Solving the Social Security Puzzle

Transcription

1 Solving the Social Security Puzzle What You Need to Know About Your Social Security Benefits Before You Claim Robin Brewton VP of Client Services This presentation is provided by Social Security Solutions. Wells Fargo does not guarantee the accuracy of the information in this presentation. Presented information is for educational purposes only and does not constitute investment, financial, tax, or legal advice. Please contact an investment, financial, tax, or legal advisor regarding your specific situation. DISCLAIMER The views presented today are provided by Social Security Solutions, Inc. The information was taken from sources believed to be reliable but cannot be guaranteed. They do not necessarily represent the views of the Social Security Administration. The information presented today does not constitute financial, legal or tax advice and should be used for informational purposes only. Since individual circumstances vary, you should consult your legal, tax, or financial advisors for specific information. All values in these slides are in today s dollars. Neither Wells Fargo nor Social Security Solutions, Inc. is affiliated in any way with the Social Security Administration. A STRATEGY FOR SOCIAL SECURITY There are thousands of options one can use in claiming Social Security retirement benefits. Making the best choices for your circumstances can make a significant difference in the amount of cumulative lifetime benefits you receive. While you may be able to learn about Social Security and make a good decision, you need help to make the best decision for your situation. 1

2 COMMON QUESTIONS Will Social Security be there for me when I m ready to claim? What about recent changes I ve heard about? Will Social Security be enough to live on in retirement? How much will I receive? What s the best time and way for me to claim benefits? WILL SOCIAL SECURITY BE THERE FOR ME? In short, YES! WILL SOCIAL SECURITY BE THERE? $9.2 Billion amount that Social Security income will exceed expenses in 2016 $2.79 trillion amount in the Social Security Trust fund, which is $25 billion more than last year 2034 last year Social Security will be able to pay full benefits if nothing is done 79% -- amount of benefits able to pay out after 2034, if nothing is done Source: SSA, Congressional Budget Office,

3 WHAT ABOUT RECENT CHANGES? RECENT CHANGES TO SOCIAL SECURITY The Bipartisan Budget Act of 2015 create changes to Social Security The ultimate effect is that 2 ways to claim that had been common no longer exist Social Security is still confusing There are plenty of strategies you can use to maximize benefits Some of you may have a window in which you can continue to use these strategies and you need expert help to make sure you get this right Source: Bipartisan Budget Act of 2015 WILL SOCIAL SECURITY BE ENOUGH TO LIVE ON? Probably not. 3

4 RETIREMENT SPENDING FOR THE AVERAGE RETIREE* Shelter/Utilities $11, 967 Transportation $8,214 Clothing $1,287 Healthcare $5,540 Food $5,793 TOTAL BASIC EXPENSES = $33,057 (don t forget taxes) Source: U.S. Consumer Expenditure Survey, U.S. Bureau of Labor Statistics, 2014 * Retirees aged 65 to 74 with a reported spending average of $45,968 HOW MUCH WILL THE BENEFIT BE? It depends. HOW MUCH WILL I RECEIVE? Your benefits are determined by a combination of personal factors: How much you earned over your working lifetime The age at which you apply for benefits Your marital status How well you use the rules to maximize your benefits If you start to collect at: 62 66* 70 If your monthly retirement benefit is: Your minimum At least 1/3 more At least 3/4 more $1000 $1333 $1760 *Assumes FRA of 66 Source: Social Security Administration,

5 MEET JOE AND MARY At age 66, Joe claims his $2,000/month retirement benefit At age 66, Mary claims her $1,200/month benefit Joe plans to live until age 80, and Mary until age 90 If they live to those precise ages, they will collect about: $777,600 in lifetime cumulative benefits Source: Social Security Administration, 2016 HOW BENEFITS ARE CALCULATED Formula includes your highest 35 years of earnings (years with no earnings are averaged in as zero) Earnings are indexed for inflation and averaged Your benefits are based on your Primary Insurance Amount (PIA) Benefit is increased in some years by cost-of-living adjustments (COLAs) IMPACT FOR FILING EARLY If you file before full retirement age, your benefit is reduced If you were born between 1943 and 1954, Full Retirement Age is 66 Apply at age Benefit will be % of PIA Example if PIA is $2, % $1, % $1, % $1, % $2,080 5

6 DELAYED RETIREMENT CREDITS For every month beyond your full retirement age that you wait to claim, you will get 2/3% more! If you were born between 1943 and 1954: Apply at age Benefit will be % of PIA Example if PIA is $2, % $2, % $2, % $2, % $2, % $2,943 WHEN AND HOW SHOULD I CLAIM MY BENEFITS With a good claiming strategy. WHEN SHOULD I START BENEFITS? Depends on a lot of factors: Marital status Age Life expectancy 401(k) savings Pension Need for income Desired standard of living Planning to continue work Survivor needs You need a STRATEGY that considers all of these factors! And remember: when you stop working and when you start Social Security can be separate decisions. 18 6

7 WHAT IS A CLAIMING STRATEGY? Using all of the complicated rules of Social Security to your advantage. This may involve combining and/or postponing certain benefits at a particular time. The difference between a good and a bad strategy can be $100,000 or more. 19 TYPES OF BENEFITS Your retirement benefit is the foundation for other benefits in qualifying situations Survivor Children s/child-in-care Surviving Divorced Spouse Divorced Spouse Widow/Widower Spousal Retirement SPOUSAL BENEFITS The spousal benefit is based on 50% of the other spouse s Primary Insurance Amount (PIA) As the spouse of an insured worker, you are generally eligible to receive spouse's insurance benefits if you meet these conditions: Your spouse has filed for retirement benefits. You are not receiving a higher benefit. You have filed an application for spousal benefits. You are over 62. Source: Social Security Administration,

8 EXAMPLE OF SPOUSAL BENEFITS Tom s Primary Insurance Amount is $2,000 His wife Melinda can claim a spousal benefit on his record If she claims at her full retirement age, she will receive $1,000 monthly that s half of his PIA If she claims the benefit at age 62, she will receive only $700 monthly a 30% reduction due to the early claim For every month she waits to claim, she ll get a little bit more IMPORTANT TO KNOW ABOUT SPOUSAL BENEFITS Spousal benefits do not earn delayed retirement credits Only one member of a couple can receive spousal benefits at a time Once you ve opened your own record, you cannot claim a spousal benefit unless it s bigger than your own benefit You must have been married for a full year to collect a spousal benefit Source: Social Security Administration, DIVORCED SPOUSE BENEFITS Divorced spouse benefits are very much like spousal benefits The divorced spouse benefit is based on 50% of the other spouse s Primary Insurance Amount (PIA) As the divorced spouse of an insured worker, you are generally eligible to receive ex-spouse's insurance benefits if you meet these conditions: You were married at least 10 years. You are not already receiving a higher benefit. You are over 62. Your ex-spouse is receiving benefits OR the divorce has been final at least 2 years and your ex-spouse is at least age

9 PERKS OF THE DIVORCED SPOUSE BENEFIT If your own benefit is lower than the divorced spouse benefit but can grow larger than the divorced spouse benefit, claim the divorced spouse benefit at your full retirement age. You can switch to your own larger retirement benefit later. It doesn t change the amount your ex-spouse can get, and it doesn t reduce what his or her current spouse receives. If your ex-spouse pre-deceases you, you can qualify for an amount equal to his or her full benefit at the time of death. REMEMBER JOE & MARY? Joe: Mary: PIA of $2,000 PIA of $1,200 Life expectancy 80 Life Expectancy 90 Best Strategy: Mary begins her retirement benefit at age 66 Joe collects spousal benefits on Mary s record beginning at age 66 When he turns 70, Joe begins his own benefit Cumulative benefit: $864, THE POWER OF COMPARE Cumulative difference between Primary and Early: $115,948! Survivor benefit difference: $862/month for the rest of Mary s life While income in the early years may seem important, it often won t be when a higher survivor benefit will provide more income late in life when savings may be running low. This is general and hypothetical. It is not a guarantee of specific results. Individual circumstances vary. 27 9

10 HOW DOES SOCIAL SECURITY FIT WITH MY 401(K)? WHEN YOU RETIRE You may have multiple savings accounts : 401(k) or 403(b) Brokerage account Certificates of deposit IRA or ROTH IRA Cash You may have income: Part-time employment Rental income Pension You will definitely have expenses: Non-discretionary shelter, transportation, food (needs) Discretionary cable TV, travel, dining out (wants) CREATING INCOME IN RETIREMENT Social Security wasn t created to replace all of your income in retirement The average Social Security check in 2016 is: $1,341 for singles Remember, it s based on your $2,212 for couples highest 35 years of earnings Your savings accounts will fill the gap between your expenses and your Social Security benefits Coordinating when and how you take Social Security can help extend the spend-down of your savings 10

11 CLAIMING STRATEGY AFFECTS PORTFOLIO LONGEVITY $800,000 $700, $600,000 $500, $400,000 $300,000 $200, $100, $ The larger the Social Security benefit, the less that may need to be withdrawn from other sources, potentially extending an individual s financial portfolio. See for additional examples. From Meyer and Reichenstein, Social Security: When to Start Benefits and How to Minimize Longevity Risk, Journal of Financial Planning, March CASE STUDY 1 Bob: Single, age 66 (his full retirement age) $100,000 in 401(k) $50,000 in other savings PIA: $1,600 Bob intends to work part-time between ages 66 and 70 earning $1,000/month. He is already FRA, so the earnings test won t reduce his benefits. Monthly spending $2,500 SS benefit now $1,600 Difference $ 900 Bob will need to withdraw $900 per month from his 401(k) after he quits working in order to meet his spending needs of $2,500. Bob s savings will last a lifetime! A small cost of living adjustment of 1.5% has been added to the Social Security benefits for Bob. Source: SSAnalyzer Software and Income Solver Software CASE STUDY 2 Jack and Joan: Both age 66 (full retirement age) $350,000 in Jack s 401(k) $150,000 in Joan s 401(k) Jack s PIA: $2,600 Joan s PIA: $1,500 Life expectancy: 85 Life expectancy: 90 Monthly spending in retirement: $7,000, less after Jack dies Lifetime cumulative Social Security: $1,449,060 Balance of 401(k) after taxes: $1,449,060 in cumulative lifetime Social Security will provide over 3 times the income their 401(k) will provide! But note that in the last two years, even with substantial savings, Social Security will be the only income for Joan. So maximizing the survivor benefit is a smart idea! A small cost of living adjustment of 1.5% has been added to the Social Security benefits for Jack and Joan. Source: SSAnalyzer Software and Income Solver Software 11

12 JOINT LIFE EXPECTANCY IS THE KEY Survival Probabilities for Males, Females, and One or Both Members of a Same Age Opposite Sex Couple Retirement Age: 65 Graph data from the Social Security Administration Period Life Table for 2007, Graph published in the Journal of Financial Planning, Spending Flexibility and Safe Withdrawal Rates, (Finke, Phau, Williams, 2011) LONGEVITY HEDGING Longevity risk is the risk that you will live longer than you expect and that you ll outlive your savings The Society of Actuaries has shown that the 40% of pre-retirees underestimate their life expectancy by 5 or more years Getting more in cumulative benefits means you need to rely less on savings Your Social Security benefits can protect you from longevity risk by providing income late in life when other assets might be running low Hedging against longevity can be accomplished by crafting a Social Security strategy that maximizes benefits late in life in case you live longer than you expect Couples should maximize the survivor benefit the higher earner should delay taking benefits until age 70 SUMMARY When you claim matters! Not having a smart strategy can cost you thousands of dollars in benefits. The rules are complicated and voluminous. It s impossible to learn all of the rules and create a strategy that uses them to your advantage. There are many combinations of options that can help you maximize your benefits. In fact, there are as many as 10,000 combinations of ways to claim. You need expert advice. We can make it simple for you to know your best strategy