39 Broadway, 23rd floor, New York, NY 10006, phone: (888) ext.1,

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1 39 Broadway, 23rd floor, New York, NY 10006, phone: (888) ext.1, Hi all Savvy Social Security Planners! It's been a while since I've issued an update, but a lot of good information has come to light, so please read this carefully. Pardon me if I indulge my obsessive side, but this is what makes for good Savvy Social Security planning. Anyone can learn the rules posted on the Social Security website. What makes for good planning is the analysis that helps clients understand the long-term consequences of decisions made today. 0% COLA for 2010 There will be no cost-of-living adjustment (COLA) in This did not come as a surprise, as the CPI numbers have been trending downward ever since their peak in the third quarter of The timing of that peak (caused by a spike in oil prices in July of 2008) will wreak havoc on the COLA formula for the next couple of years, because the CPI-W will have to claw its way back to its previous high before the annual COLAs may be resumed. When the 2010 COLA was calculated, the average CPI-W for the third quarter of 2009 was , or 2.09% lower than it was in the third quarter of By law, Social Security benefits may not be reduced if inflation is negative. But there can be no more COLAs until the index exceeds the previous high of This is not expected to happen until 2011, which means COLAs should resume in Here are the SSA trustees' COLA estimates for the next several years. Elaine Floyd, CFP Announced in October of: To start with January payment in: SSA trustees' projected COLA (%) and thereafter 2.8 To see how these COLA projections compare to the flat 2.8% we are using in the

2 calculators, I tested our PIA adjustments to the adjustments made by the SSA detailed calculator which uses the COLAs listed above. The biggest disparity happens with people who will be 64 or 65 in 2010 (born in 1946 or 1947). For example, a maximum wage earner born in 1947 would have a PIA of $2,346 before COLA adjustments. Our calculator would adjust it to $2,549 at age 66 (2.8% per year over the next two years) vs. $2,346 for the SSA detailed calculator (0% next year and 1.4% in 2011). For the other cohorts the difference is negligible. In fact, our calculator shows a lower adjustment for people age 61 or younger because we are sticking with the 2.8%, whereas the trustees show 3.1% and 3.0% in 2014 and 2015 respectively. COLA-adjusted PIA for maximum wage earner Year of birth Unadjusted PIA (benefit at age 66 in $) COLA adjusted benefit at 66 using SSA Detailed Calculator ($) The bottom line, when you are using the calculators, is to be careful not to overestimate benefits for clients born in 1946 or This may mean using the benefit estimate from their annual statement and changing the COLA on the calculators from the default 2.8% to 0%. This will underestimate their income stream in the later years, but it's better to do that than to overestimate their benefit by as much as $200 per month, especially at this crucial time when they are deciding when to apply for benefits. Scenario planning for married couples COLAadjusted benefit at 66 using Savvy Social Security Benefit Adjustment Calculator at 2.8% ($) ,293 2,293 2, ,359 2,359 2, ,346 2,346 2, ,360 2,614 2, ,375 2, ,389 2,874 2, ,403 3,003 2, ,417 3,128 3, ,426 3,261 3, ,434 3,401 3, Difference between ours and theirs ($) Speaking of scenario planning for spouses, I would like to emphasize the importance of incorporating your knowledge of the rules into your scenario planning. For example, you know that a wife cannot claim her spousal benefit until her husband has either started

3 receiving benefits or has filed and suspended. Furthermore, you know (I hope!) that the husband cannot file and suspend until he has reached FRA. So if you were thinking of running a scenario for a couple who are both 62 now and where the husband wants to delay benefits until age 66 or 70, you cannot have the wife claiming her spousal benefit at 62. Unfortunately, the Spousal Planning Calculator does not block you from running an invalid scenario. Someday we may be able to embed all the Social Security rules into the calculators, but until then, you will have to create your scenarios based on your knowledge of the rules. As you are entering a spouse's age and benefit amount in either the "his/her work record" box or the "husband/wife work record" box, ask yourself, can this be done? To help, here's a quick review of the rules and clarification of some previously muddy issues: If a wife applies at 62, she will be given the highest benefit she is entitled to. If her husband hasn't applied yet, she will be given her own reduced benefit. If her husband has already started receiving his benefit (or if he has already turned FRA and has filed and suspended), and if her spousal benefit would be higher, she will be given her own benefit plus enough to equal the spousal benefit. For example, if Jane's PIA is $800 and Jim's PIA is $2,000, and if she applies at 62, she will be given her own benefit of $600 ($800 x.75). Since her age-62 spousal benefit would be $700 ($2,000 x.35), they will give her an additional $100 for a total of $700. This should answer the question of whether the wife can start her spousal benefit at 62 and claim her own full benefit at 66 or later. The answer is no. If you are thinking of having a high-earning husband apply for his spousal benefit before he turns 66, keep in mind that if anyone applies for any benefit before FRA, he will be given the highest benefit his is entitled to. If he is entitled to more than one benefit, he may not pick and choose which benefit he wants to receive. The term the Social Security people use is "deemed" filing. A person who applies before FRA is "deemed" to be filing for all the benefits he is entitled to. For this reason, you will want to caution everyone who is thinking about walking into a Social Security office before turning FRA. They don't have as many options available to them, and once they are slapped with the actuarial reduction, it is permanent. No wonder the "do-over" is getting so much attention these days. Too many non-savvy people claimed early benefits without realizing the long-term consequences, and now they want another chance. The exception to deemed filing is survivor benefits. Anytime after age 60, a surviving spouse (or surviving divorced-spouse) may choose to receive only her survivor benefit, even if it is lower than her own benefit. She may then claim her own benefit later the full, unreduced benefit at FRA, or the DRC-enhanced benefit at 70. Taking a reduced survivor benefit will not cause her own benefit to be reduced. This means any widowed client you run into even a high-earning widower is a candidate for survivor benefits after age 60, as long as he or she remains unmarried or if remarriage took place after age 60. So the optimal strategy for a high-income widow(er) is to claim survivor benefits after age 60, and then switch to his or her own benefit at 70. Failing to claim survivor benefits where the widow(er)'s own benefit is higher will cause them to be lost. And don't forget

4 about divorced-spouse survivor benefits. It may not even occur to people who were divorced many years ago that they could be entitled to survivor benefits on a former spouse's work record if that spouse has died. Claiming them can bring in some extra cash while the person's own benefit builds delayed credits. A husband does not have the option to "file and suspend" before FRA. If he "files" he may not suspend and he will be given his actuarially reduced benefit. Voluntary suspension may only be done after FRA. So please, if the husband is planning on maximizing his benefit by delaying it to age 70, do not run any scenario that calls for the wife to file for her spousal benefit before the husband is FRA. Instead, enter the current year and their ages into the calculator, look at columns C and D to find out how old she will be when he turns FRA, and make that the age she files for her spousal benefit. A high-earning husband (or wife) may not claim his spousal benefit before FRA (see above). But after FRA he may indeed claim just his spousal benefit and let his own benefit earn delayed credits. This has been a source of confusion, and I'm hearing that clients are being told in their local Social Security offices that they cannot claim their spousal benefit if it is lower than their own benefit. This is not true. It even says the following on the SSA website now: If your spouse has reached full retirement age and is eligible for a spouse's benefit and his or her own retirement benefit, he or she has a choice. Your spouse can choose to receive only the spouse's benefit now and delay receiving retirement benefits until a later date. If retirement benefits are delayed, a higher benefit may be received at a later date based on the effect of delayed retirement credits. I have learned that in order to do this, a person must "restrict" his application to his spousal benefit. Then the SSA won't even look at his own benefit in order to compare the two. Your clients will need to be proactive about this. If the scenario they are following is for the high-earning husband to file for his spousal benefit at FRA and delay his own benefit to age 70, he should march into his Social Security office and tell the worker that he wants to file for Social Security but that he wants to restrict his application to his spousal benefit. If the worker gives him a hard time, he should ask to speak to a supervisor. (Of course, his spouse must already be receiving benefits on her record in order for him to claim his spousal benefit.) And this brings us to another huge issue, for which we have finally received a satisfactory answer: can both spouses claim spousal benefits on the other's work record at the same time? The answer is no. I addressed this question in my May update and after the SSA press office refused to answer it directly, I offered my own interpretation of the rules. Turns out I was wrong. Fred King, an advisor in Portland, Oregon, had better luck with the press office, and so did Kelly Greene, who covered it in her "Ask Encore" column in the September edition of the Wall Street Journal. Both Fred's and Kelly's source at the SSA press office was Dorothy Clark, whom I have since spoken to and received a satisfactory answer. The reason both spouses can't claim spousal benefits at the same time is that the spouse on whose record the other spouse is receiving benefits must have already filed for his or her own benefit and if it is higher, that negates the spousal benefit.

5 Here's the question Fred received at a seminar: Jack and Jill are basically the same age and have basically the same PIA. Can Jack and Jill both "file and suspend" their own benefits, and then each turn around and apply for their respective spousal benefits, thus allowing them to collect some sort of benefit while they delay starting Social Security? Here's the answer Fred got from Dorothy Clark at the SSA press office: When a person files for both retirement and spouse's benefits at or after FRA and elects to suspend the retirement benefit to earn DRC's, he or she will receive only the excess payable on the spouse's record. The spouse benefit will be paid as if the retirement benefit was also being paid. Since their PIAs are basically the same, their own retirement benefit will exceed 50% of the other's PIA and no spousal benefits are payable to either. This is generally the result when both have basically the same PIA and both file and suspend their own benefits. On the other hand, it is more advantageous if one files and suspends their own benefits and the other files on the same record restricting the application to spouse's benefits and delays filing for retirement benefits. For example, Jill files and suspends her own benefit to earn DRCs. Jack can file and restrict his application to spouse's benefits on Jill's record and receive 50% of Jill's PIA. At age 70, Jack can file for retirement benefits on his record with an increase in benefits resulting from the delayed retirement credits. Jill's suspended benefit would automatically be resumed at age 70 (unless she requests it sooner). So, when you are working with two high-earning spouses who are close in age and who each want to delay benefits to age 70 in order to earn DRCs, your best bet is to help them decide which spouse should claim the spousal benefit at FRA. Since no couple will be the exact same age and have the exact same PIA, the answer will be different for each couple. Send me your scenarios As you can see, new Social Security insights are coming to light all the time. And Savvy Social Security advisors have the inside track because you can learn from other advisors' experiences via these updates. Although I've been preaching that every situation is different and must be analyzed on its own, I would like to start drawing some conclusions about suitable scenarios for a variety of situations. For example, now that we know that only one spouse may claim spousal benefits on the other's record, how do we decide which of two high-earning spouses should claim the spousal benefit? I found that in one case it was the wife, because her half of his PIA was more than his half of her PIA. But one case does not create a rule of thumb. So, I would love it if you would send me some real-life cases that will help us start drawing conclusions about strategies for spousal planning. Either send me your Excel files or even just the information about your couples: Husband's age and PIA, wife's age and PIA, and their plans for how long they plan to keep working.

6 "What if I keep working?" One of the most common questions advisors hear from clients is what happens if they keep working. There are two parts to this. The first part relates to the earnings test. If a person is receiving reduced benefits before FRA, $1 in benefits will be withheld for every $2 earned over the earnings test threshold, which will remain $14,160 in The second, more complicated and more interesting part of the question is what happens to their benefit if they continue to earn a high salary. As you know, the Social Security benefit is based on the highest 35 years of earnings. And as we've discussed in the past, if a person continues to work, and if he earns enough to replace a low- or zero-earning year, he can increase his benefit. But what if he already has 35 years of maximum earnings? If he continues to work past age 62 at maximum earnings, can he improve his benefit? It turns out the answer is yes. Let's consider our friend Boomer Bob, who was born in 1946 and turned 62 in When he turned 62, his PIA was calculated to be $2,230. Adjusted for this year's 5.8% COLA, his PIA is $2, This is the amount he would receive at age 66 (not counting future COLAs). Now, Boomer Bob had maximum earnings every year starting in 1968, when he graduated from college. In 1968, the Social Security taxable maximum was just $7,800. So when his PIA was calculated, his 1968 earnings were indexed and counted for $54,108. (The indexing factor is different for every age cohort and for every year. The 1968 indexing factor for baby boomers born in 1946 was For 1969 it was , gradually decreasing every year until it reaches at age 60, where it remains thereafter. I told you I get obsessive about this stuff.) The indexing factor is designed to make wages earned many years ago equivalent to wages earned today. But it really doesn't. Boomer Bob's wages in 1968 counted for $54,108, compared to the $106,800 his wages count for today (because of the 0% COLA, the taxable maximum for 2009 remains the same in 2010). So every year Boomer Bob earns the taxable maximum, it lops off an earlier year, even if he earned the maximum that year. To see the effect on his benefit, I used the SSA downloadable calculator and estimated his benefit if he stops working at 62, 66, or 70. When he continues to work, he earns the taxable maximum (not escalated for COLAs). Here are the three PIAs (remember, the PIA is his age-66 benefit, not adjusted for the actuarial reduction or delayed credits): Stops working at 62; PIA based on earnings in : $2, Stops working at 66: PIA based on earnings in : $2, Stops working at 70: PIA based on earnings in : $2, So it is clear that even though Bob already had 35 years of maximum earnings when his PIA was originally calculated, he can improve his benefit if he continues to work. If he keeps working until age 66, he will receive an additional $66.70 per month or $800 per year. And if he keeps working until age 70, he'll receive another $42.80 per month or

7 $ per year. And since his wife's spousal and survivor benefits would be based on his PIA, he can also improve her benefits by continuing to work. If he delays benefits to age 70, the DRCs would build these PIAs to $3,114, $3,202, and $3,259, respectively. I am not going to run these out with COLAs, but you can imagine that over time it could become a significant amount. What happens if Bob earns less than the maximum after age 62? Let's say he retires and does some part-time consulting, earning $40,000 per year. Will these lower earnings reduce his benefit? The answer is no. If he doesn't earn enough to replace one of those 35 years of high earnings, his benefit will not be recalculated. The public is becoming savvier about Social Security If you catch some of the questions coming into the personal finance publications, you can see that people are becoming savvier about Social Security strategies. The question about dual spousal benefits that came into Kelly Greene at the WSJ in September was one. Here's a question that came into Robert Powell's Retirement Weekly: I am currently 65 and my ex-wife is 64. We divorced amicably about 25 years ago. She has since remarried, while I have not. Her income was less than mine. I am planning to wait until age 70 1/2 to begin receiving my Social Security benefit. Can I claim spousal benefits at 66 based on her, and then shift over to my own later? While the amount of the spousal benefit is probably not large and I don't really need it, it would let me increase my charitable giving to a favorite non-profit that, like most in this economy, is struggling. J.R. Too bad Mr. Powell didn't ask for my help on this one. (He has consulted me in the past on other questions.) Instead, he turned to Denise Appleby, who is an expert on IRAs and retirement plans, but not so much on Social Security. She quoted the rules for spousal benefits off the SSA website and said that J.R. can only collect his divorced-spouse benefit if it is higher than his own benefit. Donna Clements of Mecer (Mercer?) said that with his higher earnings history, there most likely would not be a spouse's benefit payable. J.R. must have known something that these retirement professionals did not, or he wouldn't have asked the question. As it turns out, he may indeed claim his divorcedspouse benefit, if he waits until he turns 66. At that time he may "restrict" his application to his divorced-spouse benefit as discussed above, and start drawing a few hundred dollars a month to give to his favorite charity. I confirmed with Dorothy Clark at the SSA press office that this strategy applies to divorced-spouse benefits as well as spousal benefits. In fact, it's on the SSA website. Let this be a word to the wise: the public is getting savvier about Social Security strategies and advisors need to stay a jump ahead of them. I know I'm preaching to the choir, but it wouldn't hurt to spread the word among your colleagues. As we've said from the beginning, baby boomers will bring their business to the advisor who can first help them understand Social Security and recommend innovative strategies to maximize benefits before discussing the rest of their retirement income plan.

8 Incidentally, J.R.'s plan to claim Social Security at "70-1/2" shows some confusion about the age for claiming maximum Social Security benefits and the age for RMDs. This is just one example of a minefield that people need you to help them navigate around. As always, I'd love to hear from you. Success stories are especially welcome, as are your questions, which help us all become savvier Social Security planners. Please send your s to socialsecurity@horsesmouth.com. By the way, if you have ed me in the past and received an answer that conflicts with some of the newer information that has recently come to light and which is discussed in this update, please note the correct information above and let me know if you still have questions. Happy Social Security planning! Elaine Floyd, CFP Director of Retirement and Life Planning Horsesmouth 2009 Horsesmouth, LLC. All rights reserved. Follow us at You are currently subscribed to this list as %%$ %% To unsubscribe from this list click here: %%UNSUB_HREF%% To unsubscribe from all communication from Horsesmouth, click here: If you have questions, please us, do not respond to this message.