Social Security Planning Strategies. Anthony Tony Boquet CLU, ChFC, CASL, CLF, FSCP, LUTCF Vice President

Transcription

1 Social Security Planning Strategies Anthony Tony Boquet CLU, ChFC, CASL, CLF, FSCP, LUTCF Vice President

2 Disclaimer The material included in this presentation is not offered as legal or tax advice. Information and examples to illustrate tax concepts are based on published IRS guidance as of June 1, 2015, and are subject to change. You are urged to seek the advice of your tax advisor, attorney, and/or financial planner for guidance in your individual circumstances. All material is presented solely as educational information and is not a solicitation or offer of any products or services.

3 Impromptu Survey How many of you plan to retire before your full retirement age?

4 Social Security Retirement Strategies The age at which an individual chooses to start Social Security retirement benefits can be arguably the most significant factor in his or her ability to maintain financial security throughout retirement. Tacchino, Littell, and Schobel, A Decision Framework for Optimizing the Social Security Claiming Age, Benefits Quarterly, Q2/2012.

5 Why Advisors Need This Impact of Social Security and strategies Boomers entering retirement Senior clients expect you to know it and want your guidance Could lose business if clients go to others for advice

6

7

8 Social Security Planning Strategies But first some basics

9 Good News--Living Longer Bad News--Living Longer!

10 Life Expectancy by Gender: 1940 vs Years A. Munnell, Social Security s Real Retirement Age is 70, Boston College, CRR, Oct 2013, No Age 70 is the new 65!

11 The Impact of Social Security Provides 40% of income for Americans 65+ An estimated 50% of seniors would be in poverty w/out Social Security, vs. about 10% with it!

12 What is Social Security Retirement? An inflation-adjusted stream of payments for life a life annuity with COLA! Social Security = Longevity insurance

13 Social Security What does the average client know about it? Very little! How does the average worker decide on a start date for retirement benefits? Casually for most! 40 percent or more begin retirement benefits at 62 80% by age 63. A bad decision for most!

14 Eligibility for Retirement Benefits 40 coverage credits fully insured In 2015, $4,880 in earnings, any time during the year, equals 4 coverage credits for the year. Spousal benefits for non-employed or lower earning spouses, based on worker s PIA. Workers benefits are based on the 35 years of highest earnings. Planning Point: Continued work by a client may increase Social Security benefit amounts by replacing zeros.

15 Social Security s Role It s a Big Deal! For 1 in 5 retirees Social Security is their only source of income. For 1 in 3 retirees Social Security is 90 percent of their retirement income. For 2 in 3 retirees Social Security is more than 50 percent of their retirement income. These ratios are not expected to change over time. Dependence on Social Security grows with age of retiree (esp. affects married women!)

16 By the Numbers 62- Earliest age to start S-S retirement $$ 60 Earliest age to start widow(er) $$ $1,328/mo Average, All workers {2015} $2,176/mo Average, couples, both retired {2015} $1,274/mo Average, widow(er) alone {2015} $2,663/mo Max. benefit at FRA {2015} $15,720/yr Earnings limit prior to FRA {2015} 70 Max. age for deferred S-S credits

17 Investment Advisor E-Newsletter, June 2014

18 Primary Insurance Amount (PIA) An eligible worker can receive at full retirement age a monthly benefit of 100 percent of PIA. - All benefits based on worker s PIA Social Security benefits are indexed for wage growth. Earnings at age 60 and older are not indexed. S-S Earnings are capped at the taxable wage base ($118,500 in 2015)

19 Primary Insurance Amount (PIA) Planning Point: Replacing a year with salary for a zero year will increase the benefit amount. Planners should encourage work that will replace low earning or zero years. Replacing a zero year with a year with earnings could result in roughly a 3-4 percent increase in the benefit. Clients are typically not aware that their Social Security benefit is based on 35 years of earnings. Planning Point: A client who continues to work is not just working for his/her salary. The client may also be working for a bump in the Social Security benefit (and a similar effect on any employer-provided pension benefit).

20 Deferred Social Security Credits For those born , each year delay beyond full retirement age results in an 8 percent increase in benefits (not including COLAs) Example: PIA = $1,000 (at age 66) Benefit = $1,320 (at age 70) Planning Point: There is no reason to delay S-S benefits beyond age 70.

21 Single Beneficiary Claiming Options Age $60,000 Final Salary, Continues Work Until Claiming Age AGE YEAR ANNUAL BENEFIT REPLACEMENT RATIO $13,212 22% $18,684 31% $26,076 43% Planning Point: For many clients, working longer and delaying S-S benefits will be key!

22 Early Claiming Age A benefit is reduced 5/9 of one percent of the PIA for each month before full retirement age up to 36 months. If the number exceeds 36, then the benefit is further reduced 5/12 of one percent of the PIA per month. Example 1: Dan, who retires and claims benefits 3 years early, will receive a monthly benefit 20 percent smaller than his PIA. (5/9 x 36=20) Example 2: Jamie, who retires and claims benefits 4 years early, will receive a monthly benefit 25 percent smaller than her PIA. (5/9 x 36=20) + (5/12 x 12=5) (total 25 percent). If Jamie would have received $1,500 per month at full retirement age, she would get $1,125 at age 62.

23 Why Do So Many People Claim Early? Fear that Social Security will implode Need or wish to supplement pension income. They have a salary continuation view Ignorance of the claiming rules & strategies Focus on a break-even analysis Ignoring the insurance benefit of Social Security Planning Point: Rules allow a do-over to stop S/S benefits within 12 months (before FRA).

24 Deferred Claiming Age In the case of a claiming age after full retirement age a benefit is increased 2/3 of one percent of the PIA for each month for anyone born in 1943 and after. Example 1: Connie delays one year beyond full retirement age. She will receive a monthly benefit 8 percent larger than her PIA. (2/3 x 12 = 8) Planning Point: Every year the primary worker works past age 62 will normally result in an increased AIME, PIA and final benefit. Even without working, benefit at age 70 is 76% higher than age 62! Planning Point: If a worker voluntarily suspends their Social Security benefit after Full Retirement Age (FRA), the worker could request to receive all of the suspended benefits as a lump sum payment anytime between the ages of FRA and 70.

25 Social Security Claiming Ages 76 Percent Increase

26 Maximum Benefit Amounts Age Per Month Per Year 62 $1,997 $23, $2,663 $31, $3,515 $42,182 Note: Based on earnings at or above the Taxable Wage Base. These figures do NOT include COLA.

27 Financial fears have many workers planning to delay retirement By Melissa A. Winn Although U.S. workers on a whole are more satisfied with their current financial situation than in years past, most (58%) remain concerned about financial stability in retirement and say they plan to continue working until age 70 or later, a new Towers Watson survey shows.. With many workers expecting to fall short on their retirement savings, nearly four in 10 plan on working longer, an increase of 9% since A large majority of these employees expect to delay retirement by three or more years and 44% plan on a delay of five years or more, the Global Benefit Attitudes Survey finds. Employee Benefit News, March 26, 2014.

28 Taxation of Social Security Watch out for the TAX TORPEDO!

29 Taxation of Social Security Provisional Income = AGI + Tax-exempt income + ½ of Social Security benefits ================================= For Married Filing Jointly: Under $32,000-0% SS is taxed $32,000- $43,999 Up to 50% SS taxed $44,000 and more Up to 85% SS taxed

30 Taxation of Social Security & The Tax Torpedo Planning Point: For middle-income couples drawing Social Security benefits and taking taxable withdrawals from retirement plans, the effective tax on the withdrawals can be as high as 46% per dollar!! This occurs because higher percentages of Social Security benefits are taxed (50% or 85%) if provisional income exceeds thresholds.

31 The Claim Now, Claim More Later Strategy People who claim their benefits prior to full retirement age will miss out on the claim now, claim more later strategy. Claiming after full retirement age provides the recipient a choice of either spousal or worker benefit. Planning Point: Under the claim now, claim more later strategy the client can choose their spousal benefit first, and defer their worker s benefit until later typically age 70. This provides delayed credits on their worker s benefit.

32 Claim Now, Claim More Later Bob, age 70, delayed filing for Social Security retirement benefits to take advantage of delayed credits. His wife Brenda, age 66, could now file for spousal benefits (based on Bob s work history) and delay filing on her own earnings history until she reaches age to maximize her worker s benefit with delayed credits.

33 Claim and Suspend Strategy John and Betty are both retired professionals with significant work histories. John s PIA is $2,000, while Betty s is $1100.They are both age 66, their full retirement age. John can claim and suspend, allowing Betty to file for her spousal benefit of $1,000. She can delay taking her worker s benefit until age 70, when the benefit will be $1,452 (1.32 x $1,100) due to her delayed retirement credits of 8 percent per year. John s worker s benefit will be $2,640 due to his delayed credits.

34 The Claim and Suspend Strategy Since 2000, workers can start benefits at (or after) full retirement age and voluntarily suspend them (and restart them later). - Note, the strategy only works if the higher-earning spouse is at or beyond full retirement age. Planning Point: Claim and suspend enhances the options of one-earner couples or couples with a spouse with small Social Security worker benefits (worker s benefits that are below the spousal benefit). Planning Point: Caution in exercising the strategy. Do it in person with a knowledgable SS representative!

35 Claim and Suspend Claim (also file ) and suspend enhances the claiming options for married couples and thereby increases their potential lifetime benefits. The wife s survivor benefit, which she will receive once her husband dies (in 75% of marriages), depends on her husband s actual benefit. To get as high a survivor benefit as possible, the husband should continue working as long as possible. Thus, the optimal claiming ages for the husband and wife are 70 and 62, respectively. (Note: for a non-working, or very low-income, spouse). [Munnell, Golub-Sass, Karamcheva: Strange But True: Claim and Suspend Social Security. BC CRR, May 2009.

36 Claim and Suspend Planning Point: Locking in the biggest survivor benefit should be the main goal of most married couples. In 75% of cases, the survivor will be the wife.

37 Claim & Suspend, and a Later Lump Sum Payment Stanley files and suspends his Social Security benefit at age 66. Three years later, his wife dies and Stanley develops an incurable disease. He can request a lump sum payment of all benefits back to age 66 and begin taking monthly benefits going forward. His monthly S/S benefit will not include any delayed credits, but it will include COLAs since age 66.

38 Start-Stop-Start Strategy A worker who started S/S retirement benefits before full retirement age can stop the benefits after reaching FRA, and then later start them again (generally at age 70). Example: Carlos, age 62, is married to Maria, age 55, and they have a 14-year old son, Hector. Carlos starts S/S benefits at 62 which allows Maria to obtain a spousal child-in-care benefit and Hector to obtain a child benefit. After four years, Hector s benefit is ended, and Carlos (now age 66) can stop his retirement benefits and start them again at age 70. From age 66 to 70, Carlos will get delayed retirement credits of 8 percent per year.

39 Choosing the Optimal Social Security Claiming Age

40 Suggested Model Step One: Change client perceptions through an educational program. Stress increased benefits from delay rather than decreased benefits for early claims. Step Two: Assess funding adequacy, then either conduct a breakeven analysis or a bridge-period analysis to select a claiming age. Step Three: Assess the client s options under Social Security. (Spousal? Claim now, more later? File and suspend?) Step Four: Integrate the claiming decision into a cohesive retirement income plan.

41 Education Program To properly choose a claiming age, it may be necessary to change client attitudes. Two faulty perceptions: That the claiming age and the retirement decision are inexorably linked; they are not. In the vast majority of cases, the retirement age and the claiming age do not have to be the same. That the client should avoid losing out on years of payments from Social Security. However, losing out on payments is a secondary concern to running out of money in retirement.

42 Separate the Retirement and Social Security Start Date Except where absolutely necessary because of lost work and no meaningful savings, the desire for a specified retirement age should NOT drive the claiming decision. Deferring Social Security claiming, even if retirement has begun, could increase retirement income substantially. A delayed claiming decision may be one of the few planning tools available to an individual with insufficient savings. Fiscal concerns for many may create an insurance by necessity situation, and thus a delayed claiming age is typically the best alternative. Planning Point Like other insurance decisions, delayed claiming may still be a wise decision even if the claimant dies earlier than expected.

43 Free Money? The concept of passing up free money at age 62 is a short-sighted way to view a complex issue. The issue of when to claim is effectively using foregone benefits to purchase an inflation-adjusted annuity. Purchasing a larger annuity at an advanced age absent, for example, knowledge of a terminal illness for a single client, will lead to greater insurance protection in the later years for the vast majority of clients. Planning Point: The free money that needs to be focused on is not the dollars of low marginal utility at 62, but the dollars of high marginal utility at advanced ages. Which is more important: a sailboat at 62, or food and shelter at 85?

44 Single Clients If the client claims anytime between 62 and 70, and lives to about 80, the actuarial value of the benefit is nearly the same. If the client feels he/she will live well beyond age 80 there is a benefit to delayed claiming. If the single client feels he/she will NOT live to about 80, then early claiming may be prudent, but still consider the longevity insurance aspect. The strategy can be much different for married couples!! Ref: Social Security Strategies, Reichenstein, Meyer, April, 2011.

45 Fully Funded Clients The fully funded client & Social Security start date The fully funded client is most likely to frame the issue as a net present value break-even analysis. About 80 is the break-even point. Planning Point: Clients should be careful because a married person claiming early may leave the widow(er) with a permanently reduced benefit. Consider the life expectancy of the ultimate beneficiary (the wife 75% of the time!)

46 Partially Funded Clients Marginally or underfunded clients face portfolio failure in later years! Deferring Social Security and replacing the lost income from earnings from employment should be a strong consideration. Some will not have the option of continuing to work. Planners will often find delaying Social Security benefits to be the most effective solution for marginally funded or underfunded clients. Planning Point: In this case the claiming-age analysis will entail an analysis of a how best to deal with the bridge period-- the period between the discontinuance of a paycheck and the commencement of Social Security. Consider the early withdrawal of IRA/401(k) money reverse Tax Torpedo.

47 The Break-Even Approach For some clients the claiming-age decision is a net-present-value break-even choice that attempts to maximize the net worth a client can achieve. Might be correct for clients not in danger of sacrificing their standard of living in the later years of retirement.

48 Break-Even Assumptions Use Discount rate (huge factor!) Personal life expectancy The earnings test Lots of moving parts!! Taxation of Social Security Spousal survivor benefit opportunity COLAs Good Luck! Expenses

49 Reasons to Delay Social Security There is a snowballing effect on delaying S-S benefits because of both the actuarial increases and the compounding of COLA increases. The reverse tax torpedo if S-S benefits are taken later because only one-half of Social Security benefits are included in the calculation of provisional income. Some of the investment risk has been transferred by a delayed claiming because you are replacing income from 401(k)/IRA assets with S-S annuity income. Treat S-S as bond portion of portfolio. There is less money being paid to investment expenses since assets are consumed earlier in a trade-off for higher Social Security benefits.

50 Reasons for Early Claiming Age There is a loss of liquidity because in most cases the retiree will need to consume retirement assets early. The desire for leaving assets to heirs is jeopardized because in most cases the retiree will need to consume retirement assets early. The rate of return net of taxes and expenses that could be earned on invested retirement savings may outperform the higher Social Security annuity.

51 The Social Security Annuity Social Security is the cheapest and best annuity available. Social Security is inflation adjusted in a way that no private annuity is (full CPI protection). Social Security does not have loads or fees. Social Security is guaranteed by the government. Buying longevity insurance should not be considered a bad decision before the fact, even if the individual happens to die early.

52 What the Research Reveals Unless the 401(k) gets astonishing returns, the delayed Social Security benefit option will be better despite the liquidation of 401(k) assets.

53 The Planner s Challenge It is a battle to change client perceptions. People perceive that Social Security is going away. There are uses of money other than income. Can you spell C-R-U-I-S-E? Clients need a rational way to decide to what extent they need an income stream or a liquid fund. These are legitimate and competing interests.

54 Impact on Systematic Withdrawals Delaying, even though liquidating assets, allows the asset portfolio to last longer! In one study, under fixed assumptions: A 2-year delay raised the portfolio longevity to 91. A 4-year delay raised the portfolio longevity to 93. Waiting to 70 to claim Social Security benefits will initially reduce the portfolio in half. But the 76 percent higher (age 70 vs 62) benefit will make the portfolio last longer. Ref Social Security Strategies, Reichenstein, Meyer, April, 2011.

55 Social Security Changes The winds of change are blowing for Social Security. Change may grandfather in people in, or near, pay status. Planning Point: Social Security must change in the next 25 years. Changes will probably include revenue increases (new taxes) and benefit cuts. Increases to the normal retirement age are the most probable change. (70 is the new 67????)

56 Social Security Changes An increased normal retirement age will lower the level of benefits at every age in the continuum (62-70). For break-even analysis, the thought process will remain unchanged. If we are talking about getting a basic income, clients will have to work longer and delay claiming. Even if the overall level of Social Security benefits is reduced, the claiming-age decision will continue to remain important. The ratio of what you can get to what you need will change and push clients to claim at a higher age. Planning Point: The insurance framing of the claiming-age decision becomes more important if future Social Security benefits are discounted.

57 Where it all begins Three frogs were sitting on a lily pad, two decided to jump into the pond. How many are still on the lily pad?

58 Deciding to do something is not the same as doing it!

59 Good Sources TAC s RICP program Social Security Strategies, Social Security Strategies, Reichenstein & Meyer, April, Boston College Center for Retirement Research