TPDAN55 – Thank you for your question. The decision to take SBP or to look at an alternative strategy is an important one that we get asked frequently. Bottom line up front: USAA believes that taking the full SBP election is in your best interest as it ensures the highest income benefit available for your survivors.
In my experience working with retirees, the conversation is equal parts mathematical and personal considerations. Mathematically, the amount of life insurance you are considering isn’t too far off the replacement cost of your pension benefit. I did run a few life insurance quotes and assuming a 55-year-old male, and assuming a non-discounted preferred health rate, you would be able to get $750,000 of 20-year level term life insurance for less than your SBP estimated cost of $400 a month - medical underwriting would be required to determine your final policy costs.
However, there are a couple of key risks that I am concerned about that the life insurance strategy may not offset. Consider the following risks/factors:
Longevity – I am assuming that your spouse is similarly aged or younger. If you died yesterday and they are using the life insurance proceeds for the rest of their live starting today, there is a considerable risk of them outliving the insurance proceeds. SBP is based on mortality and income payments would not stop until your spouse passes away, so this risk is offset completely.
Inflation and increased expenses – Historical inflation has run between 2-3%, but as you age and have increases in cost of living, namely due to health care costs, your withdrawals will reduce the length that your money can last. Health care costs continue to increase by to 6-7% per year which can reduce spendable income or cause an increase in withdrawals as well. Offsetting these risks comes from potentially how accounts are invested or what type of insurance planning has been done.
Investment risks and management – It is important to consider how comfortable your spouse is with investing, including tolerance for risk, managing their portfolio or sensitivity towards losses. The market will undoubtedly move up and down, and having a diversified investment allocation can reduce overall portfolio volatility, but withdrawing from a beat-up portfolio isn’t ideal.
More so, how does your spouse feel about their time commitment, ability or desire to manage investments? Having a large portion of retirement income being generated from investments adds to the portfolio complexity so it is important to get your spouse’s input here.
Planning for Long Term Care – Long term care support or services are needed by the majority of Americans in retirement. 70% of those over the age of 65 will need some form of care during their lifetime and the costs continue to rise. According to seniorliving.org, the national average for assisted living costs is $43,536 a year. Nursing home care is nearly double that. Your surviving spouse won’t have you there to support them, so consider how long-term care factors in to your plans and what resources can be planned on. Long-term care costs can easily deplete a retirement nest egg, and you are at the right age to have that conversation to better plan for needs in the future.
My personal preferences in planning for retirement income is knowing a worst-case scenario. The SBP annuity provides a paycheck for life which can provide a great deal of peace of mind. Running the numbers can be a fun exercise and seeing which is the most optimal on paper. However, ultimately this is a conversation that you and your spouse need to have and determine which strategy does your spouse feel better with.
I know it’s a lot to read through. I recommend that you speak with one of USAA’s Financial Advisors so that you can stress test the various scenarios in your financial situation by working through a USAA Personal Financial Plan. They can also take into consideration your entire financial picture to see how the SBP decision affects other factors in your balance sheet and vice versa. I am happy to answer any other questions you have as well, so that you and your spouse can make the best decision for your need.
Reach out to one of our advisors at 800-292-8482 and start the conversation today.
Thank you for your service and for your membership!
Sean Scaturro CFP®, MBA
Director of Financial Advice