Horsesmouth
Savvy Social
Security Planning:
What CPAs, Attorneys, and Other Professionals Need to Know About Social Security Claiming Strategies
Slide #1
Savvy Social Security Planning:
What CPAs, Attorneys, and Other Professionals Need to Know About
Social Security Claiming Strategies
Script
Welcome everyone, and thank you for coming. Today we are going to talk about Savvy Social Security Planning: what CPAs, attorneys, and other professionals need to know about Social Security claiming strategies. You may have noticed an emerging trend among your baby boomer clients. They are approaching the Social Security question in a whole new way. When their parents retired, they probably didn't think too much about Social Security. They just went down to their local office as soon as they turned 65, or maybe 62 if they retired early, and applied for benefits. They took their benefits for granted and didn't ask very many questions. But baby boomers are studying up on Social Security and asking far more questions than their parents did.
Slide #2
USA Today
The media is jumping on the baby boomer retirement boom. Most of the major publications regularly feature articles on Social Security claiming strategies. That's why it's important for us – the people who advise baby boomers approaching retirement – to stay current on the rules and the various strategies.
Slide #3
Baby boomers want to know:
• Will Social Security be there for me?
• How much can I expect to receive?
• When should I apply for Social Security?
• How can I maximize my benefits?
• Will Social Security be enough to live on in retirement?
Script
Baby boomers want to know: Will Social Security be there for me? They've been told for years that the system is "going broke." But now that it's almost their turn to collect, they want to know: is that really true?
They also want to know how much they can expect to receive. Before they can retire, they have to know how they are going to support themselves. That means doing a budget, lining up all their income sources and knowing how much they can expect to receive from each. Social Security, because it is a relatively known quantity, represents the foundation of that plan.
The big question they are asking is when they should apply for Social Security. Should they take early benefits even though it means their checks will be smaller? How can they be sure delaying benefits is the best move? And what about spousal and survivor benefits? We're going to shed some light on these issues today.
Something their parents probably never asked is this: how can I maximize my benefits? There is absolutely nothing wrong with people using the Social Security rules to their advantage. Today I'm going to show you five ways your clients can maximize their Social Security benefits simply by knowing the rules and making smart decisions.
And finally, boomers are wondering if Social Security will be enough to live on in retirement. They probably already know the answer to this. Social Security represents about 40 percent of the average retiree's total income – less for high-income clients. But by coordinating Social Security with the rest of their retirement income plan, they can pursue the universal dream of a comfortable, worry-free retirement.
Slide #4
Baby Boomer Social Security Question #1
Will Social Security be there for me?
Answer: Yes.
Script
OK. Let's get one of the biggest concerns out of the way first. Social Security benefits for baby boomers are not in jeopardy. Here's why.
Slide #5
OASDI Trust Fund still growing
Trust fund balance on 12/31/11: $2.677 trillion
2012 results
• Total income: $840 billion
• Total expenditures: $786 billion
• Net increase in assets: $ 54 billion
Trust fund balance on 12/31/11: $2.732 trillion
Script
Social Security was designed as a pay-as-you-go system. Payroll taxes from current workers go into a trust fund and are immediately paid out to current retirees. Because baby boomers have been in their peak earning years, the trust fund has accumulated more than needed for current benefits. Right now the trust fund holds about $2.7 trillion, which is invested in special-issue Treasury securities. As baby boomers start retiring, these trust fund assets will gradually be drawn down.
Slide #6
Long-term projections: without reform benefits fall to 75% in 2033
[Chart from OASDI Trustees Report]
Script
Over the next 75 years, costs will begin to exceed income. There are enough reserves that the system will be able to pay 100% of promised benefits until 2033. After that, if nothing is done to reform the system, income will be sufficient to cover just 75% of promised benefits.
Slide #7
What would it take to restore solvency to the system?
Reform proposals being studied
• Increase the maximum earnings subject to Social Security tax
(currently $113,700 in 2013)
• Raise the normal retirement age
(currently 66 for individuals born between 1943 and 1954; 67 for those born in 1960 or later)
• Lower benefits for future retirees
(escalate benefits based on increases in consumer prices rather than wages)
• Reduce cost-of-living adjustments (COLAs) for all retirees
Script
Although the Social Security system is not in imminent danger, most people agree that the earlier reforms are instituted, the less painful they will be on everyone. Here are just a few of the ideas that have been proposed:
One is to increase the maximum earnings subject to Social Security tax, currently $113,700.
Another reform proposal calls for raising the normal retirement age as life expectancies increase. Currently, full retirement age is 66 for people born between 1943 and 1954, and 67 for people born in 1960 or later.
Still another reform proposal would change the benefit formula so that future increases would happen at a slower pace. This would affect the benefits of future retirees.
And some are talking about changing the formula for cost-of-living adjustments. This could give retirees smaller benefit increases going forward, although the changes are expected to be minimal. You can learn more about Social Security reform proposals from the American Academy of Actuaries at their website: .
Slide #8
Baby Boomer Social Security question #2
How much can I expect to receive?
Answer depends on:
1) How much you earned over your working career
2) When you apply for benefits
Script
Now that we've addressed the solvency issue, let's look at how to answer baby boomer question number 2: how much can they expect to receive? The answer will depend on how much they earned over their working career, and at what age they apply for benefits.
Slide #9
How Social Security is calculated
• At age 62, each year’s earnings are tallied up and indexed for inflation
• Highest 35 years of earnings are averaged (AIME)
• AIME is divided by three “bend points” to determine your primary insurance amount (PIA). This is the amount you'll receive at full retirement age.
• Benefit is increased each year by cost-of-living adjustments (COLAs)
Script
First let's look at the formula for calculating Social Security. This background is important for understanding how earnings affect the amount of the benefit.
The general process goes like this. First Social Security looks at your annual earnings over your entire lifetime, indexes them for inflation, and picks the 35 highest years' earnings to include in the formula. The indexed earnings are totaled and divided by 420 to come up with the average indexed monthly earnings. If you don't have 35 years of earnings, the missing years will be filled in with zeroes.
Next, a formula is applied to your average indexed monthly earnings to determine your primary insurance amount. This is the amount you will receive when you reach full retirement age. As mentioned earlier, if you were born between 1943 and 1954, your full retirement age is 66.
Each year, annual cost-of-living adjustments are applied to your benefit to help you keep up with the cost of living.
Slide #10
Example of benefit formula
• Baby boomer age born in 1950
• Maximum Social Security earnings every year since age 22
• AIME = $8,238
• PIA formula:
$767 x .90 = $690.30
$3,857 x .32 = 1,234.24
$3,614x .15 = 542.10
Total $2,466.64
PIA = $2,466.60
Amount worker will receive at full retirement age
Script
Here is an example of how the benefit formula would work for a baby boomer who was born in 1950 and who earned the Social Security maximum every year since the age of 22. His average indexed monthly earnings would work out to be $8,238. In calculating his primary insurance amount, the first $767 would be multiplied by 90%. The amount between $767 and $4,624, or $3,857, would be multiplied by 32%. And the amount over $4,624, or $3,614, would be multiplied by 15%. These amounts would be totaled to come up with a PIA of $2,466.60. This is the amount the worker would receive at full retirement age.
Slide #11
Full Retirement Age (FRA)
Year of Birth Full Retirement Age
• 1943-54 66
• 1955 66 and 2 months
• 1956 66 and 4 months
• 1957 66 and 6 months
• 1958 66 and 8 months
• 1959 66 and 10 months
• 1960 and later 67
Script
Full retirement age is the age at which you can claim full, unreduced benefits. It used to be 65 for everyone. But now we are seeing a higher full retirement age being phased in as a result of the 1983 amendments. For everyone born between 1943 and 1954, full retirement age is 66. For everyone born in 1960 and later, full retirement age is 67. For those born in 1955 through 1959, full retirement age is 66 plus some number of months.
Slide #12
What if you apply for early benefits?
You will receive a percentage of your PIA
|Apply at age |If FRA = 66 |If FRA = 67 |
|62 |75.0% |70% |
|63 |80.0% |75% |
|64 |86.7% |80% |
|65 |93.3% |86.7% |
|66 |100% |93.3% |
|67 | |100% |
Script
Now, remember that I said that your primary insurance amount, or PIA, is the benefit you will receive at full retirement age. So what happens if you apply for Social Security before full retirement age? Well, your benefit will reduced. You will receive a percentage of your PIA depending on when you apply. If your full retirement age is 66 and you apply at age 62, you will receive 75% of your PIA. At 63, 80% and so on. If your full retirement age is 67 and you apply at 62, you will receive 70% of your PIA. These amounts are actually prorated monthly, so you can apply anytime after the age of 62 and your benefit will be reduced by the appropriate amount.
Slide #13
What if you apply after FRA?
You will earn delayed credits
|Apply at age |Benefit will be % of PIA if FRA = 66 |Benefit will be % of PIA if FRA = 67 |
|66 |100% |93.3% |
|67 |108% |100% |
|68 |116% |108% |
|69 |124% |116% |
|70 |132% |124% |
Script
If you apply for Social Security after full retirement age, you will earn delayed credits of 8% for each year you delay. So if your full retirement age is 66 and you apply at 67, your benefit will be 108% of your PIA. At 68 it will be 116%, and so on. After age 70 you can't earn any more delayed credits, so it doesn't pay to wait until after age 70 to apply for Social Security.
Slide #14
How to estimate your Social Security benefits
• Obtain your annual Social Security statement at mystatement
• Go to , click on "Estimate Your Retirement Benefits"
• Use one of the calculators on the SSA website (may be more accurate)
Script
There are several ways clients can get an estimate of their Social Security benefit.
One, they can refer to their annual Social Security statement. The annual Social Security statement used to be mailed to everyone once a year. Now it is only mailed to people over 60. However, everyone can access their Social Security statement online at mystatement. First you have to set up an account by answering a number of security questions.
The second way is to use the Retirement Estimator on the Social Security website. This calculator taps into your specific earnings history after you enter your personal identifying information including your birth date, Social Security number, and mother's maiden name.
The annual statement and the Retirement Estimator do not factor cost-of-living adjustments into future benefit estimates. This means the actual benefit will likely be higher than the amount shown. But our calculators do adjust for COLAs, so if a client knows his primary insurance amount, or PIA – this is the amount shown that he will get at full retirement age -- we can help clients project their future benefits.
You and your clients also might try one of the three calculators on the Social Security website at planners/benefitcalculators.htm. Feel free to browse around the site and play with the calculators.
Slide #15
Baby Boomer Social Security Question #3
When should I apply for benefits?
Answer depends on:
1. Health status
2. Life expectancy
3. Need for income
4. Whether or not you plan to work
5. Survivor needs
Script
The decision of when to apply for benefits is one of the most important and most complicated questions. It can literally make the difference of thousands of dollars over a client's lifetime.
Before we get into the number crunching, it's important to realize that the decision of when to apply for Social Security depends on many factors unique to the client's situation. These include health status, life expectancy, need for income, whether or not the client plans to work, and, survivor planning.
Slide #16
Screen shot of Breakeven Calculator
Script
We have available a suite of calculators that can help baby boomers decide when to claim Social Security benefits. One of the most basic ways to look at the question is to consider the breakeven age. Let's say we have a baby boomer with a primary insurance amount of $2,400. He can start his benefit at 62 and receive $1,800 a month, or he can wait until age 70 and receive a COLA-adjusted $3,951. The breakeven calculator figures out how old he will be when the total cumulative benefits from the later-claiming scenario catches up and begins to overtake cumulative benefits from the early-claiming scenario. Looking at the two columns of cumulative benefits, the higher number is in bold. So we see here that when he is 78, he will have receive more total benefits if he delays the start of benefits to age 70, rather than taking early benefits at 62.
Slide #17
Screen shot of Reinvest Breakeven Calculator
Script
So the next question clients ask is, "what if I invest my benefits rather than spend them? Doesn't it make sense to take early benefits and get those checks invested?" And here we have a Reinvest Breakeven Calculator that analyzes this question. In the example we show a conservative 3% return and the breakeven age is 80. If we were to raise the return assumption the breakeven age would go up. But then you always have to consider the investment risk profile compared to the relatively risk-free Social Security formula.
Slide #18
Screen shot of Retirement Spending Calculator
Script
And finally, clients who retire early often want to know whether they should start Social Security early and meet their spending needs from a combination of Social Security and IRA withdrawals or other personal sources, versus delaying Social Security and meeting all of their spending needs from personal sources until the Social Security kicks in at age 70. It may seem counterintuitive to clients, but you can see here that if they delay the start of Social Security, at some point their benefit will be enough higher that they will end up actually drawing less from personal resources than if they started benefits early. Again, the breakeven age is around 78.
I realize we are covering a lot of material very fast today. I will be glad to show you a more in-depth demonstration of these analytical tools at another time.
Slide #19
Baby Boomer Social Security Question #4
How can I maximize my benefits?
Answer:
1. Improve your earnings record
2. Delay the start of benefits
3. Take advantage of spousal and survivor benefits
4. Minimize taxes on benefits
5. Coordinate Social Security with overall retirement income plan
Script
The next big question baby boomers have, after they ask when to claim benefits, is how they can maximize their benefits. In a nutshell, here is the answer. improve your earnings record. Delay the start of benefits. Take advantage of spousal and survivor benefits. Minimize taxes on benefits. And coordinate Social Security with the overall retirement income plan. I'll cover each of these in the following slides.
Slide #20
Strategy #1 for maximizing your benefits
Improve your earnings record
Consider the following strategies:
• Work longer
• Earn more
Script
The first thing clients can do, while they still have time, is improve their earnings record. Often this means working longer and earning more. Your baby boomer clients may not want to hear this.
But if they do not have 35 years of earnings, or if they had a few years of low-earning years early in their career, working a few more years at a high income level can replace some of those zeroes or low-earning years with higher-earning years.
And clients should know that even after they start receiving Social Security, their earnings record will be updated every year. If there's an improvement, this can cause their benefit to be raised.
Slide #21
Impact of improved earnings
• Rebecca, age 60
• Earnings history:
• Average earnings 1973-79
• No earnings 1980-2000
• Maximum earnings 2001-2012
• What will her benefit be at age 66 if she …?
• Stops working now
• Keeps working until age 70
Script
Let's look at an example. Rebecca is a 60-year-old baby boomer woman. Typical of many boomer women, she worked at average earnings right out of college. Then she took time off to raise her children. When the youngest was in high school she went back to work. Most women re-entering the work force wouldn't earn the Social Security maximum right away, but let's say Rebecca went to work selling real estate or something that allowed for high earnings.
The question is, what will her benefit be at age 66 if she stops working now? What will her benefit be at 66 if she keeps working until age 70?
Slide #22
Impact of continued earnings
| |Age 66 benefit |Monthly income at 85 |Monthly income at 85 |Cumulative benefits at|Cumulative benefits at|
| | |(today’s dollars) |with 2.8% COLAs |85(today’s dollars) |85 with 2.8% COLAs |
|Stops working at 60 |$1,722 |$1,722 |$2,910 |$421,920 |$544,090 |
|Keeps working until age |$2,181 |$2,181 |$3,686 |$523,440 |$689,118 |
|66 | | | | | |
Script
And here we see that her age-66 benefit will be $1,722 if she stops working at 60, versus $2,181 if she keeps working until age 66. Now, keep in mind that these amounts do not take into account the actuarial reduction if she were to claim early benefits or the delayed credits if she were to take Social Security at 70. In reality, the disparity would probably be larger than you see here because if she stops working at 60, she might decide to apply for Social Security at 62. This would drop her age-66 benefit to $1,291. Conversely, if she keeps working until age 66, the additional earnings might allow her to delay her Social Security benefit to age 70, in which case the $2,181 would be 32% higher and give her nearly $2,900 a month.
But to compare apples to apples, we just want to see how the additional earnings will affect her Social Security benefit if she takes it at 66. And we see that she'll get $459 more a month if she works another six years. Future cost-of-living adjustments will increase the disparity. At age 85 her income will be $2,910 versus $3,686, a difference of $746 per month. Total benefits at age 85 will be $544,000 if she stops working at 60, versus $689,000 if she keeps working until age 66 – a difference of $145,000.
Slide #23
Strategy #2 for maximizing your benefits
Delay the start of benefits
Consider the following strategies:
• Apply for Social Security at age 70
• Receive spousal, divorced-spouse, or survivor benefits from 66-70
Script
Now we come to strategy #2 for maximizing benefits: delay the start of benefits.
By delaying benefits to age 70, a client can not only increase his benefit by 8% a year from age 66 to 70, he can also take advantage of spousal, divorced-spouse, and survivor benefits from age 66 to 70.
Slide #24
Impact of delayed benefits
• Michael, age 62, maximum earner
• PIA = $2,500
• What will his benefit be if he …?
• Starts Social Security at age 62
• Starts Social Security at age 70
Script
First let's look at the impact of delaying benefits. In this example Michael is 62 and has earned the Social Security maximum all his life. His primary insurance amount is $2,500. What will his benefit be if he starts Social Security age 62, and what will it be if he waits until age 70?
Slide #25
Impact of delaying benefits
|PIA = $2,500 |Starting benefit |Monthly income at 85* |Monthly income at 85* |Cumulative benefits at 85 |Cumulative benefits at 85 |
| | |(today’s dollars) |with 2.8% COLAs |(today’s dollars) |with 2.8% COLAs |
|Claims Social |$1,875 |$1,875 |$3,539 |$540,000 |$755,476 |
|Security at 62 | | | | | |
|Claims Social |$3,300 |$3,300 |$6,228 |$633,600 |$979,990 |
|Security at 70 | | | | | |
* If Michael dies before age 85, this will be the amount of his wife’s
survivor benefit
Script
Here we see that if he claims Social Security at 62, his benefit will be 75% of $2,500 or $1,875. If he waits until age 70, his benefit will be $3,300. If he's still alive at age 85, his benefit will be $6,228 if he had claimed at 70, versus $3,539 if he had claimed at 62. And what if he doesn't live to age 85? Well, his benefit will transfer over to his wife as her survivor benefit providing it's higher than her own retirement benefit. So if he dies anytime between the ages of 70 and 85, his wife at 85 will have nearly $2,700 more income every month if he delays the start of his benefit to age 70. If your high-earning clients aren't sure what to do about Social Security, just ask their wives. They will surely want their husbands to delay benefits to age 70.
Slide #26
Why delay benefits?
Bigger checks to start
|Age at which |% of PIA |Benefit without |Benefit with |
|benefits are |if FRA = 66 |COLAs |COLAs |
|claimed | | | |
|62 |75% |$1,875 |$1,875 |
|63 |80% |$2,000 |$2,056 |
|64 |87% |$2,167 |$2,290 |
|65 |93% |$2,333 |$2,535 |
|66 |100% |$2,500 |$2,792 |
|67 |108% |$2,700 |$3,100 |
|68 |116% |$2,900 |$3,423 |
|69 |124% |$3,100 |$3,761 |
|70 |132% |$3,300 |$4,116 |
Assumes PIA = $2,500 and 2.8% annual COLAs
Script
Why is it preferable to delay benefits? One reason is that you get bigger checks to start. If your PIA is $2,500 and you claim Social Security at 62, your permanent benefit, not including cost-of-living adjustments, will be $1,875 a month, versus $3,300 per month if you wait until age 70. If you add in cost-of-living adjustments the disparity in income widens all the more: $4,116 versus $1,875. In other words, if you're 62 now and your age-70 benefit computes out to be $3,300, by the time you actually get to age 70, your benefit will have grown to $4,116, assuming 2.8% cost-of-living adjustments.
Slide #27
Why delay benefits?
More income later on
|Benefit at age |If claim at 62 |If claim at 70 |
|70 |$2,339 |$4,116 |
|75 |$2,685 |$4,725 |
|80 |$3,082 |$5,425 |
|85 |$3,539 |$6,228 |
|90 |$4,063 |$7,150 |
|95 |$4,664 |$8,209 |
|100 |$5,355 |$9,424 |
Assumes PIA at 66 = $2,500 and 2.8% annual COLAs
Script
Now, a lot of people look at their Social Security statements and don't see a lot of difference between the age-62 amount and the age-66 or age-70 amount. But let's look at the relative income many years down the road, assuming cost-of-living adjustments compound at 2.8%. By age 90, if the client is still alive – or if his surviving spouse is still alive – his monthly income will be $4,063 if he claimed at 62, versus $7,150 if he claimed at 70. These COLA-adjusted amounts may seem unrealistically high, but they won't seem high when a loaf of bread costs $10. I believe financial people tend to place too big an emphasis on the breakeven age, when really, the monthly income is what will matter most when your clients or their widows live to 90 or 95 or 100.
Slide #28
Strategy #3 for maximizing your benefits
Take advantage of spousal and survivor benefits
Consider the following strategies:
• Married couples determine which spouse gets the spousal benefit
• Divorced spouses claim on former spouse’s record
• Widow(er)s coordinate survivor and retirement benefits
Script
Strategy number 3 for maximizing benefits is to take advantage of spousal and survivor benefits.
If you have two high-earning spouses and they both delay their benefits to age 70, there's an opportunity for one spouse to receive a spousal benefit off the other's record from age 66 to 70. Since only one spouse can claim the spousal benefit, the strategy here will be for the couple to decide which spouse should claim the spousal benefit. I'll talk more about this in a minute.
Divorced spouses, if they were married more than 10 years, can claim a spousal benefit off the ex-spouse's record.
And widows and widowers who are entitled to both a survivor benefit based on their deceased spouse's record as well as a retirement benefit based on their own record can coordinate benefits to take advantage of each benefit at different times.
Slide #29
Spousal Benefits
Traditional
Spousal benefit = 50% of the primary worker's PIA if started at full retirement age (35% if started at 62)
Example:
• John’s PIA is $2,000
• Jane does not qualify for Social Security on her own work record
• If Jane applies at FRA, her spousal benefit will be $1,000
(50% of John’s PIA)
• If she applies at 62, her spousal benefit will be $700 (35%)
• (John must have filed for benefits to entitle Jane to a spousal benefit)
Script
First let's look at spousal benefits in the traditional sense. Spousal benefits were designed for a non-working spouse to be able to collect some benefits off the working spouse's record. The amount is 50% of the working spouse's PIA if she starts the spousal benefit at her full retirement age. Or 35% if she starts at 62. So let's say John's PIA is $2,000. Jane doesn't qualify for Social Security on her own record. If Jane applies for her spousal benefit at her full retirement age, her spousal benefit will be $1,000, or 50% of John's PIA. If she applies at 62. Her spousal benefit will be $700, or 35%.
Note that John must have filed for his retirement benefit in order for Jane to be entitled to a spousal benefit. That's just a rule.
Slide #30
Spousal Benefits
Both Spouses Worked
Either spouse can claim spousal benefit off the other’s work record
Example:
• Bob’s PIA is $2,400. Betty’s PIA is $1,400
• At his FRA Bob can claim a spousal benefit off Betty’s work record and receive $700, OR
• At her FRA Betty can claim a spousal benefit off Bob’s work record and receive $1,200
• Both allow own retirement benefit to build delayed credits to 70
Script
Today we don't find very many couples where one spouse didn't work at all. In some cases a spouse might not qualify for Social Security because she worked in a job that didn't pay into Social Security. But then she becomes subject to the Government Pension Offset, which we don't have time to go into today.
But in most cases you'll see couples where one spouse was a high earner and the other spouse was a medium or low earner; sometimes you'll see two high earners. In these cases the couple can take advantage of spousal benefits.
Let's say Bob's PIA is $2,400. Betty's PIA is $1,400. When Bob turns full retirement age, he can claim a spousal benefit off Betty's work record and receive 50% of her PIA or $700. Alternatively, Betty can claim a spousal benefit off Bob's work record and receive $1,200. Both allow their own retirement benefit to build delayed credits to age 70. In a minute I'll show you how we determine which spouse should claim the spousal benefit.
Slide #31
“File and suspend”
At FRA, higher-earning spouse applies for his benefit and asks that it be suspended
Lower-earning spouse files for spousal benefit
Higher-earning spouse claims benefit at 70
Example:
• Bob and Barbara are 66
• Bob’s PIA is $2,000; Barbara does not qualify for Social Security
• Bob wants to delay his benefit to age 70. Barbara wants to file for her spousal benefit now
• Bob “files and suspends” at 66. This entitles Barbara to her spousal benefit while Bob’s benefit continues to earn delayed credits
Caution: “File and suspend” may not be done before FRA
Script
Now I'm going to talk about two strategies that your clients probably will not know about, unless they read the personal finance publications. These originally came out of the Center for Retirement Research at Boston College. The first is called "file and suspend." It is also called "claim and suspend."
As I mentioned earlier, in order for a low-earning spouse to receive a spousal benefit, the high-earning spouse must have filed for benefits. But often the high-earning spouse wants to delay his benefit to age 70 in order to maximize income to the couple while both are alive, and income to the surviving spouse after one spouse dies. So as soon as the high-earning spouse turns full retirement age, he files for his benefit and then immediately suspends it. This allows his wife to start her spousal benefit while his benefit earns 8% annual delayed credits.
Here's how it works. Bob and Barbara are married. Both are 66. Bob's PIA is $2,000. Barbara's PIA is $800, which is less than her spousal benefit of $1,000. If Bob waits until age 70 to apply, Barbara would have to wait four years to start her spousal benefit. So Bob files and suspends at 66. This entitles Barbara to her spousal benefit, while Bob's own benefit continues to earn delayed credits.
Please note that this does not work if Bob is under full retirement age. It is only after full retirement age that a person may voluntarily suspend their benefit in order to earn delayed credits. The lower-earning spouse may, of course, apply for her spousal benefit anytime after the age of 62. If she applies before full retirement age, she will receive a lower amount. In order to receive the full 50% of her husband's PIA, she must apply at full retirement age.
Slide #32
“Claim now, claim more later”
At FRA, higher-earning spouse restricts his application to his spousal benefit (lower-earning spouse must have filed for benefits on her record)
At 70, higher-earning spouse switches to his own maximum benefit
Example:
• Mike and Mary are 66
• Mike’s PIA is $2,000; Mary’s PIA is $800
• Mary files for her benefit at 66
• Mike files for his spousal benefit at the same time and begins collecting $400 (half of Mary’s PIA)
• When Mike turns 70, he switches to his maximum benefit of $2,640. Mary adds on her $200 spousal benefit (total $1,000)
Caution: Higher-earning spouse may not do this before FRA
• Only one spouse may do this (both spouses can’t receive spousal benefits on each other’s record at the same time)
• Spousal planning analysis can determine which of the various spousal strategies will work best for your situation
Script
Here's another strategy that has come out of the Center for Retirement Research at Boston College. It's called "claim now, claim more later," and it has been blessed by the Social Security Administration, even if all the local Social Security personnel are not quite up to speed on it.
Here's how it works. At full retirement age, the higher-earning spouse restricts his application to his spousal benefit. His spouse must already be receiving benefits on her record. When he turns 70, he files for his own benefit, which will include the maximum delayed credits.
For example, let's say Mike and Mary are 66. Mike's PIA is $2,000; Mary's PIA is $800. Mary files for her benefit at 66. Mike files for his spousal benefit at the same time and begins collecting $400 (half of Mary's PIA). When Mike turns 70, he switches to his own higher benefit. The result is that Mike receives an additional $400 per month from age 66 to 70.
It is important to follow the rules carefully, or this strategy could backfire. First, you cannot do it before full retirement age. If Mike walks into his Social Security office before he turns 66, they will compare his own benefit to his spousal benefit and give him the higher of the two. He will be given his own benefit, and it will be reduced for early claiming. It is only after full retirement age that he can "restrict" his application to his spousal benefit. And that's the language he should use. Social Security personnel are accustomed to giving people the highest benefit they are entitled to, but if he restricts his application to his spousal benefit, his own higher benefit will not be part of the application. That way, it can continue to earn delayed credits until he turns 70.
Another important note is that both spouses cannot do this. The explanation is complicated, but suffice it to say that if one spouse is claiming spousal benefits the other spouse must be receiving benefits on his or her own record.
And finally, spousal strategies may vary depending on the ages and PIAs of the respective spouses. We have a special Spousal Planning Calculator that will help us analyze the possible strategies for your clients' situation and come up with a plan that fits their circumstances.
Slide #33
Spousal Planning Analysis
[screen shot of Spousal Planning Calculator]
Script
Here is a screen shot of the calculator we use to help couples determine when they should take their own retirement benefit and which spouse should claim the spousal benefit.
In this example Bob is 62 and Betty is 60. Bob's PIA is $2,400. Betty's PIA is $1,400. The calculator lets us design different scenarios. So for this first scenario let's say Bob files for his benefit at age 70. The calculator fills in the year 2021 and the amount he'll receive at that time. We also have Betty file for her benefit at age 70, and again the calculator fills in the year and amount. For this scenario let's have Betty claim the spousal benefit. So we put 66 as the "age at which Betty will claim benefits on Bob's work record." The calculator fills in the year and the amount. Down below, we enter 68 as the age at which Bob must file and suspend. Remember, Betty can't claim a spousal benefit until Bob has filed for his benefit. Since he wants to delay his benefit to 70, he will suspend his benefit immediately after filing. He must be over full retirement age to do this. We enter 2.8% as the cost-of-living adjustment based on the OASDI trustees' projections. And we'll enter 85 as the life expectancy for Bob and 95 as the life expectancy for Betty.
Slide #34
Spousal Planning Analysis
Social Security Income Stream
[screen shot of income stream]
Script
Here we see the Social Security income stream for this scenario. By the time Betty starts her spousal benefit at 66, six years worth of COLAs will have increased it to $1,416. So she receives that amount from 66 to 69, then at age 70 starts her own benefit which has been increased by delayed credits and COLAs. Bob's benefit starts at age 70 and increases by the annual COLAs.
As you can see, the columns show the monthly and annual benefit for each spouse as well as their combined benefit and the cumulative total.
Slide #35
Spousal Planning Analysis
Survivor Benefit in 2037
[screen shot of income stream]
Script
The thing to notice about this slide is what happens after Bob dies at age 85. His benefit will go to zero, and Betty's benefit will jump from $3,488 to $6,146. There are two key points here. One is that Betty takes on Bob's benefit because it is higher than hers. So now it becomes clear that when the high-earning spouse delays his benefit, it results in higher income for the surviving spouse. The other key point is that their combined income will drop, because the lower benefit stops. So now Betty will have to live on about two thirds of the income they had as a couple.
Slide #36
Scenario summary
[screen shot of scenario summary page]
Script
Here is the scenario summary page. We only showed you one scenario here, but typically we will design several scenarios so the couple can see what the impact on their benefits would be if they claimed Social Security at different ages. This page shows a recap of the scenarios and shows the total income and cumulative benefits at five-year intervals, with the highest number for each scenario in bold. This is how we show clients the long-term effect of their Social Security claiming decisions and help them choose the optimal strategy.
Slide #37
Divorced-spouse benefits
Same as spousal benefits if:
• Marriage lasted 10 years or more
• Person receiving divorced spouse benefit is currently unmarried
• The ex-spouse is entitled to Social Security retirement or disability benefits and is at least age 62
Script
Now let's move on to divorced-spouse benefits. A woman can receive Social Security based on her ex-husband's work record, providing the marriage lasted at least 10 years and she is currently unmarried. And vice versa. Men can receive divorced-spouse benefits too. If the divorce occurred more than two years ago, the ex-spouse doesn't need to have filed for his benefit. However, he must be at least 62.
Slide #38
Rules for divorced-spouse benefits
• More than one ex-spouse can receive benefits on the same worker's record
• Benefits paid to one ex-spouse do not affect those paid to the worker, the current spouse, or other ex-spouses
• The worker will not be notified that the ex-spouse has applied for benefits
• Divorced-spouse benefits stop upon remarriage of spouse collecting benefits (not upon remarriage of primary worker spouse)
Script
Here are the rules for divorced-spouse benefits. More than one ex-spouse can receive benefits on the same worker's record. So if your ex-husband client has remarried a couple of times, all three ex-wives can claim divorced-spouse benefits, as long as the marriages lasted at least 10 years.
The benefits paid to one ex-spouse do not affect those paid to the worker, the current spouse, or the other ex-spouses.
The worker will not be notified that the ex-spouse has applied for benefits. So your divorced clients need not worry that their long-lost ex-husbands will find out that they applied for benefits based on his work record. They do not need to know his whereabouts, only enough identifying information that the Social Security people can look up his records. They'll also need to provide documentation showing the dates of the marriage and divorce.
If a person receiving divorced-spouse benefits remarries, the divorced-spouse benefit will stop. However, she may then be eligible for spousal benefits based on the new husband's work record. Or she can switch to her own benefit, of course, if she also qualifies for Social Security.
Slide #39
Survivor benefits
• Survivor benefit will depend on:
• The age at which the deceased spouse originally claimed his benefit (the "original benefit")
• If he claimed before FRA, survivor benefit will be limited to the higher of the deceased spouse’s actual benefit or 82.5% of his PIA
• If he claimed after FRA, the survivor benefit will include delayed credits
• The age at which the widow claims the survivor benefit (the "actual benefit")
• If she claims before her FRA, her survivor benefit will be a fraction of the original benefit (e.g., 71.5% if claimed at 60)
• If she claims at her FRA or later, her survivor benefit will equal 100% of the original benefit
Script
Survivor benefits can be somewhat complicated, but it's important to understand how they work because decisions clients make now can influence the amount of the survivor benefit later on.
There are two factors that influence the amount of the survivor benefit. The first factor is the age at which the deceased spouse originally claimed his own retirement benefit. If he originally applied for Social Security before full retirement age, the survivor benefit will be limited to his actual benefit or 82.5% of his PIA, whichever is higher. If he applied at his full retirement age, the survivor benefit will equal 100% of his PIA. If he applied at 70, the survivor benefit will include delayed credits. We'll see an example in a moment.
The second factor influencing the amount of the survivor benefit is the age at which the widow claims the survivor benefit. If she claims it at 60, or 50 if disabled, the survivor benefit will equal 71.5% of the original benefit amount. If she claims it at her full retirement age or later, her survivor benefit will equal 100% of the original amount. She may, of course, apply for it anytime between the ages of 60 and 70 and the reduction will be prorated.
Slide #40
Survivor benefits
If spouse dies while both are receiving benefits, widow(er) may switch to the higher benefit
Example:
• Joe and Julie are married. Both are over full retirement age.
• Joe's benefit is $2,000, Julie's benefit is $1,200.
• Joe dies.
• Julie notifies Social Security and her $1,200 benefit is automatically replaced with her $2,000 survivor benefit.
Script
If both spouses are receiving benefits and one spouse dies, the other spouse may switch to the higher benefit.
Here's a hypothetical example. Let's say Joe and Julie are married. Both are over full retirement age and currently receiving Social Security benefits. Joe's benefit is $2,000 and Julie's benefit is $1,200. If Joe dies, Julie's $1,200 benefit will stop and she will start receiving $2,000.
Slide #41
Survivor benefits. Example of Early claiming
• Joe and Julie are married.
• Joe’s PIA is $2,000.
• Joe files for Social Security at 62; his benefit is 75% of $2,000, or $1,500.
• Joe dies.
• Julie’s survivor benefit will be 82.5% of $2,000, or $1,650.
• If Julie claims her survivor benefit at age 60, her benefit will be 71.5% of $1,650, or $1,180.
• If Julie claims her survivor benefit at 66 or later, her benefit will be 100% of $1,650, or $1,650.
Script
Here is a hypothetical example of early claiming. Let's say Joe and Julie are married. Joe's primary insurance amount is $2,000. If Joe files for retirement benefits at 62, his benefit will be 75% of the $2,000, or $1,500. If Joe suddenly dies, Julie's survivor benefit will be 82.5% of the $2,000 primary insurance amount, or $1,650. Normally the survivor benefit would equal the amount the deceased spouse is receiving at the time of his death, but there's a special formula that sets a floor at 82.5% of his PIA if he's receiving less than that.
Now, Julie will receive that $1,650 only if she files for the survivor benefit at her full retirement age or later. If she files for it as early as age 60, her survivor benefit will be 71.5% of the $1,650, or $1,180. So the amount that the survivor actually receives depends both on when the deceased spouse filed for benefits and when the surviving spouse filed for the survivor benefit.
Slide #42
Survivor benefits. Example of delayed claiming
• Joe and Julie are married.
• Joe’s PIA is $2,000.
• Joe files for Social Security at 70; his benefit is 132% of $2,000, or $2,640.
• Joe dies.
• Julie’s survivor benefit will be equal to Joe's benefit of $2,640.
• If Julie claims her survivor benefit at age 60, her benefit will be 71.5% of $2,640, or $1,887.
• If Julie claims her survivor benefit at 66 or later, her benefit will be 100% of $2,640, or $2,640.
Script
Now let's see what would happen if the deceased spouse had delayed the start of Social Security. In this hypothetical example Joe files for Social Security at age 70. His benefit is 132% of the $2,000 PIA, for a total benefit of $2,640. Now if he dies, Julie's survivor benefit will be equal to Joe's benefit of $2,640. If she claims her survivor benefit at age 60, her benefit will be 71.5% of the $2,640, or $1,887. If she claims it at 66 or later, the survivor benefit will be 100% of the $2,640, or $2,640.
Survivor planning is a very important part of Savvy Social Security planning for married couples. It can really influence the surviving spouse's standard of living later on in life based on decisions they make now.
Slide #43
Rules for survivor benefits
• Couple must have been married at least 9 months at date of death (except in case of accident).
• Survivor must be at least 60 for reduced benefit (50 if disabled), or FRA for full benefit.
• Survivor benefit not available if widow(er) remarries before age 60, unless that marriage ends.
• Divorced-spouse survivor benefit available if the marriage lasted at least 10 years.
Script
Here are some of the rules for survivor benefits.
In order for the surviving spouse to receive survivor benefits, the marriage must have lasted at least 9 months, except in case of accident.
To start benefits, the survivor must be at least 60, or 50 if disabled. However, if the widow or widower applies before full retirement age, the benefit will be reduced, as it is for regular retirement benefits. Some of the same principles that go into deciding when to apply for regular retirement benefits also apply to survivor benefits.
If you remarry before age 60, you will not be able to receive a survivor benefit based on your previous spouse's earnings record, unless your remarriage ends.
Divorced-spouse survivor benefits are available if the marriage lasted at least 10 years.
Slide #44
Strategy #4 for maximizing your benefits
Minimize Taxes on benefits
Consider the following strategies:
• Draw down IRAs before 70-1/2 to reduce RMDs
• Convert IRAs to Roth
• Shift to tax-advantaged investments (but not municipal bonds)
Script
Strategy number 4 for maximizing Social Security is to minimize taxes on benefits. As you know, the income thresholds for the taxation of Social Security benefits are not adjusted for inflation. This means more and more people are paying taxes on 50% or 85% of their Social Security benefits. I'm afraid this is becoming a losing battle, but it doesn't mean we shouldn't think about ways to reduce clients' taxable income after they go onto Social Security. Basically, it requires planning ahead, because one of the biggest sources of taxable income for high-net-worth clients over age 70 is the required minimum distributions from their IRAs. So we might recommend drawing down IRAs before 70-1/2 or converting traditional IRAs to Roths. For taxable accounts we look for tax-advantaged investments that might defer income or convert ordinary income to capital gains. Municipal bonds won't work, though, because tax-exempt interest is included in the formula for determining the taxation of Social Security benefits. But you're the expert on taxes, so we'll leave the tax discussion there for now.
Slide #45
Strategy #5 for maximizing your benefits
Coordinate Social Security with overall retirement income plan
Consider:
• Retirement accounts
• Investment portfolio
• Earnings from work
Script
Strategy number 5 for maximizing benefits is to coordinate Social Security with the overall retirement income plan. Social Security must be considered in the context of a client's other retirement resources, including pensions, IRAs and 401(k)s, the required minimum distributions they'll be taking at age 70-1/2, the overall investment portfolio, and the client's plans for working in retirement. All of these resources should be coordinated to give clients the income they need for the rest of their life.
Slide #46
Baby Boomer Social Security Question #5
Will Social Security be enough to
live on in retirement?
Answer: Probably not.
Script
And this brings us to the last of the five questions baby boomers are asking. Will Social Security be enough to live on in retirement? The answer is: probably not. This is why it is so important for clients' advisors to work together to coordinate taxes, investments, estate planning, insurance, and all the other elements of the financial plan. For many baby boomers, Social Security is the starting point. Once they understand how much Social Security they can count on – and once they realize that it won't be enough – they will be more open to the services that we all offer, whether it's tax planning, financial planning, or estate planning.
Slide #47
You have questions.
We can help.
• When should I apply for Social Security?
• What if I want to keep working?
• What if I've already applied?
• How much will my benefit be?
• How can I coordinate spousal benefits?
• What's the best long-term strategy for my situation?
• What do I do next?
Script
Once clients learn a little bit about Social Security and retirement income planning, the floodgates open with more questions. When should I apply? What if I want to keep working? What if I've already applied and now regret the decision? How much will my benefit be? How can I coordinate spousal benefits? What's the best long-term strategy for my situation? What do I do next? As you encounter these questions from your own clients, we would be happy to assist you in answering them.
Slide #48
Social Security is too important for guesswork.
Let us help you protect your nest egg and maximize
your income in retirement.
Script
Social Security really is too important for guesswork. Let us help you protect your nest egg and maximize your income in retirement.
And that concludes our presentation today. Thank you for your attention.
Are there any questions?
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