Optimal Decisions with Social Security Benefits.

Transcription

1 Optimal Decisions with Social Security Benefits. Michael Zaidlin, J.D., AIF Madrone Investment Advisory, LLC San Rafael, Ca. Marin County Section on Aging January 21, 2016

2 Disclaimer The information presented here is solely intended for general information and educational purposes only, is not intended for public use, and does not constitute investment, tax, estate planning, legal or financial or investment advice. Much of the information presented here is touched upon in only the most cursory manner, and does not, and cannot, constitute a comprehensive analysis of the topics herein, nor should it be relied upon without consulting with a financial planner or tax professional in order to determine the validity and suitability of any strategy or topic discussed herein for any particular situation. The information presented here is not sufficient to make optimal Social Security filing decision for any particular individual. The strategies and guidelines in this presentation are hypothetical illustrations only. There are numerous exceptions to the rules illustrated within. Social Security claiming decisions are complex an should be only made within an overall financial planning framework, taking into account tax, estate planning, and general financial planning considerations unique to a particular individual. Professional software should always be used to determine the optimal claiming decision in any particular situation, and professional assistance should always be sought. Social Security, retirement accounts, tax and investment-related rules and regulations are subject to numerous exceptions as well as frequent changes. The applicable rules, regulations, laws and statutes that apply to each of the topics addressed within are often complex, subject to numerous exceptions, and may become quickly outdated. All hypothetical future annual rates of return mentioned in this article are for illustrative purposes only, and cannot be relied upon. The author shall have no liability or responsibility, directly or indirectly, for any loss of damage caused, or alleged to be caused by the information, or lack of information contained herein. DISCLAIMER OF TAX ADVICE: This presentation and any attachments are solely intended to communicate general information for discussion purposes only. The information herein is not intended to constitute written tax advice within the meaning of IRS Circular , and is not intended to be relied on, nor can it be used, for that or for any other purpose. 2

3 Presentation Overview. Social Security claiming strategies for individuals, married, divorced, and surviving spouses. Deadlines and eligibility for filing and suspending and filing a restricted application for spousal benefits. Social Security s role as longevity insurance, and as a joint and survivor annuity for married couples (and many divorced couples) due to the survivor step up. The often favorable impacts from delaying benefits. Social Security s tax structure Social Security from an investment perspective. The impact on retirement benefits if working past age sixty. Withdrawing or suspending benefits, and\or obtaining retroactive benefits. The impact of the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP) on CalSTRS and other non covered pensions. 3

4 An Overview of Social Security. Social Security is a major component of total retirement income for most recipients. The median married couple or individual recipient aged 65 and over relies on Social Security for 67% of annual income. (1) Even for a married couple whose liquid investments and income consist of an IRA totaling $1M, Social Security benefits are still likely to be greater than 50% of that couple s annual retirement income. Lifetime benefits for a couple can easily exceed $1M in current dollars. (2) Social Security is a unique form of longevity insurance. Like other fixed lifetime annuities, Social Security represents longevity insurance, particularly for married (and many divorced) couples for whom it is also a joint and survivor annuity. Unlike other fixed annuities, these benefits have the triple advantage of being inflation adjusted, tax favored, and government backed. Delaying benefits can have a major impact on the amount of total lifetime benefits. Delaying benefits from age 62 to age 70 can often result is an additional $200k $250k in lifetime benefits for a married couple who each live to age 90. Postponing retirement benefits from age 62 to 70 causes retirement benefits to grow an average of just under eight percent annually in inflation adjusted (and tax favored) dollars. One entitled to a retirement benefit of $20,000 at age 62 would receive $26,667 at age 66, or $35,200 if claiming at age 70 a 76% increase. (3) Concerns about Social Security benefit cuts should play no role in determining when to take benefits. Although it is possible, if not likely, that benefits will be reduced in the future, it is highly unlikely that those actions will have a material impact on the claiming decision for anyone currently nearing retirement. Further, there are a number of ways in which Social Security can become more fully funded without any cuts in benefits. These options include raising the FICA tax from it s current 12.4% level, increasing the ceiling on FICA tax from the current $118,500 level, and increasing the FRA. (4) (1) Jeff Chapman and Michael Ettlinger, Social Security and the Income of the Elderly, Nov 4, 2005, Economic Policy Institute. (2) See Michael Kitces, Valuing Social Security Benefits As An Asset On The Household Balance Sheet, April 8, 2015, (3) Lawrence J. Kotlikoff, et al. Get What s Yours The Secrets to Maxing Out Social Security, p. 39. Simon & Schuster, (4) Kotlikoff at

5 Many Factors Determine the Optimal Claiming Age. Type of benefit: A retirement benefit can generally be taken between ages 62 and 70, a spousal benefit can be claimed between ages 62 and 66, and a survivor benefit can normally be taken between ages 60 and 66. In some cases, one can take one benefit early, such as a survivor benefit, or a spousal benefit via a restricted application, while allowing a higher benefit to continue to grow and be claimed at a later date. Eligibility for filing and suspending and\or a restricted application. These options often allow for delaying and growing retirement benefit, but eligibility requirements must be met. Current marital status and prior marriage history: There may be multiple benefits that one or both spouses can choose from. For a married couple, the claiming decision should be analyzed from the perspective of a joint and survivor annuity with a 100% survivor benefit, because the lower earning spouse will step up to the higher benefit. (1) Dependent or disabled children at home. A retired worker who has a child under 18 still living at home (or older if disabled before age 22) is eligible for child and child in care spousal benefits. This may make an early filing for retirement benefits more desirable. Life expectancy. The longer one s life expectancy, the greater the benefit of delaying, with certain exceptions. While the break even age is subject to various factors such as prevailing interest rates, it is generally estimated to fall between ages 81 and 83. Age and earnings differences between spouses. For example, if H is the higher earner and significantly older than W, it is extremely likely that W will step up to a survivor benefit. In that case, it may be optimal for W to file early for a benefit, since that benefit is likely to be replaced by the larger survivor benefit before W reaches her break even age. If still working: If still working after full retirement age, one s (higher) marginal tax rate during those working years may mean that the Social Security benefit should be delayed so as to ensure not only a higher pre tax benefit, but a higher after tax benefit as well. (1) John B. Shoven and Sita Natarj Slavov, When Does it Pay to Delay Social Security?, p. 9, NBER Working Paper 18210, Nat l Bureau of Economic Research, July

6 The Case for Delaying Benefits. Life expectancies have increased, and are expected to continue to increase. Life expectancy at age 65 for the U.S. population has increased by five years since 1940, to 84.3 years for men and 86.5 years for women, leading to an increased risk of outliving one s other investments. (1) Despite increasing life expectancies, Social Security s actuarial tables have not been updated since (2) Social Security provides longevity insurance. One of every four people currently aged 65 will live to at least 90, and one of ten will live to at least age 95. However, by the time many of these 65 year olds are 85, those life expectancies are likely to have increased. Those with higher education and\or income have longer life expectancies and benefit more from delaying. For a 65 year old male within the highest 25% of income earners, the average life expectancy is 3.16 years longer than for a male in the lowest 25%. For women, the gap is 1.52 years. Delaying results in a safer, larger source of retirement income. Guaranteed income streams reduce longevity risk, sequence of return risk, and the risk of poor investment returns. Delaying benefits is often the most cost effective means of increasing the size of a guaranteed income stream, because the delayed benefit not only grows by approx. eight percent for every year the benefit is delayed, but also because the benefit is both inflation adjusted and tax favored. (3) Higher survivor and dependent benefits. Delaying until age 70 may enable one s spouse or exspouse to obtain a higher survivor benefit. (1) Felicitie C. Bell and Michael L. Miller, Social Security Actuarial Life Table, Life Tables for the United States Social Security area , Actuarial study #120. 2) Wade Pfau, "Fitting Social Security into a Retirement Income Plan, Webinar, October (3) Michael Kitces, How Delaying Social Security Can Trump Long Term Portfolio Returns or Lifetime Annuity April 2, 2014, 6

7 Delaying Benefits The Larger Impact for Women. Women have greater longevity than men. One of every three women currently aged 65 will live to age 90 or higher, as compared to one of every five men. Three quarters of the 90 andolder U.S. population are women, and 84% are widowed. (1) Eighty percent of Social Security survivor benefits are paid to women. (2) Women often collect survivor benefits for many years. Statistically, women aged 65 outlive men aged 65 by 2.4 years. (3) On average, women also 2.3 years younger than male spouses or ex spouses. (4) As a result, women are much more likely than men to receive survivor benefits for an extended time period. Women often receive lower survivor benefits due to a deceased, higher earning spouse having taken benefits too early. Nearly 40% of retired workers take benefits at age 62, 30% wait until FRA, and less than 3% take benefits at age 70, resulting in a significantly smaller survivor benefit for the survivor. (5) Social Security s actuarial tables are not gender specific, and thus favor delaying for women. Unlike commercial annuities which are based on gender, Social Security s actuarial tables are not gender specific. As a result, women are even more likely than men to benefit from delaying. (1) Emily Brandon, More Americans living until 90, November 28, 2011, U.S.News & World Report LP. (2) Kotlikoff at (3) Calculators: Life Expectancy, (4) Sven Drefahl, Marriage and Life Expectancy: May 12, 2012, Demography. See also, American Community Survey, US Census Bureau, (5) Steve Vernon, More People are Delaying Social Security Benefits, April 15,

8 Delaying Social Security: The Investment Perspective. The decision to delay Social Security turns out to be a fantastic triple hedge protecting against unanticipated longevity, mediocre market performance and the risk of unexpected inflation the exact three scenarios that traditional portfolios are least effective at managing. (1) Current real rate of return from delaying. Currently, the annual compounded real rate of return received by delaying retirement benefits from age 62 to age 70, using a discount rate of one percent, is 3.2% if one lives to 84 (male life expectancy), 4.0% if living to 86 (female life expectancy), and 5.2% for one living to 90 (joint life expectancy). (2) If living to 95, the real return from delaying increases to 6.0%. The real return from delaying, compared to a TIPS Bond: The comparable risk adjusted investment to delaying is the 10 year TIPS bond, which currently has a real rate of return of 0.6%. (3) For risk averse investors who would otherwise be in conservative investments such as bonds and cash, the return from delaying is particularly valuable. Social Security acts as a hedge against an investment portfolio. The lower interest rates and real returns are, and\or the higher inflation is, the more valuable Social Security is. (4) Further, the larger benefits received by delaying should lead to smaller annual withdrawals from an investment portfolio because of the tax favored status of those higher benefits, allowing the investment portfolio to last longer. (5) (1) Michael Kitces, Delaying Social Security Is the Best Inflation Hedge, November 15, 2013, (in context of low interest rate environment.) See also, How Delaying Social Security Can Trump Long Term Portfolio Returns or Lifetime Annuity April 2, 2014, (2) Wade Pfau, Investment Return From Delaying Social Security? Sure Beats TIPS., April 1, See also Wade Pfau, Delaying Social Security: What an Investment!, April 2, 2015, (3) Id. (4) Michael Kitces, Valuing Social Security Benefits as an Asset on the Household Balance Sheet, April 8, 2015, (5) Wade Pfau, The New Math of Delaying Social Security Benefits, October 23, 2015, blogs.wsj.com See, also Wade Pfau, Valuing Social Security Benefits as an Asset On The Household Balance Sheet, April 1, 2015, 8

9 Social Security Terminology. Full retirement age: Full retirement age (FRA) is 66 for those born between 1943 and 1954, increasing by two months every year for those born after 1954, up to a maximum of 67 years for those born in 1960 or later.* It is the age on which one s Full Retirement Benefit ( Primary Insurance Amount ) is based, and upon which many dependent benefits are set, such as spousal and child care benefits. (1) Full retirement age is a key date for several reasons. For example, only when one spouse reaches FRA can that spouse utilize the file and suspend strategy to allow the other spouse (or ex spouse) to collect a spousal benefit. FRA is also the minimum age at which one spouse may file a restricted application for a spousal benefit and allow his\her retirement benefit to grow. It is also the age where both a survivor benefit and a spousal benefit reach their maximum size. Primary insurance amount: The primary insurance amount (PIA) is the monthly amount of the retirement benefit one is entitled to at FRA. It is also known as the full retirement or basic benefit. (2) Average indexed monthly earnings: The AIME is the earnings base upon which one s PIA is determined. It is calculated by taking one s highest 35 years of covered earnings and indexing (adjusting) those earnings upwards to reflect the rise in average wages each year. (3) Delayed retirement credits: Upon reaching FRA, one can delay (or suspend) claiming a retirement benefit until age 70 and accumulate delayed retirement credits. These credits allow one s retirement benefit to grow at eight percent annually, as compared to their PIA, until age 70. (4) * For survivor benefits, Full Retirement Age is 66 for those born between 1945 and 1956, increasing by two months annually through See, Full Retirement Age for Survivors: If You Were Born Between 1945 And 1956, (1) Retirement Planner: Benefits By Year Of Birth, (2) Primary Insurance Amount, (3) 2015 Social Security Handbook, (4) 2015 Social Security Handbook, 720.

10 Stepping Up to the Higher Survivor Benefit. The step up at death of first spouse. At the death of the first spouse, the smaller benefit received by either spouse will drop off, and the survivor steps up to the higher of the two benefits. (1) As a result of the step up, Social Security is a joint and survivor annuity for married (and many divorced) couples. Eligibility for the step up. To obtain survivor benefits from a deceased spouse s work record, a couple must have been married a minimum of nine months.* For a deceased ex spouse, the marriage must have lasted ten years, and the surviving spouse cannot have remarried prior to age 60, or before age 50 if disabled. (2) Filing considerations for a higher earning, older spouse. The general guideline as to when the higher earner should claim a benefit depends on the longest of the two life expectancies. (3) Because of the step up, if at least one spouse is expected to live past the approximate break even age of 80 84, the higher earning spouse should usually wait until age 70 to claim a retirement benefit, with some exceptions. (4) Filing considerations for a younger, lower earning spouse. Because the smaller benefit will drop off when the first spouse dies, the lower earning spouse should file early if he or she will be younger than 82 or so when the higher earning spouse passes away, with certain exceptions. (5) Large differences in ages and earnings maximize the value of the step up. The greater the difference in age between an older, higher earning spouse and the younger, lower earning spouse, the more valuable the step up. For example, if H is the higher earner and ten years older, and both have normal life expectancies, there is a greater than even chance that W will receive H s higher benefit for thirteen or more years. Professional software should always be used to analyze all but the simplest claiming situations. For married couples in particular, there are literally hundreds of potential claiming options related to timing. *Length of marriage requirement is waived when caring for a child of the deceased spouse who is under the age of 16. (1) John B. Shoven and Sita Natarj Slavov, When Does it Pay to Delay Social Security?, p. 8, NBER Working Paper 18210, Nat l Bureau of Economic Research, July (2) 2015 Social Security Handbook, 401 and 404. (3) Lawrence Kotlikoff, How Should a Higher and Lower Earner File?, March 13, 2015, (4) William Reichenstein and William Meyer, Social Security Strategies for Couples. Dec.2013, AAII Journal (5) Id. 10

11 Married and Divorced Couples: Switching Between Survivor and Retirement Benefits. Survivor benefit may be claimed as early age 60. A surviving spouse can claim survivor benefits as early as age 60. (50 if disabled, and the disability started within seven years of the deceased s death). A survivor benefit will be reduced if taken before the survivor reaches FRA, to as low as 71.5% of the FRA benefit if taken at age 60. (2) A survivor benefit does not increase after the survivor reaches FRA. Deeming does not apply to survivor benefits. Taking a retirement benefit before FRA will not cause the survivor benefit to be reduced, nor will taking a survivor benefit before FRA cause a retirement benefit to be reduced. (3) A surviving spouse can take either benefit first, allow the other benefit to grow, then switch to the higher benefit. If retirement benefit is larger than survivor benefit: If a survivor s retirement benefit will be larger at age 70 than the survivor benefit will be at FRA, it may be optimal for the survivor to file for a survivor benefit at 60, then switch over to his\her retirement benefit at age 70. If retirement benefit is smaller than survivor benefit: If a survivor s retirement benefit at age 70 will be smaller than the survivor benefit would be at FRA, it may be optimal for the surviving spouse to take a reduced retirement benefit beginning at 62, then switch to the survivor benefit at FRA. (4) (1) Survivors Planner: Survivors Benefits For Your Widow Or Widower, (2) William Reichenstein and William Meyer, Social Security Strategies for Couples, Dec 2013, American Assoc. of Individual Investors. (3) Lawrence Kotlikoff, Will I Get Deemed if I Take My Survivor's Before My Retirement Benefit?, Feb 17, www,forbes.com (4) Mahany, p

12 The Amount of the Survivor Benefit: When Did Each Spouse File? The size of the survivor benefit is dependent on whether the deceased filed for retirement benefits before or after FRA, and when the surviving spouse files for the survivor benefit. There are four general scenarios to consider, as excerpted below from author and Social Security expert Lawrence Kotlikoff. (1) The deceased waited until FRA to file, the survivor. filed before FRA. If the deceased took a retirement benefit at or after FRA and the surviving spouse takes a survivor benefit before FRA, the survivor benefit will be reduced by a benefit reduction factor, down to 71.5% if taken at age 60. The deceased filed before FRA, the survivor filed at FRA. If the deceased took a retirement benefit before FRA and the surviving spouse waits until FRA to take a survivor benefit, the surviving spouse will receive the larger of the retirement benefit the deceased was receiving, or 82.5% of the deceased s PIA. Both waited until FRA to file. If the deceased took a retirement benefit at or after FRA and the surviving spouse takes a survivor benefit at FRA, the surviving spouse will receive the actual benefit the deceased was receiving, or would have received if benefits had been applied for on the date of death. Both filed before FRA. In this case, the survivor benefit depending on how early the survivor takes the benefit may be a low as 71.5% of the deceased s PIA. But if the survivor files closer to FRA, the survivor benefit will be the higher of the reduced retirement benefit the deceased was receiving, or 82.5% of the deceased s PIA. (1) See, Kotlikoff p

13 Spousal Benefits for Married Couples. When the spousal benefit can be claimed. A spousal benefit can only be claimed when one spouse has filed for his or her own retirement benefit, which may be as early as age 62. The other spouse can then file for a spousal benefit if he or she is age 62 or older. (1) A spouse of a worker who is receiving disability benefits must be at least 62 to claim the spousal benefit, but may file for it regardless of the age of the disabled worker. (2) How calculated. The full spousal benefit, if taken at FRA, is equal to one half of the other spouse s PIA, but is reduced if taken before FRA. Spousal benefit does not increase after FRA. A spousal benefit will not increase in size after the spouse who collects it reaches FRA, therefore no reason to postpone collecting it past FRA. Even if H files for a retirement benefit before reaching his FRA, W is still entitled to a full spousal benefit as long as she waits until her FRA to claim it. Filing for a spousal benefit before FRA. Filing for a spousal benefit before FRA results in a permanent reduction in the size of the spousal benefit. For example, if H is 62 and claims a spousal benefit, he will receive approx. 35% of W s PIA, not the 50% he would be entitled to at FRA. The child in care spousal benefit. A child in care spousal benefit, also known as the mother or father benefit, can be collected at any age with no reduction if the other spouse has filed for a retirement benefit and has children under 16 living at home, or if there is a disabled child living at home whose disability began before age 22. (4) (1) 2015 Social Security Handbook, (2) Lawrence J. Kotlikoff, et al. Get What s Yours The Secrets to Maxing Out Social Security, p Simon & Schuster, (3) James Mahaney, Innovative Strategies to Help Maximize Social Security Benefits, 2012, Prudential Financial. (4) 2015 Social Security Handbook, ; See also Benefits for Spouses, 13

14 Spousal Benefits for Married Couples (continued). Married a minimum of one year. To obtain spousal benefits based on a current spouse s work record, one must be married a minimum of one year. To obtain spousal benefits based on an ex spouse s work record, the marriage must have lasted a minimum of ten years. (1) Filing a restricted application for spousal benefits. At FRA or later, a spouse can file a restricted application for spousal benefits and allow his or her retirement benefit to grow until age 70, then collect that larger benefit. The restricted application cannot be filed before the other spouse has filed for a retirement benefit. (2) Under The Act, a new restricted application can only be filed by one who was born on or before January 1, The Restricted Application is not always of value. The restricted application is only needed if the retirement benefit at age 70 will be greater than the spousal benefit at FRA. (3) A spousal benefit may be lost if not requested. One who files for a retirement benefit before the other spouse has filed for his or hers is not eligible to receive a spousal benefit at that time, but must be requested when the other spouse files for a retirement benefit. (4) (1) 2015 Social Security Handbook, (2) William Reichenstein and William Meyer, Social Security Strategies for Couples, Dec 2013, American Assoc. of Individual Investors. (3) Kotlikoff at , (4) Kotlikoff at

15 Spousal Benefits for Divorced Spouses. Eligibility: To be eligible for a spousal benefit, one must have been married a minimum of ten years, be currently unmarried, and be 62 or older. In addition, the ex spouse must have reached age 62 and already have filed for a worker benefit, or be disabled, with the following exception. (1) Exception when ex spouse has not filed for a retirement benefit: If divorced for more than two years, spousal benefits can be obtained regardless of whether the ex spouse has filed for benefits, as long as both spouses are eligible to file. i.e. age 62 or disabled. (2) Eligibility can be regained. Eligibility for a spousal benefit is regained upon divorce. (3) Each ex spouse can file for spousal benefits. Each divorced spouse can file for spousal benefits, in contrast with married spouses, where one spouse must first file for a retirement benefit before the other spouse can apply for spousal benefits, and where only one spouse is eligible to receive a spousal benefit. (4) Divorced spouses can each file a restricted application for spousal benefits. As with married couples, filing a restricted application at FRA or after for spousal benefits can be utilized by a divorced spouse. (5) Ex spouse s marital status is irrelevant. Remarriage of the ex spouse does not affect the other ex spouse s ability to claim a spousal or a survivor benefit. (1) 2015 Social Security Handbook, 311; See also Retirement Planner: Benefits For Your Divorced Spouse, (2) Id. (3) Id. (4) James Mahaney, Innovative Strategies to Help Maximize Social Security Benefits, 2012, Prudential Financial. (5) Mahaney, p. 7 15

16 Filing for Spousal or Retirement Benefits: The Impact of Deemed Filing. Deeming. When one files for a retirement or a spousal benefit, the applicant is deemed to be filing for both benefits that he or she is eligible for at the time of filing. If deemed, only the highest benefit will be awarded. A filing spouse cannot be deemed to be filing for a spousal benefit unless the other spouse has previously filed for a retirement benefit. Deeming will not occur if, at the time of filing for a retirement or spousal benefit, the other spouse has not yet filed for a retirement benefit. (1) If deemed, one cannot maximize both the retirement and spousal benefit: Instead, only the higher of these two benefits is received. In contrast, one who is not deemed can switch over to a higher benefit at a later age by utilizing a restricted application. (2) Impact of the Bipartisan Budget Act on Deeming: Under the Act, a spouse or ex spouse who files for a retirement or a spousal benefit at any age will automatically be deemed to be filing for both benefits, except for a spouse or ex spouse who was born on or before January 1, 1954 and who later files a restricted application for spousal benefits upon or after reaching FRA. Deeming does not apply to survivor or disability benefits. Under the Act, one will still be allowed to obtain a survivor benefit while allowing a retirement benefit to grow, and vice versa. (3) (1) 2015 Social Security Handbook, (Must be filed one month or more later to avoid deeming.) (2) James Mahaney, Innovative Strategies to Help Maximize Social Security Benefits, 2012, Prudential Financial. See also, Kotlikoff at 222. (3) Lawrence J. Kotlikoff, et al. Get What s Yours The Secrets to Maxing Out Social Security, p. 44, 190. Simon & Schuster,

17 Filing and Suspending for Married Couples: Limited Availability: Filing and suspending a retirement benefit is only available to those who were born on or before May 1, 1950 and who file and suspend by April 29, The primary purpose of filing and suspending is to allow the other spouse to obtain a spousal benefit, while permitting one to accumulate delayed retirement credits until age 70. (1) Suspending a retirement benefit can only be done at FRA or later. (2) A retirement benefit is the only type of benefit that can be suspended. (3) May be used in tandem with a Restricted Application for spousal benefits. A spouse who has reached FRA can file a restricted application as long as the other spouse has filed for a retirement benefit. In that situation, both spouses are postponing the collection of their retirement benefit. Filing and suspending can also provide for the claiming of in care child and child in care spousal benefits. Filing and suspending also enables a child who is under 18, (or older if disabled before age 22), and living at home to collect a child benefit, which is 50% of the workers PIA, as well as to enable a spouse of any age to obtain a spousal benefit for an in care child, if that child is under 16, or older if disabled before age 22. (4) Filing for retirement benefit eliminates the separate spousal benefit. When filing for a retirement benefit, even if it is immediately suspended, one can no longer separately file for a full spousal benefit. This is true whether one files for a retirement benefit before or after FRA. (1) See, H.R. 1314, See also Michael Kitces, Congress Is Killing The File And Suspend And Restricted Application Social Security Strategies, October 28, 2015, (updated Nov. 4, 2015) (2) Lawrence Kotlikoff, Why Can't I Suspend Spousal Benefits to Increase Them?, May 13, 2015, (3) James Mahaney, Innovative Strategies to Help Maximize Social Security Benefits, 2012, Prudential Financial. (4) Lawrence Kotlikoff, Can I File and Suspend at 66 to Allow Child's Benefits?, February 12, 2015, 17

18 Suspending Benefits at Full Retirement Age. Purposes: Suspending a benefit at or after FRA, even for only one or two years, allows the retirement benefit to grow at approx. 8% annually and, depending on when the benefit is suspended, may also allow the entire amount of the suspended benefit to be collected in a lump sum. Filing and suspending as a strategy to allow dependent benefits to be collected will be phased out. While suspending a retirement benefit will still be allowed under the Act, the benefit must be suspended by April 29, 2016 in order to allow a dependent benefit to be collected, and\or to collect the lump sum total of one s suspended benefits. * If a benefit is suspended after that date all dependent benefits (spousal, child, child in care) will be suspended as well. Obtaining a retroactive benefit. Retroactive benefits can only be taken after one has reached FRA, and should be taken by anyone who be1atedly realizes he or she should have filed for a particular benefit after reaching FRA. (1) A maximum of six months of benefits can be obtained retroactively. Medicare Part B premiums. If one has filed for a retirement benefit, then suspends it, Medicare Part B premiums should be paid out of pocket. Otherwise, SSA may pay the premiums and conclude that the retirement benefit was never suspended. (2) (1) 2015 Social Security Handbook, 1513, Retroactive Effect of Application. (2) Retirement Planner: Suspending Retirement Benefit Payments, * The ability to collect lump sum benefits is currently permitted only as a result of the language in Social Security s operations manual. 18

19 The 2015 Bipartisan Budget Act: The Impact on Claiming Strategies. Filing and Suspending: Under the Act, filing and suspending a retirement benefit for the purpose of allowing a dependent benefit to be collected is grandfathered if one has already done so; new applications to utilize the file and suspend strategy for this purpose are only permitted for those who were born on or before May 1, 1950 and who file and suspend by April 29, (2) Restricted Application: Under the Act, only a spouse who has born on or before January 1, 1954 will still be able to file a restricted application for spousal benefits once he or she reaches FRA. (3) Voluntary Suspension: Voluntarily suspending a retirement benefit in order to accrue Delayed Retirement Credits is still permitted under the Act. (4) However, suspended benefits can no longer be collected in a lump sum if benefits are not suspended by April 29, (5) After this date, suspending a retirement benefit will automatically result in the suspension of all dependent benefits. Deeming: Except when permitted, a married or divorced spouse who files for a retirement benefit anytime through age seventy will now be deemed to be filing for a spousal benefit as well, assuming the other spouse has already filed for a retirement benefit. (6) (1) H.R Bipartisan Budget Act of 2015, congress/house bill/1314/text (2) Michael Kitces, Congress Is Killing The File And Suspend And Restricted Application Social Security Strategies, October 28, 2015, (updated Nov. 4, 2015) (3) See, H.R. 1314, above (4) See H.R. 1314, above 19 (5) See Kitces, above. (6) See Kitces, above.

20 Withdrawing Social Security Benefits. Time limit to withdraw benefits: One has 365 days from the date of filing for a retirement benefit to withdraw that it by filing form SSA 521. Only one withdrawal is permitted. The total proceeds received over the period covered by the withdrawal must be paid back, including any dependent benefits that may have been paid, as well as Medicare Part B premiums or taxes deducted from the benefit. (1) Withdrawing is the equivalent of never having applied for benefits. The withdrawn benefit will grow retroactive to the beginning of the period covered by the withdrawal. If the withdrawal deadline has passed, suspending the benefit at FRA is the nextstop. If one has filed for a retirement benefit at any time before FRA, and is no longer able to withdraw that benefit because 365 days have passed from the date of filing, the benefit can be suspended at any time upon reaching FRA. (3) The Earnings Test may provide the equivalent of a backdoor withdrawal: If withdrawing benefits is not an option, the Earnings Test can have the same impact. For example, one who took a retirement benefit at sixty two and is now sixty three and a half could return to work and earn enough income to be subject to the Earnings Test. Any benefits withheld will be returned in the form of a higher benefit at FRA or later. (4) (1) Retirement Planner: If You Change Your Mind, (2) Id. (3) Retirement Planner: Suspending Retirement Benefit Payments, (4) William Reichenstein and William Meyer, Social Security s Earnings Tests: A Primer For Financial Planners, p. 58 January 2015, Journal of Financial Planning. 20

21 Child Benefits and Child In Care Spousal Benefits. The child in care spousal benefit. If currently married to a worker who has filed for retirement benefits, a spouse of any age caring for a child under 16 (or older if disabled before age 22) can receive an in care spousal benefit in the amount of 50% of the retired workers PIA. (1) This benefit is not reduced if claimed before the retired spouse has reached FRA, and does not trigger deeming. The child benefit. The qualifying child will also receive 50% of the filing spouse s PIA until he or she turns 18. (19 if still in high school). A disabled child can receive the child benefit after 18 if disabled before age 22. (2) Maximum Family Benefit limit. The maximum monthly amount that can be paid to a family based on a particular worker's earnings record generally ranges from 150% to 180% of that workers PIA. Child in care spousal benefit for surviving spouse of deceased worker. A surviving spouse of any age can receive an in care spousal benefit of 75% of the deceased worker s PIA until the child is 16. (1) If aged 60 or over, the surviving spouse can either receive this benefit or a survivor benefit, whichever is larger. (3) Child benefit for child of deceased worker. The deceased worker s child will also receive 75% of the deceased worker s PIA until the child is 18. (19 if still in high school.) A disabled child can receive this benefit if the child is 18 or over and the disability occurred before the child turned 22. (2) Divorced spouse with child in care. A divorced spouse of a living worker is not eligible for an in care child spousal benefit before age 62, regardless of how long the marriage lasted. (4) Dependent children may make delaying the retirement benefit less desirable. The benefits of filing for an earlier retirement benefit to obtain child related benefits may outweigh the benefits of delaying. (5) (1) 2015 Social Security Handbook, (2) 2015 Social Security Handbook, (3) Kotlikoff at 112. (4) Kotlikoff at 153. (5) Michael Kitces, Why Social Security Dependent Benefits For A Child Can Make It A Good Deal To Start Early And NOT Delay, August 14,

22 The Social Security Earnings Test. Earnings defined. The test applies to earnings which consist of gross wages for services rendered in that taxable year, plus all net earnings from self employment, minus any net loss from self employment for that year. The Test does not apply to other government benefits, investment earnings, pensions, annuities, or capital gains. (1) The Test. For every two dollars one earns in excess of $15,720, one dollar in benefits will be withheld in any year before the year that the recipient reaches FRA. In the year FRA is reached, $1 in benefits will be withheld for every $3 in earnings in excess of $41,880 which are earned in the months preceding FRA. (2) Dependent benefits may also be impacted: For example, W is 62 and files for a retirement benefit; H is 66 and claims a spousal benefit. If W is subject to the earnings test, both her retirement benefit and H s spousal benefit will be impacted, even if H has no outside earnings, because W, the person on whose work record the spousal benefit is based on, is below her FRA. (3) The Earnings Test is usually a cash flow issue, but withheld benefits can be permanently lost. Withheld benefits will be returned in the form of higher benefits beginning at FRA or later, assuming normal life expectancy, except in certain circumstances such as the following examples: (4) How benefits subject to the Earnings Test can be permanently lost: 1) If W takes a survivor benefit at age 60, then switches over to her retirement benefit at age 66, she will not recover the withheld portion. (5) 2) Spouses and survivors who receive benefits because they have minor or disabled children in their care also do not receive increased benefits at FRA if benefits have been withheld. (6) 3) A younger, lower earning spouse may lose a portion of withheld benefits if he or she steps up to a larger survivor benefit before age (1) William Reichenstein and William Meyer, Social Security s Earnings Tests: A Primer for Financial Planners, p. 54, January 2015, Journal of Financial Planning. (2) Id at 53. (3) Id at (4) Id at 57. (5) Kotlikoff at (6) How Work Affects Your Benefits, 22

23 Social Security Disability Insurance (SSDI): Benefit amount is based on covered earnings. As with retirement benefits, the size of a disability benefit under SSDI is solely based on covered earnings. It is not based on the degree of disability, nor on the degree to which one has other sources of income. (1) Number of credits to qualify depends on an age based sliding scale. For example, twenty credits are required (five years) if between ages 31 42, and forty credits if filing at age 62. In general, forty credits are needed, twenty of which must have been earned in the previous ten years ending in the year of disability. (2) Full benefit is given at age 62. Disabled workers receive 100% of their PIA once they reach age 62, in contrast to non disabled workers who must wait until FRA to receive 100% of their PIA. (3) The disability benefit becomes a retirement benefit at FRA. Upon reaching FRA, the SSA will automatically file for a retirement benefit, which will be the same amount of the disability benefit and essentially replace it. The retirement benefit can be suspended at that time to allow for the building of delayed retirement credits (4). Deeming does not apply. Disabled workers are not subject to deeming provisions. (5) Specific claiming rules and strategies apply to the disabled and to their dependents. For example, the disabled can take reduced survivor benefits beginning at age fifty. Spousal benefits for dependents can also be collected at an earlier age (6) (1) Disability Planner: How Much Work Do You Need?, (2) Id. (3) Id (4) Lawrence Kotlikoff, Social Security Q&A: After Taking Disability, Can I Suspend at 66?, July 22, 2015, (5) Lawrence Kotlikoff, et al. Get What s Yours The Secrets to Maxing Out Social Security, p Simon & Schuster, (6) Kotlikoff, p

24 Working After Sixty: The Impact on the Retirement Benefit. Pre age sixty covered earnings: One s retirement benefit (PIA) is calculated by taking the worker s highest 35 years of covered earnings and determining the Average Indexed Monthly Amount (AIME) with which to produce the worker s Full Retirement Benefit, or PIA. Covered earnings before age sixty are adjusted ( indexed ) to account for the impact of wage inflation over time. (1) Indexing for wage inflation ends at sixty. Indexing for wage inflation for pre age sixty earnings ends at that age. Because inflation is a near constant, working after sixty make it easier for covered earnings in any year after that age to become one of the top 35 covered years. This is a certainty if the worker is at the earnings maximum, simply because the FICA limit increases almost every year. (2). Dependent benefits also grow. As one s retirement benefit increases, spousal, survivor, and other dependent benefits for that worker s current spouse or ex spouse and\or dependent children increase as well, providing another potential benefit to working past age sixty. Often beneficial if one has relatively few years with covered earnings. For example, if one has only ten years of covered Social Security earnings, working three more years after age sixty (or before) can increase the size of the retirement benefit by 25 30%. If impacted by the Earnings Test: If returning to work, and the deadline for withdrawing a benefit has passed, the benefit can be suspended at FRA. But if switching benefits for example, taking a survivor benefit at 60 and a retirement benefit at 70 the withheld benefit won t be returned in full. (3) Caveat: If earnings after age sixty are not top 35 years: If one works past age 60 and has earnings insufficient to constitute a top 35 earnings year, those earnings will still be subject to FICA tax, but will not increase the worker s retirement benefit. (1) Kotlikoff at (2) Kotlikoff at (3) Kotlikoff at

25 Social Security and Non Covered Government Pensions: The Windfall Elimination Provision. When it applies: The WEP is applied when one has a non covered government pension a pension in which Social Security contributions were not made, such as a CalSTRS pension. Which benefits are affected: The WEP reduces the pension owner s own Social Security retirement benefit, as well as spousal and children s benefits being collected on that worker s record by family members. The WEP will not reduce survivor benefits for that worker s family members. (1) Amount of the reduction: The WEP can reduce one s Social Security retirement benefit by a maximum of fifty percent of the size of the non covered pension, or $413, whichever is less. (2) Several exceptions apply. (2) For example, if one has thirty years of substantial covered Social Security employment, the WEP will not apply. The WEP is applied based on a sliding scale. (3) Example: W is 66, and is receiving a CalSTRS pension of $3500\month and a Social Security retirement benefit of $500\month, based on ten years of covered earnings. In this case, the WEP will reduce her Social Security retirement benefit by 50%, to $250. If H is receiving a spousal benefit, it will be based on the size of W s WEP adjusted retirement benefit. So instead of receiving a spousal benefit of $250, H will receive a spousal benefit of $125, which is 50% of W s adjusted PIA of $250. Lump Sum Pension Payment: If taking a lump sum pension distribution in lieu of a monthly payment, Social Security will apply both the WEP and the GPO by calculating a monthly pension equivalent. (1) Planning for the WEP Impact: If one has close to thirty years of covered employment, it may be worthwhile to reach that target to eliminate any possible WEP reduction. One could also take a Social Security retirement benefit (or spousal benefit) before collecting the non covered pension. (4) (1) Determining Pension Applicability, Eligibility Date, and Monthly Amount, Social Security Program Operations Manual System (POMS) (2) Kotlikoff at 202. (3) Retirement Planner: How the Windfall Elimination Provision Can Effect Your Social Security Benefit, (4) Kotlikoff at

26 Social Security and Non Covered Government Pensions: The Government Pension Offset (GPO). The GPO impacts the non covered pension owner s spousal or survivor benefit. Unlike the WEP, which reduces the size of the Social Security retirement benefit being received by the non covered pension recipient, the GPO reduces spousal or survivor benefits received by that pension recipient. The GPO has a much larger potential impact than the WEP. If one is subject to the GPO, two thirds of the pension payment will be deducted from the amount of the spousal or survivor benefit being received by the pension owner. In many cases, the GPO will completely eliminate a spousal benefit, or greatly reduce a survivor benefit. (1) Spousal benefit reduction example. W is 66 and receives a non covered CalSTRS pension of $2700\month. H is 67 and has a Social Security PIA of $2600. W is eligible for a full spousal benefit of $1300, but that spousal benefit will be reduced by two thirds ($1800) of her $2700 CalSTRS pension, completely eliminating her spousal benefit. (2) Survivor benefit reduction example. W, who is 75, receives a non covered CalSTRS pension of $2700\month. H is deceased and had received a retirement benefit of $2700. W will receive a survivor benefit of $900 instead of $2700, because the $2700 survivor benefit will be reduced by two thirds ($1800) of her $2700 CalSTRS pension. Planning for the GPO Impact: Taking Social Security benefits particularly a sizeable spousal benefit before collecting the pension may be desirable, as the the GPO does not come into effect unless a Social Security benefit is received. (3) The earnings test may be a factor. (1) Government Pension Offset, (2) GPO Calculator, (3) Kotlikoff at

27 Social Security Taxation: The Provisional Income Formula. Federal and state taxation of Social Security benefits: Social Security benefits are federally tax favored. Depending on the level of benefits received and the amount of other income one has, the percentage of Social Security benefits which will be subject to federal taxation will be either 85%, 50%, or 0%. (1) California, like the majority of states, does not tax Social Security benefits. (2) The Provisional Income formula determines the degree to which Social Security benefits are taxed. Only one half of one s Social Security benefits are included in the PI formula, while AGI is counted at 100%. For married filers with PI below $32k, no Social Security benefits will be taxed. If PI is above $32k but under $44k, 50% of the benefits will be taxable, while PI over $44k will cause 85% of SS benefits to become taxable. (3) Impact of Roth versus IRA distributions: Qualified Roth distributions are not included in the calculation of PI; regular IRA distributions are. As a result, it may be tax efficient to take IRA distributions before collecting Social Security, then utilizing Roth or taxable account sources when collecting Social Security. A Roth conversion analysis should consider the impact of the conversion as it applies to future Social Security taxation. (1) Robert S. Keebler, Using Roth IRA Distributions to Mitigate Income Taxes and Enhance Overall Wealth Part 1, pp. 35 7, March\April 2010, Journal of Retirement Planning. See also, James Mahaney, Innovative Strategies to Help Maximize Social Security Benefits, Prudential Financial, See also 26 U.S.C. 86: Social Security and Tier 1 Railroad Benefits.. 27 (2) See Special Circumstances,