5 Keys to Profitable Social Security Planning

Transcription

1 5 Keys to Profitable Social Security Planning What Advisors Need to Know to Optimize Clients Retirement Benefits By Elaine Floyd, CFP Director of Retirement and Life Planning, Horsesmouth, LLC 1

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3 Common misconceptions about Social Security You have to be old to collect The system is going broke Benefit amounts are too small to bother with Social Security personnel can help No compensation for the advisor 3

4 OASDI Trust Fund still growing Trust fund balance on 12/31/10: $2.609 trillion 2011 results Total income: $805 billion Total expenditures: $736 billion Net increase in assets: $ 69 billion Trust fund balance on 12/31/11: $2.677 trillion Source: Social Security Administration, Office of the Chief Actuary 4

5 Long-term projections: without reform, benefits fall to 75% in 2033 OASDI Income, Cost and Expenditures as Percentages of Taxable Payroll [Under Intermediate Assumptions] 25% 20% Cost: Scheduled and payable benefits Cost: Scheduled but not fully payable benefits 15% 10% 5% Income Payable benefits as percent of scheduled benefits: : 100% 2033: 75% 2086: 73% Expenditures: Payable benefits = income after trust fund exhaustion in % Calendar Year Source: 2012 OASDI Trustees Report 5

6 The lifetime value of Social Security benefits $2,513/month + 2.8% annual COLAs: Live 10 more years: $383,000 Live 20 more years: $847,000 Live 30 more years: $1.4 million 6

7 What Social Security personnel can and can t do They CAN Estimate individual benefits Tell clients the amount they are entitled to now They CAN T Project future benefits through scenario planning Help with innovative strategies designed to maximize benefits 7

8 Savvy Social Security planning promotes client retention and referrals Social Security is the foundation of the retirement plan Customized guidance is essential Opens the door to comprehensive retirement income planning Specialized skill set provides concrete reason for referrals 8

9 How Social Security works: What advisors need to know How benefits are calculated When benefits may begin Rules for spousal benefits Rules for survivor benefits How working affects benefits How COLAs affect benefits How benefits affect taxes How benefits may be reduced by WEP or GPO 9

10 Why maximize Social Security benefits? More income now Higher lifetime benefits Greater security in old age 10

11 5 Strategies for maximizing Social Security benefits 11

12 Strategy #1 for maximizing Social Security benefits Work longer, earn more 12

13 Benefits based on highest 35 years of earnings up to taxable maximum Table of maximum earnings Year Maximum Maximum Maximum Year Year earnings $ earnings $ earnings $ , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,600 13

14 Average Indexed Monthly Earnings (AIME) for baby boomer born in 1950 Maximum earnings since 1972 $3,443,975 in total indexed earnings 420 months = $8,200 AIME Year Age Nominal earnings Indexing factor Indexed earnings , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,800 14

15 Example of benefit formula Baby Boomer born in 1950 Maximum Social Security earnings every year since age 22 AIME = $8,200 PIA formula: $767 x.90 = $ $3,857 x.32 = $1, ($4,624 - $767 = $3,857) $3,576 x.15 = $ ($8,200 - $4,624 = $3,576) Total = $2, PIA = $2, Amount worker will receive at full retirement age (66) (not including COLAs) 15

16 Effect of working longer if less than 35 years of earnings Donna: age 50, no earnings record to date If Donna s benefit is based on: She will receive this monthly benefit at age 66 in today's dollars She will receive this monthly benefit at age 66 in COLAadjusted future dollars Spouse's earnings record ($2,367 PIA in today s dollars) Own earnings record with 16 years of maximum earnings (age 50-66) $1,183 $2,115 $1,655 $2,901 Difference = $472/month in today's dollars $786/month in future dollars Difference over 30 years with annual COLAs = $434,471 16

17 Effect of working longer if more than 35 years of earnings Boomer Bob: age 62, 35 years of maximum earnings If he works until age: Years of earnings used in benefit computation PIA Age-70 benefit $2, $3, $2, $3, $3, $4,057 17

18 Strategy #2 for maximizing Social Security benefits Apply at the optimal time 18

19 When benefits may begin Year of birth Full Retirement Age (FRA) & 2 mos & 4 mos & 6 mos & 8 mos & 10 mos & 2 mos & 4 mos & 6 mos & 8 mos & 10 mos & later 67 19

20 Effect of early or delayed retirement Age % of PIA Benefit in today's dollars if PIA is $2,460 Benefit adjusted for annual COLAs* $1,845 $1, ,968 2, ,132 2, ,296 2, ,460 2, ,657 3, ,854 3, ,050 3, ,247 4,050 *Assumes 2.8% annual COLAs 20

21 Bob, Betty, and Bill, each 62 now, all live to age 80 Age Year Bob's annual benefit with 2.8% COLAs Cumulative total Betty's annual benefit with 2.8% COLAs Cumulative total Bill's annual benefit with 2.8% COLAs Cumulative total $22,140 $22,140 $0 $0 $0 $ ,760 44, ,397 68, ,052 92, , ,075 32,964 32, , ,493 33,887 66, , ,623 34, , , ,485 35, , , ,098 36, ,312 48,600 48, , ,485 37, ,157 49,961 98, , ,666 38, ,061 51, , , ,665 39, ,055 52, , , ,504 41, ,168 54, , , ,206 42, ,433 55, , , ,796 43, ,881 57, , , ,298 44, ,546 58, , , ,738 45, ,461 60, , , ,143 47, ,662 62, , , ,539 48, ,185 64, , , ,954 49, ,066 65, , , ,417 51, ,344 67, , , ,956 52, ,057 69, , , ,603 54, ,247 71, , , ,388 55, ,954 73, ,312 21

22 Bob, Betty, and Bill, each 62 now, all live to age 80 Age Year Bob's annual benefit with 2.8% COLAs Cumulative total Betty's annual benefit with 2.8% COLAs Cumulative total Bill's annual benefit with 2.8% COLAs Cumulative total $22,140 $22,140 $0 $0 $0 $ ,760 44, ,397 68, ,052 92, , ,075 32,964 32, , ,493 33,887 66, , ,623 34, , , ,485 35, , , ,098 36, ,312 48,600 48, , ,485 37, ,157 49,961 98, , ,666 38, ,061 51, , , ,665 39, ,055 52, , , ,504 41, ,168 54, , , ,206 42, ,433 55, , , ,796 43, ,881 57, , , ,298 44, ,546 58, , , ,738 45, ,461 60, , , ,143 47, ,662 62, , , ,539 48, ,185 64, , , ,954 49, ,066 65, , , ,417 51, ,344 67, , , ,956 52, ,057 69, , , ,603 54, ,247 71, , , ,388 55, ,954 73, ,312 22

23 Simple breakeven analysis Simple Breakeven Analysis Enter the earlier age benefits may be claimed Corresponding monthly benefit amount Enter the later age benefits may be claimed Corresponding monthly benefit amount COLA% (Annual cost-of-living adjustment) 62 $1, $3, % Age Monthly Annual Cumulative Monthly Annual Cumulative benefit if start benefit if start benefit if start benefit if start benefit if start benefit if start at earlier age at earlier age at earlier age at later age at later age at later age 62 $1,759 $21,108 $21,108 $0 $0 $0 63 1,808 21,699 42, ,859 22,307 65, ,911 22,931 88, ,964 23, , ,019 24, , ,076 24, , ,134 25, , ,194 26, ,699 3,862 46,344 46, ,255 27, ,763 3,970 47,642 93, ,318 27, ,584 4,081 48, , ,383 28, ,184 4,196 50, , ,450 29, ,585 4,313 51, , ,519 30, ,810 4,434 53, , ,589 31, ,881 4,558 54, , ,662 31, ,821 4,686 56, , ,736 32, ,656 4,817 57, , ,813 33, ,411 4,952 59, , ,892 34, ,110 5,090 61, , ,973 35, ,781 5,233 62, , ,056 36, ,451 5,379 64, , ,141 37, ,148 5,530 66, , ,229 38, ,900 5,685 68, , ,320 39, ,737 5,844 70, , ,413 40, ,690 6,008 72, , ,508 42, ,789 6,176 74,110 1,065, ,607 43, ,067 6,349 76,185 1,141, ,707 44, ,557 6,527 78,318 1,220, ,811 45, ,292 6,709 80,511 1,300,765 23

24 Strategy #3 for maximizing Social Security benefits Coordinate spousal benefits 24

25 Spousal benefits: Traditional (gender neutral) Wife with low or no earnings receives one-half of husband s PIA Rules for spousal benefits If wife files at FRA, spousal benefit is 50% of husband s PIA; if she files at age 62 it is 35% Husband must file for benefits in order for wife to receive spousal benefit (if over FRA he can suspend if he wants to delay) No delayed credits after FRA for spousal benefits Same rules for divorced-spouse benefits if marriage lasted 10 years and recipient is currently unmarried 25

26 Spouses benefits based on filing date Herbert & Lola, both 62 now Herbert earned maximum over career Herbert s PIA = $2,507 Lola had little or no earnings Age Herbert's worker's benefit (COLA adjusted) 62 (both file) $1,880 (75% of $2,507) 66 (both file) $2,800 ($2,507 adjusted for 4 years of 2.8% COLAs) Lola's spousal benefit (COLA adjusted) $877 (35% of $2,507) $1,400 (50% of $2,800) Total COLAadjusted benefit at age 70 $2,757 $3,439 $4,200 $4, (Herbert files & suspends at 66, claims at 70; Lola claims at 66) $4,127 ($2,507 adjusted for 8 years of 2.8% COLAs and 4 years of DRCs) $1,564 ($1,400 adjusted for 4 years of COLAs) $5,691 $5,691 Assumes 2.8% annual COLAs 26

27 Strategies from the Center for Retirement Research at Boston College File and suspend High-earning husband files for own benefit at 66 to make wife eligible for her spousal benefit Husband suspends own benefit to earn DRCs to age 70 Claim now, claim more later High-earning husband claims his spousal benefit at 66 (wife must have filed for her own benefit) Switches to his own benefit at 70 Warning: these strategies do not work before FRA How to decide: Customized scenario planning for each couple based on individual ages and benefit amounts 27

28 Example of scenario planning Andy & Alice Both age 62 Andy s PIA = $2,200 Alice s PIA = $800 Which strategy will give them the most annual income? Which strategy will give them the most cumulative benefits? 28

29 Scenarios 1-3 for Andy & Alice Scenario 1 Alice files for her own benefit now, at 62 Andy files for his benefit in eight years, at age 70 Scenario 2 Alice files for her own benefit now, at 62 In four years, when they are 66, Andy files and suspends so Alice can switch to her higher spousal benefit Four years later, when Andy is 70, he claims his own benefit Scenario 3 Alice files for her own benefit now, at 62 In four years, when Andy turns 66, he files for his spousal benefit off Alice s record Four years later, when Andy is 70, he switches to his own benefit and Alice switches to her higher spousal benefit 29

30 Scenarios 4-5 for Andy & Alice Scenario 4 Andy files and suspends at 66 Alice files for her spousal benefit at 66 When they both turn 70, Andy claims his maximum benefit Scenario 5 Alice files for her own benefit at 66 Andy files for his spousal benefit at 66 When they are both 70, Andy claims his full benefit and Alice switches to her higher spousal benefit 30

31 Inputs for Scenario 5 31

32 Calculations for Scenario 5 32

33 Scenario Summary Combined annual income When wife is age: Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6 70 $55,799 $56,222 $55,799 $59,927 $59,927 $0 75 $64,061 $64,546 $64,061 $68,800 $68,800 $0 80 $73,546 $74,103 $73,546 $78,986 $78,986 $0 85 $84,436 $85,075 $84,436 $90,681 $90,681 $0 90 $75,507 $75,507 $75,507 $75,507 $75,507 $0 Cumulative benefits When wife is age: Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6 70 $119,372 $133,905 $141,731 $121,416 $127,006 $0 75 $422,697 $439,526 $445,057 $447,179 $452,769 $0 80 $770,934 $790,398 $793,294 $821,174 $826,764 $0 85 $1,170,732 $1,193,221 $1,193,092 $1,250,544 $1,256,134 $0 90 $1,528,252 $1,550,741 $1,550,612 $1,608,064 $1,613,654 $0 33

34 Strategy #4 for maximizing Social Security benefits Maximize survivor income 34

35 Survivor benefits: traditional Both spouses already receiving Social Security when one spouse dies Surviving spouse switches to survivor benefit (100% of deceased spouse s benefit) if higher Amount of survivor benefit depends on when deceased spouse originally applied for benefits 35

36 Lola s survivor benefit based on age Herbert applied Age at which Herbert filed for benefits Lola's survivor benefit at age 70 Lola's survivor benefit at age 85 (2.8% COLAs) 62 $2, $3, $4,127 (82.5% of $2, years of 2.8% COLAs) (Herbert's age 66 benefit of $2,800 adjusted for 4 years of 2.8% COLAs) (Herbert's age-70 starting benefit) $3,903 $4,732 $6,245 36

37 Survivor benefits important reminders for clients Death of a spouse will cause loss of one income (widow s own benefit will stop when she switches to survivor benefit) Remarriage before age 60 disqualifies a widow(er) from receiving survivor benefits Same rules for survivor benefits also apply to divorced-spouse survivor benefits 37

38 Savvy survivor planning for widow(er)s over 60 Is survivor benefit higher or lower than earned benefit? Recommend the strategy that will maximize the higher benefit 38

39 Savvy survivor planning When survivor benefit is higher than earned benefit Widow(er) waits until FRA to claim survivor benefit Resist temptation to apply for survivor benefit at 60 (71.5% of PIA - permanently reduced) Apply for earned benefit at 62 to bring in extra income 39

40 Teresa Widow, age 60, PIA = $800 Deceased spouse s s PIA = $2,200 Scenario 1: Applies for survivor benefit at 60 Scenario 2: Applies for own benefit at 62, switches to survivor benefit at 66 Monthly income at age 80: Scenario 1: $2,733 Scenario 2: $3,821 40

41 Savvy survivor planning When survivor benefit is lower than earned benefit High-earning widow(er) claims survivor benefit as early as age 60 and lets own benefit earn DRCs to age 70 Claiming survivor benefit before FRA does not reduce own benefit Brings in extra income until age 70 High-earning widow(er)s may not think to ask about this! 41

42 Peter & Paula Both spouses age 60 Peter s PIA - $2,389 Paula s PIA = $1,500 Paula dies Peter claims survivor benefit at 60, receives $1,072 (71.5% of $1,500), from age 60 to 69. COLA-adjusted total: $146,000 in survivor benefits that otherwise would have been lost Also works for divorced-spouse survivor benefits Warning: earnings test applies before FRA 42

43 Strategy #5 for maximizing Social Security benefits Minimize taxes on benefits 43

44 Taxation of Social Security benefits Filing status Provisional income* Amount of SS subject to tax Married filing jointly Under $32,000 $32,000 - $44,000 Over $44, % 85% Single, head of household, qualifying widow(er), married filing separately & living apart from spouse Under $25,000 $25,000 - $34,000 Over $34, % 85% Married filing separately and living with spouse Over 0 85% *Provisional income = AGI + one-half of SS benefit + tax-exempt interest 44

45 Maximum amount of other income to avoid tax on 85% of Social Security benefits Herbert & Lola at age 70 Half of Social Security benefit: $5,691 x 12 = $68,292 2 = $34,146 $44,000 85% taxation threshold for married couple - 34,146 One-half of Social Security benefit $ 9,854 = Maximum amount of other income to avoid 85% taxation Maximum IRAs to keep RMDs under taxation threshold $9,854 x 27.4 = $270,000 45

46 Tax planning strategies Start drawing down IRAs before age 70-1/2 to reduce RMDs Convert traditional IRAs to Roth Delay Social Security: reduces number of years benefits are subject to tax Reduce expenses: pay down debt, adopt simpler lifestyle Continue to manage taxes throughout retirement 46

47 What is Savvy Social Security Planning? 47

48 Savvy Social Security Planning is Teaching baby boomers through seminars, workshops, and individual consultations Baby boomers want to know... Will Social Security be there for me? How much can I expect to receive? When should I apply for Social Security? How can I maximize my benefits? Will Social Security be enough to live on in retirement? 48

49 Savvy Social Security Planning is Helping baby boomers avoid common mistakes Applying too early Not understanding the interplay of earned, spousal, and survivor benefits Failing to understand the long-term impact of decisions made today 49

50 Savvy Social Security Planning is Guiding clients decisions through in-depth scenario planning Shows year-by-year income and cumulative benefits using clients actual ages and benefit amounts Enables clients to make their own decisions; you provide guidance, but the ultimate decision is theirs Shows income shortfalls that will need to be made up from other sources, leading to comprehensive retirement income planning 50

51 Establishing yourself as an expert on Social Security Learn the rules and stay on top of the literature and new developments Identify a niche: Boomers approaching age 62 Women Married couples Communicate and educate: seminars, workshops, newsletters Develop a referral strategy 51

52 Opportunities abound for advisors knowledgeable about Social Security Baby boomers are turning 62 at the rate of 10,000 per day Social Security is more complicated than people realize Decisions made early in the process have farreaching impact The strain on Social Security personnel will increase Advisors who understand Social Security will be in great demand 52

53 How we can help Send questions to 53