©2015, college for financial planning, all rights reserved. session 13 retirement & selecting...

©2015, College for Financial Planning, all rights reserved.

Session 13Retirement & Selecting Optimum Social Security Benefit

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMFinancial Plan Development Course

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This class is being recorded so you may review it at a future time.

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Retirement Basics

Current 4-legged stool1.Social Security and other government

resources2.Employer-provided plans3.Employment during

retirement4.Personal assets

Lifestyle choices related to controlling spending patterns may need to be incorporated into concepts for clients.

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OASDI

3 main components of Old Age, Survivors, andDisability Insurance:1. Retirement

(old age)2. Disability

(disability of wage earner)

3. Survivorship (death of wage earner)

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Average Indexed Monthly Earnings (AIME)

Used to create PIA

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Results of PIA Formula

Source: Czarnowski 3/19/2014

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Full Retirement Age (FRA)

Born Full Retirement Age Age 62 Benefit

Before 1938

65 80%

1938-1942 65 plus monthly adjustment

75-80%

1943-1954 66 75%

1955-1959 66 plus monthly adjustment

70-75%

After 1960 67 70%

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Benefit Adjustments Due to Age • Primary Benefit is based on PIA at

full retirement age (FRA).

• Persons beginning benefits prior to FRA will have benefits permanently reduced:o By 5/9 of 1% per month for the

first 36 months=20% reduction.o Plus an additional reduction of

5/12 of 1% per month over the remaining months.

o FRA at 66=25% reduction at 62.• Persons beginning benefits after

FRA, until age 70, delayed retirement credit (DRC)=annual 8% benefit increase or monthly .666% benefit increase—FRA at 66 = 132% increase at 70.

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Benefit Adjustments Due to Age • Spousal benefit is 50% of

spouse’s PIA at full retirement age (FRA).

• Persons beginning benefits prior to FRA will have benefits permanently reduced:o By 25/36 of 1% per month for

the first 36 months=25%.o Plus an additional reduction of

5/12 of 1% per month over the remaining months (5% for 12 months).

o FRA at 66 = 35% of spouse’s PIA.

• Spousal benefit does not include DRC.

• Survivor benefit=100% with DRC. 13-9

Benefit Adjustment Due to Age

Age

Wage earner—retirement

benefit will be reduced to

Spouse—retirement

benefit will be reduced

to

62 75% 35%

63 80% 37.5%

64 86.7% 41.7%

65 93.3% 45.8%

66 100% 50%

70 132% 50%Source: Social Security Administration (www.socialsecurity.gov/retirement/1943.html)

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Social Security Benefit Review

Benefits will be paid to: Retirement Disability Death

Worker, under FRA Reduced PIA 100% of PIA N/A

Worker, FRA & over 100% of PIA Disability benefits cease; retirement

benefits begin

N/A

Spouse, age 60 or 61 No benefit No benefit100% of PIA,

reduced

Spouse, age 62 to FRA

50% of PIA, reduced100% of PIA,

reduced

Spouse, FRA or older 50% of PIA 100% of PIA

Spouse, any age, caring for child under age 16 or disabled

50% of PIA(subject to family maximum)

75% of PIA, reduced (worker

was currently insured)

Unmarried child under age 18 (19 if in high school) or any age if disabled

50% of PIA (subject to family maximum)

75% of PIA, reduced (worker

was currently insured)

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Benefit Reductions Due to Earnings

Age You will loseAmount (2014)

Prior to year of FRA

$1 in benefits for every

$2 of earnings above

$15,480

Year you reach FRA

$1 in benefits for every

$3 of earnings above

$41,400

After reaching FRA

No benefit reduction

Unlimited

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Retirement Earnings Test Example

At FRA, Social Security will review what you received, and perform an “Adjustment to the Reduction Factor” (ARF) and adjust your payments accordingly. (Landis)

Item Amount

Total Social Security benefits prior to FRA

$20,000

Earnings $41,080

Social Security earnings limit (2014)

$15,480

Excess earnings $25,600

Reduction in Social Security benefits (50% of excess earnings)

$12,800

Net Social Security benefits $ 7,200

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Income Tax on Social Security Benefits

Threshold income: joint filers

Threshold income: single filers

Percent of Social Security retirement benefit subject to

income tax

Less than $32,000 Less than $25,000 None

$32,000 to $44,000 $25,000 to $34,000 Up to 50%

Greater than $44,000


Up to 85%

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Thresholds are arrived at by using “provisional income.”

Main components of provisional income are:

• AGI

• Tax-exempt interest income (muni bonds)

• One-half of OASDI benefits

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Threshold income: joint filers

Threshold income: single filers

Percent of Social Security retirement benefit subject to

income tax

Less than $32,000 Less than $25,000 None

$32,000 to $44,000 $25,000 to $34,000 Up to 50%



Up to 85%

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Dowler Social Security

$335,183 difference in today’s dollars!

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Illustration of Impact on Retirement Success

Increase from 69% to 77% confidence if file and suspend! It’s a big deal!So why aren’t we using file and suspend and staying with age 70?

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Social Security Quick Calculator

Great to do with clients if you don’t have their benefit info!Information You Submitted

Date of birth: 6/15/1952

Current earnings: $117,000

Benefit in year 2014 dollars

Retirement Benefit Estimates

Retirement ageMonthly benefit amount 1

62 and 1 month in 2014 $1,72366 in 2018 $2,37170 in 2022 $3,2361 Assumes no future increases in prices or earnings.

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Selecting Optimum Social Security Benefit

Key Ages for Beginning Benefits

• Age 62—($1,723)o Do over—stop & refund within 12 monthso Voluntary suspension at FRAo Reduce AIMEo Benefit reduced due to age—75% with FRA

at 66o Benefit reduced due to earned incomeo Deemed filing for benefit based upon own

earnings & spouse’s earning with highest benefit paid

• FRA—66 ($2,371) o Receive 100% of PIAo No reduction due to earned incomeo New options—file & suspend and restricted

application

• Age 70 ($3,236)o Receive 8% annual DRCo Upon death, spouse (or ex-spouse) could

receive DRC

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Selecting Optimum Social Security Benefit

Compare benefits paid until age 80

• Benefit at 62 1 month = $1,723 = $372,168 at 80

• Benefit at 66 (FRA) = $2,371 = $398,328 at 80

• Benefit at 70 = $3,236 = $388,320 at 80

• 70------------------80--------------90+

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Life Expectancy

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Interactive Live Expectancy Calculators

• Living to 100 Life Expectancy Calculator: <https://www.livingto100.com/>

• Lifespan Calculator: <http://media.nmfn.com/tnetwork/lifespan/#0>

• Life Expectancy Calculator:<http://www.peterrussell.com/Odds/VirtualAge.php>

• How long will I live?: <http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html >

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Selecting Optimum Social Security Benefit for Single

• Income need may dictate when to start

• Short life expectancy, cumulative benefits leans toward starting as soon as possible

• Long life expectancy, cumulative benefits lean toward delaying start of benefits

• Meyer & Reichenstein also argue that delaying the benefit would increase the life of a portfolio worth $500,000 or $700,000

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Selecting Optimum Social Security Benefit for Single

Life of portfolio about the same with life expectancy around age 80

Lower level of wealth increases importance of choosing correct age to start Social Security

(Source: Reichenstein, W. & Meyer, W. (2011). Social Security Strategies.) 13-26

Selecting Optimum Social Security Benefit: Couple

Definition of spouse

On June 26, 2013, the Supreme Court ruled that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional. Therefore, Social Security no longer is prevented from recognizing same-sex marriages for purposes of determining entitlement to or eligibility for benefits. Social Security is now processing some retirement, surviving spouse and lump-sum death payment claims for same-sex couples, and paying benefits where they are due.

Source: SSA Web site—view FAQs—Same Sex Couples <https://faq.ssa.gov/link/portal/34011/34019/ArticleFolder/407/Same-Sex-Couples>

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• Both spouses can claim benefit based on their own earnings record

• One spouse with much higher PIA, other spouse can claim spousal benefit = 50%o Benefit reduced prior to

FRA (could start at 62)• 1st 36 months—25/36 of

1%/month (25% reduction)

• Additional months—5/12 of 1%/month (5% reduction next 12 months)

• If FRA at 66, benefit at 62 = 35% of spouse’s PIA

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John’s PIA = $1,000; Marsha’s options for spouse benefit:

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• To file spousal benefit, other spouse must have filed

• At FRAo higher PIA spouse could use file & suspend to allow

other spouse to claim spouse’s benefit, & then add 8%/year to personal benefit until age 70

o either spouse, but only one, could use “restricted application” taking spousal benefit to allow personal benefit to increase 8% year to age 70

• Death of first, survivor gets highest benefit including any DRC deceased had!

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Rule for Primary Wage Earner

Base choice on last-to-die life expectancy (Meyer & Reichenstein)

• Assume Ralph and Alice are same age and married. Ralph has a much higher PIA—even though his life expectancy may be short, he should base his benefit on Alice’s long life expectancy.

• Ralph takes benefit at age 70 = 132% of PIA (if PIA had been $2,000=$2,640 at 70).

• Assume Ralph used file & suspend at FRA so that Alice could begin spouse benefit at FRA = 50% of Ralph’s PIA = $2,000 x 50% = $1,000.

• Upon Ralph’s death in early 70s, Alice begins receiving benefit Ralph was receiving (i.e., $2,640 plus COLA adjustments).

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Rule for Lower Wage Earner

Base choice on first-to-die life expectancy (Meyer & Reichenstein)

• Assume George and Myrtle are similarly healthy as Ralph & Alice, but Myrtle is four years younger than George. George’s PIA = $2,000.

• At FRA (66) George files & suspends.

• Myrtle could then file for spouse benefit = 35% of $2,000 = $700.

• George waits until age 70 and begins receiving $2,640.

• Upon George’s death in early 70s, Myrtle would begin receiving $2,640 + COLA for the rest of her life.

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Divorced Spouse

• Requirementso Married at least 10 years and divorced at least two years

(waived if worker was eligible for benefits prior to divorce)o Both parties must be at least 62—age reduction applies to

benefits prior to FRAo Unmarried, even if ex-spouse has remarriedo Person can begin receiving benefits on ex-spouse’s

earnings even if the ex has not filedo Not subject to family maximum & does not limit

benefits for ex-spouse and/or the ex-spouse’s new family

• Married more than once (must be for at least 10 years) can choose which would pay the most

• Survivor benefit—as long as not remarried before age 60

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Just Like Social Security

• Understand employer plans• Explore distribution strategies• Become good at creating Excel analysis

with various alternatives (e.g., reverse mortgages, immediate annuities, integration of life insurance as alternative to joint and survivor pensions).

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Employer-Provided Plans: Details to Master

Rules of the plan before retirement:

• Vesting

• Matching

• Type of contributions – pre-tax and post-tax

• Investment options

• Use of company stock

• Restrictions and valuation of company stock

• Rules concerning concentrations and when it can be diversified

• Restrictions based on company position, hours, etc.

• Loan provisions

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Employer-Provided Plans: Details to Master

Rules of the plan in year preceding and year of retirement:•Loans at time of retirement and pre- or post-payment

•Distribution options

•Investment options after retirement

•Restrictions on changes after retirement

•Valuation of company stock dates and implications

•Impact of elections in year prior to retirement

•Important dates and deadlines

•Nonqualified plans need special attention to detail

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Next Class

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©2015, college for financial planning, all rights reserved. session 13 retirement & selecting...

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