Social Security Benefit Report. Paul and Mary Sample

Transcription

1 Social Security Benefit Report for Paul and Mary Sample November 9, 2015 The Social Security Maven Peter M. Weinbaum, JD 128 Bliss Road Montpelier, VT Your trusted source for Social Security advice

2 Dear Paul and Mary, As you know, Travis and Don have asked me to analyze your Social Security situation and to put together a detailed report describing a range of claiming options for your consideration. They recognize that effective retirement planning requires serious consideration of Social Security options, and that Social Security claiming decisions are best made within a Big Picture context. One complicating factor for some couples has been the sudden passage of legislation (the 2015 federal Budget Bill) affecting certain Social Security claiming techniques, such as file and suspend and the restricted application for spousal benefits only. You may be pleased to know that the changes in the law should not prevent you from using those techniques to the extent that they are otherwise useful to you. Before we move into the analysis, I want to be clear that this is not a question of right and wrong or what you should or shouldn t do. It s about finding an approach that feels like a good fit for you after you see a range of available options. My goal is to put you into the best position possible to make sound, well-informed decisions about Social Security. Overview and Summary I approach the analysis by looking first at how you ranked your priorities for your Social Security benefits. You indicated that your top priority is to maximize the combined monthly benefits you will receive at older ages (70 s and 80 s). Your second priority is to maximize the total combined benefits you both will receive from Social Security over your assumed life expectancies. By omitting the other two choices from your ranking maximizing early benefits and survivor benefits you indicated that they are of little interest to you. That makes our task somewhat simpler. Your top two priorities are positively correlated with each other: strategies designed to maximize combined monthly benefits tend to support and reinforce total combined lifetime benefits as well. In some cases a couple can enhance their Social Security benefits if one or both of them can claim spousal benefits which, in their purest form, are equal to 50% of the other spouse s PIA. That is particularly true for you, because in your situation you have many options to consider, and some of the most attractive involve coordinating your individual filings so that one or the other of you can claim spousal benefits. Parenthetically, I will mention that although survivor benefits did not appear on your priority list, they are integral to the production of high total benefits over long life expectancies. Before you read any further in this report, I invite you to view the section beginning on page viii of the Appendix entitled: A Framework for Understanding Claiming Priorities. In light of the above, I decided to illustrate six strategies that cover a broad range of possibilities, culminating in one strategy that allows you to maximize both of your top priorities. 2

3 In each case I explain, step by step, how the strategy works and I illustrate the highlights in a way that shows you what the cash flows would look like. I then put all of the strategies into perspective through the use of a Strategy Comparison Table as well as several charts. Please understand that while these options represent key points along the claiming spectrum, there can be dozens of possible variations. For example, under Strategy 1 Paul claims his benefits at age 62-1 (meaning 62 years, 1 month); but he could instead claim his benefits at age 64-7, at age 68-3, or at any other age between 62-1 and 70, and each of those actions would generate different cash flows. Immediately below is a preview of the Strategy Comparison Table so that you can see the end points of the various options I will be discussing in this report. Combined Monthly Benefits at Older Ages Total Benefits Over Life Expectancies Survivor Benefits Strategy 1 $4,117 $1,310,736 $2,084 Strategy 2 $4,767 $1,438,717 $2,683 Strategy 3 $4,783 $1,459,572 $2,751 Strategy 4 $5,281 $1,465,951 $2,683 Strategy 5 $5,285 $1,509,558 $2,751 Strategy 6 $5,434 $1,517,988 $2,751 I provide a good deal more explanation about where the numbers in the comparison table came from in the pages that follow. I also offer some observations about the comparison table following the section that contains individual descriptions of each strategy. Certain terms and phrases are color coded, indicating that you can find additional information about them in the Glossary of Social Security Terms and Concepts, beginning on page ii of the Appendix. The Glossary might be the first place to look if you come across something in the report that is unclear. Ultimately I don t tell you what you should do, nor do I expect you to choose a claiming strategy based solely on this report. Many couples find it helpful to review these options with their financial advisor in the context of their overall retirement income plan; you are fortunate to be working with Travis and Don in this regard. 3

4 Assumptions This analysis is based on information and assumptions derived from the questionnaire you completed and your Social Security statements. In the course of this report you will notice that I frequently use words like estimated, approximately, around, or about. The one thing I can almost guarantee is that the numbers appearing in this report will not precisely match the actual benefit dollars you receive. This is true for reasons that will become apparent to you, including the fact that I show constant, uninflated 2015 dollars. I note some of the more important assumptions here: Dates of birth: Mary 5/11/1953 Paul 4/30/1950 Primary Insurance Amount (PIA): 1 Mary $1,986 Paul $2,033 Projected Stop Working Date: Mary 12/31/2018 Paul Retired Assumed Life Expectancies: Mary 95 Paul 90 Additions to Earnings History: Mary $64,200 (2014); $67k (2015); $70k ( ) Please keep the following in mind as a context for reviewing this report: 1. One of the more attractive features of Social Security is that your benefits are inflationprotected to some degree by means of Cost of Living Adjustments. I have not assumed any COLA increases in this report, believing that it is preferable to use today s (2015) dollars as a point of reference in evaluating your options. However, you can expect COLAs to preserve purchasing power, thus adding important value to these benefits Your Primary Insurance Amount (PIA) is based on your highest 35 years of inflationadjusted earnings. Your statements provide estimates of what your PIA will be at your Full Retirement Age (FRA). To arrive at those estimates, SSA takes your earnings from the last year shown on your Earnings Record and assumes that you will earn the same amount each year until you reach FRA. I calculate your PIAs independently when different assumptions are indicated. Since Paul has retired, his Earnings Record is now complete: his PIA stands at $2,033, a number that matches the SSA estimate. On the other hand, Mary s PIA is a moving target. According to her own estimates, her earnings in each of the next four years ( ) will become part of her highest 35 years. Assuming that those earnings actually materialize, I estimate that Mary s PIA will increase to $2,084 over the next several years, as shown in the table on the next page: 1 As indicated in your documents provided by the Social Security Administration (SSA). 2 That said, in October 2015 SSA announced that there will be no COLA in

5 Changes in Mary s PIA Based on Anticipated Future Earnings 2015 $1, $2, $2, $2, $2, The impact of claiming age. You probably know that claiming before Full Retirement Age (FRA) results in a reduction in benefits. You may also know that you have the ability to increase benefits on your own record by waiting past FRA to claim them. This is accomplished by earning Delayed Retirement Credits, or DRCs, and the effect is that for every month you delay past FRA, your benefits grow by 2/3% per month (8% per year) until you reach age You should regard these and any other figures I illustrate as estimates, to be confirmed by the Social Security Administration before you take, or refrain from taking, any action. Please forgive modest inconsistencies in the numbers, as they are sometimes caused by different rounding modalities. The Strategies The strategies I have illustrated here cover a range of possibilities along the claiming spectrum. In this report I have arranged them in ascending order based on the extent to which they deliver combined monthly benefits at older ages. Strategy 1 Paul begins benefits based on his earnings record in April 2016 at age 66 Mary begins benefits based on her earnings record in May 2019 at age 66 This is the simplest, most straightforward approach we will look at. Because early benefits are not of particular importance to you, and because Mary is still working, the earliest claiming that you should consider is at Full Retirement Age. In this scenario, Paul claims benefits of $2,033 when he turns 66, and Mary claims her benefits of $2,084 when she turns 66. Those are the amounts you will receive for the rest of your lives (except as they may increase from time to time as a result of COLAs). Because Mary s benefits are higher than Paul s, she will continue to receive her own benefits when Paul predeceases her. 5

6 The following table shows what the cash flows might look like under Strategy 1: Paul s Age Mary s Age Paul s Benefits Mary s Benefits Combined Family Benefits $2,033 $0 $2, $2,033 $2,084 $4,117 Paul assumed to die at $0 $2,084 $2,084 Total Benefits Over Life Expectancies Mary assumed to die at 95-0 $585,504 $725,232 $1,310,736 Results for Strategy 1: Combined monthly benefits at older ages $4,117 Total combined benefits over assumed life expectancies $1,310,736 Survivor benefits $2,084 Strategy 2 Mary begins benefits based on her earnings record in May 2019 at age 66 Paul files a restricted application for spousal benefits only in May 2019 at age 69-1 Paul switches to benefits based on his earnings record in April 2020 at age 70 In April 2040 Mary switches to survivor benefits There is nothing wrong with Strategy 1 after all, it does generate over $1.3 million in combined lifetime benefits but if even one of you is willing to delay benefits for a period of time the long term gains can be significant. Under this next approach, Paul does not claim his benefits at 66 but simply delays until Mary turns 66. At that point, Mary claims her benefits of $2,084, and Paul files a restricted application for spousal benefits only. Although this technique was eliminated by the recent budget bill, it is still available to Paul because he turned 62 years old well before the end of This entitles him to receive monthly payments equal to 50% of Mary s PIA, or (.5 x $2,084) $1,042 for the next 11 months. He has already earned 37 months of DRCs up to this point, and he earns an additional 11 months while collecting spousal benefits. When he switches to benefits based on his own record at age 70, they will have grown to $2,683. $2,084 and $2,683 are the respective amounts you can each expect to receive until Paul predeceases Mary, at which time she will switch to survivor benefits of $2,683. 6

7 The following table shows what the cash flows might look like under Strategy 2: Paul s Age Mary s Age Paul s Benefits Mary s Benefits Combined Family Benefits $1,042 $2,084 $3, $2,683 $2,084 $4,767 Paul assumed to die at $0 $2,683 $2,683 Total Benefits Over Life Expectancies Mary assumed to die at 95-0 $655,382 $783,335 $1,438,717 Results for Strategy 2: Combined monthly benefits at older ages $4,767 Total combined benefits over assumed life expectancies $1,438,717 Survivor benefits $2,683 Strategy 3 Paul begins benefits based on his earnings record in April 2016 at age 66 Mary files a restricted application for spousal benefits only in May 2019 at age 66 Mary switches to benefits based on her earnings record in May 2023 at age 70 Under this approach Paul claims his benefits of $2,033 at age 66 just as under Strategy 1. When Mary reaches her FRA she files a restricted application for spousal benefits only, which enables her to receive benefits equal to 50% of Paul's PIA, or ( ) $1,016 per month for the next 48 months. As in Paul s case, the restricted application is still available to Mary because she turned 62 years old before the end of By the time Mary switches to her own benefits at age 70, they will have grown to $2,751. $2,033 and $2,751 are the respective amounts you can each expect to receive for the rest of your lives. The following table shows what the cash flows might look like under Strategy 3: 7

8 Paul s Age Mary s Age Paul s Benefits Mary s Benefits Combined Family Benefits $2,033 $0 $2, $2,033 $1,016 $3, $2,033 $2,751 $4,783 Paul assumed to die at $0 $2,751 $2,751 Mary assumed to die at 95-0 Total Benefits Over Life Expectancies $585,504 $874,068 $1,459,572 Results for Strategy 3: Combined monthly benefits at older ages $4,783 Total combined benefits over assumed life expectancies $1,459,572 Survivor benefits $2,751 Strategy 4 Mary begins benefits based on her earnings record in May 2019 at age 66 Paul files a restricted application for spousal benefits only in May 2019 at age 69-1 Mary suspends benefits in April 2020 at age Paul switches to benefits based on his earnings record in April 2020 at age 70 Mary resumes benefits based on her earnings record in May 2023 at age 70 In April 2040 Mary switches to survivor benefits This option looks just like Strategy 2 at the outset: Mary begins her benefits at age 66, and Paul files a restricted application for spousal benefits only at his age This enables Paul to receive spousal benefits of $1,042 per month on Mary s record for the next 48 months, after which Paul switches to his own benefits, which have grown to $2,683. But this time, as soon as Paul turns 70, Mary suspends her benefits at age Her objective in suspending is not to enable Paul to claim spousal benefits, as he has already received as much as he can. Rather it enables Mary to earn 37 months of DRCs; by the time she resumes her benefits at age 70 they will have grown to $2,598. $2,683 and $2,598 are the respective amounts you can each expect to receive until Paul predeceases Mary, at which time she will switch to survivor benefits of $2,683. 8

9 The following table shows what the cash flows might look like under Strategy 4: Paul s Age Mary s Age Paul s Benefits Mary s Benefits Combined Family Benefits $1,042 $2,084 $3, $2,683 $0 $2, $2,683 $2,598 $5,281 Paul assumed to die at $0 $2,683 $2,683 Mary assumed to die at 95-0 Total Benefits Over Life Expectancies $655,382 $810,569 $1,465,951 Results for Strategy 4: Combined monthly benefits at older ages $5,281 Total combined benefits over assumed life expectancies $1,465,951 Survivor benefits $2,683 Strategy 5 Paul begins benefits based on his earnings record in May 2019 at age 69-1 Mary files a restricted application for spousal benefits only in May 2019 at age 66 Mary switches to benefits based on her earnings record in May 2023 at age 70 In this case, Paul delays claiming his benefits until age The 37 months of DRCs he has earned up to this point have translated into an increased benefit amount, starting at $2,466 and jumping to $2,534 seven months later. As soon as Paul claims, Mary files a restricted application for spousal benefits only, entitling her to $1,016 per month for the next 48 months. As under Strategy 3, when Mary switches to her own benefits at age 70, her benefits will have grown to $2,751. $2,534 and $2,751 are the respective amounts you can each expect to receive for the rest of your lives. The following table shows what the cash flows might look like under Strategy 5: 9

10 Paul s Age Mary s Age Paul s Benefits Mary s Benefits Combined Family Benefits $2,466 $1,016 $3, $2,534 $1,016 $3, $2,534 $2,751 $5,285 Paul assumed to die at $0 $2,751 $2,751 Mary assumed to die at 95-0 Total Benefits Over Life Expectancies $635,490 $874,068 $1,509,558 Results for Strategy 5: Combined monthly benefits at older ages $5,285 Total combined benefits over assumed life expectancies $1,509,558 Survivor benefits $2,751 Strategy 6 Paul files and suspends benefits in April 2016 at age 66 Mary files a restricted application for spousal benefits only in May 2019 at age 66 Paul begins receiving benefits based on his earnings record in April 2020 at age 70 Mary switches to benefits based on her earnings record in May 2023 at age 70 ALERT: Under this approach, Paul will use the file and suspend technique that is described in the Glossary (on page ii in the Appendix). This means that at age 66 he files for his benefits but immediately requests that payments be suspended. Although he can begin benefits at any time, the intention here is for Paul to begin receiving benefits at age 70, thus earning enough DRCs to increase his benefits to $2,683. Paul will be among the last claimants to use this technique, as it was eliminated by the Social Security provisions in the recent budget bill. The opportunity was extended to people who were born on or before May 1, Had Paul been born two days later, or had the President signed the bill on Saturday, October 31 instead of waiting until Monday, November 2, this strategy would not be available to you. Paul, to utilize this technique you must file for his benefits effective next April and request that benefits be suspended at the same time you file. You should make an appointment at your local SSA office in February 2016, fill out the application there, request the suspension in 10

11 writing, and get a receipt proving that all this was done before April 30. After April 29, the opportunity expires. Mary, you must wait until May 2019 to file the restricted application for spousal benefits only, and I recommend that you also file the application a couple months in advance, in person, specifying May as the effective date of the filing. That will provide you with 48 months of spousal benefits at $1,016 per month. When Paul turns 70 he switches to his benefits of $2,683; when Mary turns 70, she switches to her benefits of $2,751. These are the amounts you will each receive for the rest of your lives. As you can see, this approach absolutely maximizes both of your top priorities, as well as survivor benefits. The following table shows what the cash flows might look like under Strategy 6: Paul s Age Mary s Age Paul s Benefits Mary s Benefits Combined Family Benefits File & Suspend $0 $ $0 $1,016 $1, $2,683 $1,016 $3, $2,683 $2,751 $5,434 Paul assumed to die at $0 $2,751 $2,751 Total Benefits Over Life Expectancies Mary assumed to die at 95-0 $643,920 $874,068 $1,517,988 Results for Strategy 6: Combined monthly benefits at older ages $5,434 Total combined benefits over assumed life expectancies $1,517,988 Survivor benefits $2,751 Comparing the Strategies Below is the same Strategy Comparison Table that appears on page 3, but now that you see the numbers in context the figures should be more meaningful. 11

12 Combined Monthly Benefits at Older Ages Total Benefits Over Life Expectancies Survivor Benefits Strategy 1 $4,117 $1,310,736 $2,084 Strategy 2 $4,767 $1,438,717 $2,683 Strategy 3 $4,783 $1,459,572 $2,751 Strategy 4 $5,281 $1,465,951 $2,683 Strategy 5 $5,285 $1,509,558 $2,751 Strategy 6 $5,434 $1,517,988 $2,751 Observations: 1. With the exception of Strategy 1, all of these options could be viable for you depending on the totality of your retirement planning situation. 2. One feature common to Strategies 2-6 is that they all take advantage of spousal benefits to a greater or lesser extent. Spousal benefits represent the closest thing to free money in the Social Security system. The reason that Congress took action against file and suspend and restricted applications is that these techniques were thought to be too expensive for the system to continue supporting. 3. If receiving substantial benefits before age 70 were important to you, that would provide a reason to look closely at the first few options. Otherwise, I suggest focusing on Strategies 4-6. The following charts provide visual cues to assist you in comparing the strategies. $6,000 $5,500 $5,000 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 Combined Monthly Benefits at Older Ages $5,281 $5,285 $5,434 $4,767 $4,783 $4,117 Strategy 1 Strategy 2 Strategy 3 Strategy 4 Strategy 5 Strategy 6 12

13 Combined benefits at older ages are purely a function of the age at which each of you claim your own benefits. The minimum claiming age is 62-1; the maximum claiming age is 70. Under Strategy 1 both of you claim your benefits at age 66, while under Strategy 6 you both claim at 70. You can see the steady progression as one or both of you claim at later ages. At the high end of the spectrum, Strategy 6 generates over $1,300 more in combined monthly benefits than Strategy 1 and about $150 more than Strategies 4 and 5. $1,600,000 $1,500,000 $1,400,000 $1,300,000 Total Benefits Over Life Expectancies $1,509,558 $1,517,988 $1,438,717 $1,459,572 $1,465,951 $1,310,736 $1,200,000 $1,100,000 $1,000,000 Strategy 1 Strategy 2 Strategy 3 Strategy 4 Strategy 5 Strategy 6 Total combined benefits over assumed life expectancies. This is the place where the cumulative impact of differences in your early benefits, combined monthly benefits at older ages, spousal benefits, and survivor benefits is reflected. Notice that Strategy 1 is dwarfed by the others; 2 through 5 are clustered; and the difference between 5 and 6 is only about $8,400. In your situation Strategy 6 on the high end generates about $207,000 more in benefits than Strategy 1 on the low end. $3,000 $2,800 $2,600 $2,400 $2,200 $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 Survivor Benefits $2,683 $2,751 $2,683 $2,751 $2,751 $2,084 Strategy 1 Strategy 2 Strategy 3 Strategy 4 Strategy 5 Strategy 6 13

14 Survivor benefits. Since we are assuming life expectancies of 90 and 95 for purposes of this report, Mary figures to survive Paul by 97 months. That makes the benefits Mary will receive as the survivor important for both of your top priorities. However, the difference between her benefits as the survivor under Strategies 2 and 4 versus 3, 5, and 6 is only $68 per month or a total of $6,566 over the entire survivorship period. Only Strategy 1 falls substantially short with respect to this metric. In Conclusion Although there are literally hundreds of possible claiming combinations available to you, these strategies represent key points along the claiming spectrum. You can fine tune your approach by selecting one of these strategies and making minor changes in the timing of your filings. For example, Mary could modify Strategy 4 by suspending her benefits a few months later or resuming her benefits a few months earlier, thus changing the balance between early and longer term benefits. Clearly there is no right answer. It s a question of what feels right to you and what fits best into your overall retirement picture. The tables, charts, numbers, and verbiage can help you better understand Social Security, but they can t tell you what you should do. That s where Don and Travis can be most helpful to assist you in figuring out how the various claiming strategies might coordinate best with your overall retirement income plan, taking into account all of the other assets and sources of income you have at your disposal. I hope that this report gives you a better idea of what your options are, and thus positions you to make your decisions with more confidence and awareness. Should you have any questions about this report I invite you to contact me for a follow up conversation. Respectfully, Peter M. Weinbaum The report up to this point has been handcrafted for you and your unique situation. The Appendix material in the pages that follow is standard in my reports, and while some of that material might not be applicable to your situation, it is my hope that you will find some useful information there. 14

15 THE FINE PRINT This report is provided by Consultant 3 for informational purposes only. Its purpose is to provide you and your financial advisor with information and guidance to help you craft a personalized approach to your Social Security claiming strategies. All the information provided in this report is predicated on current Social Security rules, benefit calculations, and payout promises based on existing funding levels and without taking into account future COLA increases or changes in the Social Security system. Limitation of Liability: Consultant intends and believes that all the information and illustrations are accurate and sound, even though they can be regarded as no more than estimates. However, the Social Security system is highly complex, and errors related to interpretation, mathematical calculations, and transferring numbers from calculation software to this report can occur. In addition, Consultant relies on information provided by you and the Social Security Administration, as well as on third party calculation software. Therefore, you should not take, or refrain from taking, any action in reliance on this report without first confirming its accuracy and viability with the Social Security Administration. 4 Consultant does not purport to provide legal or tax advice, and to the extent that this report comments on or offers interpretations of laws, regulations, or rulings by the Social Security Administration or any other body, or on the interplay of Social Security claiming, Medicare, and the availability of HSA contributions, Consultant specifically requires and instructs you to consult with your own legal counsel, CPA, HSA custodian, health insurance plan administrator, or other source of expertise before taking, or refraining from taking, any action in relation to this subject matter. Consultant shall not be liable for any loss incurred by you with respect to the subject matter of this report, except where such loss directly results from Consultant s gross negligence or willful misconduct. In no event shall Consultant be liable for damages in excess of fees paid by you to Consultant for services provided to you. Use of this report signifies your awareness of, and your consent to be bound by, this limitation of liability. 3 This report is provided by Stillpoint Associates, Ltd., a Vermont corporation. Stillpoint Associates, Ltd., is represented by Peter M. Weinbaum, doing business as The Social Security Maven, which is a registered trade name of Stillpoint Associates, Ltd. Peter M. Weinbaum, The Social Security Maven, and Stillpoint Associates, Ltd. are collectively referred to herein as Consultant. 4 Please keep in mind that you may encounter an SSA employee who is unfamiliar with some perfectly sound strategies and may indicate that they are not available to you, or not available to the extent illustrated. If that occurs, please bring it to my attention to make sure that the SSA employee is providing accurate information. i

16 Glossary of Social Security Terms and Concepts Age: In the world of Social Security, a person attains a given age at 12:00 a.m. on the day before their actual birthdate. Further, to claim retirement benefits at the earliest possible time (age 62), Social Security requires that you must be 62 for the entire month. If you were born on the 2 nd day of the month, you will be deemed to have been born at 12:00 a.m. on the 1 st ; and if you were born on the 1 st, you will be treated as if you had been born at 12:00 a.m. on the last day of the previous month. If you were born on any day other than the 2 nd, you must wait until age 62-1, since you will not have been 62 for the entire month of your birth. Cost of Living Adjustments (COLAs): Social Security benefits are protected from inflation to some degree. In most years, everyone s Social Security benefits are increased based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). After two years of no COLAs in 2010 and 2011, SSA declared increases of 3.4%, 1.7%, 1.5%, and 1.7% for 2012, 2013, 2014, and 2015 respectively. There is no COLA in Delayed Retirement Credits (DRCs): Increases in your monthly Social Security benefits if you delay claiming benefits based on your own Earnings Record after you have reached your Full Retirement Age or if you suspend benefits after FRA. For every month you delay past FRA, your benefit grows by 2/3% per month (8% per year) until you reach age 70 or resume receiving payments, whichever occurs earlier. However, when you claim spousal or survivor benefits you do not earn DRCs on those benefits by waiting past Full Retirement Age to claim them. Earnings Record: Page 3 of your printed Social Security statement shows the history of your Social Security covered earnings for the years you have worked over your lifetime. Covered earnings are the wages or self-employment earnings on which you paid Social Security taxes. Earnings Test: If you claim before FRA and earn more than a specified amount ($15,720 per year in 2016), $1 of benefits is withheld for every $2 of earnings over the limit. A more liberal test is used during the calendar year in which you reach Full Retirement Age. Once you reach Full Retirement Age, the Earnings Test no longer applies to you. [See page vi for more.] File and suspend: This is where a person files for retirement benefits based on his or her Earnings Record but then immediately suspends payments. Most often this technique is employed to enable the other spouse to claim spousal benefits, while the spouse who filed and suspended earns Delayed Retirement Credits. IF A CLAIMANT SUSPENDS BENEFITS AFTER APRIL 30, 2016, NO ONE IS PERMITTED TO RECEIVE BENEFITS ON THAT CLAIMANT S RECORD WHILE BENEFITS ARE SUSPENDED. Full Retirement Age (FRA): The age at which you are eligible for your full monthly benefits without reduction for early claiming. For people born between , FRA is age 66. FRA increases by two months for each subsequent birth year after 1954, capping out at age 67 for those born in 1960 or later. For a widow or widower who is claiming survivor benefits, FRA is 66 if his or her birth year is ii

17 Primary Insurance Amount (PIA): This is the amount you would receive if you first claimed benefits at your Full Retirement Age (FRA). It is based on an average of your highest 35 years of covered earnings, adjusted for inflation. If you do not have 35 years of covered earnings, the missing years will count as zeroes in the average. Restricted Application for Spousal Benefits Only: A claim filed at or after Full Retirement Age that is restricted to spousal benefits. IF A CLAIMANT WAS BORN AFTER JANUARY 1, 1954, THAT CLAIMANT WILL NOT BE PERMITTED TO FILE A RESTRICTED APPLICATION. Spousal Benefits: Benefits paid to the spouse of an eligible worker and based on the Social Security earnings record of the eligible worker. You must be at least age 62 to claim spousal benefits. In their purest form, spousal benefits are equal to 50% of the other spouse s PIA. Theoretically, either spouse can collect spousal benefits on his or her spouse s record, but: (1) You cannot file for spousal benefits until your spouse has claimed his or her own benefits (2) A husband and wife cannot both collect spousal benefits at the same time (3) If you are not receiving benefits on your own record, any spousal benefits you receive are based on 50% of your spouse s PIA. (4) If you are receiving benefits on your own record, the total of your own benefits and any spousal add-on cannot exceed 50% of your spouse s PIA. (5) Spousal benefits may be reduced by up to 30% if claimed before you reach FRA (6) If you apply for benefits before your FRA you must apply for your own benefits first, i.e., you may not restrict your application to spousal benefits only. You may also be eligible for spousal benefits but only if your PIA is less than half of your spouse s PIA. Survivor Benefits: Benefits paid to the surviving spouse of a deceased eligible worker. A surviving spouse is eligible to claim benefits at the death of his or her spouse as follows, unless affected by the Windfall Elimination Provision or Government Pension Offset: (1) The benefits are paid instead of not in addition to any other benefits the survivor is receiving. Thus, they must be larger than the benefits the survivor is already receiving. (2) The benefits are equal to 100% of the amount the deceased spouse was receiving at the time of death or 82.5% of the decedent s PIA, if that amount is larger. A more complex calculation may be used if both the decedent and the survivor claimed benefits before FRA (3) Benefits may be claimed as early as age 60 age 50 if the surviving spouse is disabled but may be reduced by up to 28.5% for claiming before FRA. (4) Critical factors in determining the size of survivor benefits are: (1) the size of the decedent s PIA; (2) the age at which the decedent claimed benefits; and (3) the age at which the survivor claims benefits. Suspending Benefits: Once you have begun receiving retirement benefits, you cannot suspend payments until you reach FRA. At that time you may suspend benefits, typically for the purpose of earning Delayed Retirement Credits, and then resume benefits no later than age 70. iii

18 The Impact of Starting Age on Monthly Retirement Benefits Many factors can influence your Social Security retirement benefits, and perhaps the most significant is your age when you begin benefits. Social Security uses a carrot and stick approach to the claiming of retirement benefits. As a general rule, the earlier you claim your Social Security benefits the lower your monthly benefits will be. If you delay the start of benefits until after your Full Retirement Age (FRA), your benefits will be increased for every month you delay through Delayed Retirement Credits (DRCs). So the basic tradeoff is between beginning earlier and receiving more, but smaller, payments or beginning later and receiving fewer, but larger, payments. Example: Assume that Husband will reach FRA at age 66 with a PIA of $2,000. If he stops working and claims his benefits at age 62, he will receive $1,500 per month, which is 25% less than his PIA and 43% less than his maximum possible benefit, which would have been $2,640 had he waited until age 70. Put another way, as compared to claiming at 62, Husband could increase his benefit to $1,600 (6.67%) by waiting until 63; to $1,733 (15.53%) by waiting until 64; to $1,866 (24.4%) by waiting until 65; and to $2,000 (33.3%) by waiting until 66. On the other hand, the SSA offers a carrot for each month claiming is delayed beyond FRA in the form of Delayed Retirement Credits (DRCs). You earn an increase of 2/3% of PIA 5 for each month claiming is delayed between FRA and age 70, which amounts to 8% per year. The following table captures these relationships in a more visual format: Full Retirement Age (FRA) = 66 PIA = $2,000 Age at Filing Benefit % % of Early Benefit Actual Benefit of PIA 62 75% 100% $1, % % $1, % % $1, % % $1, % % $2, % % $2, % % $2, % % $2, % % $2,640 5 If you claim your own benefits before FRA and suspend benefits after FRA, the 2/3% per month increase is based on the lesser of (1) the amount you were actually receiving at the time of suspension, or (2) your PIA. iv

19 The amount of benefit reduction if you claim before FRA depends on the exact month in which you file. The reduction for claiming within 36 months of FRA is 5/9% of PIA for each month of early filing; the monthly reduction for claiming more than 36 months before FRA is 5/12% of PIA the amount you would have received had you claimed at Full Retirement Age. The stick principle applies to reductions for claiming other benefits before FRA as well, including spousal and divorced spouse benefits and survivor benefits, although the percentage reductions are different from those described above. DRCs are available only for retirement benefits claimed on one s own record: there is no increase in spousal, divorced spouse, or survivor benefits for delaying past FRA. For those born between 1955 and 1960, when FRA grades up to 67 in increments of 2 months per year, the stick gets heavier and the carrot smaller. Timing Is Everything Not only does the age you begin benefits impact your monthly payments, but it also affects your "longevity risk" the risk of outliving your resources. If you are married, and your Social Security earnings are higher than your spouse s, the impact of claiming early and locking yourself into smaller benefits becomes magnified, since if your spouse survives you he or she will (in most cases) inherit the benefit you were receiving when you died. There are several factors that should be considered before selecting the optimal date to begin benefits. Your health status, life expectancy, current need for income, whether or not you plan to continue working, and how concerned you are about running out of money in your older years could all be considerations in determining the date to begin your benefits. Married couples often consider the need to maximize income for a surviving spouse who was the lower wage earner. The process can be complex, and the number of possible claiming strategies can be daunting. While having a strategy for when to begin Social Security benefits is important, the analysis requires careful consideration of your claiming options in the context of your overall retirement planning, which may involve working closely with a financial advisor. Incorporating your benefits into an overall retirement income plan may make a material difference in the amount of income available to you in retirement. How Your Benefits Are Determined Your actual benefits will depend on: How much you earned over your working career The age at which you apply for benefits Whether you qualify for spousal benefits or divorced spouse benefits Survivor benefits benefits for which you as the surviving spouse are eligible, based either on your own record or on your deceased spouse s record v

20 Social Security benefits are based on the average of your highest 35 years of covered earnings earnings that were subject to Social Security taxes with earnings through age 60 indexed to reflect increases in U.S. workers' average wage level. For example, if the wage level in the U.S. is twice as high when you turn 60 as it was when you were 40, the formula doubles your age 40 earnings. If you worked fewer than 35 years, the "missing" years are calculated as zero. The maximum income in any year is equal to that year's maximum income subject to Social Security taxes. If you claim benefits before Full Retirement Age (FRA) and continue to have more than a modest amount of earned income (e.g., wages, salary, earnings from self-employment), the Social Security Earnings Test may cause you to lose some or all of your Social Security benefits. Social Security Earnings Test If you continue to work while receiving benefits, and have not yet reached age 66, you are subject to the Social Security Earnings Test. That means that if you have earnings subject to Social Security tax that exceed the exempt amount ($15,720 6 in 2016), your benefits will be reduced by $1 for every $2 earned over the limit. During this time, if any family members are receiving benefits on your record, their benefits may be reduced as well. This is how it works: SSA asks you each year how much you expect to earn in the coming year. [In the year of your initial application, the Earnings Test operates on a monthly basis.] Then they subtract the exempt amount ($15,720 in 2016) from your anticipated earnings and divide by 2. The result of these calculations is called excess earnings. The excess earnings are divided by the monthly benefit you are receiving, and the quotient is rounded up to the next whole number. That will be the number of months, beginning in January, in which you will get no benefits. During the balance of the year you will get full benefits. Any extra amounts withheld will be paid to you early in the following year. Technically these benefits are being withheld rather than lost, because you will begin to recoup that money at Full Retirement Age. At that time, SSA will recalculate your benefits by adding the total number of months that were withheld to your original claiming age. For example, if you first claimed your benefits at age 63 and a total of 12 months were withheld, beginning when you reach FRA your benefits will equal you would have received had you originally filed at age 64. If you live long enough, you will not only recoup all of the benefits that were withheld but you will gain additional benefits that would not have been available to you had not worked after claiming and simply continued benefits based on a claiming age of 63. It gets more complicated where two or more family members are claiming on one record at the same time. 6 During the calendar year in which you reach Full Retirement Age, the exempt amount goes up significantly ($41,880 in 2016), and $1 is withheld for every $3 of earnings above the exempt amount. vi

21 Example 1: If Wife has claimed her own benefits at age 63 and is subject to the Earnings Test, and Husband (age 66) is claiming spousal benefits on her record, the excess earnings could result in both spouses having benefits withheld until the excess is accounted for. Wife is very likely to recoup her withheld benefits, as described above, but Husband s withheld benefits will never be recovered. Example 2: Same facts as described in Example 1, except that Wife is no longer working and Husband is Husband is continuing to work and is earning more than the exempt amount. Husband s excess earnings will not affect Wife s benefits, but they will cause his benefits to be withheld. Husband will begin to recoup withheld benefits at FRA. Example 3: Same facts as Example 1, except that their minor Child is also receiving benefits based on Wife s record. Wife s excess earnings will result in amounts being withheld from her benefits, as well as the benefits that Husband and Child are receiving on her record. Husband and Child will not be able to recover amounts withheld from their benefits. Example 4: Wife is 63 and still earning more than the exempt amount. Husband dies and Wife claims reduced survivor benefits. Wife s excess earnings will result in amounts being withheld from her benefits. At Full Retirement Age, Wife will begin to recoup amounts withheld, as long as she continues to receive survivor benefits. The Impact of Mortality Assumptions We all face a variety of risks that have financial implications. If one spouse dies too soon, the survivor may experience a reduction in the income and in the accumulation of assets that he or she had anticipated. On the other hand, if one or both spouses live too long, especially in the context of chronic illness or cognitive impairment, there is a risk that their assets could be depleted and that their standard of living could suffer in later years. In the world of Social Security, the selection of claiming strategies is dictated by our financial goals, our overall financial situation, and our decisions about where we self-insure and where we will transfer risk through the use of insurance. Social Security is a form of longevity insurance. Maximizing cumulative Social Security benefits over a couple s joint lifetimes helps protect them against outliving their assets. The premium payments for this insurance are not only the Social Security taxes we paid on our earnings, but also the number of months we refrain from claiming after we become eligible for benefits. According to a simple calculator, available on the website of the Society of Actuaries, 8 for a male/female couple each of whom is currently age 65, there is a 36% probability of at least one spouse living for 30 more years i.e., to age 95. In fact, the calculator suggests that there is a 7 Although Husband cannot restrict his application to spousal benefits, if his PIA is less than 50% of Wife s PIA he may be able to get a spousal add-on to his own reduced benefits. For claimants born after January 1, 1954, the ability to file a restricted application is no longer available. 8 vii

22 50/50 chance of at least one spouse living to age 92. That is why assumed life expectancies of 90 (husband) and 95 (wife) are suggested for illustration purposes. Social Security is not the only form of longevity insurance: life insurance and annuities particularly those that offer guaranteed income features may play an important role in your financial risk management. Your financial advisor knows all about these tools and how they might apply to your situation. If we knew when we were going to die, we could all make very intelligent decisions about when to claim our benefits just as we could be very smart about acquiring life insurance and annuities. But we generally don t know for sure until it is too late to purchase life insurance and annuities, or to target our Social Security claiming decisions precisely. You can work with your advisor to design an overarching retirement plan that fits for you and provides you with the level of financial security and peace of mind you are seeking. The Social Security Benefit Report is intended to assist you and your advisor in selecting the claiming strategies that work best in connection with your overall plan. A Framework for Understanding Claiming Priorities The total amount of benefits a couple will receive from the Social Security system over their respective life spans is made up of several components, and it is a function of the benefits they will collect during three different periods or stages: 1. The early stage. I define this as the period beginning with the month in which either of you starts receiving benefits and ending when the younger spouse turns 70. If all you cared about was maximizing the total benefits you would receive during this period, the strategy would be for both of you to file for benefits as early as possible. Another point: if you are assuming relatively short life expectancies (for example, 80 and 82), the early stage plays a much larger role in total benefits from an illustration standpoint. 2. The middle stage. This period begins where the first leaves off, and it ends when one of you passes away. For illustration purposes, this is a function of your assumed life expectancies. Of course either of you could actually live for a longer or shorter period of time, so we make assumptions about mortality based on the period you decide to plan for. This is frequently the longest of the three stages, during which each of you is collecting the highest level of benefits you will receive, based on claiming choices you made before you turned 70. Therefore this is generally the single most critical driver of total benefits over your life expectancies. 3. The survivorship stage. This period begins when the first spouse dies and lasts until the survivor passes away. During this period the survivor will receive the higher of the individual benefits you were receiving at the time of the first death. For illustration purposes we make certain assumptions about the order and timing of mortality, but in real viii

23 life anything can happen. The question becomes one of risk tolerance and risk management, and there are many ways to manage risk other than those that may be found in the Social Security system. I mentioned that there are several components that determine total benefits received over assumed life expectancies. These include: Your individual benefits. In some situations these will be the only benefits that you will be receiving for certain periods of time. Spousal benefits. A couple s total benefits can often be enhanced when one spouse is able to claim benefits on the other s record. In their purest form, spousal benefits are equal to 50% of the other spouse s Primary Insurance Amount (PIA). Combined monthly benefits at older ages. This may turn out to be simply the sum of your individual benefits, or it may include spousal benefits as well. Even a $100 difference in the combined monthly benefits generated by two strategies may result in a significant difference in the total benefits those strategies deliver. This is the metric that dominates the middle stage, which can last for well over 200 months. Survivor benefits. These benefits are equal to the higher of two amounts: (1) the benefit amount that the deceased spouse was receiving at the time of death, or (2) the retirement benefit amount that the survivor is receiving, or is eligible to receive. Nuts and Bolts You typically should plan to file your application two or three months before you want to begin (or switch) benefits, specifying the effective month of the application. If you miss your intended initial filing date of FRA or later, you can make your filing retroactive for up to six months, although not earlier than the month in which you attained FRA. This can also work to some extent if you change your mind and wish you had filed earlier. However, if you file an application for benefits before you reach FRA, you have only one opportunity in your lifetime to withdraw your application within 12 months of claiming and repay all benefits received. If you fail to do so, then you must wait until you reach FRA to change course. You do not have to make your filing effective in a birthday month. For example, if you decide to file at age 66-9, you are absolutely free to do so. How to apply. Applications may be filed at your local SSA office or by using SSA s online application process. A simple application for benefits on your own record should be able to be filed online with minimal risk. A more complex filing, e.g., the file and suspend or restricted application techniques, can possibly be done online, but I suggest that you visit your local SSA office to file in person. Eventually the online application process may become more routine, thus involving a lower risk of errors than there may be today. ix