Social Security and Retirement Planning

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2 Social Security and Welcome Each course in the series covers an investment topic or strategy that can provide you with: Timely Information Keys to Success Prospects & Prosperity Today s Presentation The material presented in today s course will: Increase your product and service knowledge Help you discover new markets Provide you with new tools and ideas Notice These materials are being presented for the sole purpose of providing Continuing Education. This presentation may include a generic discussion of certain classes of investments, discussion of tax issues and hypothetical scenarios. The information contained herein is not intended as a solicitation nor intended to provide specific advice or recommendations to any individual. Federal tax laws are complex and subject to change. Any tax statements made herein reflect the understanding of SunAmerica Retirement Markets, Inc. ( SunAmerica ), and may not necessarily be current or complete. Neither SunAmerica nor its representatives may give legal, tax or investment advice. Certain classes of investments discussed may be distributed by SunAmerica Capital Services, Inc. Introduction Agenda For over 75 years Social Security has represented a significant aspect of the retirement income equation and, for many, the single most important source of retirement income Baby Boomers, in particular, have grown up with the promise that Social Security would provide a reliable source of retirement income, a promise that is now in question The Social Security Promise: History and Financial Considerations Potential Changes / Reforms to Social Security Retirement Income Planning Strategies Incorporating Social Security 1

3 Social Security and The Social Security Promise: History and Financial Considerations History of Social Security The Social Security Act, which covered workers in commerce and industry, was signed by President Roosevelt in 1935 We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age. President Franklin D. Roosevelt - Presidential Statement Signing the Social Security Act, August, 1935 (Source: Social Security Administration) History of Social Security 1935 Coverage was limited under initial Social Security system Slightly over 50% of workers were eligible to participate Benefits were only payable to the individual worker No benefits for dependent family members Benefits were modest and not indexed for inflation Benefits became available at age 65 Average life expectancy 1 : Men: 58 Women: 62 History of Social Security Expansionary period for Social Security Coverage extended to the majority of workers Coverage extended to family members Benefits increased both directly and via cost-ofliving indexing 1 Source: Social Security Administration, History of Social Security 1977-present Policy retrenchment period for Social Security Increasing taxes Curtailing eligibility Reducing benefits All were attempts to keep the program financially solvent On the subject of financing Social Security was initially designed to be self-financing Financed via dedicated payroll taxes and NOT general government revenues Objective was to ensure that the program could never spend more than it could accrue through payroll taxes Costs would be lowest at the start, but would increase with time (transferring increased financial burden to future generations) Creation of a reserve (trust) fund to generate investment income; offset future costs 2

4 Today, there are two separate trust funds: Old Age and Survivors Insurance (OASI) Disability Insurance (DI) Together, they make up the Social Security program (OASDI) Trust Fund Income Sources in 2011: Payroll taxes: $564.3 billion Interest payments on trust fund assets: $114.4 billion Taxes assessed on benefits: $23.8 billion General Fund reimbursement: $102.7 billion Total 2011 Income: $805.1 billion What happens to income received by the trust funds? By law, income must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the U.S. government. Cash exchanged for the securities is deposited in Treasury s general fund If all income is invested, how are benefits paid? Cash to cover trust fund expenditures comes from the redemption or sale of securities held by the trust funds Two types of securities may be held by the Trust funds: Public Issue: Marketable Treasury bonds available to the public Subject to market forces value may rise or fall Special-Issue: Available only to the trust funds Redeemable at face value at any time Pay interest upon redemption The trust funds now hold only special-issue securities Historical Ratio of Social Security Covered Workers to Beneficiaries Selected Years Year Covered Workers (Thousands) Beneficiaries (Thousands) Ratio (Workers per Beneficiary) , ,280 2, ,530 14, ,090 25, ,656 35, ,672 39, ,295 45, ,081 48, ,725 53, Source: Social Security Administration Projected Ratio of Social Security Covered Workers to Beneficiaries Selected Years Year Covered Workers (Thousands) Beneficiaries (Thousands) Ratio (Workers per Beneficiary) ,353 70, ,251 78, ,066 85, ,683 90, ,614 93, ,669 95, ,445 97, , , , , Source: Social Security Administration CBO projects that over the long term, paying the Social Security benefits scheduled under current law will require economic resources totaling between 5 percent and 7 percent of GDP. At the same time, the federal revenues dedicated to Social Security will remain close to their current level about 5 percent of GDP in the absence of changes to the program. Thus, annual outlays for Social Security are projected to exceed revenues beginning in OASDI Outlays as Percentage of Gross Domestic Product Source: Congressional Budget Office: The 2012 Long-Term Projections for Social Security: Additional Information 3

5 Should the OASDI Trust Funds become exhausted in 2033, only 3/4ths of scheduled benefits will be payable Source: Social Security Administration, 2012 OASDI Trustees Report Scheduled vs. Payable Benefit Social Security Benefits Scheduled vs. Payable Benefits Projected Average (Median) Monthly Benefit, 2030 through 2070 (In 2009 dollars) DEFINITIONS: Scheduled benefits are benefits specified under current law without regard to the balances in the Social Security trust funds. Payable benefits are what can be paid to all beneficiaries after trust fund exhaustion 1 2 Source: Modeling Income in the Near Term, Version 5 (MINT5) micro simulation model using 2008 Trustees Report intermediate assumptions, and the payable baseline is from the 2009 Trustees Report, released September Benefits specified under current law without regard to the balances in the trust funds. 2 Benefits that can be paid to all beneficiaries after trust fund exhaustion. Solvency requires a positive level of assets in order to pay scheduled benefits. Unlike most other Federal programs, the trust fund programs have NO borrowing authority. Social Security and For the OASDI Trust Funds to remain solvent lawmakers could immediately and permanently: (1) increase the combined payroll tax by 2.61% (from 12.4% to 15.01%), (2) reduce scheduled benefit cost by 16.2%, (3) draw on alternative sources of revenue, or (4) adopt some combination of these changes. 1 Potential Changes / Reforms to Social Security Source: Social Security Administration, 2012 OASDI Trustees Report Potential Changes to Social Security Substantive, material suggestions involve increasing revenue and/or decreasing benefits Fixes have been / are driven more by political considerations than financial ones Suggestions for Social Security Reform Potential methods to increase income: Change the law to allow loans from the Treasury s general fund to the trust funds Make earnings of all state and local government employees subject to the payroll tax Include capital gains in the computation of ordinary income subject to payroll tax Subject employer-sponsored health insurance premiums to the payroll tax Source: Social Security Administration 4

6 Suggestions for Social Security Reform Potential ways to reduce scheduled benefits: Raise the Full Retirement Age to 69; and the Early Retirement age to 64 Use a different index to calculate cost of living adjustments Establish price indexing for benefits Change the number of years upon which career income is calculated to 40 from 35 Reduce benefits for those with modified adjusted gross income above a set amount Reduce retirement benefit amounts Reduce benefit amounts for children of early retirees Reduce spousal benefit computation from 50% of spouse s Full Retirement Age benefit to 33% Recap Reviewed the history of the program (the past) Discussed the challenges that lay ahead (the future) Let s switch gears and take a look at what matters to participants today Social Security and Social Security Benefit Rules Understanding the Social Security Statement Page 1: Table of Contents Source: Social Security Online Understanding the Social Security Statement Page 2: Estimated Benefits Retirement benefit levels (early, FRA and deferred) Disability benefits (eligibility and levels) Family & Survivors benefits Understanding the Social Security Statement Page 3: Earnings Record Years Worked Taxed SS Earnings Taxed Medicare Earnings Medicare eligibility Source: Social Security Online Source: Social Security Online 5

7 Eligibility for Retirement Benefits 40 Social Security credits Required for those born in 1929 or later Credits based on earnings In 2013, one credit for each $1,160 in earnings Maximum of 4 credits can be earned in one year The Bottom Line: 40 Credits Required 4 Credits per Year Maximum = A Minimum of 10 Working Years to Qualify for Social Security Retirement Benefits Eligibility for Spousal Benefits Currently Married Married to an eligible worker who has filed for benefits, and Married to him or her for at least 12 months, and At least age 62 Divorced Divorced at least 2 years, and Married to the eligible worker for >10 years, and Not currently married At least age 62 Eligibility for Survivor Benefits Social Security survivors benefits can be paid to (among others): A widow or widower Full benefits at full retirement age, or reduced benefits as early as age 60 A disabled widow or widower as early as age 50 A widow or widower at any age if he/she takes care of the deceased s child who is under the age of 16 or disabled, and receiving Social Security benefits Unmarried children under the age of 18, or up to age 19 if they are attending elementary or secondary school full time. Children at any age who were disabled before the age of 22 and remain disabled Dependent parents age 62 or older Full Retirement Age/Impact of Early Retirement Year of Birth Full Retirement Age Months between 62 and $1,000 benefit Full Retirement Age reduced to 1937 or Earlier $ and 2 months 38 $ and 4 months 40 $ and 6 months 42 $ and 8 months 44 $ and 10 months 46 $ $ and 2 months 50 $ and 4 months 52 $ and 6 months 54 $ and 8 months 56 $ and 10 months 58 $ and later $700 Source: Social Security Administration Full Retirement Age/Delayed Retirement How Much Will Delayed Retirement Credits Increase My Benefit? Year of Birth Yearly Rate of Increase Monthly Rate of Increase % 3/8 of 1% % 5/12 of 1% % 11/24 of 1% % 1/2 of 1% % 13/24 of 1% % 7/12 of 1% % 5/8 of 1% 1943 or later 8.0% 2/3 of 1% Source: Social Security Administration Choosing When to Elect Benefits Lower Payment for More Years? Or Higher Payments for Fewer Years? So you can see the impact of delaying receipt of retirement benefits you can receive more than a 50% higher benefit payment by delaying to age 70 versus starting benefits at age 62. Of course, by taking benefits later, you re foregoing receipt of several years of monthly benefit payments; if you start taking benefits at the earliest age, for several years you d be ahead in terms of total benefit received. This advantage tends to go away as you age, though. The break-even point is reached in your early 80s in most cases Source: Jim Blankenship, CFP, EA: A Social Security Owner s Manual 6

8 Social Security and Retirement Income Planning Strategies with Social Security Effective retirement income planning strategies: Take a holistic approach Consider the pros and cons of various income sources Evaluate the most effective use / timing of each source of income in order to maximize the result Sources of Retirement Income Social Security Considerations: Choosing when to elect benefits Impact of earned income on benefits Taxation of benefits Source: Social Security Administration, 2010 Choosing When to Elect Benefits Lower Payment for More Years? Or Higher Payments for Fewer Years? Consider in the context of other resources / sources of income Alternative income sources may be available to supplement reduced benefits associated with early retirement Alternative income sources may be available to bridge the gap between retirement and deferred election of benefits Case Study #1 Supplement Reduced Benefits to Support Early Retirement Scenario: Bob is a 62-year old who is retiring. If he elects Social Security benefits at his FRA, Bob estimates he would receive $24,000 a year; if he elects benefits at age 62 benefits would drop to $18,000 a year Goal: Replace the $6,000 difference in lifetime annual income Possible Solution: Supplement Social Security benefits with income from alternative sources such as: Fixed/Variable annuities (including those that offer guaranteed living benefits) Immediate annuities Laddered bond portfolios Other sources of predictable income Wages 7

9 Case Study #1 Supplement Reduced Benefits to Support Early Retirement Example: Invest sufficient assets in an investment vehicle (such as an annuity) providing a reliable source of lifetime income equal to $6,000 annually. Considerations: If inadequate resources exist to fully supplement reduced benefits associated with an early retirement alternatives to consider include: Continue working Modify lifestyle/financial requirements Case Study #2 Build an income bridge to maximize future benefits Scenario: Kathy is a 66-year old who is retiring. She is eligible for benefits of $24,500 a year; if she defers election, benefits would increase to $32,340 at age 70 Goal: Use alternative resources to generate $24,500 of annual income while deferring election of benefits until age 70 Possible Solution: Replace Social Security benefits with income from alternative sources such as: Fixed/Variable annuities (including those that offer guaranteed living benefits) Immediate annuities Laddered bond portfolios Retirement accounts Wages Case Study #2 Build an income bridge to maximize future benefits Example A: Liquidate assets in order to bridge the retirement income gap. Future income from those assets will be lost Example B: Invest sufficient assets in an investment vehicle which will provide annual income of $24,500 for a minimum of 4 years. Once Social Security benefits begin at age 70, income derived from other sources may be scaled back in order to preserve the asset base Considerations: The cost of deferring election of Social Security benefits and replacing current benefits is $98,000 ($24,500 x 4) in return for an annual increase in lifetime benefits at age 70 of $7,840. Impact of Wages on Benefits If Social Security retirement benefits are elected prior to full retirement age (FRA), benefits are reduced if wages exceed certain levels If younger than FRA for the full year benefits reduced $1 for each $2 earned over $15,120 (2013) In the year in which FRA is reached benefits reduced $1 for each $3 earned over $40,080 (2013) Benefits aren t reduced once FRA is reached Benefits reduced as a result of wages will increase future benefits once FRA is reached Source: Social Security Administration 2013 Fact Sheet Taxation of Retirement Income Part of an effective retirement income plan includes an evaluation of the tax ramifications associated with various types of assets and income sources. Taxation of Social Security Benefits Taxable portion of benefits paid to: Single taxpayer with provisional income* of $25,000 to $34,000: up to 50% Single taxpayer with provisional income* over $34,000: up to 85% Joint filers with provisional income* of $32,000 to $44,000: up to 50% Joint filers with provisional income* over $44,000: up to 85% * Adjusted Gross Income + Tax-Exempt Income + ½ of Social Security Benefits = Provisional Income" In order to minimize taxation of Social Security benefits, consider allocating unneeded sources of income to investments, such as deferred annuities, that can defer recognition of income. 8

10 In Summary Despite the uncertainty that long-term financial challenges pose for Social Security, it will remain an important aspect of retirement income planning for many Utilization of alternative sources of predictable income, such as annuities, can add flexibility to decisions regarding Social Security Careful coordination of Social Security and other sources of retirement income can maximize results Social Security and Thank you for your participation in today s discussion about Social Security and C4995PPT.1 9

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