Social Security The Choice of a Lifetime. Timothy O Mara, Vice President, Nationwide Retirement Institute

Transcription

1 Social Security The Choice of a Lifetime Timothy O Mara, Vice President, Nationwide Retirement Institute

2 FOR BROKER/DEALER USE ONLY NOT FOR USE WITH THE GENERAL PUBLIC

3 Important things to keep in mind Not a deposit Not FDIC or NCUSIF insured Not guaranteed by the institution Not insured by any federal government agency May lose value FOR BROKER/DEALER USE ONLY NOT FOR USE WITH THE GENERAL PUBLIC The content of this presentation is provided for informational purposes only and should not be construed as investment, tax, or legal advice or a solicitation to buy or sell any specific securities product. The information provided is based on current laws, which are subject to change at any time, and has not been endorsed by any government agency. The general distributor is Nationwide Investment Services Corporation (NISC), member FINRA. The Nationwide Retirement Institute is a division of NISC. Social Security 360 and Social Security 360 Analyzer are service marks of Nationwide Life Insurance Company. Nationwide, the Nationwide N and Eagle, Nationwide is on your side and Nationwide Retirement Institute are service marks of Nationwide Mutual Insurance Company Nationwide NFM-12436AO.6 (1/16) 3

4 4

5 Nationwide Retirement Institute Retirement Income Strategies Sponsored Research Educational Presentations Knowledgeable Professionals Intuitive Tools 5

6 Today s agenda Social Security The choice of a lifetime Social Security basics o Bipartisan Budget Act implications on filing strategies Managing the discussion How Nationwide can support you 6

7 Social Security The choice of a lifetime 7

8 WHY SOCIAL SECURITY IS THE CHOICE OF A LIFETIME Most file at the earliest possible time New Social Security claimants in a calendar year 1 Nearly two out of three individuals filed early for reduced benefits 2 37% 23% 31% 6% 3% 1 Source: SS Supplement Table 6.B5, Social Security Administration, 2014 calendar year. 2 FRA = Full retirement age. For this data, FRA is 66. 8

9 Meet Jim & Linda a 62-year-old married couple $2,400 Jim s SS benefit at FRA $1,300 Linda s SS benefit at FRA This example is hypothetical and for illustrative purposes only $403,410 Cumulative benefit lost by filing early 3 Figures as shown represent future value and assume average life expectancy of 86 for men and 89 for women and 2.7% annual cost-of-living adjustments (COLA). Cumulative benefit if both file at 62 3 $1,245,750 Cumulative benefit if both optimize SS benefits 3 1,649,160 9

10 WHY SOCIAL SECURITY IS THE CHOICE OF A LIFETIME Significant income for retiree households Mass affluent households 4 (Investable assets between $100,000 and $1M) 14% Employment & Other 16% Personal assets & retirement plans 32% Social Security 38% Pension 4 LIMRA Retirement Income Reference Book, Sources of Retirement Income study, LIMRA,

11 WHY SOCIAL SECURITY IS THE CHOICE OF A LIFETIME Pension income will shrink Percentage of private-sector workers participating in defined benefit pension plans 5 Only 16% covered by pension 6 5 Source for chart: The last private industry pension plans: a visual essay, William J. Wiatrowski. Bureau of Labor Statistics, Monthly Labor Review. Dec LIMRA, "At Companies with DC Plans, Most Employees Participate, but Many Acknowledge Ignorance about Investing", December

12 Social Security The basics 12

13 SOCIAL SECURITY BASICS What does Social Security offer? Old Age, Survivors and Disability Insurance (OASDI) Guaranteed lifetime income Survivor benefits Indexed to inflation Preferential tax treatment 13

14 SOCIAL SECURITY BASICS Social Security Act of 1935 Designed to help older Americans living in poverty during the Great Depression Never meant to be sole source of retirement income Ida May Fuller First recipient of a monthly Social Security check (1940) 14

15 SOCIAL SECURITY BASICS Earning Social Security credits 40 credits at retirement needed to qualify for retirement benefits 1 credit per $1,260 in earnings Max of 4 credits per year At least 10 years of employment 15

16 SOCIAL SECURITY BASICS Primary Insurance Amount (PIA) Amount received each month if benefits start at full retirement age (FRA) Based on lifetime Social Security earnings adjusted for inflation o o o Average indexed monthly earnings (AIME) over highest 35 years of earnings Benefit reflects a percentage of average monthly earnings Higher earners receive a smaller percentage than low-wage earners o Maximum PIA for 2016 is $2,639 Social Security statements available on mysocialsecurity (Sign up at ssa.gov/myaccount) 16

17 SOCIAL SECURITY BASICS How PIA is calculated Three components of AIME percentages defined by bend points AIME= Average indexed monthly earnings Add up three components to get PIA 90% of first $856 32% of next $4,301 15% of AIME over $5,157 $856 $5,157 bend points for 2016 Portions defined by bend points for the year when turning

18 Hypothetical example: Jim is 62 and his AIME is $6,845 $ % of $856 + $1, % of $4,301 $253.2 = $2,400 15% of $1,688 $856 $5,157 bend points for

19 SOCIAL SECURITY BASICS Full Retirement Age 19

20 SOCIAL SECURITY BASICS Early and delayed filing affects monthly benefit Delaying benefits can increase monthly benefit by 76% Delaying benefits can increase monthly benefit by 32% 75% 80% 86% 93% 100% 108% 116% 124% 132% % of PIA received Starting age of SS benefits 20

21 SOCIAL SECURITY BASICS Benefits adjusted for inflation Social Security annual cost-of-living adjustments (COLA), historical and projected (as of 2015) 7 Historical average since 1990 (2.6%) 2016 COLA 0% Estimated 2.7% COLA for Source for chart data: Social Security Administration 21

22 SOCIAL SECURITY BASICS How Medicare affects Social Security Medicare Part A Medicare Part B Medicare Part D Medigap Policy Part B premiums Monthly premium come out of SS checks. $0 $0 Annual premium $ ,9 $1, $ $ $ $2, TOTAL Per Person Per Couple $ $ $3, $7, Monthly premium for those protected by the hold-harmless provision, which is the majority. Otherwise, the amount is $ The provision provides that Part B premiums cannot rise more than a person s Social Security benefits rise through annual adjustments accounting for inflation. 9 Medicare.gov, Kaiser Family Foundation. Medicare Part D: A First Look at Plan Offerings in Medicare.gov, Median cost for Medigap Supplement Plan F in Columbus, Ohio. Ranges from $116-$

23 SOCIAL SECURITY BASICS How working impacts Social Security If under FRA for the full year In the year of FRA (Up to FRA month) At FRA and beyond $1 withheld for every $2 above annual limit ($15,720 or $1,310/month) $1 withheld for every $3 above annual limit ($41,880 or $3,490/month) No limit on earnings Withheld earnings are returned 23

24 SOCIAL SECURITY BASICS Changes to filing options On November 2 nd, the Bipartisan Budget Act of 2015 was signed by the President, causing major changes to filing options The filing restricted option is being phased out; when an individual files, he or she is only eligible for the higher of his or her own benefits, spousal or divorced benefits After April 29 th, file and suspend will no longer allow spousal or dependent benefits to be paid while the worker earns delayed retirement credits Retroactive lump sum request is no longer available 24

25 SOCIAL SECURITY BASICS Rule change from Section 831(a) Rule change Extends deeming rule to those born on or after January 2 nd 1954; will no longer be allowed to file restricted for spousal benefits Deeming is for any age of eligibility, not just month of initial entitlement Impact Those born on or after Jan 2 nd 1954 will have the opportunity to implement timing of Social Security to optimize the income received 25

26 SOCIAL SECURITY BASICS Rule change from Section 831(b) Voluntary suspension will now require suspension of the wage earner s benefit plus suspension of all benefits payable under the wage earner s record Dependents can no longer claim other benefits while the wage earner s benefits are suspended Anyone who voluntarily suspends (after one year) can no longer request retroactive benefits back to the beginning of a suspension This change is grandfathered and will be effective after April 30 th 2016 Impact Those born before May 1 st 1950 and who file for voluntary suspension prior to April 30 th 2016 will be grandfathered 26

27 SOCIAL SECURITY BASICS Complexity of understanding the rules increases Individual date of birth Grandfathered May 1 st 1950 January 1 st 1954 or before January 2 nd 1954 or after Strategies available Strategy examples Anybody who has already filed will not be impacted by legislative changes File and suspend available as long as voluntary suspension occurs prior to April 30, 2016 Jim file and suspends, allows his benefits to grow at 8% Linda files restricted, collects spousal benefit and allows her benefit to grow at 8% Restricted application available, once individual is eligible Jim collects benefit or was born before May 1, 1950 and filed and suspended Linda files restricted to collect spousal benefit and allows her benefit to grow to 8% Deemed filing rules apply, and timing strategies available Jim files for his benefits Linda files for her benefits and receives spousal access, if spousal benefit is greater than hers 27

28 SOCIAL SECURITY BASICS Filing rules for different situations Surviving spouses Spouses Divorced spouses Dependent children Disabled individuals 28

29 SOCIAL SECURITY BASICS Impact on filing situations Spouses Divorced spouses Dependent children These three groups will be impacted by changes to the Social Security rules The primary beneficiary must begin benefits before dependents can collect benefits If the primary beneficiary voluntarily suspends benefits, then all dependent benefits are also suspended Filing options for survivor s benefits do not change 29

30 SOCIAL SECURITY BASICS Spousal filing rules Eligibility Eligible at 62 Married for at least one year Benefits Up to 50% of spouse s PIA One spouse must file for the other to claim benefits 30

31 SOCIAL SECURITY BASICS For surviving spouses Eligibility Eligibility Married for at least nine months Benefits can be taken as early as age 60 Currently married or remarried after age 60* Benefits Benefits Up to spouse s PIA including delayed retirement credits earned Survivor benefits can be received independent of individual benefits * Marriage lasted 10 years or more. 31

32 SOCIAL SECURITY BASICS For divorced spouses Eligibility Married for at least 10 years Currently unmarried Ex-spouse does not have to file beyond two years after divorce Benefits Spousal, then survivor benefits No impact on ex-spouse s benefit Not subject to the family maximum 32

33 SOCIAL SECURITY BASICS For dependent children Eligibility Eligibility Dependent under age 18 Disabled dependents if disability occurred before age 22 Benefits 50% of parent s PIA 75% of deceased s PIA 33

34 SOCIAL SECURITY BASICS For disabled individuals Eligibility Eligibility Qualifying medical condition Recent work test (individual) Duration of work test (individual) Benefits Benefits Individual benefit Spousal benefit Survivor benefit Dependent children benefit 34

35 SOCIAL SECURITY BASICS For same-sex couples On June 26, 2015, the Supreme Court issued a decision in Obergefell v. Hodges, holding that same-sex couples have a constitutional right to marry in all states Claim processing details are forthcoming; same-sex couples should apply for benefits while details are being finalized More information at socialsecurity.gov/people/same-sexcouples 35

36 SOCIAL SECURITY BASICS For government employees Windfall elimination provision (WEP) Reduces individual benefit to prevent higher benefits on top of pension income Changes formula used to calculate PIA and reductions o As little as 40% of first $856 instead of 90% 12 o Reduction cannot be more than ½ of pension amount o Maximum PIA reduction for WEP for 2016 is $ Source: Social Security Administration. Based on 2015 formula. 36

37 SOCIAL SECURITY BASICS How WEP affects the PIA calculation Hypothetical example Frank is 62 and his AIME is $4,000 PIA without WEP reductions is $1, years of substantial earnings $ % of $856 + $ = $ % of $3,144 PIA is reduced by $428 ($1776 -$1,348) $856 $4,000 Cannot be more than one-half of pension from noncovered employment. 37

38 SOCIAL SECURITY BASICS Effect on spousal or survivor s benefit Government Pension Offset (GPO) Reduces a government employee s Social Security spousal or survivor s benefits Benefits are reduced by 2/3 of their government pension If government pension is large enough, spousal or survivor s benefit may be eliminated 38

39 SOCIAL SECURITY BASICS How GPO reduces benefits Spouse 1 Worked in government throughout career Receiving $2,100 monthly pension GPO = $1,400 (2/3 of $2,100) Spouse 2 Worked in private sector Paid FICA taxes PIA: $2,000/month 39

40 Managing the Social Security discussion 40

41 MANAGING THE SOCIAL SECURITY DISCUSSION General filing guidelines Before FRA 13 FRA to Age Individuals with shorter life expectancies Investors with a higher risk tolerance who believe they can earn relatively high returns on retirement portfolio Individuals with longer life expectancies Married couples Women Low-risk investors expecting to earn conservative returns on retirement portfolios 13 Source: When to Claim Social Security Retirement Benefits, David Blanchett, CFA, CFP, Journal of Personal Finance, Volume 11, Issue 2,

42 MANAGING THE SOCIAL SECURITY DISCUSSION Client concern: Social Security solvency Based on combined trust fund reserves and current assumptions 14 : Full benefits payable to at least 2034 With no legislative changes, Social Security would pay 79% of benefits afterward 14 Source: 2015 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. 42

43 MANAGING THE SOCIAL SECURITY DISCUSSION Proposals to address Social Security solvency Link COLAs to different inflation indexes Increase FRA beyond 67 May increase solvency without significant effect on most Americans Current retirees will see smaller annual benefit increases Expected to impact workers age 45 and younger to allow time to plan for retiring later 43

44 MANAGING THE SOCIAL SECURITY DISCUSSION Proposals to address Social Security solvency Increase or eliminate wage cap Increase payroll taxes Raises amount of earned income subject to Social Security taxes 2016 cap is set at earned income up to $118,500 Currently set at 12.4% split evenly between workers and employers 44

45 MANAGING THE SOCIAL SECURITY DISCUSSION Client concern: Longevity Over 40% of retirees and 30% of pre-retirees underestimate their life expectancy by five years or more 15 Underestimate by 5 years + Retirees Pre-retirees 31% 41% Underestimate by 2 4 years Retirees Pre-retirees 13% 14% 15 Source: Society of Actuaries longevity study,

46 MANAGING THE SOCIAL SECURITY DISCUSSION Average life expectancy and beyond 50% 50% chance of chance of reaching age 16 AGE 65 AGE 65 reaching age % 25% chance of cnce reaching of age 16 reaching age For married couples, there is a 50% chance one spouse will reach age LIMRA Retirement Income Reference Book. 46

47 MANAGING THE SOCIAL SECURITY DISCUSSION Where s the break-even point? Client is single filer Birth year 1954 = FRA 66 PIA at FRA: $2,639 Break-even for filing at 70 Filing early at 62 earns more until now Cumulative benefits for filing at FRA exceed filing early 47

48 MANAGING THE SOCIAL SECURITY DISCUSSION Client concern: Taxation Taxable retirement income Partially taxable retirement income Tax-free retirement income Pension Income Traditional Retirement accounts (401(k), IRA) Interest and dividend income Social Security Up to 85% taxed Immediate annuity income Cash-value of life insurance Roth IRAs and 401(k)s Interest from municipal bonds Loans from life insurance policies Please note that Nationwide does not provide legal, tax or accounting advice. You should consult with your accounting or tax professional for guidance regarding your specific financial situation. 48

49 MANAGING THE SOCIAL SECURITY DISCUSSION Social Security benefits are taxed differently 50% of Social Security benefits + Taxable pensions, wages, interest, dividends, other taxable income + Tax-exempt interest income (e.g., interest on municipal bonds) = Provisional income Source: 2015 Internal Revenue Service Publication 915 Worksheet A. 49

50 MANAGING THE SOCIAL SECURITY DISCUSSION Tax thresholds for Social Security benefits Provisional income Single filers; Head of household; Qualified widower Married filing jointly Married filing separately, lived apart all year Married filing separately, lived together at some point in the year % of Social Security benefits subject to Federal income tax Equal to or less than $25,000 Equal to or less than $32,000 Equal to or less than $25,000 N/A Zero $25,001- $34,000 $32,001- $44,000 $25,001- $34,000 N/A Up to 50% Over $34,000 Over $44,000 N/A Over $0 Up to 85% 50

51 MANAGING THE SOCIAL SECURITY DISCUSSION Client concern: Taxation Total taxable income AGI + income after Social Security income test Reduced benefits Maximum benefits Target pre-tax income $90,000 $90,000 Social Security benefits $30,690 $54,014 Traditional retirement income $59,310 $35,986 Provisional income $74,655 $62,993 $85,397 $58,130 Delayed filing increases Social Security by 76% Taxable income decreases by 47% 51

52 MANAGING THE SOCIAL SECURITY DISCUSSION Simplifying Social Security decisions Nationwide s Social Security 360 Analyzer tool Identifies optimal filing methods and allows you to adjust parameters to compare different strategies Provides instructions on how to file Helps you integrate Social Security into your comprehensive retirement income plan 52

53 MAKING YOUR SOCIAL SECURITY DECISION Social Security Assessment This report is provided for informational purposes only and should not be construed as investment, tax or legal advice or a solicitation to buy or sell any specific securities product. You should work closely with your financial professional to develop a plan that incorporates your investment objectives, goals, risk tolerance and time horizons based on your specific situation. This report relies upon the accuracy of the data you provide and is an estimate of the Social Security benefit you may receive which will differ from the actual benefit amount you receive at the time of application with the Social Security Administration. The information provided is based on current laws, which are subject to change at any time. This report has not been reviewed or endorsed by any government agency. 53

54 MANAGING THE SOCIAL SECURITY DISCUSSION Social Security Assessment 54

55 MANAGING THE SOCIAL SECURITY DISCUSSION Compare filing strategies The client s Social Security report shows cumulative benefits of an optimization strategy vs. early filing and alternative filing strategies Lifetime Benefits 55

56 MANAGING THE SOCIAL SECURITY DISCUSSION Analyze break-even points Illustrates which of the outlined strategies provides the best outcome at any given set of mortality assumptions for SS claimants Break-even Chart 56

57 MAKING YOUR SOCIAL SECURITY DECISION Your suggested Social Security Strategy The expected lifetime family benefit using this strategy is: $1,023,880 Note that this illustration is for educational purposes only. Jim File a standard application for benefits at your age 70 years. Your approximate monthly benefit would be: $3,820. Linda File a standard application for benefits at your age 70 years. Your approximate monthly benefit would be $2,

58 MANAGING THE SOCIAL SECURITY DISCUSSION Identify income gaps The report illustrates annual Social Security cash flow for the suggested filing strategy vs. projected retirement income needs. Estimated vs. Desired Income 58

59 MANAGING THE SOCIAL SECURITY DISCUSSION Cashflow analysis helps identify income gaps Jim and Linda begin claiming at age 70 After Jim passes away, Linda begins her survivor benefit. 59

60 MANAGING THE SOCIAL SECURITY DISCUSSION Social Security client questionnaire Helps gather relevant client information to prepare a filing strategy comparison Marital status Expected benefit amount Life expectancy Planned retirement date Desired retirement income Retirement goals, concerns, etc. 60

61 MANAGING THE SOCIAL SECURITY DISCUSSION Social Security client questionnaire 61

62 Help clients with the choice of their lifetime Become an indispensable resource by knowing the basics of Social Security Use our tool to help make filing decisions easier for clients Broaden the discussion to include comprehensive retirement income planning 62

63 Next steps Review our Social Security 360 program materials at nationwidefinancial.com/ss Complete a Social Security planning questionnaire Access the tool or get appointed for tool access Call the Retirement Institute Income Planning Team for help with specific cases