Risk Management Strategies for Boomers in 2012 and Beyond

So what are some risk management strategies we, as highly trained licensed professionals, can help our clients address and manage? There are only so many solutions to specific issues, and often addressing one is an offshoot to managing another. The following are examples.

Health insurance: Senior health insurance is somewhat different than underage health insurance in that private insurance is required in combination with government coverage. A typical senior health insurance program would include Medicare to cover 80% of health care costs and private insurance, or Medigap coverage, to cover the other 20%. Sources of health insurance are:

• Medicare
• Medicaid
• Short/Long-term care
• Medicare Supplement/Medicare Advantage

Life insurance: For seniors, life insurance solves problems such as providing liquidity at death for a surviving spouse, replacing Social Security income lost due to the death of a spouse, ease of estate settlement and division, creating a pool of money for special needs, and wealth transfer. Types of life insurance are:

• Term
• Permanent
• Final Expense

Asset protection: Many retirees lack control of 50% or more of their retirement income, which includes Social Security, employer pension and investment returns. This makes those sources somewhat difficult to manage or change. They can include:

• Savings: CDs, stocks, bonds and existing coverage
• Annuities: Fixed, indexed and variable
• Wills, trusts and estate planning

Reducing taxable income: Some ways to reduce taxable income are by:

• Standard deductions,
• Deductions for 65+ or blindness,
• Itemizing deductions,
• Listing medical expenses (must exceed 7.5% of Adjusted Gross Income AGI),
• Charitable deductions, and
• Personal exemptions 

Social Security and provisional income
In 1935, President Roosevelt signed into law one of the most significant pieces of legislation of our time, the Social Security Act. At the time, the U.S. Treasury ruled that benefit payments were gifts and would not be subject to tax. In 1983, Congress changed the law and allowed up to 50 percent of Social Security benefits to be subject to tax. In 1993, the law was changed again: Now up to 85 percent may be taxed. So what causes Social Security to be taxed? The taxation is based on the amount of income received in a calendar year called "provisional income."

What is "provisional income?"

For married or head of household:

• Social Security can become taxable when income plus half of the amount received from Social Security exceeds $32,000 — up to 50 percent of Social Security benefits, and 
• If the amount exceeds $44,000 — up to 85 percent of Social Security benefits which can be taxed.

For a single person:

• Social Security can become taxable if income plus half of the amount received from Social Security exceeds: $25,000 — up to 50 percent of Social Security benefits, and
• If the amount exceeds $34,000 — up to 85 percent of Social Security benefits which can be taxed.

What constitutes provisional income?

Income from these accounts may be the reason your clients pay more taxes, including the tax on their Social Security.

1. IRA distributions
2. Certificates of deposit
3. Money market accounts
4. U.S. Treasury bills
5. Mortgage certificates
6. Capital gains
7. Dividends
8. Tax-free bonds
9. Corporate bonds
10. Half of Social Security

Income from any combination of these accounts added to half of Social Security results in a "threshold income" that determines the tax that may have to be paid. Repositioning these income producing assets into a vehicle where the income produced is not reportable may reduce the senior's taxable income, preserving more of their monthly disposable income and allowing their earnings to earn more while also ensuring the money they would have paid for taxes will have the opportunity to earn money. Section 72 of the Internal Revenue Code allows "income credited on a deferred annuity contract is not currently includable as income." Based on Section 72, income credited inside an annuity may not create a tax on Social Security.

Along with the risk management strategies listed above, this type of repositioning can be incredibly valuable for your clients.Check back next week for part 2 of our boomer review, when we'll cover the ins and outs of marketing.