the important things about couples strategies
00:15:08.120 | is to recognize that there are a few different types of risks that we've got to figure out.
00:15:17.880 | And when you have a couple, you have your Social Security benefits and then also your
00:15:22.560 | wife's Social Security benefits.
00:15:24.600 | And we need to plan for both your benefits continuing for a long life and then what happens
00:15:30.980 | if you die early.
00:15:31.980 | And we also need to plan for your wife's benefits continuing for a long life and what happens
00:15:36.260 | if she dies early.
00:15:38.200 | So if you expect a long life expectancy, then usually it's good to just push it about as
00:15:44.640 | late as you can.
00:15:46.200 | And there are benefits with those increases beyond the full retirement age.
00:15:50.220 | Those are benefits because if you look at somebody's last decade of their life, how
00:15:55.500 | big of a difference having that higher Social Security benefit can be over the last decade,
00:16:01.100 | and especially recognizing that it's a benefit that you can't outlive, it's a huge, huge
00:16:07.300 | benefit.
00:16:08.300 | The other thing that you've got to consider is you've got to say, "Okay, what would be
00:16:10.660 | the benefit for you if your wife died early?"
00:16:13.620 | And so when you look at it, you look at the benefit at age 70 and you say, because in
00:16:18.460 | your situation, Paul, you've been living on your Social Security benefit and then your
00:16:24.060 | wife's earned income.
00:16:25.740 | So we've got to protect you in case your wife dies early and we want to make sure the spousal
00:16:30.620 | benefit for you is as high as possible.
00:16:33.900 | And then also we need to look at the flip side for your wife and say, "Well, if Paul
00:16:37.700 | dies early, how do we make sure that her benefit is as high as possible?"
00:16:42.700 | It's important, the variation in ages.
00:16:46.820 | If you have a low ratio, and just a second, let me find that part of my book here to give
00:16:51.460 | it to you, and I'll get you here the example here for a low ratio couple.
00:17:05.540 | But you're going to need to go through this book and answer it specifically for yourself.
00:17:09.740 | Is this helpful?
00:17:10.740 | I know I'm kind of walking around your question without giving it straightforward, but do
00:17:14.700 | you want to ask a follow-up question?
00:17:15.700 | Is this at all helpful for you?
00:17:17.700 | Overall, I've gone through this through my head and kind of worked out some, I worked
00:17:25.540 | it out on pencil.
00:17:27.780 | Your help, it's nice to bounce back what I was initially thinking in terms of whether
00:17:35.660 | she goes or I go and what's available for either of us.
00:17:39.180 | A follow-up question to that then, if we decide not to collect and say delay because of that
00:17:44.580 | 8% increase each year thereafter, I'm also looking at an option of taking some cash out
00:17:51.300 | rather than taking Social Security, taking cash out, you know, every six months, whatever,
00:17:58.260 | to cover what she would receive on Social Security, take it from our 401(k) given our
00:18:04.100 | taxes will be much lower at that time.
00:18:06.860 | Is that a reasonable option?
00:18:09.340 | Because my overall goal is to preserve capital and that's the primary goal, would be to
00:18:15.740 | preserve capital then with regards to our IRA and 401(k).
00:18:20.380 | Yeah, I think that's a reasonable goal.
00:18:23.140 | Is she committed certainly to actually retiring from her work regardless of whether she takes
00:18:29.300 | Social Security distribution or not?
00:18:32.060 | You know, we've got some options and so to have these choices, it's really nice and
00:18:36.860 | so that's why I'm planning out ahead what those options might be because, you know,
00:18:41.020 | who knows, she might come home and say, "I've had it already.
00:18:43.820 | It's time to move on."
00:18:44.820 | Sure.
00:18:45.820 | And I just want to be prepared.
00:18:46.820 | Absolutely.
00:18:47.820 | So if it were coming down to, given what you told me about, okay, $300,000, $300,000 of
00:18:55.180 | investments is a nice nest egg to have saved up.
00:18:59.340 | So $300,000 of investments, that's fantastic.
00:19:03.240 | As far as the income that you'll actually be able to build off of that, depending on
00:19:08.640 | how much you take on it, the income from that into perpetuity is going to be relatively
00:19:13.880 | low, meaning that if we just follow the 4% rule for example, 4% per year would be $12,000
00:19:21.100 | per year of benefit.
00:19:22.640 | So in order to do that, you'll need to compare the cost of waiting on Social Security of
00:19:28.360 | what actual figures you don't get in and compare it with the benefit coming in from the Social
00:19:37.480 | Security and kind of compare those two.
00:19:41.160 | The huge benefit of Social Security at your age bracket, I would expect that your age
00:19:44.840 | bracket, Social Security system to be relatively stable going forward into your retirement
00:19:50.640 | years.
00:19:51.640 | I don't expect the same for me in my age bracket.
00:19:54.340 | But for you guys, I would expect it to be relatively stable.
00:19:57.360 | And if you can set up a pension income that is going to last for your entire lifetimes
00:20:04.560 | and it's adjusted with COLA, that is very, very powerful and it's in many ways more powerful
00:20:10.120 | than what you can have just simply by having your investments in a mutual fund.
00:20:17.400 | So I would personally lean toward that and explore it with the actual numbers.
00:20:22.920 | I would make a spreadsheet and build it out.
00:20:25.400 | But my gut reaction is yes.
00:20:27.260 | If I needed to take $10,000 or $15,000 or $20,000 out of the retirement income to supplement
00:20:37.440 | while waiting for that Social Security income to increase, I would pursue that.
00:20:41.440 | Do you have the paper there in front of you that tells you what her benefits would be
00:20:43.880 | at age 70 versus now at 66 or 65?
00:20:47.440 | Yes.
00:20:48.440 | I gave that to you earlier.
00:20:50.440 | Okay.
00:20:51.440 | I see it.
00:20:52.440 | 2169.
00:20:53.440 | Okay.
00:20:54.440 | Forgive me.
00:20:55.440 | So 2169 minus 1568.
00:20:56.440 | So that's $600 a month of additional benefit from waiting basically these four or five
00:21:04.800 | years.
00:21:06.160 | Multiply that times 12.
00:21:07.400 | That comes out to be $7,212 per year of income, of benefit.
00:21:15.760 | That's a substantial increase in lifestyle.
00:21:20.800 | If you were to replace that, this is just rough and dirty, let's just multiply that
00:21:24.520 | times 2169 minus 1568, 601.
00:21:35.760 | Let's multiply that times 300.
00:21:37.480 | So that's a portfolio value.
00:21:39.640 | To create something similar, you'd need in excess of $180,000 of savings.
00:21:44.280 | So even if you're looking at working and you're looking at the ability to defer that,
00:21:50.200 | it's going to be a good increase in savings.
00:21:54.840 | That's probably the extent I can do on a live call like here without building a spreadsheet
00:21:58.840 | and comparing options.
00:22:00.200 | I do commend you to the book Social Security Strategies and I commend you to a spreadsheet
00:22:05.240 | to actually look at it.
00:22:07.000 | In that context as well, the last comment I would make is you need to look at her earnings
00:22:12.480 | record on the Social Security earnings.
00:22:16.200 | And let me just ask you, what's her current income right now?
00:22:21.600 | About 50K.
00:22:23.800 | Okay.
00:22:24.800 | And is that the highest that she's earned in her past career?
00:22:27.840 | Yeah, she's gone up a bit but not much.
00:22:33.200 | So the other thing that you should check is you should check to see what happens in her
00:22:38.880 | earnings record if she replaces older years of lower income with current years of higher
00:22:46.600 | income.
00:22:47.600 | So the way the Social Security calculation works is it takes the 35 years of highest
00:22:52.800 | income – is it highest income or the last 35 years?
00:22:55.760 | I think it's 35 years of highest income and it calculates from that the primary insurance
00:23:02.920 | amount.
00:23:03.920 | So sometimes if somebody's earnings record looked like $20,000 a year, $20,000 a year,
00:23:10.040 | a straight $20,000 a year for 20 years or 15 years and then after that it made a big
00:23:14.520 | jump in income, sometimes putting in five more years of earnings can make a big difference
00:23:20.720 | in the formula because for every year that she's getting rid of a $20,000 record and
00:23:25.400 | replacing with a $50,000 record, that can dramatically raise the amount.
00:23:29.840 | So you should look at her earnings record and see if there are any benefits that would
00:23:32.720 | be accrued from that as well.
00:23:34.640 | Got you.
00:23:35.640 | Okay.
00:23:36.640 | It's also important – sorry.
00:23:37.640 | I know I'm going on and on but it's also important if she has any years of zero income.
00:23:45.280 | So what can often happen with women, especially if they've taken time out of the career
00:23:53.320 | workforce to stay at home with kids, is they'll have some years of zero dollars of income.
00:23:58.520 | And so if she's working and she's getting rid of a zero in the amount and replacing
00:24:04.400 | it with a $50,000 per year number, that can make a substantial difference as well.
00:24:10.320 | That's an important consideration.
00:24:12.480 | I never looked at that part.
00:24:13.480 | I think I'll go back and take a closer look at that.
00:24:16.080 | Yep.
00:24:17.080 | Go back and check it.
00:24:18.080 | You can actually build the entire formula yourself with a spreadsheet.
00:24:24.720 | If you get that book and you make a spreadsheet, if you're pretty proficient with spreadsheets,
00:24:29.460 | you can actually build an entire thing yourself.
00:24:31.360 | You put in the earnings record, you follow the formula to pull off the earnings record,
00:24:35.740 | and you can create the primary insurance amount off of that, and then you can take that and
00:24:39.680 | you can use some of the different estimators.
00:24:42.400 | But you can actually build it.
00:24:45.200 | That's the best I got for you.
00:24:47.480 | Very good.
00:24:48.480 | I got a follow-up question.
00:24:50.480 | Okay.
00:24:51.480 | Go ahead.
00:24:52.480 | I got you on my – myself.
00:24:53.480 | I want to ask you this.
00:24:54.480 | I want to look at the issue of term insurance.
00:24:59.760 | We're getting up in age, and it's getting pricey.
00:25:04.120 | But at the same time, when I look at the benefit amount, the fact that it's not taxable at
00:25:10.840 | the time that the benefits collect, I kind of – I bit the bullet and said, "We're
00:25:19.680 | going to just keep it because I'm looking at that benefit as a – I'm going to say
00:25:25.880 | investment because I can't get that type of return anywhere else by paying that monthly
00:25:32.120 | premium."
00:25:33.120 | You got where I'm coming from?
00:25:35.280 | Yeah, absolutely.
00:25:36.280 | Do you already have coverage in force that you're trying to decide whether to keep or
00:25:39.240 | to get rid of, or would you be applying for new coverage?
00:25:42.760 | Well, no.
00:25:44.720 | We're looking at applying for new coverage.
00:25:48.160 | The renewable data is at 75, and I'm quite a ways away from that.
00:25:52.520 | But I'm still – I'm trying to look at what the premium amount might be.
00:25:57.560 | And so, I'm trying to rationale.
00:25:58.560 | It may be, in fact, more reasonable for me to pay that increase knowing then that the
00:26:05.080 | return on that will be much greater than I can get anywhere else.
00:26:09.920 | And so, that's why I'm looking at that term insurance policy as a policy, as an investment,
00:26:17.200 | rather than – I don't know how to explain that.
00:26:22.360 | That's kind of where I'm coming from.
00:26:25.640 | For me, I would not follow that path.
00:26:29.680 | And the reason I wouldn't is because it's very unlikely for you to actually collect
00:26:33.040 | a death benefit on a term insurance policy.
00:26:36.880 | The insurance underwriters are really good.
00:26:39.580 | And in general, term insurance is just simply not going to pay out in general because you're
00:26:46.640 | going to outlive it.
00:26:47.800 | So, when you get up to your age, in about your mid-60s, something like that, you're
00:26:53.920 | going to be – in order to keep it cost-effective, you're going to be looking at pretty short-term
00:26:58.840 | rates.
00:26:59.840 | You're going to be looking at 10-year term, maybe 15-year term.
00:27:02.320 | But there's going to be a huge difference in premium cost between a 10-year term policy
00:27:06.680 | and a 20-year term policy.
00:27:09.000 | And so, at your age bracket, you're going to be looking for a shorter-term policy.
00:27:14.620 | And if you get the coverage, you're getting it because the insurance company has underwritten
00:27:20.880 | your file and they do not find any medical risk factors of an early death.
00:27:28.580 | So basically, you have to assume when you buy life insurance, term life insurance, if
00:27:34.520 | you get it from the insurance company, basically – although, hey, medical things change all
00:27:39.560 | the time.
00:27:40.560 | You could look totally healthy today and then a year from now be diagnosed with cancer and
00:27:43.880 | you never knew it.
00:27:45.320 | That happens and that does happen.
00:27:47.100 | But when you actually look at it, it happens such a small percentage of the time that you
00:27:51.200 | basically have to think of it as protecting you from an accident.
00:27:54.880 | It would protect you from an accidental death and so it would protect you from an accidental
00:28:01.000 | death, not so much from the other types of death.
00:28:04.000 | The insurance underwriting process, they're pretty good.
00:28:06.560 | So the way I would look at it is as risk management.
00:28:09.800 | If you look at your situation and let's say it would be on your wife's life right
00:28:16.320 | now because she's the one who's earning an income.
00:28:18.240 | You don't have any income other than your social security benefit.
00:28:20.360 | Is that right?
00:28:21.360 | Michael Strong: Correct.
00:28:22.360 | Aaron Ross Powell: OK.
00:28:23.360 | So the major risk is of your wife dying early because your income – she would still have
00:28:31.040 | the paid-for house.
00:28:32.220 | She would still have the retirement assets and she's going to have a social security
00:28:35.720 | benefit for herself and even if you died now and she wasn't claiming, she can file for
00:28:40.800 | a spousal benefit and get a spousal benefit or she can get a widow benefit off of your
00:28:47.520 | record.
00:28:50.580 | So the major risk is for you, the loss of her income and the loss of her probably higher
00:28:56.360 | social security benefit to you.
00:29:00.200 | If you needed to protect that for the next five years, that would be where I would look
00:29:04.720 | at life insurance.
00:29:08.120 | So if you assume that she's going to earn $50,000 per year for the next five years and
00:29:13.440 | that's going to give you guys $250,000 of earnings, some of that is going to be spent
00:29:22.080 | but some of it is also going to be saved.
00:29:23.680 | Plus you're going to have that increase in social security benefits for you.
00:29:27.160 | I would consider putting some life insurance on her to protect that.
00:29:31.040 | But I wouldn't view term life insurance as an investment simply because it's very unlikely
00:29:36.400 | to ever pay a death benefit.
00:29:37.880 | There is protection.
00:29:39.160 | It would pay a death benefit if you died but you're unlikely to die, especially at your
00:29:43.880 | age bracket when you're going through medical underwriting.
00:29:47.680 | Yeah, and that's the other side of insurance we don't talk about.
00:29:51.680 | When you need it, it's great that it's there.
00:29:53.480 | When you don't need it, it's money that's kind of gone.
00:29:56.320 | Yeah, term insurance especially because term insurance only pays you out if you die.
00:30:00.400 | It's great protection.
00:30:01.960 | Again, it's the perfect fit if you decide she's going to work five more years, you're
00:30:06.520 | not quite comfortable and you buy a five-year $250,000 term policy that would run you on
00:30:12.440 | her life, it would be somewhere between $1,000 and $1,500 a year.
00:30:17.320 | So that might be a really reasonable risk thing to do but it's not going to be an investment
00:30:22.160 | because it's unlikely to pay out.
00:30:24.280 | It would be a shame to spend $1,500 a year and then it's all gone.
00:30:30.160 | You've always got to recognize that most likely the premium dollars are going to be gone.
00:30:33.520 | Very good.
00:30:34.520 | Listen, you've been most helpful and I appreciate your feedback.
00:30:38.160 | Good.
00:30:39.160 | I'm so glad, Paul.
00:30:40.160 | And at the moment, that is going to be it for today's show.
00:30:42.600 | I just had one caller.
00:30:43.600 | So if you'd like to talk to me in the future, we've got plenty of room.
00:30:46.080 | These calls have been varied.
00:30:47.080 | I thought they were going to be more popular but I guess, who knows, we've answered everyone's
00:30:51.960 | questions.
00:30:52.960 | Really appreciate those of you who do call in.
00:30:54.680 | If any of you are regular listeners of the show and you would like to call into a show
00:30:57.840 | like this, I set aside an hour for these things and so there's plenty of room for you to get
00:31:02.820 | on and be able to ask me any question that you want.
00:31:05.120 | If you can make your opinion heard, I don't do any censorship of what you want to talk
00:31:09.280 | about.
00:31:10.280 | So I'd be glad to have you on a call like this.
00:31:11.280 | Become a patron at RadicalPersonalFinance.com/patron and you'll have access to these Q&A calls
00:31:17.520 | on a regular basis.
00:31:18.520 | Thank you all so much for listening.
00:31:20.040 | I will be back with you very soon.
00:31:22.720 | [Music]
00:31:29.720 | (mouse squeaking)