HS 354 Sources of Retirement Income

Approximately how much will a couple with a PIA of $1,600 cumulative benefit from Social Security receive?

$1.1 million dollars. Planners should run the numbers for their clients. If a client were to have negative returns in the years just before and at the beginning of retirement (market risk) this could impact their income in later years. Since this is guaranteed income, market risk, sequence of returns risk isn't a problem.

What are the advantages of delaying Social Security?

* Insurance protection * Spousal death benefit * Reverse tax torpedo

Why should the claiming age decision be framed as an insurance decision?

1) Clients should focus on the later year because a newly retired couple could go back to work. 2) One of the most important ways that the client can look at the claiming age decision is to focus on the replacement ratio that Social Security will provide. 3) Claiming at age 70 provides more of the needed replacement ratio. One way to look at it is to focus on Social Security providing the basic expense for a client. A deferred claiming date will allow Social Security to pay more of these expenses. $750 @ 62 vs $1,320 @ 70. 4) Another way to envision the benefit of delayed claiming is to look at the percent increase provided by delaying. a) Age 62 = 100% b) Age 66 = 133% c) Age 70 = 176% (a 76% increase!) 5) COLAs can't be duplicated in the private sector.

What are some of the examples of the 3rd step, evaluating the client's specific situation?

1) Continued employment 2) Marital status 3) Wealth/net worth/sources of income outside Social Security 4) Personal risk tolerance/degree of investment savvy 5) Financial reliance on Social Security 6) Availability of other Social Security benefits such as disability benefits or survivor benefits 7) Ability to boost Social Security income by working past age 62 8) Age disparity between spouses 9) Earnings disparity between spouses 10) Work in noncovered employment 11) Divorce 12) Federal income taxation of benefits

What are some reasons for an early claiming age?

1) Loss of liquidity because in most cases the retiree will need to consume retirement assets early. 2) The desire of leaving assets to heirs is jeopardized because in most cases the retiree will need to consume retirement assets early. 3) The rate of return net of taxes and expenses that could be earned on invested retirement savings may outperform the higher Social Security annuity. Planners are obligated to consider the superior investment performance on retirement investments may offset any mortality gain experienced by a long-lived client and vice versa.

In order to determine the claiming age you may need to change a client's perception. What are the two faulty perceptions?

1) The claiming age and the retirement age are seen as one in the same, but in fact they can be different. 2) Clients should avoid losing out on payments, but in fact losing out on payments is secondary to running out of money.

Why is the break even age viewpoint flawed?

1) The fundamental concern should be planning for an adequate retirement income. The break even method ignores how the benefit age claiming question fits into the bigger picture of retirement income security. 2) Researcher have found that choosing a different discount rate may change the results of the analysis. 3) This method incorrectly assumes the insurance value of delayed Social Security is zero. 4) Induces people to think about the problem wrong because research shows that only if life expectancy is long or short does the commencement decision significantly affect wealth.

What are some reasons for delayed Social Security?

1) The snowballing effect on benefits because of both actuarial increases and the compounding COLA increases. 2) There's a reverse tax torpedo because only half of benefits are included in the calculation of provisional income. 3) Some investment risk has been transferred because you're replacing income from a 401(k) with Social Security annuity income. 4) There is less money being paid to investment expenses since assets are consumed earlier in a trade-off for higher Social Security benefits.

What are the key components of a Social Security education program?

1) Use a comprehensive planning approach to determine adequate retirement income. 2) Focus on the desired income replacement ratio. Low and middle income earners will need to rely more on SS. 3) Care for the surviving spouse, claim to early and the surviving spouse has lower income for the rest of their life. 4) Understand the SS annuity advantages. It has CPI increases. 5) Prepare to live long and prosper. 6) Avoid irrational thinking. Some think it will go away.

What is the PIA formula?

1.) 90% of the first $816 of AIME + 32% of the AIME over $816 - $4,917 + 15% of AIME > $4,917 (2014). 2.) The PIA is calculate at 62 regardless of when the benefit is taken.

At full retirement age what can an eligible worker receive?

100% of their primary insurance amount (PIA).

How many people are subject to the tax torpedo?

16% pay taxes on 85% of their benefit, they are fully phased in. 16% pay taxes on up to 50% of their benefit, they are partially phased in and are the group most vulnerable to the tax torpedo.

How many years of earnings are calculated in the PIA formula?

35 years. Replacing 0 years with salary will increase the amount. You should always encourage replacing low earning or 0 years.

How are state, local, and federal employees impacted by Social Security benefits?

5 million or 25% of state and local government employess are not covered by Social Security. Federal employees hired after 1983 are covered, those before are not.

What is the earliest claiming age for Social Security?

62. A person claiming benefits at 62 will receive 75% of their PIA. If they wait till 70, they will receive 132% of their PIA.

In how many cases does the man predecease the wife?

75%

What are the Social Security claiming rules for someone born on the 1st or 2nd day of the month?

A person is deemed to attain their age as of the day prior to their birthday. Most people can't claim benefits at exact age 62 unless they were born on the 2nd day of the month they have to wait until 62 and 1 month. A person born on the 2nd day of the month can receive benefits at exact age 62. A person born in the 1st day of the month can receive an extra month's benefit.

What is an example of the spousal reduction?

A spouse with FRA of 67 claims at 62, 60 months early. They will have a 35% reduction. (25/36 x 35 = 25) + (5/12 x 24 = 10) 25 + 10 = 35% If the working spouse's PIA is $2,000 the spouse will receive $1,000 per month at 67. If they claim at 62: $1,000 x 35% = $650

What is an example of windfall-elimination?

A worker who worked for a noncovered state agency and then the private sector long enough to become eligible for Social Security will look poor because of how benefits are calculated. (The earnings from the noncovered employment aren't counted).

What do the source of income statistics tell us?

A) For 1 in 5 it's their only source of income. B) For 1 in 3 it's 90% of their income. C) For 2 in 3 it's 50% of their income. D) These are not expected to change.

What are the additional Social Security benefits paid once an eligible worker claims benefits?

A. A nonworking spouse age 62 can claim benefits if there is a benefit based on their own work history. Can get the greater of the worker's or spousal benefit. B. Spouse caring for a child under 16 can receive full benefits regardless of the spouse's age. C. Benefits can also be paid to dependent, unmarried children under 18 (under 20 if in secondary school). D. Benefits to children 18 or older who were disabled before age 22. E. There is a family maximum for 2 benefit families. F. Divorced spousal benefit is paid to an unmarried divorced spouse as long as the marriage lasted 10 years, this doesn't affect the total family benefit.

What is the amount of Social Security retirement benefits?

A. Discriminates in favor of lower paid workers. B. The amount of income SS replaces is called the SS replacement ratio. C. $18.8k in 2013 (and comparable amounts in previous years) would receive about $10.4k which replaces about 55% of earnings. A worker in the maximum taxable amount ($117k in 2014) would get benefits to replace about 25% of prior earnings. D. This means affluent clients need to save more. No SS benefits for earnings over the base.

What are the 2 Social Security trust funds and Medicare fund?

A. Old-age and survivors insurance B. Disability insurance C. Medicare Part A D. Medicare Part B

How many people receive Social Security benefits?

A. One of six Americans receives benefits from the system. B. Approximately 96 percent of working-age Americans are covered by the system. C. Who receives Social Security? (1) 34.7 million retired workers (2) 8.2 million disabled workers (3) 4.4 million widows and widowers (4) 2.5 million spouses (5) 1 million adults disabled since childhood (6) 3.4 million children

How is Social Security funded?

A. There is a 6.2% payroll tax (also known as FICA) up to the taxable wage base. Both the employer and employee pay this tax. B. There is a 1.45% FICA tax on all income. C. There is a 12.4% Social Security self-employment tax (aka SECA tax) up to the taxable wage base; half of the tax is deductible from income. 2% lower in 2012. D. There is a 2.9% SECA tax on all income.

What is the eligibility for worker's retirement benefits?

A. Worker must earn 40 coverage credits to earn the basic retirement benefit. B. Must earn a minimum of $4,800 (2014) and earn 4 quarters of coverage. C. That means only 10 years of substantial employment to qualify. D. Benefit formula is applied to what is referred to a average indexed earnings looking at 35 highest years of wage history. E. If fewer than 35 years of work, 0's go into the calculation of the formula. A person would benefit from additional years of work. F. Full benefits begin at full retirement age, but reduced benefits can begin at 62 and deferral credits can be earned till 70.

Deemed filing benefit

An application for a spousal benefit is deemed under the law to be an application for a worker benefit, unless the applicant has reached FRA. Claiming prior to FRA is automatically an application for all eligible benefits.

Caveat about the claiming age decision.

Any decision model must anticipate that changes may affect clients and issue a caveat that the claiming age strategy is contingent on the status quo and any alteration of the status quo may have an impact on the validity of the decision.

What is the reverse tax torpedo?

As a planner you want to help keep your clients below the taxable thresholds. You can minimize the years a client is exposed to it by trading retirement asset income (401(k)) for Social Security. By taking the 401(k) income and delaying Social Security it raises the Social Security amount and may lower the tax on Social Security because only half of Social Security counts towards provisional income.

What are the spousal replacement ratios for delaying Social Security benefits?

At age 62, over 30% replacement ration. At age 70, over 60% replacement ratio.

How are Social Security earnings capped?

At the taxable wage base. Someone earns $150k. Their benefit is calculated at the cap of $113,700.

How are Social Security benefits taxed?

Benefits are taxed if a persons provisional income reached certain thresholds provide in Code Sec. 86. First you need to calculate the provisional income: AGI + 1/2 Social Security + other nontaxable interest. 0% Single $25k, Married Filing Jointly $32k Up to 50% Single $34k, Married Filing Jointly $44k Up to 85% Single > $34k Married Filing Jointly > $44k A few dollars over a threshold will not cause the amount to be fully taxed. The closer to the floor the less is taxed. The closer to the ceiling the more is taxed. Municiple bonds aren't tax advantaged in this case. Roth IRA distributions are not included in the calculation.

What are the assumptions used in the net present value break even age calculation?

Discount rate, personal life expectancy, the earnings test, taxation of social security, spousal survivor benefit opportunity, COLAs, expenses

What is the tax torpedo?

Each dollar coming out of a 401(k) is taxed and it also results in more Social Security to be taxed. If income is kept down to a threshold level the tax torpedo won't apply. While the Social Security tax is phasing in, every dollar of non-Roth income has a higher marginal rate of return. In other words as income increases, the benefits subject to tax increases.

What is an example of the triple dip strategy?

Husband and wife are 65 and plan to work to 70. The husband's PIA is $3,000 and the wife's PIA is $2,000. At FRA, 66, the husband will file for benefits and suspends them till age 70. The wife applies for $1,500 spousal benefit at 66. The wife's benefit grows 8% per year (more if she continues to work) and will grow to $2,640 (or more) at age 70 (1.32 x $2,000). When the husband dies the wife will get $3,960 which his the husband's benefit ($3,000 x 1.32, because he waited till age 70).

When is the break even more relevant?

If life expectancy is significantly more or significantly less that 80. However break even is not the only consideration, clients need to minimize longevity risk. Planners should run the numbers to show the effect of longevity.

What is an example of the government pension offset?

If one spouse works for the private industry their whole life and has Social Security income of $12,000 per year and the other spouse is a noncovered state employee who receives a $15,000 annual pension from the state. If the noncovered spouse had not worked they would be entitled to a $6,000 spousal benefit at full retirement age. However with the offset the noncovered employee will receive nothing. $15,000 x 2/3 = $10,000. The $10,000 will offset the $6,000.

What about Social Security benefits for divorced couples?

If the couple were married 10 years or longer, the spouse is eligible for spousal benefits.

Widow's Benefits

If the spouse dies while receiving benefits, survivor's benefits are usually available equal to the deceased spouse's benefit immediately. If the spouse dies before receiving benefits survivor benefits equal to the deceased spouse's PIA is available. The PIA may be lower due to assumed earnings not being met. Survivor benefits can begin at age 60 or 50 if they're disabled, or at any age if caring for a child 16 or younger or disabled. Benefits prior to FRA will be reduced for each month before FRA.

When did Social Security paper benefit statements end?

In 2011 due to budget cuts the paper statements stopped. Due to demand, in February of 2012 those 60 and over started receiving paper statements. In May of 2012 the online statement started. Late 2012 those turning 25 received received paper statements.

Is it cheaper to buy $570 per month ($1,320 vs $750) by using 401(k) money today or taking early Social Security?

In all but rare instances where the 401(k) earns a significant rate of return it will be cheaper to buy Social Security and spend the 401(k).

Who should use the claim now, claim more later strategy?

In order to try to get the largest benefits possible for the largest period of time, the higher earning spouse should use this strategy. Example: 1) Couple age 66 2) Husband PIA $12,000 ($1,000 per month at FRA) 3) Spouse PIA $8,000 ($666.67 per month at FRA) Solution: A) Wife claims her $8,000, husband entitled to the spousal benefit of $4,000 B) At age 70 the husband claims his benefit and receives $12,000 + $4,000 = $16,000 or $1,333.33 per month. C) When he dies the wife will receive this plus COLAs This can help reduce longevity risk

Ordering benefits

In some cases individuals can switch benefits. If eligible for both a worker and a spouse benefit are deemed to have requested the larger of the two unless they have reached FRA. At FRA they can make a restricted request for one of the two benefits. When the spousal benefit is smaller this allows you to receive the smaller benefit when there is no advantage to deferring and then switching to the worker's benefit when it is eligible for deferral credit. If the worker benefit is smaller it may be possible and advisable to claim the worker's benefit first, before eligibility for the spousal benefit has been triggered.

What should a consultant know about the optimal claiming age for their client?

In the past the focus was on recommending discrete solutions based on how the issue was framed. The largest amount of research was based around net present value, or the money's worth, model and it tried to discern a break even age which would be more financially beneficial for the client. Other researchers focused on longevity risk to the age claiming process. Yet another group focused on strategies focused on Social Security laws as a way to frame the question and ultimately make a decision.

What if the Medicare premium increases more than the COLA?

It can't. The increase in Part B premium is never allowed to be more than someone's COLA. Waiting to claim Social Security, the Part B premium will be less likely to be capped because age 70 COLAs are greater (in dollars, not as a percentage) than age 62 COLAs. This could work as a disadvantage to delayed claiming in rare cases where the Part B premium would have been capped with an earlier claiming date and consequently a smaller COLA, as apposed to a larger claiming date and consequently a later COLA.

What will the earnings test do to the widow's benefit?

It could stop the widow(er) from receiving it.

What is a fully funded client?

It is a client who has sufficient assets and income for expenses in retirement, they many not be afraid of running out of money in retirement.

What it the earnings test?

It is a suspension of benefits because benefits are recalculated (increased) at full retirement age. It applies to only those who are younger than full retirement age. It applies to worker and spousal benefits paid between 62 and full retirement age. In 2014 the amount was $15,480. If earnings over this amount the Social Security benefit is reduced $1 for evrey $2 over the threshold.

What is the net present value break even approach for fully funded clients?

It is the break even age when account 1 and account 2 have the same money. This attempts to maximize the net worth a client can achieve. Mostly used when clients have sufficient assets and income for expenses in retirement, they many not be afraid of running out of money in retirement. Essentially it compares the net present value of x dollars to y months (early start) to the net present value of x plus dollars for y minus months (later start). Picking the correct discount rate is and the client's expected mortality matching the client's actual mortality. Clients dying young get a larger net present value from claiming benefits early (62). Clients dying after the break even age get a larger net present value from benefits if they claim later (70).

Who will the claim and suspend help the most?

It will enhance the options of one earner couples or couples with a spouse who has a small Social Security worker benefit (below the spousal benefit). High earning spouse must be at FRA.

Why do people want to hold onto their 401(k) money?

It's a battle for planners to change people's perceptions. People believe that Social Security will run out of money and people struggle addressing their financial needs. People need a rationale way to help them decide to what extent they need an income stream or retain assets to meet liquidity and legacy needs. These are legitimate and competing needs.

What is the benefit of claiming Social Security benefits later?

It's assumed that using a 4% withdrawal rate a portfolio will last for 30 years of retirement under any historical worst case scenario. By claiming their benefit at 70 they can minimize the impact of longevity risk in retirement and take inflation adjusted withdrawals from their portfolio. This benefit decreases commensurate with increases in the client's wealth because: a) All clients have both Social Security and their financial portfolio as two parts of their retirement puzzle. b) If delaying Social Security plays a greater role in retirement income then delayed claiming enhances the 4% rule. It plays less of a role if the client is less dependent on the benefit. For someone with $200,000 and $700,000, delaying benefits is the best way to increase portfolio longevity.

What is the best strategy, delaying the benefit and spending down the 401(k) or taking the benefit early?

It's beneficial to draw down the 401(k) in the first 8 years of retirement (between 62 & 70). The 401(k) is best used to delay taking Social Security even though more will be depleted in the early years of retirement, the goal is longevity not 401(k) preservation.

The online Social Security statement

It's created by the individual. The account is created with personal information and is protected with a username and password. The statement contains client information: A) The full retirement age and their estimated benefit B) Estimate benefit at 62 and 70 C) Estimated eligible disability benefit D) Estimated survivors benefit for children and spouse E) Medicare eligibility F) Earnings record (should be verified for full benefit) G) Estimated taxes by the client and employer It provides information: A) The windfall-elimination provision B) The government pension offset C) Potential benefit changes due to law D) Phone numbers for Social Security and Medicare E) Social Security's future F) Links to qualify G) How the benefits are estimated H) Considerations for retirement I) Relevant publications

What is each month of deferral during the bridge period?

It's like buying an additional inflation-adjusted life annuity. Planners need to balance the reduction in other retirement savings versus taking higher income from Social Security. This balancing act is between taking income from retirement savings vs taking higher income from Social Security.

What is the most important step in reaching the best conclusion for claiming age?

Making sure the problem is framed correctly for the client's situation.

What about claiming Social Security for those who are married?

Married beneficiaries may be eligible to receive spousal benefits in addition to their own. Usually happens when one spouse has stayed at home. Benefits can be received at 62 which are half the PIA of the worker. These will be reduced if the worker isn't FRA. The worker must trigger the benefit. The earnings test applies to spousal benefits. Both spouses can be eligible but not at the same time. If spousal benefits are applied for prior to FRA, it's assumed that both are applying and both the spousal and worker's benefits are awarded with the appropriate reduction for the spousal. However, at FRA the individual who hasn't claimed benefits can choose which benefit to receive. There is no increase in spousal benefits after FRA, there's no reason to wait beyond FRA.

What is Social Security combined with to provide a level of retirement security for the vast majority of Americans?

Medicare

When using the claim and suspend strategy what do you need to be aware of with Medicare?

Medicare premiums are deducted from Social Security. You must be careful to avoid Medicare lapsing.

What is the maximize the survivor benefit strategy?

Most men claim their benefits at 62 or 63 well short of FRA. While this might seem to maximize the present value of household benefits they are leaving money on the table. When someone claims early the survivor benefit is reduced. What the surviving spouse receives while the deceased spouse is alive is replaced by the deceased spouse's benefit. The surviving spouses benefit rises by 7-8% each year it's postponed up to FRA and 8% from FRA to 70. This has a long positive effect on the expected present value of the surviving spouse's benefit.

Should the claiming age decision be framed as insurance against longevity risk?

Most people assess the problem is either (1) they act without planning or (2) use a break even strategy to garner the largest possible amount from the system. However if there are concerns with adequate income in later years the question should be framed differently.

How might a planner use other forms of insurance when communicating with clients?

Most would not complain that they don't get their money's worth from a policy because it didn't burn down. They would be content with protection from catastrophic loss and happy that nothing happened. Planners need to show that lack of adequacy of retirement income is a real catastrophic concern. Explaining to the clients that losing money if they die after 62 is just one way to look at the decision. Insurance from extreme poverty in old age may be more important than extra dollars to enhance a lifestyle in the early years of retirement.

Divorced spousal and survivor benefits

Must be married for at least 10 years. Can begin at 62 even if the worker hasn't started benefits, however must have been divorced for at least 2 years. The divorced benefits go away if remarried. If the marriage ends, benefits can begin again. the benefit amount is the same for married spouses, 50% of the ex-spouse's PIA if FRA. The benefits end when the worker dies and widow benefits are available. Remarriage doesn't negate widow benefits if the marriage is after 60.

If a person waits to claim their benefit will they lose their COLA?

No, a person does not need to claim their benefit to get their COLA. A person claiming at 66 will get their COLA beginning at age 62.

Social Security as also know as?

Old Age, Survivors and Disability Insurance system (OASDI)

The spousal benefit

Once a worker's benefit is claimed, either actually claimed or claimed and suspended, an eligible nonworking spouse is entitled to a spousal retirement benefit. A former spouse can claim if they have been divorced for two or more years even if the spouse has not filed for or claimed benefits. The age of the spouse and not the worker is used to determine if spousal benefits will be available. The spouse must be 62 in order to received the benefit unless they're caring for a child under 16. The spousal benefit is only paid if the worker has been married for one year before filing the worker benefits. The spouse benefit is 50% of PIA at full retirement age. These can be taken early but there is an actuarial reduction beginning at 62 to 66. Spousal benefits end at the death of the worker.

What is the third step of the decision process?

Once the preliminary evaluation of the client's funded status has identified the appropriate decision framework, the third step of the decision process is to evaluate the client's specific situation to identify all the factors critical in making a decision.

What is the special rule for earnings test in the year a worker reached full retirement age (FRA)?

Only earnings before the month of FRA count towards the earnings test. Earnings in the month or after FRA don't count towards the earnings test. The Senior Citizens' Freedom to Work Act of 2000 eliminated the annual earnings test after the month a person attains FRA. If a client is in the calendar year he attains FRA, $1 in benefit for each $3 earned above $41,400 threshold will be deducted until the month FRA is attained.

Why do people claim early?

Over 50% claim at 62. People see the money as a way for them to retire even if it's a false reading for the early years of retirement. People confuse the retirement and Social Security claiming decision and they should be thought of as two separate issues. It doesn't matter when people think they're going to die, it matters whether they need the insurance protection against longevity.

What earnings are not included in the earnings test?

Pensions, interest and dividends, bonuses earned the previous year, deferred compensation earned the previous year.

What is the "free money" at age 62 concept?

People have a shortsighted view of when to claim and will see buying a sailboat at 62 rather than food and shelter at 85. This has a low marginal utility at 62 but the dollars of high marginal utility at later years. This is basically an annuity purchasing decision. Purchasing at a later year, unless there is a terminal illness will lead to greater insurance protection for most people.

What question should be asked about the survivor benefit?

Since this is essentially buying life insurance, one should ask, "Along with other savings, will the survivor's benefit be enough to maintain your desired standard of living?"

What happens if someone wants to withdraw their application for Social Security benefits?

Someone who has claimed benefits can stop their benefits and claim them at a later date. This applies to retirement benefits only, not disability or survivor's benefits. You can only do this once and all benefits, including spousal or beneficiaries, must be paid back, with no interest, within 12 months. This includes Medicare payments and if the person wants Medicare to continue, they will need to pay the premiums. Not many do this and it could be appropriate for someone who lost a job and went back to work in a short period of time.

What model includes all the current age claiming research where planners can use the single stream of research or the combination approach?

Step 1: Change the client's perception through an educational program. Step 2: Assess funding adequacy, then either conduct a break-even analysis or a bridge-period analysis to select a claiming age. Step 3: Assess the client's options under Social Security. Step 4: Integrate the claiming decision into a cohesive retirement income plan.

What is the appropriate discount rate for use in Social Security analysis?

The Treasury Inflation Protected Security Bond (TIPs). The 10 year TIPs has a zero yeild. With today's low interest rate someone should wait till 69 to claim Social Security to maximize cumulative benefits. If someone can get a 3% rate of return by delaying and TIPs are at 0%, it pays to delay.

The spousal benefit reduction.

The actuarial reduction for the spouse is larger than the worker's reduction factors. If the spouse claims at 62, 70% of the 50% benefit (35%) is received. The reduction for the first 36 months is 25/36 of 1% for each month before FRA. 12 months early = 25/36 x 12 = 8.33 an 8 1/3% reduction. If the number of months exceeds 36 the benefit is further reduced by 5/12 of 1% each month.

Why is the age of claiming Social Security important?

The age that someone chooses to start Social Security retirement benefits can possibly be the most significant factor in their ability to maintain financial security throughout retirement.

What is the Primary Insurance Amount (PIA)?

The basic building block of all Social Security benefits.

Claim now, claim more later strategy

The clients must be married. One person must wait until FRA to claim. There must be two wage earners. The client will choose the spousal benefit first, and defer the worker's benefit until later, typically age 70. Claiming after FRA provides the choice of either spousal or worker benefit. Person 3 years older than spouse, both want to wait till 70 to receive benefits. At age 70 the person claims the worker benefit and the spouse claims the spousal benefit and continues to work. At age 70 the spouse files their own benefit and receives the worker benefit with the increase for delaying.

Combining worker and spousal benefits

The first amount paid is the worker's benefit, any excess is the spousal benefit. If the worker's benefit is $1,000 and the spousal benefit is $800, the entire amount is considered the worker's benefit. If benefits are taken early, the reduction factor applies to the entire $1,000. If the worker's benefit is $1,000 and the spousal benefit is $1,200 and is taken early, the worker reduction factor applies to the $1,000 and the spousal reduction factor applies to the $200.

How might Social Security affect the claiming age decision?

The only constant with Social Security is change. Changes will probably include revenue increases (new taxes) and benefit cuts. An increase in normal retirement age will lower the level of benefits at every age (62-70). The ratio of the benefit will remain about the same meaning the breakeven age thinking process will be unaffected. People at or near retirement age will most likely be grandfathered. The claiming age decision will remain important as well as insurance framing of the claiming age becomes more important.

What are marginally or underfunded clients?

The vast majority of workers fall into this category. Their focus will be more on financial security, portfolio failure, and the need to insure their standard of living. Working longer, deferring benefits, and how to deal with the bridge of retiring age to maximizing benefits.

What does full retirement age depend on?

The year of birth. 1.) <= 1937 = 65 (add 2 months through 1942) 2.) 1943 - 1954 = 66 (add 2 months through 1959) 3.) >= 1960 = 67

Why are people reluctant to defer Social Security?

Theory 1: Men only think of themselves and ignore their wives needs (this is not likely). Theory 2: Financial ignorance. People more financially literate are more likely to defer Social Security. Theory 3: Social convention. The standards and norms practiced by a majority of the population. Theory 4: For those with a defined benefit plan it could be the retirement age for the plan. The defined benefit may not be enough to sustain the client. Those with a 401(k) may be able to use this to delay taking Social Security. Theory 5: Fears of Social Security failing. This is irrational thinking, it will change, but it won't end. Theory 6: People believe they won't live long so they won't break even and don't see the benefit of delaying. The only way to win this bet is to die young. Theory 7: Misunderstanding of what Social Security is. Some believe it's salary continuation rather than insurance. If there is an insurance or longevity mind-set people may delay.

What if under the earnings test someone earns too much while receiving Social Security?

There is a mandatory suspension and the Social Security Administration will recalculate the benefit.

What happens to the earnings test if someone retires in the middle of the year?

There is a special monthly earnings test. If less than 1/12 of annual amount in any month they can still receive the full benefit for that month. If under full retirement age for all of 2014 they are considered retired any month that the earnings are $1,290 or less and no substantial services in self-employment. If they are full retirement age in 2014 they are considered retired in any month that the earnings are $3,450 or less and no substantial services in self-employment. Substantial services in self-employment is when there are 45 hours a month devoted to a business or between 15 and 45 hours for a highly skilled occupation.

What happens if Social Security benefits are delayed?

There is an actuarial increase for deferring. The benefit is increased by 2/3 of 1% of the PIA for each month for anyone born on or after 1943 up to age 70. Someone delays 1 year, 2/3 x 12 = 8. They will receive an 8% increase in their monthly benefit.

What happens if you claim Social Security benefits before full retirement age?

There is an actuarial reduction for claiming early. The benefit is reduced 5/9 of 1% for each year prior to full retirement age for each month up to 36 months. If it exceeds 36 months, it's reduced

What should someone do if they are terminally ill at 62?

They should wait to claim the benefit. The terminally ill spouse will only be able to claim benefits for a short amount of time and this will cap the survivor benefit. If it's not claimed the surviving spouse will receive 100% of the PIA. This is essentially buying life insurance.

Explain the Social Security cost of living benefits.

They use the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), 3rd quarter to 3rd quarter for COLAs. They're effective in December and paid in January of the following year. Proposed changes are to use the CPI-E (elderly). This is chain-weighted approach that will decrease the COLA provided is it's adopted.

Explain how Social Security benefits are indexed.

They're indexed for growth. Previous earnings and the benefit formula itself are restated in term of today's wages by indexing past earnings and formula parameters to wage growth to age 60. Actual earnings in 1984 of $20k. In 2001 at age 60 the earnings are idexed to $40,807.90.

What is the government pension offset provision?

This eliminates most spousal and widow(er) benefits for those who have one spouse with noncovered employment income and the other spouse has covered employment. This can eliminate the noncovered (long time state employee) spouse from double dipping under the state and Social Security system for spousal and widow(er) benefits. 2/3 of the government pension reduces spousal and widow benefits dollar for dollar.

What is the triple dip strategy?

This is the way for a lower or no earning spouse to maximize what they may get from the Social Security system. When a spouse reaches FRA they have the option of claiming the worker's or spousal benefit. Prior to FRA there is no choice, a client is deemed to have applied for both benefits. In this case the worker's benefit is always paid and the excess (if any) of the spousal benefit over the worker's benefit is paid in addition. Both benefits are reduced to account for age. You should claim the spousal benefit and wait to claim the worker benefit until age 70. This is only available to one spouse. There are 3 benfits: 1) The spouse with the lower PIA claims the spousal benefit from the spouse with the higher PIA at FRA. 2) The spouse with the lower PIA claims their benefit at 70, assuming the worker benefit is greater than the spousal benefit. 3) After the death of the higher PIA spouse, the lower PIA spouse claims the survivor benefit.

What is the windfall-elimination rule?

This takes the weighting intended for low-income people because workers outside the Social Security system only look like low-income people, but in actuality they have noncovered compensation. This limits in many cases and employee with noncovered compensation (a long time state employee) from double dipping under the state system and Social Security. The Social Security PIA replaces 90% of low monthly income. For those on noncovered employment it reduced the PIA from 90% to 40% if the person has less than 20 years of service. From 20-30 years there is a modified formula. No reduction of 30 or more years of substantial service.

Why is the Social Security system balanced actuarially?

Those who die at life expectancy would get approximately the same amount from the system whether they claim early or claim late. Because single women have above average life expectancy they are more likely to delay claiming. Married couples must factor in the survivor benefit possibility. So, the system is acutuarially fair because someone living to life expectancy will get the same amount if they claim at any age from 62-70. It's assumed that a client will live to 84 an earn a 3% real risk free rate.

Who is more likely to draw down their 401(k) assets?

Those with siesta till 401(k) assets are able to draw down assets from the plan and delay Social Security. Those with minimal account balances who might exhaust their liquid funds by deferring Social Security to age 70 face a difficult choice. The answer depends on a case by case basis. Some may want to spend down as a Medicaid spend down plan. Others may prefer liquid assets for LTC and longevity. Liquidity is needed for LTC, health care, and the unexpected. Clients need to quantify the amount needed for reserves and the amount needed for income.

What's an alternative to withdrawing a Social Security application?

Voluntary suspension allows someone to voluntarily elect to stop at or after full retirement age and begin again later. This allows them to increase benefits based on the period that benefits stop.

The desire for a specified retirement age should not drive the claiming decision, but when is it necessary to do so?

When someone has lost work and they have no meaningful savings. Deferring could increase the income substantially and is one of the few planning tools for someone with limited savings. This may make the decision to claim be an "insurance by necessity" issue and delaying claiming age is typically the best alternative.

What is an example of ordering benefits?

Worker age 62 with a $2,400 PIA and is still working. Spouse at 62 not working with a PIA of $800. The spouse can file now and receive their benefit because of the deemed filing rule doesn't apply since the worker has not applied for their benefit so the spouse isn't eligible for the spousal benefit. If the spouse does claim their benefit now, they will receive a reduced benefit. Since they are taking the benefit 4 years before FRA they will receive 75% of their PIA or $600 a month. The earnings test won't be applied since they aren't working and claiming their own benefit. If the worker files 4 years later the spousal benefit will be triggered. The worker would immediately suspend their benefit to maximize their benefit at a later date. The spouse's benefit will then be a combination of their worker benefit and the spousal benefit. They will continue to receive the reduced amount of $600 plus the unreduced spousal benefit. The spousal amount will be the difference between the spousal benefit at FRA with is $1,200 minus their $800 PIA at FRA. They will receive an additional $400 for a total of $1,000.

What should be looked at for a widow(er) if they can claim both the survivor benefit and their own?

You can start the reduced benefit, whichever is less, and once FRA is reached switch to the larger benefit. On their own record they will receive an 8% per year actuarial increase every year they wait.