How to Use the Savvy Social Security Calculators

Transcription

1 How to Use the Savvy Social Security Calculators The Savvy Social Security Calculators utilize Excel spreadsheets to help you run various scenarios when doing Social Security planning for clients. They are used in conjunction with the benefit estimate provided by the Social Security Administration to give clients an accurate picture of their Social Security income stream going forward, including annual cost-of-living adjustments (COLAs). This appendix explains how to use the Savvy Social Security Calculators. For further explanation, please see the four-part orientation series, How to Use the Planning Calculators at on the Subscriber Webinars page. Important: In order to preserve the calculators in their original form for use with many clients, do this when you first open the Excel file: 1. Change your security settings to medium or low. If asked, click on Enable Macros. Each Excel file is a Read-only file. When running a calculation for a client, do a save as and give it a unique name. This will preserve the original file for use with other clients. 2. The benefit estimates are automatically adjusted for early or late claiming and COLAs. If you need to manually change an amount for a special circumstance, you can unprotect the worksheet using the password security. Online calculators now available Online versions of the calculators can now be accessed at After logging in, click on the Calculators tab, then click on the link to access the online calculators. Using the Savvy Social Security Calculators The primary purpose of the Savvy Social Security Calculators is to help you advise clients on when to apply for benefits. The underlying principle in each analysis is that 1

2 benefits: (1) are reduced if the application is made prior to full retirement age (FRA); (2) build delayed credits if the application is made after FRA (up to age 70). Early application results in more checks but in a reduced amount, while later application results in fewer checks in a higher amount. Social Security actuaries have determined that the net effect upon the system is the same regardless of when people apply. But for individual clients, especially those at risk for living a long time and who may end up depending on Social Security in their old age, the decision is a crucial one. Taking early benefits leaves them with a reduced benefit for life; this not only results in a lower cumulative benefit but also gives them less annual income in their later years, when they are likely to need it most. Breakeven analysis for individuals. The classic breakeven analysis compares two scenarios where benefits are claimed at age 62 vs. 70. Other ages may be used, but these are the most extreme alternatives. To use the calculators, you will enter the client s primary insurance amount (PIA), the client s current age, the earlier age benefits may by claimed, and the later age benefits may be claimed. Starting benefits are increased each year by an assumed cost-of-living adjustment (COLA). The default COLA is 2.7% because this is the inflation rate assumed by Social Security trustees under their intermediate-cost scenario. However, you can override the default rate and use a more conservative estimate if you wish. (See Chapter 3 of the Financial Advisor s Guide to Savvy Social Security Planning for more information on COLAs.) One way to help clients decide when to apply for benefits is to show them their year-byyear benefits, as well as the cumulative total of benefits, under each scenario. The crossover year, or breakeven age, is the age the client must live beyond in order for the later application to be worth more. Put simply, if the client thinks he will not outlive the breakeven age, he should apply for benefits early; if he thinks he or his surviving spouse will live longer than the breakeven age, he should delay applying for benefits. Each of the Savvy Social Security Calculators considers the breakeven analysis in a slightly different way. It is important to note that while the income stream revealed by the calculators can be exceedingly helpful, the when to apply? question involves more than mere number crunching. There are many qualitative issues that must be considered as well, such as a client s health status and need for income; please see Chapter 5 of the Financial Advisor s Guide to Savvy Social Security Planning. Scenario planning for married couples. The analysis for married couples goes beyond simple breakeven planning because of the interaction of earned benefits, spousal benefits, and survivor benefits. In fact, it turns the breakeven analysis on its head: if a high-earning spouse believes he has a short life expectancy, it is all the more important for him to delay his benefit in order to give his surviving spouse more income in her old age. Spousal planning involves scenario planning, or seeing the effects of each spouse applying for his or her own benefit, as well as a spousal benefit, at differing ages. You can try out up to six different scenarios and show clients the lifetime income stream under each scenario. A summary page compares them all so clients can see at a glance which scenario will provide the most income and cumulative benefits 2

3 Overview of the four Savvy Social Security Calculators Each of the four Savvy Social Security calculators helps you analyze the claiming decision in a slightly different way. Simple Breakeven Calculator This basic calculator helps you advise clients on when to apply for Social Security benefits. It allows you to run two scenarios apply earlier and receive a smaller amount, or apply later and receive a larger amount. The calculator shows the age the client must live beyond in order for delayed benefits to produce a higher cumulative amount. This calculator is designed for simplicity and does not take into account investment returns if benefits are invested. Reinvest Breakeven Calculator This calculator is designed for high-income clients who will not need Social Security to meet living expenses. If their intent is to invest their monthly benefits, should they apply early and get those benefits invested as soon as possible, or should they delay their application in order to receive a higher benefit? At varying return assumptions, the calculator shows the year-by-year results and cumulative totals so you can see the crossover point, or breakeven age, at which delaying benefits produces the higher total amount. Retirement Spending Breakeven Calculator This calculator assumes the client has personal assets in addition to Social Security. If the client retires sometime between the ages of 62 and 70, should he apply for Social Security immediately and leave the personal assets invested, or should he draw from the personal assets first and wait to apply for Social Security in order to build delayed credits? A year-by-year run shows how much of each year s spending need is met by personal assets vs. Social Security. The objective is to determine which strategy (early or later filing) requires the least amount to be drawn from personal assets to meet the same spending need. Spousal Planning Calculator One of the most challenging aspects of Social Security planning is coordinating spousal benefits, especially when the spouses are different ages. This calculator allows you to enter each spouse s age and respective benefit amount, along with the projected COLA, and see a year-by-year run of the couple s combined benefits and the cumulative total. Six identical worksheets allow you to try out several scenarios (wife applies at 62, husband applies at 66; wife applies at 66, husband applies at 70, and so on), so you can see what their combined benefit would be in 2015, 2016, 2017, etc. Estimating a client s Social Security benefit The first step in using the Savvy Social Security Calculators is to obtain a client s primary insurance amount (PIA) as estimated by the Social Security Administration. There are several ways to do this. Annual Social Security statement Clients can obtain their latest statement online at SSA has teamed up with one of the credit reporting agencies to ensure privacy and security. In order to access their statement, clients must first set up an account by answering a number of questions that only they would know the answers to. These are questions obtained from their credit file, such as the amount of their mortgage payment or a previous address. Once the account is set up they can obtain a copy of the familiar- 3

4 looking statement which shows their benefit estimate and earnings history. For the calculators, you want the number on the line that says, At your full retirement age (66) your payment would be about $XXX. This is the client s estimated PIA and is the number you will use in the calculators. SSA Retirement Estimator If a client is not able to obtain his annual statement for some reason, he can obtain his PIA by running the Retirement Estimator at This taps into the client s earnings record and also shows the benefit estimates. Again, you want the benefit at full retirement age. This is the PIA. You cannot run the Retirement Estimator for the client. The client must register and enter personal identifying information to obtain his or her individual benefit estimate and then provide the information to you. SSA provides three other calculators which may be useful in certain situations, especially if you do not have access to a client s statement but want to have some idea of what his PIA might be. To access them, go to benefitcalculators.htm. SSA Quick Calculator Of the SSA calculators, this is the easiest and fastest but least accurate method. It provides a simple, rough estimate when you input a client s date of birth and current earnings. SSA Online Calculator This calculator requires you to enter annual earnings in order to obtain a more accurate estimate. Of course, the only way to know a client s annual earnings is to refer to the annual statement, and if you have the statement you also have access to the benefit estimate. But it s helpful when working with clients who do not have their annual statement and who you know earned the Social Security maximum throughout their career. Refer to the table of maximum earnings and enter these amounts into the SSA Online Calculator. 4

5 Table of Maximum Earnings Year Maximum earnings Year Maximum earnings Year Maximum earnings , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,500 Source: Social Security Administration SSA Detailed Calculator This downloadable calculator has the Social Security formula embedded in it. You enter the client s birth date and earnings history (or click on the button for maximum earnings ) and can save the information and access it off your hard drive rather than returning to the SSA website and entering the information again. You can create a separate file for each client and update it as new earnings are posted. This calculator also allows you to project future earnings. For example, if a client owns a business and has flexibility in setting his and his wife s salary, you can help him determine how much his future Social Security benefit may be based on the different earnings projections. Warning: this calculator is not very user-friendly. But if you get the hang of it, you can obtain a wealth of information that will satisfy any Social Security math geek, such as the wage indexing formula used to calculate the average indexed monthly earnings (AIME) and the bend points used to calculate the primary insurance amount (PIA). Savvy calculators adjust for early or late claiming. All of the Savvy Social Security Calculators adjust for early or late claiming based on the client s full retirement age. FRA for baby boomers born between 1943 and 1954 is 66. FRA for those born in 1955 through 1959 is 66 plus some number of months. Since the Savvy calculators do not break amounts down by months, FRA is rounded down to 66 for anyone born in 1957 or earlier, and up to 67 for anyone born in 1958 or later. Simply enter the client s PIA that is, the benefit amount at FRA and the calculators will automatically adjust the benefit for either the actuarial reduction or delayed credits as well as annual COLAs. 5

6 Important note about COLAs: The Savvy Social Security calculators adjust the benefit estimates for annual COLAs. This means you will want to work with noninflation adjusted PIAs. The annual Social Security Statement and the SSA Retirement Estimator do not factor COLAs into the age-70 estimate. In other words, they are stated in present dollars, not future dollars. This is what you want, because the Savvy calculators will make the adjustment. The other three SSA calculators the Quick Calculator, Online Calculator, and Detailed Calculator allow you to ask for the benefit estimate in either present or future dollars. Make sure you stick with present dollars. Using the Savvy Social Security Calculators Once you have a client s PIA, you are ready to use the Savvy Social Security Calculators. Simple Breakeven Calculator To do a simple breakeven analysis that will help clients decide when to apply for Social Security, open the file Simple Breakeven Calculator.xls. Enter your client s name and do a save as giving the file a unique name such as Breakeven Analysis for Joe Smith. This will protect the original calculator file for use with other clients. In cell H6, enter the client s PIA. Remember, this is the benefit amount shown on the annual Social Security statement or the SSA Retirement Estimator that the client is projected to receive if he or she applies at full retirement age. Fill out the rest of column H with the current year, the earlier age benefits may be claimed (such as 62), and the later age benefits may be claimed (such as 70). The default COLA is 2.7%, but you may change it if you wish. As soon as you enter the information, Excel will fill in the amounts and calculate the income streams under the two scenarios. Notice the two cumulative columns. For each year, Excel compares the two cumulative amounts and shows the higher amount in bold. You will see that Cumulative benefit if start at earlier age is in bold during the first several years, then switches to Cumulative benefit if start at later age. The crossover year is the client s breakeven age. If the client or his surviving spouse expects to live beyond the breakeven age, the client will receive more cumulative benefits by waiting until the later age to apply. 6

7 Example: We open the Simple Breakeven Calculator.xls file for Boomer Bob and immediately save it as Breakeven Analysis for Boomer Bob.xls. Here are our entries for Boomer Bob: PIA $2,400 Current year 2015 Client s age 62 Earlier age benefits may be claimed 62 Corresponding monthly benefit amount $1,800 Later age benefits may be claimed 70 Corresponding monthly benefit amount $3,921 COLA% (Annual cost-of-living adjustment) 2.70% As soon as we enter the claiming ages, the adjusted benefit amounts and the lifetime income stream are immediately populated. Instantly, we see Boomer Bob s Social Security income stream for the two scenarios along with the cumulative totals. From age 62 through 77, he receives more cumulative benefits if he applies at 62. Beginning at age 78, the cumulative total for the later scenario starts to pull ahead and remains higher for the rest of his life. The longer he lives, the greater the disparity becomes as COLAs are applied to the higher amount. In addition to showing clients the cumulative totals, also show them the annual income they can expect to receive in the future. For example, if Boomer Bob (or his surviving spouse) is still alive at age 85, annual Social Security income will be $70,160 ($5,847 per month) if he delays applying for benefits, but just $39,863 ($3,322 per month) if he applies at age 62. IMPORTANT DISCLAIMER. Make sure that clients understand that Social Security benefit estimates are just that estimates. Many factors influence the actual benefit amount, including additional earnings and the unpredictability of future COLAs. Clients won t know the exact amount of their Social Security benefits until they actually apply and even then they can change. The Savvy Social Security Calculators allow you to update the income projections as new information becomes available. Still, it is important that clients understand that the calculations are used for planning purposes only and that their actual benefit may be different. 7

8 Simple Breakeven Analysis for Boomer Bob Age Monthly benefit if start at earlier age Annual benefit if start at earlier age Cumulative benefit if start at earlier age How to Use the Savvy Social Security Calculators Monthly benefit if start at later age Annual benefit if start at later age Cumulative benefit if start at later age 62 $1,800 $21,600 $21,600 $0 $0 $0 63 1,849 22,183 43, ,899 22,782 66, ,950 23,397 89, ,002 24, , ,056 24, , ,112 25, , ,169 26, , ,228 26, ,773 3,921 47,047 47, ,288 27, ,226 4,026 48,317 95, ,350 28, ,420 4,135 49, , ,413 28, ,375 4,247 50, , ,478 29, ,112 4,361 52, , ,545 30, ,652 4,479 53, , ,614 31, ,017 4,600 55, , ,684 32, ,228 4,724 56, , ,757 33, ,310 4,852 58, , ,831 33, ,284 4,983 59, , ,908 34, ,176 5,117 61, , ,986 35, ,009 5,256 63, , ,067 36, ,811 5,398 64, , ,150 37, ,606 5,543 66, , ,235 38, ,421 5,693 68, , ,322 39, ,284 5,847 70, , ,412 40, ,224 6,004 72, , ,504 42, ,269 6,167 73,999 1,072, ,598 43, ,449 6,333 75,997 1,148, ,696 44, ,795 6,504 78,049 1,226, ,795 45, ,339 6,680 80,157 1,306, ,898 46, ,112 6,860 82,321 1,388, ,003 48,036 1,027,148 7,045 84,543 1,473, ,111 49,333 1,076,481 7,236 86,826 1,560, ,222 50,665 1,127,146 7,431 89,170 1,649, ,336 52,033 1,179,179 7,631 91,578 1,740, ,453 53,438 1,232,617 7,838 94,051 1,834, ,573 54,881 1,287,497 8,049 96,590 1,931, ,697 56,362 1,343,860 8,266 99,198 2,030, ,824 57,884 1,401,744 8, ,876 2,132, ,954 59,447 1,461,191 8, ,627 2,237, ,088 61,052 1,522,243 8, ,452 2,344,675 8

9 Reinvest Breakeven Calculator Some clients think they will come out ahead if they take Social Security early and invest the income as it is received. The theory here is that they can do a better job investing their benefits compared to leaving them in the system to build delayed credits and COLAs. With the Reinvest Breakeven Calculator, you can show the income stream under the two scenarios (early or later filing) under varying return assumptions. When you run this calculator you will find that the larger the return assumption is, the later the breakeven age will be. In other words, the more successful a client expects to be in investing Social Security income, the more sense it makes to take benefits early because he is less and less likely to outlive the breakeven age. Example. We opened the Reinvest Breakeven Calculator.xls file and immediately saved it as Reinvest Breakeven Analysis for Boomer Bob.xls. Next, we entered the following information: PIA $ 2,400 Enter current year 2015 Enter client s current age 62 Enter the earlier age benefits may be claimed 62 Monthly benefit amount $ 1,800 Enter the later age benefits may be claimed 70 Monthly benefit amount in future dollars $ 3,921 COLA% (Annual cost-of-living adjustment) 2.70% Enter investment return rate 3.00% When we look at the amounts under the two columns Amount at end of year if all benefits are invested at Return% we see that Boomer Bob can compile a tidy sum by investing all of his Social Security benefits. While it can be tempting to take benefits early in order to get a head start, we see that the later-filing scenario eventually catches up. At age 80 the breakeven age in this case assuming a 3% return Boomer Bob earns more by taking delayed benefits at age 70. Even though there are fewer years of compounding, the starting amount is enough higher that it eventually overtakes the claim-at-62 scenario. If we change the return assumption to 5%, the breakeven age rises to 83. If we change it to 8%, the breakeven age jumps to 90. Under this scenario it makes more sense for Boomer Bob to take early benefits in order to enjoy the extra years of compounding at the higher rate. But do keep in mind that 8% returns entail some risk, while delayed credits and COLAs do not. Investment Disclaimer Clients must always be reminded that investment returns are not predictable and may vary dramatically from the assumptions used in any planning analysis. This is especially important when doing Social Security breakeven analyses, because you are comparing a scenario of unpredictable investment returns with a scenario that builds delayed credits and COLAs under an established formula. 9

10 Reinvest Breakeven Analysis for Boomer Bob Social Security Breakeven Analysis if Benefits are Reinvested PIA $2,400 Enter current year 2015 Enter client s current age 62 Enter the earlier age benefits may be claimed 62 Corresponding monthly benefit amount $1,800 Enter the later age benefits may be claimed 70 Corresponding monthly benefit amount $3,921 COLA% (Annual cost-of-living adjustment) 2.7% Enter investment return rate 5.0% Year Age Social Security benefit if taken at the earlier age, increased by COLA% Amount at end of year if all benefits are invested at Return% Social Security benefit if taken at the later age, increased by COLA% Amount at end of year if all benefits are invested at Return% ,600 22, ,183 47, ,782 73, , , , , , , , , , , , ,461 47,047 49, , ,110 48, , , ,669 49, , , ,306 50, , , ,195 52, , , ,522 53, , , ,481 55, , , ,277 56, , , ,126 58, , , ,255 59, , , ,904 61, , , ,325 63, , ,801 1,021,783 64,770 1,013, ,795 1,112,556 66,519 1,133, ,815 1,208,940 68,315 1,262, ,863 1,311,244 70,160 1,398, ,940 1,419,793 72,054 1,544, ,045 1,534,930 73,999 1,699, ,180 1,657,015 75,997 1,864, ,346 1,786,430 78,049 2,039, ,543 1,923,572 80,157 2,225, ,773 2,068,862 82,321 2,423, ,036 2,222,743 84,543 2,633, ,333 2,385,680 86,826 2,856, ,665 2,558,162 89,170 3,092, ,033 2,740,705 91,578 3,343, ,438 2,933,850 94,051 3,609, ,881 3,138,167 96,590 3,891, ,362 3,354,256 99,198 4,189, ,884 3,582, ,876 4,506, ,447 3,824, ,627 4,841, ,052 4,079, ,452 5,196,230 10

11 Retirement Spending Breakeven Calculator To find out the amount of annual spending needs that will be met by Social Security vs. personal assets, open the file Retirement Spending Breakeven Calculator.xls. Immediately enter your client s name at the top and do a save as, giving the file a unique name such as Retirement Spending Breakeven Analysis for Joe Smith. In column K enter the information as requested. In cell K15 enter the client s annual spending need the first year of retirement and in K16 enter the year the spending need begins. The First year s annual spending need is the amount the client expects to spend the first year of retirement. It should include all expenses, including annual income taxes. A word about taxes. Please note that these calculators do not attempt to calculate a client s income tax because that would require far too many inputs and complex algorithms. However, annual income taxes should be included in the client s annual spending need. Based on income tax projections by the client s CPA or an estimate based on last year s tax return (see the line Total Tax on page 2 of Form 1040), simply add the amount of income tax to the client s other spending needs. For example, if a client s living expenses total $70,000 and federal and state income taxes are $10,000, you would enter $80,000 as the client s first year s annual spending need. Example. We opened the Retirement Spending Calculator.xls file for Boomer Bob and immediately saved it as Retirement Spending Analysis for Boomer Bob.xls. Next, we entered the following information: PIA $2,400 Enter the current year 2015 Enter the client s current age 62 Enter the earlier age benefits may be claimed 62 Monthly benefit amount $ 1,800 Enter the later age benefits may be claimed 70 Monthly benefit amount $ 3,921 COLA% (Annual cost-of-living adjustment) 2.70% Enter the first year s annual spending need $ 72,000 Enter the year the spending need begins 2015 Immediately, we see how much of each year s spending need is met by Social Security vs. personal resources. Personal resources include pension income, withdrawals from retirement accounts, income from taxable investments, income from work, and any other asset or source of income. You are not concerned here with the client s actual income (which may be higher than the spending need). Rather, you simply want to determine where the income will come from to meet a specific spending need in retirement. The goal is to choose the scenario that will require the least personal resources to meet the same spending need. It is another form of breakeven analysis. For Boomer Bob, we see that if he applies at age 62, the annual spending need is met by a combination of Social Security and personal resources. If he waits until age 70 to apply for Social Security, all of his spending needs must be met by personal resources from ages 62 through 69. However, under the later scenario, pretty soon his Social 11

12 Retirement Spending Analysis for Boomer Bob Year Age Annual spending need, increased each year by COLA% How to Use the Savvy Social Security Calculators Social Security Breakeven Analysis if Benefits are Spent PIA 2400 Enter the current year 2015 Enter the client s current age 62 Enter the earlier age benefits may be claimed 62 Monthly benefit amount $1,800 Enter the later age benefits may be claimed 70 Monthly benefit amount $3,921 COLA% (Annual cost-of-living adjustment) 2.70% Enter the first year s annual spending need $72,000 Enter the year the spending need begins 2015 Social Security benefit if taken early, increased by COLA% Amount of personal resources required to meet spending need Cumulative personal resources used to meet spending need Social Security benefit if delayed, increased by COLA% Amount of personal resources required to meet spending need Cumulative personal resources used to meet spending need $72,000 $21,600 $50,400 $50,400 $0 $72,000 $72, ,944 22,183 51, , , , ,940 22,782 53, , , , ,991 23,397 54, , , , ,097 24,029 56, , , , ,259 24,678 57, , , , ,480 25,344 59, , , , ,761 26,028 60, , , , ,104 26,731 62, ,804 47,047 42, , ,510 27,453 64, ,860 48,317 43, , ,980 28,194 65, ,646 49,622 44, , ,518 28,955 67, ,209 50,961 45, , ,124 29,737 69, ,596 52,337 46, , ,800 30,540 71, ,856 53,750 48, , ,549 31,365 73, ,040 55,202 49, , ,372 32,211 75, ,200 56,692 50,679 1,003, ,271 33,081 77,189 1,069,389 58,223 52,048 1,055, ,248 33,974 79,274 1,148,663 59,795 53,453 1,109, ,306 34,892 81,414 1,230,077 61,409 54,896 1,163, ,446 35,834 83,612 1,313,689 63,067 56,378 1,220, ,671 36,801 85,870 1,399,558 64,770 57,901 1,278, ,983 37,795 88,188 1,487,746 66,519 59,464 1,337, ,385 38,815 90,569 1,578,315 68,315 61,069 1,398, ,878 39,863 93,015 1,671,330 70,160 62,718 1,461, ,466 40,940 95,526 1,766,856 72,054 64,412 1,525, ,150 42,045 98,105 1,864,961 73,999 66,151 1,591, ,934 43, ,754 1,965,715 75,997 67,937 1,659, ,820 44, ,474 2,069,189 78,049 69,771 1,729, ,812 45, ,268 2,175,457 80,157 71,655 1,801, ,910 46, ,137 2,284,595 82,321 73,590 1,874, ,120 48, ,084 2,396,679 84,543 75,577 1,950, ,443 49, ,110 2,511,789 86,826 77,617 2,028, ,883 50, ,218 2,630,007 89,170 79,713 2,107, ,443 52, ,410 2,751,418 91,578 81,865 2,189, ,126 53, ,688 2,876,106 94,051 84,076 2,273, ,936 54, ,055 3,004,161 96,590 86,346 2,360, ,875 56, ,512 3,135,673 99,198 88,677 2,448, ,947 57, ,063 3,270, ,876 91,071 2,539, ,157 59, ,710 3,409, ,627 93,530 2,633, ,507 61, ,455 3,551, ,452 96,055 2,729,470 12

13 Security benefit is enough higher that he requires less personal resources to meet the same spending need. The breakeven age is 78. After age 78, he ll need to draw less from personal resources if he applies at age 70 than if he applies at 62. And the disparity grows with each passing year. Here are a few points to keep in mind when using the Retirement Spending Calculator with clients. Lead in to discussion of overall retirement income plan. This calculator should help you branch out from your initial focus on Social Security to a serious discussion of clients personal resources and their overall retirement income plan. Assuming clients can t meet all of their spending needs with Social Security, what other resources are available to them? Explore IRAs, 401(k)s and other retirement plans, investment accounts, income-generating assets such as real estate, potential inheritances, potential liquidity events such as the sale of a business, and plans for working in retirement. Consider taxes. Although these calculators are not designed for tax advice, it is worth exploring the tax consequences of the various forms of income that will be meeting the client s spending needs from age 62 on. Consider taxation of Social Security benefits: will one scenario result in less tax? Also consider RMDs at age : will drawing down the IRA early keep the client out of a high tax bracket later on? Engage the client s tax advisor in this discussion. Spousal Planning Calculator With married couples you are working with each spouse s retirement benefit, each spouse s potential spousal benefit, and also showing the survivor benefit for the longer-lived spouse after one spouse dies. Social Security planning for spouses is therefore one of the most complex undertakings of all, especially when the spouses are different ages. It is not always intuitive to know when each spouse should file for benefits. That s why you need the Spousal Planning Calculator to show married couples their lifetime Social Security income under several different scenarios. To start, you might have a consultation with the client. Find out when they plan to retire, how much income they will need in retirement, what their sources of income are, and if they have given any thought to when they might apply for Social Security benefits. Incorporate this information into your scenario planning, even as you help them maximize benefits by applying at the optimal time. They may find that their ideas about when to apply for Social Security are far from optimal when viewed over their respective life expectancies. If clients do not have any preconceived ideas about when to apply for Social Security, we suggest that you start out with the optimal claiming scenario. This is not always immediately apparent, but one fairly hard-and-fast rule of thumb is that the higherearning spouse should delay the start of his or her benefit to age 70. This will provide the highest income to the couple while both are alive and the highest income to the surviving spouse after one spouse dies, because the higher of the two benefits will transfer to the surviving spouse as her survivor benefit. 13

14 When lower-earning spouse s PIA is more than one-half the higherearning spouse s PIA. If the lower-earning spouse s PIA is more than one-half the higher-earning spouse s PIA, that spouse should also delay the start of benefits to age 70. When two high-earning spouses each delay benefits to age 70, as a couple they will enjoy maximum Social Security income in retirement probably higher than they expect. For example, if two spouses who are age 62 today each have PIAs of $2,200, their combined age-70 benefit, including delayed retirement credits and annual 2.7% COLAs, will be $7,188 per month. On the other hand, if they each start reduced benefits at 62, their combined income at age 70 will be just $4,084. If they both live to age 85, they will have received a total of $1,759,169 if they apply at age 70 (and one spouse takes advantage of spousal benefits from 66 to 70), versus $1,318,188 if they apply at age 62. This is powerful information for people on the brink of retirement and will come as a revelation to couples who are focused on meeting their day-to-day spending needs in the months and years immediately following retirement. In addition to recommending that both high-earning spouses delay filing for benefits, you ll want to show them how they can take advantage of spousal benefits. As soon as the younger spouse turns full retirement age, one spouse may file and suspend while the other spouse files a restricted application for spousal benefits. Note that only one spouse may receive spousal benefits at the same time. Also note that they both must be over full retirement age to execute the combination file-and-suspend and claimnow-claim-more-later strategies. The job of the calculator is to determine which spouse should take the spousal benefit between 66 and 70. It will depend on their respective ages and benefit amounts. When lower-earning spouse s PIA is less than one-half the higherearning spouse s PIA. If the lower-earning spouse s PIA is less than one-half the higher-earning spouse s PIA, you have more options. Sometimes it makes sense for the lower-earning spouse to file for early benefits at 62 if it means an older, higher-earning spouse can take advantage of spousal benefits. The lower-earning spouse will be adding on a spousal benefit later anyway, so the reduction for early claiming is likely to be less painful. Again, you have to run the numbers to determine which scenario is optimal. Example for Bob and Betty Smith To run the calculator, we open the Spousal Planning Calculator and immediately save it as Spousal Planning Analysis for Bob and Betty Smith. In the orange box labeled Enter Identifying Information we enter the advisor name, firm name, telephone number, name of the client, and the date of the report. In the second orange box labeled Enter Client Data, we enter the current year and the ages and PIAs of the husband and wife. We decide whether to keep the default 2.7% COLA or change it, and we decide whether to keep the life expectancies of 85 for the husband and 95 for the wife, or change them. In the top panel of the spreadsheet we start entering scenario information. As soon as we enter claiming ages for each spouse, the benefit amounts automatically populate, showing the starting amount and the couple s Social Security income on a year-by-year basis. 14

15 Scenario 1 Current year 2015 Bob s current age 62 Betty s current age 60 Bob s PIA (in present dollars) $2,400 Betty s PIA (in present dollars) $1,400 Age at which Bob will claim benefits on his work record Age 70 Year 2023 Monthly benefit $3,921 Age at which Betty will claim benefits on her work record Age 70 Year 2025 Monthly benefit $ 2,412 Age at which Betty will claim benefits on Bob s work record Age 66 Year 2021 Monthly benefit $ 1,408 Age at which Bob will claim benefits on Betty s work record Age Year Monthly benefit $ Age at which Bob will file and suspend Age 68 Year 2021 Age at which Betty will file and suspend Age Year COLA% (Annual cost-of-living adjustment) 2.70% Bob s life expectancy 85 Betty s life expectancy 95 The Scenario Box allows you to write a description of the scenario. Here we write Bob and Betty each claim their own retirement benefit at age 70. In 2021, when Betty is 66, Bob (68) files and suspends so that Betty can claim her spousal benefit. To try another scenario, we click on the Scenario 2 tab on the bottom of the page and enter different ages and starting benefit amounts. Now we can compare the two scenarios to see which income stream works better for them, also taking into account other income sources. Each file allows you to run six scenarios. A summary tab at the end shows the income and cumulative benefits under each scenario at key ages so you can compare the scenarios at a glance. Analyzing the Summary Page. When analyzing the summary page, note that the highest number for each scenario is in bold. For example, if you want to know which scenario will give Betty the highest income at age 85, refer to the Combined Annual Income column. You can see that for age 85, Scenarios 1, 2, and 3 are in bold. If your client is interested in highest cumulative benefits, look at that column. As you can see, the highest cumulative benefits are available with Scenario 1. This is clearly the optimal scenario for Bob and Betty. The text box at the bottom of the page allows you to write in your analysis and recommendations. Printing the report. When you print the file, it will print with a three-page cover section that explains the purpose and process of scenario planning, tells clients how to go about applying for Social Security benefits, and has the necessary disclaimers explaining the limitations of the analysis. 15

16 Scenario 1 How to Use the Savvy Social Security Calculators Social Security Analysis For Bob and Betty Smith When Betty is age: Year Combined annual income Cumulative benefits Betty files for her spousal benefit at age 66 in $78,568 $244,302 Bob files and suspends at age 68 in $89,763 $670,129 Bob files for his benefit at age 70 in $102,553 $1,156,631 Betty files for her benefit at age 70 in $73,999 $1,627, $84,543 $2,028,325 Scenario 2 Bob files for his spousal benefit at age 68 in $78,568 $193,910 Betty files and suspends at age 66 in $89,763 $619,736 Bob files for his benefit at age 70 in $102,553 $1,106,239 Betty files for her benefit at age 70 in $73,999 $1,576, $84,543 $1,977,932 Scenario 3 Bob files for his benefit at age 62 in $44,641 $405,791 Betty files for her benefit at age 62 in $51,001 $647, $58,269 $924, $42,045 $1,191, $48,036 $1,419,440 Scenario 4 Bob files for his benefit at age 66 in $59,521 $347,305 Betty files for her benefit at age 66 in $68,002 $669, $77,692 $1,038, $56,060 $1,394, $64,048 $1,698,837 Scenario 5 Betty files for her benefit at age 62 in $66,068 $278,357 Betty files for her spousal benefit at age 68 in $75,482 $636,438 Bob files for his benefit at age 70 in $86,238 $1,045, $73,999 $1,464, $84,543 $1,865,599 Scenario 6 ANALYSIS: $0 $ $0 $0 Based on the assumptions used for Social Security primary insurance amounts, life expectancies, and cost-of-living adjustments, Scenario 1 appears to be the optimal scenario, providing the highest annual income and highest cumulative benefits. It is therefore recommended that Bob file and suspend at age 68 and that Betty file for her spousal benefit at the same time. When Bob turns 70 his benefit will be automatically resumed with delayed credits. Two years later, when Betty turns 70, she should file for her own retirement benefit, which will include maximum delayed credits. It is further recommended that these Social Security numbers be incorporated into the Smiths' overall retirement income plan. 16

17 Helping clients avoid claiming mistakes The calculators have been programmed to disallow invalid scenarios. If you enter a scenario and if the benefit amount is blank, it means that scenario is not valid. For example, if Bob is delaying his benefit to age 66 or 70, Betty would not be able to claim her spousal benefit at 62 because he would not have filed yet. So if you were to enter this scenario you would see a blank cell for Betty s benefit amount. This would be your cue that the scenario is not valid. Another invalid scenario is claiming a spousal benefit before full retirement age when the person s PIA is more than one-half of the spouse s PIA. A person who claims before FRA will always receive her own benefit first. She will only receive a spousal excess if her PIA is less than one-half of her spouse s PIA, and only after he has filed. Be careful of any scenario that calls for claiming benefits before FRA, unless your purpose is to show how limiting this can be. Clients often come in with the idea of claiming benefits at 62. These clients are actually prime prospects for the Savvy Social Security planning analysis because you will be able to show them how much more income and cumulative benefits they will have over their lifetime if they delay benefits. But there s more to it than that. Clients who file for benefits before full retirement age are limited in other ways. One limitation is the annual earnings test, which withholds benefits if earnings are over the annual threshold. Another key limitation is the inability to take advantage of spousal benefits. If a client files for his own reduced benefit before FRA, he may not receive a spousal benefit if his own benefit is higher. We are seeing more and more baby boomers who have already applied for early benefits come to their advisors asking if they can take advantage of spousal benefits or otherwise raise their benefit. For many of these boomers, the damage is largely done. They can always suspend their benefit at FRA and let it build delayed credits to age 70. But the credits will be applied to the reduced amount, and the ability to claim spousal benefits is lost forever. This is why it is imperative that you reach out to baby boomers before they turn 62. Teach them the rules and the strategies and help them avoid irrevocable mistakes. Scenario Planning for Couples Please refer to the following resources for more information on scenario planning for couples. Go to and log in with your user name and password. SAMPLE CALCULATOR Spousal Planning Analysis for Bob and Betty Smith click on the Calculators tab Savvy Social Security Orientation Series: How to Use the Planning Calculators, Part 3, Spousal Planning Calculator click on the Subscribers Webinar tab Social Security Spousal Scenario Planning click on the Subscribers Webinar tab 17

18 Your Customized Social Security Analysis Bob and Betty Smith January 2, 2015 By Elaine Floyd, CFP Horsesmouth This report shows the Social Security income stream you can expect to receive under differing claiming scenarios based on your primary insurance amount as estimated by the Social Security Administration and certain assumptions for life expectancy and future cost-of-living adjustments. The numbers you see here are not exact. No one can ever know the exact amount of their Social Security benefit until it is actually received. But by making certain assumptions and trying out different claiming scenarios, you can see how your lifetime Social Security income may change depending on when you and your spouse claim benefits. The purpose of this report is to give you a long-term perspective on Social Security, which is one of the few sources of retirement income that continues for life. Married couples have several decisions to make. When will the husband claim his retirement benefit based on his earnings record? When will the wife claim her retirement benefit based on her earnings record? When will the wife claim her spousal benefit based on her husband s earnings record? Or will the husband claim his spousal benefit based on his wife s earnings record? Will either spouse need to file and suspend in order for the other spouse to become entitled to a spousal benefit? The interplay of earned benefits and spousal benefits makes for some interesting opportunities for married couples as long as you understand the rules and know which spouse can do what and when. Another important consideration is survivor benefits. If one spouse dies while both spouses are receiving Social Security, the deceased spouse s benefit stops and the surviving spouse may receive the higher of the two benefit amounts. The income streams shown here incorporate life expectancies for husband and wife. If the husband is expected to die first, for example, the analysis shows his benefit going to zero while the wife either continues with her own benefit or switches to the husband s benefit, depending on which benefit is higher. Part of Savvy Social Security planning is survivor planning for when one spouse becomes widowed. Will the survivor benefit be enough to live on? What other resources will be available? As you will see, the lifetime value of Social Security can vary greatly depending on when you decide to claim benefits. When your only interest is maximizing Social Security benefits, there is usually one optimal scenario that can provide the most benefits based on the assumptions you enter. However, it is also important to consider your own personal circumstances your need for income, your health status and life expectancy, and your other resources such as retirement and investment accounts when deciding when to claim Social Security. This report should therefore be viewed within the context of your overall retirement income plan. How to claim your Social Security benefits The scenarios shown in this report indicate the ages at which each spouse might claim his or her retirement benefit, and the age at which one spouse may claim a spousal benefit. Both spouses may not receive a spousal benefit at the same time. This is because in order for the wife, say, to receive a spousal benefit based on the husband s work record, the husband must file for his own retirement benefit. Once he files for his own retirement benefit, he may not receive a spousal benefit if his own benefit is higher. So an important part of Savvy Social Security scenario planning is determining which spouse should claim the spousal benefit. Another important part is knowing the rules about when you can and can t claim a spousal benefit. File and suspend. In order for a spouse to claim a spousal benefit, the spouse on whose work record the spousal benefit is based usually the higher-earning spouse must have filed for benefits. But the higher-earning spouse often wants to delay his or her benefit to age 70 in order to earn maximum delayed credits. In that case, the higher-earning spouse can file for Social Security at full retirement age or later and then immediately suspend his benefit. Filing will entitle his spouse to her spousal benefit. Suspending will allow his own benefit to earn 8% annual delayed credits. SSA representatives are familiar with this strategy. When filing by phone or in person at your local office, all you have to do is tell them that you want to file and suspend so your spouse will be entitled to a spousal benefit and so your own benefit can earn delayed credits. Please note that file-and-suspend cannot be done before full retirement age. Here is an SSA publication that tells about suspending benefits: gov/retire2/suspend.htm Claim-now-claim-more-later. Another strategy may call for one spouse to claim his or her spousal benefit off the other spouse s work record when his or her own retirement benefit is higher. For example, let s say the husband 18

19 wants to delay his benefit to age 70. When he turns full retirement age, he may restrict his application to his spousal benefit and receive one-half of his wife s primary insurance amount for four years while his own retirement benefit increases by 8% per year to age 70. As always, the other spouse, on whose record the spousal benefit is based, must have filed for benefits. Please note that it is not possible to file a restricted application before full retirement age. Here is some information on benefits for you as a spouse: applying6.htm#a0=0 How to file. The easiest way to file for Social Security benefits is online. Just go to and click on Apply online for Retirement Benefits. However, if you are implementing file-and-suspend or claim-now-claim-more-later, which involve voluntary suspension or restriction of application, you will need to talk with a representative to make sure your intentions are carried out. The safest way to do this is to make an appointment at your local office. Explain to the representative what you are trying to accomplish. If you are delaying your benefit to age 70 in order to earn maximum delayed credits, make sure the representative understands this. If there is any doubt, ask to speak to a supervisor. It is not unheard of for claimants to receive wrong information from Social Security representatives who have not been adequately trained in the nuances of Social Security claiming strategies. A couple of weeks after you have completed your application you will receive an award letter. Make sure the letter matches your intentions. For example, if you are expecting to receive a spousal benefit equal to 50% of your spouse s PIA and the letter indicates a higher amount, the application may not have been processed properly. In order not to jeopardize your delayed credits, you should notify SSA immediately and have the application corrected. What this report does not include You should know that this report has a number of limitations. Scenarios are not exhaustive. There are hundreds of possible claiming scenarios. This report shows you a handful of scenarios which seem appropriate based on your personal circumstances. We can run additional scenarios if you wish. Results are based on assumptions. The key assumptions used are: 1) the primary insurance amounts for husband and wife as estimated by the Social Security Administration; 2) life expectancies for husband and wife; and 3) future cost-of-living adjustments. If any of these numbers turn out to be different from the assumptions, your actual Social Security income stream will be different. If you wish to use different assumptions from the ones used in this report, please let us know and we can re-run the analysis for you. Social Security may be reformed. It is possible that the Social Security system could be reformed by Congress in the future. Possible reforms may include raising the full retirement age, changing the benefit formula, changing the formula for cost-of-living adjustments, and others. There is no way to know when or how Social Security might be reformed in the future. WEP or GPO may not be incorporated. If you ever worked in a job that did not pay into Social Security and you are entitled to a pension from that job, your Social Security benefit may be reduced. The applicable reduction in retirement, spousal, or survivor benefits may not be reflected in this report. The earnings test is not incorporated. If you file for benefits before full retirement age and you work, some or all of your benefits may be withheld due to the earnings test. These reductions are not incorporated into these estimates. Children s benefits are not included in these estimates. If you have a child under 18, the child may be entitled to children s benefits. These amounts are not incorporated into this report. Taxes are not incorporated into the estimates. If your modified adjusted gross income is over a certain threshold, up to 85% of your Social Security benefits may be reportable as income on your federal income tax return. The estimates in this report do not account for taxes. Please see your tax advisor for more information. This report is for informational purposes only. The purpose of the report is to educate and give general guidance to help craft a personalized approach to taking Social Security. Although the calculator shows an optimal claiming scenario of the ones considered, the use of different assumptions, particularly life expectancy, could change the outcome. It is therefore important for you to consider a wide variety of factors and decide for yourself when is the optimal time to claim Social Security. This report was generated by software developed by Horsesmouth, LLC. Neither we, nor Horsesmouth assumes any liability nor responsibility to any person or entity with respect to any loss or damage caused by information contained in this report. 19