Social Security Benefit Report. Ted and Linda Sample

Transcription

1 Social Security Benefit Report for Ted and Linda Sample April 8, 2014 The Social Security Maven Peter M. Weinbaum, JD 128 Bliss Road Montpelier, VT Your trusted source for Social Security advice

2 Dear Ted and Linda, Our most recent conversation helped me to better understand your priorities and to clarify my vision about what to show you in this report. My objective is to help you understand more about how Social Security works and to show you a range of claiming options in addition to the one you have been considering. The intended outcome is that you will be better informed when you are ready to make your decisions. I begin with your rank ordering of priorities and your current thoughts about how and when you would claim your Social Security benefits: 1. Cumulative benefits to assumed life expectancies of 85 (Ted) and 90 (Linda) 2. Total benefits before age Monthly benefits at older ages (over 70) 4. Benefits for surviving spouse As I understand it, the approach that you have been thinking about works this way: Ted claims his benefits at age 66. Linda claims her benefits, including spousal benefits, at 66. When Ted dies at age 85, Linda switches to survivor benefits. I m going to refer to this approach as Strategy 1. You indicated that you are not wedded to it, but that it provides a starting point. You would like to see a range of options that include both earlier and later claiming scenarios. I have included five additional strategies in this report. In each case, I provide a step-by-step description of the strategy and illustrate the highlights in a way that shows you how the cash flows would work. I then put all five strategies into perspective through the use of a comparison table and some graphs. Before we dive into this, I want to be clear about one thing: Social Security benefit claiming is not about right and wrong choices or what you should or shouldn t do. It s more about finding some solutions that work for you, are a good fit for your overall financial situation, and that you can feel good about after seeing a range of available options. As I mentioned on the phone, I don t tell you what you should do. Rather, I demonstrate how effective each approach would be at helping you achieve your priorities, and then leave you to review the options with your financial advisors. They have the professional expertise to help you coordinate Social Security with the rest of your retirement income planning. I have included a Glossary of Social Security Terms and Concepts in the Appendix to explain some of the jargon you will find here, and to describe some of the techniques and concepts used in connection with the strategies. That might be the first place to look if you come across 2

3 something in the report that is unclear. I have attempted to color code terms that are explained in the Glossary, but if you come across any terms that are unfamiliar to you, check the Glossary for explanation. This analysis is based on information you provided and assumptions I have made based on the questionnaire you completed, your Social Security statements, and the phone conversation I had with Ted. You will notice in this report that I use words like estimated, approximately, around, or about. The one thing I can guarantee is this: the numbers that appear in this report will certainly change over time. This is true for reasons that will become apparent to you, including the fact that I show constant, uninflated 2014 dollars. I note some of the more important assumptions here: Assumptions Dates of birth: Ted 10/16/1953 Linda 2/7/1954 Primary Insurance Amount (PIA) (per Statements): Ted $2,494 Linda $880 Anticipated Annual Earnings Through 2018: Ted $60,000 in 2014; $75,000 in Assumed Life Expectancy for Illustration Purposes: Ted 85 Linda 90 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 (2014) dollars as a point of reference in evaluating your options. However, you should keep in mind that inflation protection adds important value to these benefits. 2. Ted s anticipated earnings over the next several years can be expected to bring the Social Security Earnings Test into play under Strategy 2. More information on this subject can be found in the Glossary. 3. You should regard any 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. 4. Finally, keep in mind once again that while I illustrate uninflated 2014 dollars, you can expect Cost of Living Adjustments to preserve purchasing power and increase the nominal dollar amount of your benefits on a regular basis. 3

4 General Principles The mathematics of Social Security dictate the following results: 1. Strategies that emphasize total benefits received before age 70 generally result in reduced cumulative benefits over assumed life expectancy, lower survivor benefits, and smaller monthly benefits after Conversely, strategies that focus on maximizing cumulative benefits over long life expectancies generally result in higher survivor benefits, as well as higher monthly benefits at older ages at the expense of total benefits received before age 70. In fact, all three of the longer term priorities listed above go pretty much hand-in-hand. Actions designed to boost one of the three tend to increase the other two as well. On the other hand, the trade-off for using strategies that emphasize benefits before age 70 is a reduction in benefits that are available under some of these longer term approaches. To put it simply, if you can manage to get $100,000 more Social Security benefits under Strategy A than under Strategy B, your investments will need to generate $100,000 less in income over time, potentially allowing your savings to last longer. On the other hand, if circumstances dictate the use of Strategy B, your investment portfolio might need to work a little harder over a long lifetime. An x-factor is spousal benefits, which means that some of the trade-offs for claiming earlier can be offset to some extent by prudent use of spousal claiming strategies. In their purest form, spousal benefits are equal to 50% of the other spouse s PIA. Spousal claiming strategies are often an important means of expanding the total amount of benefits that are available to you. The impact of claiming age. One of the most important principles I illustrate in this report is the ability to increase benefits on one s own record by waiting past age 66 to claim them. This is done by means of what the SSA calls Delayed Retirement Credits, or DRCs, and the effect is that for every month you delay past age 66, your benefit grows by 2/3% per month (8% per year) until you reach age 70 or resume benefits earlier. Strategies The six strategies I have illustrated cover a range of possibilities along the claiming spectrum. Although there are literally hundreds of strategies in between, these six are representative of major themes you might wish to consider. When you compare strategies, you will notice that there are obvious trade-offs to be made: in many cases it is not possible to gain in connection with one priority without giving up something somewhere else. Ultimately you will decide what trade-offs you are willing to tolerate in order to gain particular advantages, and this will all be within the context of your overall retirement income planning picture. 4

5 Strategy 1 Ted begins benefits based on his earnings record in October 2019 at age 66 Linda files for benefits in February 2020 at age 66 In October 2038 Linda switches to survivor benefits This is the strategy you have been considering. By waiting until age 66, Ted will begin collecting a monthly benefit equal to his Primary Insurance Amount of $2,494 and he will receive that amount for the rest of his life. 1 Linda also waits until age 66 before claiming. Although her own benefit amounts to $880, she will be eligible for a spousal benefit of $367 as well. The total of the two amounts is $1,247, which is equal to 50% of Ted s PIA. Ted is assumed to die at age 85, at which time Linda switches to a survivor benefit of $2,494 the amount Ted was receiving at the time of his death. The following table shows what the cash flows might look like under Strategy 1. Combined Ted's Linda's Ted's Age Linda's Age Monthly Benefits Benefits Benefits $2,494 $0 $2, $2,494 $1,247 $3,741 Ted assumed to die at $0 $2,494 $2,494 Linda assumed to die at 90-0 Cumulative Benefits to Life Expectancy $568,632 $438,944 $1,007,576 Total Benefits before Linda's age 70 $189,544 Results for Strategy 1: Cumulative benefits to assumed life expectancies $1,007,576 Total benefits before age 70 $189,544 Monthly benefits at older ages (after Linda s age 66) $3,741 Benefits for survivor $2,494 1 This amount will almost certainly increase as a result of Cost of Living Adjustments, but the purchasing power should remain somewhat constant. I will not mention this again, but COLA increases can be expected to be declared on a regular basis. 5

6 Strategy 2 Ted begins benefits based on his earnings record in November 2015 at age Linda files for benefits in March 2016 at age 62-1 In October 2038 Linda switches to survivor benefits Strategy 2 is the earliest claiming strategy available, and while it seems rather simple it is also fairly difficult to explain. Ted, being the older of you by four months, files for his benefits in November 2015 at age and Linda does likewise in March Because you are claiming before Full Retirement Age (66), your benefits are reduced by about 24.6% of your respective Primary Insurance Amounts: Ted s benefit is $1,881 and Linda s is $664. In addition, under something called the deemed filing rule, Linda is treated as having filed for spousal benefits as well. Because she is filing at age 62-1, the additional spousal component is reduced from $367 to $258. The situation is further complicated by the fact that Ted s continued earnings through 2018 exceed the limit imposed under the Social Security Earnings Test. 4 This causes all of Ted s benefits and Linda s spousal benefits to be withheld until January 2019, when Ted is projected to be no longer working. (If he does continue working in 2019, the impact of the Earnings Test will be lessened and some benefits will be payable.) After Ted reaches age 66, the Earnings Test no longer applies. Ted will actually begin receiving monthly payments of $1,881 at age 65-3, and Linda will begin receiving her spousal add-on of $258 (for a total of $922) at age When Ted turns 66, SSA automatically recalculates his benefits to take into account the payments that were withheld. I estimate that 38 months of benefits would have been withheld, and thus 38 months are added back to Ted s claiming age: going forward he will be treated as having originally filed at age 65-3, bringing his monthly payments up from $1,881 to $2,369. When Linda turns 66, the recalculation will add 38 months to her claiming age (for the spousal component only), which will increase her total monthly benefits to $998. Those are the amounts you will continue to receive for the rest of your lives together. When Ted predeceases Linda, she will switch to survivor benefits of $2, Whenever you see a notation like See the section on Age in the Glossary for an explanation of why you must wait until See both the Glossary and the information on page 20 regarding the Earnings Test. 6

7 The following table shows what the cash flows might look like under Strategy 2. Ted's Age Linda's Age Ted's Benefits Linda's Benefits Combined Monthly Benefits $0 $664 $ $1,881 $922 $2, $2,369 $922 $3, $2,369 $998 $3,367 Ted assumed to die at $0 $2,369 $2,369 Linda assumed to die at 90-0 Cumulative Benefits to Life Expectancy $628,539 $418,278 $966,791 Total Benefits before Linda's age 70 $222,583 Results for Strategy 2: Cumulative benefits to assumed life expectancies $966,791 Total benefits before age 70 $222,583 Monthly benefits at older ages (beg. Linda s age 66) $3,367 Benefits for survivor $2,369 Strategy 3 Ted begins benefits based on his earnings record in October 2023 at age 70 Linda files for benefits in February 2024 at age 70 In October 2038 Linda switches to survivor benefits I have decided to illustrate this approach only because it is widely viewed by the public as desirable for maximizing certain long-term benefits. It has the advantage of delivering maximum combined monthly benefits at older ages and maximum spousal benefits, but its flaws will become readily apparent to you when you compare it to other strategies. The steps are quite simple: you each wait until age 70 to claim your benefits and you continue receiving $3,292 and $1,247 respectively for the rest of your lives together. The flaw is that Linda s total monthly benefit is no larger at 70 than it is at 66: by following this approach she needlessly gives up 4 years of benefits. When Ted predeceases Linda, she switches to a survivor benefit of $3,292. 7

8 The following table shows what the cash flows might look like under Strategy 3. Combined Ted's Linda's Ted's Age Linda's Age Monthly Benefits Benefits Benefits $3,292 $0 $3, $3,292 $1,247 $4,539 Ted assumed to die at $0 $3,292 $3,292 Linda assumed to die at 90-0 Cumulative Benefits to Life Expectancy $592,560 $430,160 $1,022,720 Total Benefits before Linda's age 70 $13,168 Results for Strategy 3: Cumulative benefits to assumed life expectancies $1,022,720 Total benefits before age 70 $13,168 Monthly benefits at older ages (beg. Linda s age 70) $4,539 Benefits for survivor $3,292 Strategy 4 Linda begins benefits based on her earnings record in March 2016 at age 62-1 Ted files a restricted application for spousal benefits only in October 2019 at age 66 Ted switches to benefits based on his earnings record in October 2023 at age 70 Linda adds spousal benefits in October 2023 at age 69-8 In October 2038 Linda switches to survivor benefits Just as she did under Strategy 2, Linda claims her own reduced benefits of $664 at age Ted delays claiming until age 66, but instead of filing for his own benefits he files a restricted application for spousal benefits only. This entitles him to spousal benefits equal to 50% of Linda s PIA ($880), or $440 per month for the next 48 months. During this time he is earning Delayed Retirement Credits; when he actually begins receiving benefits on his own record at age 70, they have grown by 32% of PIA to $3,292. When Ted claims his benefits at age 70, Linda files for the full spousal add-on of $367, bringing her total monthly benefit to $1,031. These are the amounts you will receive until Ted dies and Linda switches to survivor benefits of $3,292. The following table shows what the cash flows might look like under Strategy 4. 8

9 Ted's Age Linda's Age Ted's Benefits Linda's Benefits Combined Monthly Benefits $0 $664 $ $440 $664 $1, $3,292 $1,031 $4,323 Ted assumed to die at $0 $3,292 $3,292 Linda assumed to die at 90-0 Cumulative Benefits to Life Expectancy $613,680 $456,692 $1,070,372 Total Benefits before Linda's age 70 $98,836 Results for Strategy 4: Cumulative benefits to assumed life expectancies $1,070,372 Total benefits before age 70 $98,836 Monthly benefits at older ages (beg. Linda s age 69-8) $4,323 Benefits for survivor $3,292 Strategy 5 Ted files and suspends benefits in February 2020 at age 66-4 Linda files a restricted application for spousal benefits only in February 2020 at age 66 Ted begins benefits based on his earnings record in October 2023 at age 70 In October 2038 Linda begins survivor benefits This approach takes the best of Strategy 3, and then enhances it. Ted uses a technique called file and suspend at age That means he files for his benefits but immediately instructs SSA to suspend payments. This accomplishes two positive results: 1. Linda immediately becomes eligible for spousal benefits. 2. Ted continues earning Delayed Retirement Credits. Linda turns 66 in February 2020, and she files a restricted application for spousal benefits only, 5 entitling her to monthly benefits of $1,247. When Ted reaches age 70, he begins 5 In your particular case, it probably does not matter whether Linda files the restricted application or claims her own benefits plus the spousal add-on. The result in both cases is continuing monthly benefits of $1,247. 9

10 receiving his benefits, which have once again grown to $3,292. Linda switches to survivor benefits of $3,292 in October The following table shows what the cash flows might look like under Strategy 5. Combined Ted's Linda's Ted's Age Linda's Age Monthly Benefits Benefits Benefits $0 $1,247 $1, $3,292 $1,247 $4,539 Ted assumed to die at $0 $3,292 $3,292 Linda assumed to die at 90-0 Cumulative Benefits to Life Expectancy $592,560 $490,016 $1,082,576 Total Benefits before Linda's age 70 $73,024 Results for Strategy 5: Cumulative benefits to assumed life expectancies $1,082,576 Total benefits before age 70 $73,024 Monthly benefits at older ages (beg. Linda s age 69-8) $4,539 Benefits for survivor $3,292 Strategy 6 Linda begins benefits based on her earnings record in October 2019 at age 65-8 Ted files a restricted application for spousal benefits only in October 2019 at age 66 Ted switches to benefits based on his earnings record in October 2023 at age 70 Linda adds spousal benefits in October 2023 at age 69-8 In October 2038 Linda switches to survivor benefits This strategy is designed to maximize cumulative benefits to assumed life expectancies of 85 and 90. Here, Linda files for her benefits at age 65-8, resulting in a monthly benefit of $860 a $20 per month reduction from PIA. This enables Ted, at age 66, to file a restricted application for spousal benefits only, just as he did under Strategy 4. This entitles him to spousal benefits equal to 50% of Linda s PIA ($880), or $440 per month for the next 48 months. He also earns enough Delayed Retirement Credits to increase his own benefits to $3,292 when he actually begins receiving them at age

11 Linda adds spousal benefits of $367 at age 69-8, bringing her total monthly payment to $1,227. Once again, her survivor benefits will be $3,292. The following table shows what the cash flows might look like under Strategy 6. Combined Ted's Linda's Ted's Age Linda's Age Monthly Benefits Benefits Benefits $440 $860 $1, $3,292 $1,227 $4,519 Ted assumed to die at $0 $3,292 $3,292 Linda assumed to die at 90-0 Cumulative Benefits to Life Expectancy $613,680 $472,828 $1,086,508 Total Benefits before Linda's age 70 $80,476 Results for Strategy 6: Cumulative benefits to assumed life expectancies $1,086,508 Total benefits before age 70 $80,476 Monthly benefits at older ages (beg. Linda s age 69-8) $4,519 Benefits for survivor $3,292 Comparing the Strategies These six strategies represent discrete points along the claiming spectrum, although as I mentioned previously there are literally hundreds of possible claiming combinations available in between the approaches we have discussed here. The numbers in the table below should help you compare the differences among the various approaches. Critical factors include (1) the timing of your various applications and (2) the judicious use of spousal benefits. These in turn may be determined in part by your assessment of when certain cash flows will be most useful to you. As you can see, there is an interesting interplay of claiming techniques and benefit results: tradeoffs are inevitable, and the trick is to gain more than you give up, in terms of your own priorities. Ultimately, it becomes a balancing act and a matter of determining which strategies work best in light of your overall planning picture. 11

12 Priorities Cumulative Benefits to Assumed Life Expectancies Total Benefits Linda Before Turns 70 Combined Monthly Benefits After Linda Turns 70 Benefits for Survivor Strategy 1 $1,007,576 $189,544 $3,741 $2,494 Strategy 2 $966,791 $222,583 $3,367 $2,369 Strategy 3 $1,022,720 $13,168 $4,539 $3,292 Strategy 4 $1,070,372 $98,836 $4,323 $3,292 Strategy 5 $1,082,576 $73,024 $4,539 $3,292 Strategy 6 $1,086,508 $80,476 $4,519 $3,292 As I mentioned earlier, I don t think you need to spend much time contemplating Strategy 3. If you are willing to accept the trade-offs involved with that approach, Strategy 5 will always be superior to Strategy 3 for you. The following graphs are designed to provide visual cues to assist in comparing the approaches. $1,100,000 Cumulative Benefits to Assumed Life Expectancies of 85/95 $1,082,576 $1,086,508 $1,070,372 $1,050,000 $1,000,000 $1,007,576 $966,791 $1,022,720 $950,000 $900,000 Strategy 1 Strategy 2 Strategy 3 Strategy 4 Strategy 5 Strategy 6 12

13 $250,000 Total Benefits Before Linda Turns 70 $222,583 $200,000 $189,544 $150,000 $100,000 $98,836 $73,024 $80,476 $50,000 $0 $13,168 Strategy 1 Strategy 2 Strategy 3 Strategy 4 Strategy 5 Strategy 6 One point that is not evident in the graph below is the fact that the combined benefits shown under Strategies 1 and 2 begin significantly earlier (when Linda turns 66) than the combined benefits in the other strategies 69-8 in Strategies 4 and 6, and 70 in Strategies 3 and 5). That also accounts for the higher early benefit totals in Strategies 1 and 2. You will have to decide when in your lives you would most appreciate receiving these inflation-adjusted benefits. $5,000 $4,000 Combined Monthly Benefits Beginning When Linda Turns 70 $3,741 $3,367 $4,539 $4,323 $4,539 $4,519 $3,000 $2,000 $1,000 $0 Strategy 1 Strategy 2 Strategy 3 Strategy 4 Strategy 5 Strategy 6 Technically a survivor benefit is defined as the amount a surviving spouse will receive based on the record of the deceased spouse. Here we assume that Ted will predecease Linda by 5 years and 4 months but it could be 20 years. It is also possible that he will survive Linda, and if he does he will continue receiving his or her own retirement benefits, because they are larger. That s why I have entitled this next item Benefits for the Survivor. 13

14 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $2,494 Benefits for Survivor $2,369 $3,292 $3,292 $3,292 $3,292 $0 Strategy 1 Strategy 2 Strategy 3 Strategy 4 Strategy 5 Strategy 6 In Conclusion The tables, charts, numbers, and verbiage can help you better understand Social Security, but they can t tell you what you should do. This is where you sit down with your financial advisors and look at your entire situation to determine which strategy makes the most sense for you. All the flexibility you have in making Social Security claiming decisions ends at age 70. That means that if there is a change in your situation (or your feelings about your situation) within the next several years, you have some flexibility to make changes. However, after you reach age 70 there is virtually nothing you can do to change your decisions. Meanwhile, feel free to contact me directly with any questions you have about this report. Respectfully submitted, Peter M. Weinbaum 14

15 THE FINE PRINT This report is provided by Consultant 6 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. 7 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. 6 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. 7 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. 15

16 Glossary of Social Security Terms and Concepts Age: In the world of Social Security, a person attains a given age on midnight of 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 first; 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. However, if you were born on any day other than the 1 st or 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 a particular Consumer Price Index (CPI-W). After two years of no COLAs in 2010 and 2011, SSA declared increases of 3.4%, 1.7%, and 1.5% for 2012, 2013, and 2014 respectively. Cumulative benefits over assumed life expectancy: Lifetime total payout of Social Security benefits for two spouses (combined) from the first date benefits are paid through the assumed mortality age of the survivor. Life expectancies are assumed to be 85 for husband and 90 for wife unless you specify different ages. In the case of unmarried individuals, the totals are for that person s single life. Delayed Retirement Credits (DRCs): Increases in your monthly Social Security benefits if you delay claiming benefits on your own record past 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 on another s record, they do not earn DRCs by waiting past Full Retirement age to claim those benefits. Earnings Record: 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. Your Earnings Record appears on page 3 of your printed Social Security statement. Earnings Test: If you claim before FRA and earn more than a specified amount ($15,480 per year in 2014), $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. File and suspend: This is where a spouse files for retirement benefits based on his or her own 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. This strategy may be used only after attaining Full Retirement Age. The suspension may be lifted at any time, but payments should be resumed no later than age 70, as no Delayed Retirement Credits are earned after age Benefits, once begun, may be suspended at any time after reaching Full Retirement Age. 16

17 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(er) who is claiming survivor benefits, FRA is 66 if his or her birth year is Longevity Risk: The risk of running out of resources during your lifetime. 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 after attaining Full Retirement Age that is restricted to spousal benefits. It is important to make certain that the SSA understands that you are not applying for your own retirement benefits at this time. 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 eligible for benefits on your own record, any spousal benefits you receive are based on 50% of your spouse s PIA (4) Spousal benefits may be reduced by up to 30% if claimed before you reach Full Retirement Age (5) 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. The total of your own benefits and any spousal add-on cannot exceed 50% 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 deceased spouse as follows: (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 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 bigger. (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) Thus, the critical factors in determining the size of survivor benefits are (1) the age at which the decedent claimed benefits, and (2) the age at which the survivor claims benefits. 17

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. 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 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 visible 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 Benefits are permanently reduced if you claim them before FRA, the amount depending 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 18

19 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 involves working closely with your 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 extra money available to married couples Survivor benefits benefits available to help a surviving spouse with lower Social Security retirement benefits 19

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 less 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. For those who claim benefits earlier than Full Retirement Age (FRA) and continue to have more than a modest amount of earned income (e.g., wages and salary), 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 earnings limit ($15,480 8 in 2014), your benefits will be reduced by $1 for every $2 earned over the limit. During this time, if a family member (e.g., spouse or dependent child) is 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 ($15,480 in 2014) from your anticipated earnings and divide by 2. The result of these calculations is called excess earnings. Now you might think that it would make sense for SSA to withhold a proportional amount of the excess from each monthly benefit payment. If they did that, you would simply get smaller benefit payments for the entire year. But that, it seems, would be too easy. So they divide the excess earnings by the monthly benefit you are receiving, and round up the quotient 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. SSA stresses that these benefits are merely being withheld rather than lost, and it s true that 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 and to your original claiming age. In other words, if you first claimed your benefits at age 63 and a total of 12 months were withheld, when you reach FRA they will add 12 months to your original claiming age. They will then pay you benefits at the level you would have received if you had originally filed at age 64. If you live long enough, you will not only recoup all of the benefits 8 During the calendar year in which you reach Full Retirement Age, the exempt amount goes up significantly ($41,400 in 2014), and $1 is withheld for every $3 of earnings above the exempt amount. 20

21 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. 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. 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. 10 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, which is available on the website of the Society of Actuaries, 11 for a male/female couple each of whom is currently age 65, there is a 36% probability of at 9 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. 10 You may be familiar with the acronym OASDI, which is actually the official name for Social Security: Old-Age, Survivors, and Disability Insurance

22 least one spouse living for 30 more years i.e., to age 95. In fact, the calculator suggests that there is a 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. Action Items (Nuts and Bolts) You typically should avoid waiting until the last moment before filing for benefits. A rule of thumb is to file your application two or three months before you want to begin (or switch), 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 a once in a lifetime opportunity to withdraw your application within 12 months of claiming and repay all benefits received. If you don t take advantage of that opportunity, 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 technique, can possibly be done online, but I feel that there is enough risk of error to warrant a visit to your local SSA office to file in person. As time goes on, the online application process will likely have become routine, involving a lower risk of errors than there may be today. 22