Social Security Retirement Guide. By Jim Blair, Social Security Consultant Geoff

2012 Social Security Retirement Guide By Jim Blair, Social Security Consultant Geoff 1

Disclaimers and Legal Notices Independent Resource Notice This document is NOT a publication of the United States Social Security Administration. Nor is it endorsed by them, or affiliated with them in any way. The official website of United States Social Security Administration can be found at http://socialsecurity.gov Results Disclaimer This document contains strategies and advice related to social security benefits that, regardless of the author's own results and experience, may not provide the same (or any) results for you. The author makes absolutely no guarantee, expressed or implied that by following this advice you will save money, receive any benefits, or improve your life in any way, as there are several factors and variables that affect each person's individual situation. Liability Disclaimer By reading this document, you assume all risks associated with using the advice contained within it with a full understanding that you, solely, are responsible for anything that may occur as a result of putting this information into action in any way, and regardless of your interpretation of the advice. You further agree that the author or his company cannot be held responsible in any way for the success or failure of your results as a result of the information presented here. It is your responsibility to conduct your own due diligence regarding the safe and successful implementation of any information presented here. In summary, you understand that the author makes absolutely no guarantees regarding the results of applying this information. You are solely responsible for the results of any action taken on your part as a result of this information. Personal Use License This document is NOT free - if you received it without paying the author for access, you possess an illegal copy and we require you to report the source of distribution immediately at admin@socialsecurityretirementguide.com to ensure that we preserve the exclusive nature and value of this product in the interest of our paying customers. Furthermore, you are given a non-transferable "personal use" license to this product. You cannot distribute it to any other individual or share it on the internet. It goes without saying then that this personal use license DOES NOT include any sort of "resale rights" license or "private label" licensing whatsoever. Legal action will be taken on anyone who violates this copyright ownership. 2

Table of Contents Introduction... 4 Chapter 1: Benefit Computations... 6 Chapter 2: Options for Single Individuals... 17 Chapter 3: Options for Couples... 21 Chapter 4: Options for Widows/Widowers... 31 Chapter 5: Divorced Retirees... 38 Chapter 6: Quarters of Coverage... 39 Chapter 7: Medicare... 41 Chapter 8: Government Pension Offset (GPO)... 52 Chapter 9: Windfall Elimination Provision (WEP)... 55 Chapter 10: Questionable Retirement... 59 Chapter 11: Online Application... 61 Chapter 12: Miscellaneous Information... 64 Chapter 13: Pre-Retirement Checklist... 67 3

Introduction Social Security options for retirees are limited in number, but overlooking them can be costly. Once you make a decision and file for benefits you are locked into those benefits with very few choices for change. The Social Security Administration will not discuss all the options available to you. Their assumption is you have researched all of your options for filing, and decided that filing an application is best for you and your own situation. The problem is most individuals do not know what choices are available. Most folks know you can file at age 62. Did you know if you were born between 1943 through 1954 and you file for Social Security benefits at age 62 you take a 25% reduction in your monthly benefit from what you would receive at your full retirement age? This reduction is permanent and will be with you for the rest of your life. Do you know your full retirement age? It is different for individuals and is based on the year you were born. It was initially age 65 but starting for individuals born in 1938 it began to increase and now reaches age 67 for individuals born in 1960 or later. Those born in 1960 or later who take Social Security benefits at age 62 receive a 30% reduction in benefits. This reduction not only affects your benefits but also limits the benefits you leave for your widowed spouse. Did you know if you delay receiving monthly benefits past your full retirement age you receive delayed retirement credits that equal an 8% per year increase in your monthly benefit? Those whose full retirement age is 66 would receive a 32% increase in their monthly benefit payment if they wait until age 70 to receive benefits. Those are just a few options available to individuals. A single individual has about 3 different options, a married couple has about 8 different options and a widow/widower has about 4 different options to consider before filing for their Social Security. The Social Security Administration will talk to you about some of the well know options, but you ll rarely get them to discuss things like the file and suspend and restricted application options available to married couples. And as more cuts are being made to federal 4

budgets, the amount of staff and office hours are declining while the number of applicants is increasing. This creates a difficult situation for retirees seeking the information needed to make good decisions. The good news for readers of this guide is that I intend to help you dispel the mystery behind how Social Security retirement benefits are calculated and awarded. As a former Social Security District Manager, I have spent the majority of my life working with the rules and guidelines of the Social Security Administration. Everything I have learned is available to you in this guide. This guide is not intended to be a magic bullet for acquiring riches at the expense of Social Security, nor is it a manual for manipulating the system to receive undeserved benefits. What it is however, is a resource retirees can use to maximize their retirement benefits. You only apply for Social Security retirement once in your life, so it is reasonable to assume few of you have the expertise to recognize all of your options. Hopefully after reading my guide you will realize there are many more things to consider than simply what date to submit your application. The best strategy for reading through the chapters ahead is to read all of them in order the first time. You will come across equations and formulas in certain places that can be overwhelming initially. Do not interrupt your reading by spending hours trying to learn them. Work your way through the content first and come back to the difficult parts. The calculations are provided as resource, and in many cases you do not need them in order to maximize your benefits. If you have any questions while studying this guide, you can send them to me via email. My email address for support questions is help@socialsecurityretirementguide.com Wishing You the Best in Retirement, Jim Blair 5

Chapter 1: Benefit Computations There are a lot of misconceptions about how the Social Security Administration computes an individual s monthly benefit. This is done by computer by the Administration but it is helpful to understand how your benefits are computed. With this knowledge you can insure that your benefits are correct, determine any effect a pension not covered by Social Security has on your benefit, and it will allow you to consider a lot of what if scenarios. To do your own computation you will need to know several things. First you need to know what your Social Security earnings were in each year you worked. Use all of your earnings no matter how long ago you earned them. Second you will need to know the indexing percentages the Social Security Administration uses to bring your past earnings up to today s dollars. Third you will need to know the bend point figures the Social Security Administration uses to determine your monthly benefit. Ideally you have a copy of the most recent annual statement the Social Security Administration sent you (pictured above). As of May 2012, all workers receive one statement at age 25, and begin to receive annual statements at age 60 and beyond. If you are reading this prior to age 60 then your best option is to utilize the new Social Security website to find your most current information. 6

The newly launched My Social Security website gives everyone instant access to their personal Social Security data, including lifetime earnings and potential benefits as they are currently recorded. My Social Security Website can be found at https://secure.ssa.gov/ril/siview.do This new online feature provides a similar service to the paper statements that were once mailed out annually. It is accessible to anyone with a Social Security number who is 18 years of age or older. Registration is done directly through the website and the following information can be found once you are logged in - Your Lifetime Social Security Earnings - Estimated Benefits for Retirement, Disability and Survivors - Estimated Taxes Paid for Social Security and Medicare - Additional Planning Information for Retirement and Medicare A final option, and one that I DO NOT recommend using, is the retirement estimator tool online at http://www.socialsecurity.gov/estimator/ While this tool may appear to be a handy shortcut, it is not very transparent and therefore is not a reliable means for insuring accuracy. Yes, you can get an estimate of your retirement benefits using SSA s retirement estimator tool. But it does not provide the same information found in the annual written statement. Omissions include estimates of disability, survivor s benefits and your complete earnings record. Furthermore, younger Americans who do not have 40 quarters of credits are not even permitted to use the tool. The bottom line is that the annual statements you get in the mail and the information at My Social Security are two best sources to check for errors on your account. 7

When reviewing your lifetime earnings, keep in mind that the Social Security Administration measures earnings as wages and/or net earnings from self-employment. Other types of income, such as investment income, are not included. There is also a maximum earnings cap for each year. Any amount you earned over the maximum earnings cap does not get taxed for Social Security. You will see the annual breakdown of the maximum earnings thresholds when I get into the example computations later in this chapter. Components of the Social Security Benefits Formula In addition to your complete earnings record, you also need to know your Indexed Earnings and Bend Points in order to calculate your monthly retirement benefit at full retirement age. Let s take minute to examine what these numbers are and how they are used in the benefits formula. Indexed Earnings Social Security uses your highest 35 years of indexed earnings to determine your average indexed monthly wages. Indexed earnings are a representation of your past earnings in today s dollars. Using such indexing ensures your future benefits reflect the general rise in the standard of living that occurred during your working lifetime. The Social Security Administration uses the National Average Wage Index (NAWI) to index earnings for benefit applicants. NAWI indexing depends on the year in which a person is first eligible to receive benefits. For retirement, eligibility is at age 62. If a person reaches age 62 in 2011, then 2011 is the person's year of eligibility. An individual's earnings are always indexed to the average wage level two years prior to the year of first eligibility; earnings in the year you obtain age 60 or later will be taken at face value. The 2012 indexing factors are provided on the next page 8

For 2012, the indexing factors are: Year Factor Year Factor Year Factor 1951 14.8879771 1972 5.8417435 1993 1.8015140 1952 14.0159250 1973 5.4977507 1994 1.7544268 1953 13.2742878 1974 5.1892760 1995 1.6868131 1954 13.2061420 1975 4.8284343 1996 1.6081651 1955 12.6229251 1976 4.5167637 1997 1.5195008 1956 11.7977301 1977 4.2613718 1998 1.4439276 1957 11.4434471 1978 3.9478696 1999 1.3677075 1958 11.3435217 1979 3.6302953 2000 1.2960368 1959 10.8080891 1980 3.3303203 2001 1.2658384 1960 10.3999456 1981 3.0257408 2002 1.2532695 1961 10.1972785 1982 2.8678587 2003 1.2233639 1962 9.7110104 1983 2.7346397 2004 1.1690189 1963 9.4785632 1984 2.5828106 2005 1.1277541 1964 9.1064065 1985 2.4772659 2006 1.0781969 1965 8.9453391 1986 2.4058575 2007 1.0313905 1966 8.4387995 1987 2.2616236 2008 1.0081979 1967 7.9935379 1988 2.1554641 2009 1.0236350 1968 7.4794733 1989 2.0733713 2010 1 1969 7.0708393 1990 1.9818275 2011 1 1970 6.7365362 1991 1.9106269 2012 1 1971 6.4142399 1992 1.8170075 We will use these indexing factors in a bit when I run through the benefits calculation examples. Bend Points A three-tiered benefit formula determines a monthly benefit based on your Averaged Indexed Monthly Earnings (AIME). It is designed to replace a higher percentage of earnings for people at lower levels. At higher levels of earnings the formula provides higher benefits, but the percentage of the benefit relative to AIME declines. The earnings levels where percentages change are called bend points because a graph of the benefits would have a bend in the line at those points. 9

The Bend Points Formula provides 90% of AIME up to the first bend point, 32% from there up to the second bend point, and 15% above the second bend point. Bend points are adjusted each year for inflation. For 2012 these portions are the first $767, the amount between $767 and $4,624, and the amount over $4,624. Note that these are applied to your monthly earnings, so they correspond to annual income 12 times that amount ($9,204 for the first bend point and $55,488 for the second bend point). Example 1: Your AIME is $3,000. If you retire in 2012 your benefits would be.9(767) +.32(3,000-767) = $1,404.86 (before rounding) This is the monthly retirement benefit you receive if you retire at full retirement age. Example 2: Your AIME is $5,000. If you retire in 2012 your benefits would be.9(767) +.32(4,624-767) +.15(5,000 4,624) = $1980.94 (before rounding) *All monthly benefit amounts are rounded down to the next dime. So what you see here is a worker with lower wages will replace a higher percentage of those wages with their monthly benefits (46%). And even though the worker with higher wages gets a larger monthly benefit, it replaces a lower percentage of wages (42%). This disparity in percentages grows wider for workers with even higher AIME than those covered in example 2. The table below shows the official bend points for the last few years Year First Bend Point Second Bend Point 2010 $761 $4,586 2011 $749 $4,517 2012 $767 $4624 Example Benefits Calculations Okay, so we have discussed the core components you need to calculate your monthly benefits. You have a record of your lifetime earnings. I gave you a chart with the Index Factor for each year of earnings. And we know the Bend Points for 2012. Now it is time to plug this information into the standard benefits formula. 10

Example1: Maximum Earnings Worker A maximum earnings worker is someone who has earnings that exceeded the Maximum Earnings threshold for Social Security taxes. Assume our worker was born in 1950 and became age 62 in 2012. Step 1: Enter the actual earnings in Total Earnings column but do not enter more than the Maximum Earnings column. For example, even though our worker earned $5,000 in 1962 they would only enter $4,800 in the Total Earnings column because that is the maximum amount on which they paid social security tax for that year. Step 2: Multiply the Total Earnings Column by the Index Factor and enter results in the Indexed Earnings column. (graph continued on next page) Year Maximum Total Index Indexed Earnings Earnings Factor Earnings 1962 $4,800.00 $4,800.00 9.7110104 $45,536.59 1963 $4,800.00 $4,800.00 9.4785632 $44,446.61 1964 $4,800.00 $4,800.00 9.1064065 $42,701.50 1965 $4,800.00 $4,800.00 8.9453391 $41,946.23 1966 $6,600.00 $6,600.00 8.4387995 $54,410.09 1967 $6,600.00 $6,600.00 7.9935379 $51,539.22 1968 $7,800.00 $7,800.00 7.4794733 $58,339.89 1969 $7,800.00 $7,800.00 7.0708393 $55,152.55 1970 $7,800.00 $7,800.00 6.7365362 $52,544.98 1971 $7,800.00 $7,800.00 6.4142399 $50,031.07 1972 $9,000.00 $9,000.00 5.8417435 $52,575.69 1973 $10,800.00 $10,800.00 5.4977507 $59,375.71 1974 $13,200.00 $13,200.00 5.1892760 $68,498.44 1975 $14,100.00 $14,100.00 4.8284343 $68,080.92 1976 $15,300.00 $15,300.00 4.5167637 $69,106.48 1977 $16,500.00 $16,500.00 4.2613718 $70,312.63 1978 $17,700.00 $17,700.00 3.9478696 $69,877.29 1979 $22,900.00 $22,900.00 3.6302953 $83,133.76 11

1980 $25,900.00 $25,900.00 3.3303203 $86,255.30 1981 $29,700.00 $29,700.00 3.0257408 $89,864.50 1982 $32,400.00 $32,400.00 2.8678587 $92,918.62 1983 $35,700.00 $35,700.00 2.7346397 $97,626.64 1984 $37,800.00 $37,800.00 2.5828106 $97,630.24 1985 $39,600.00 $39,600.00 2.4772659 $98,099.73 1986 $42,000.00 $42,000.00 2.4058575 $101,046.02 1987 $43,800.00 $43,800.00 2.2616236 $99,059.11 1988 $45,000.00 $45,000.00 2.1554641 $96,995.88 1989 $48,000.00 $48,000.00 2.0733713 $99,521.82 1990 $51,300.00 $51,300.00 1.9818275 $101,667.75 1991 $53,400.00 $53,400.00 1.9106269 $102,027.48 1992 $55,500.00 $55,500.00 1.8170075 $100,843.92 1993 $57,600.00 $57,600.00 1.8015140 $103,767.21 1994 $60,600.00 $60,600.00 1.7544268 $106,318.26 1995 $61,200.00 $61,200.00 1.6868131 $103,232.96 1996 $62,700.00 $62,700.00 1.6081651 $100,831.95 1997 $65,400.00 $65,400.00 1.5195008 $99,375.35 1998 $68,400.00 $68,400.00 1.4439276 $98,764.65 1999 $72,600.00 $72,600.00 1.3677075 $99,295.56 2000 $76,200.00 $76,200.00 1.2960368 $98,758.00 2001 $80,400.00 $80,400.00 1.2658384 $101,773.41 2002 $84,900.00 $84,900.00 1.2532695 $106,402.58 2003 $87,000.00 $87,000.00 1.2233639 $106,432.66 2004 $87,900.00 $87,900.00 1.1690189 $102,756.76 2005 $90,000.00 $90,000.00 1.1277541 $101,497.87 2006 $94,200.00 $94,200.00 1.0781969 $101,566.15 2007 $97,500.00 $97,500.00 1.0313905 $100,560.57 2008 $102,000.00 $102,000.00 1.0081979 $102,836.19 2009 $106,800.00 $106,800.00 1.0236350 $109,324.22 2010 $106,800.00 $106,800.00 1 $106,800.00 2011 $106,800.00 $106,800.00 1 $106,800.00 Step 3: Choose the highest 35 years and add these amounts together. The highlighted years in the table above represent the highest 35 years of indexed earnings. When added together the sum is $3,443,975.05. 12

Step 4: Divide the total from Step 3 by 420 (35 years times 12) and round down to the next lowest dollar. This will give you the Average Indexed Monthly Earnings (AIME). $3,443,975.05 / 420 = $8199.00 Step 5: Multiply the first $767 of the AIME by 90%. This is the first bend point. $767 *.90 = $690.30 Step 6: Multiply the amount of the AIME over $767 and less than or equal to $4,624 by 32%. This is the second bend point. ($4,624 - $767) *.32 = $1,234.24 Step 7: Multiply the amount of the AIME over $4,624 by 15%. ($8,199 - $4,624) *.15 = $536.25 Step 8: Add the totals from 5, 6, and 7 and round down to the next lowest dollar. This is the monthly retirement benefit at full retirement age. $690.30 + $1,234.24 + $536.25 = $2460.79 Not too difficult, right? Now let s do another example with a different tier of lifetime earnings. Example 2: Worker with Middle Income Worker A middle income worker is someone whose earnings DO NOT exceed the Maximum Earnings threshold for Social Security taxes. Assume our worker was born in 1950 and became age 62 in 2012. Step 1: Enter the actual earnings in Total Earnings column but do not enter more than the Maximum Earnings column. In this example we do have to be concerned about Maximum Earnings because all of the workers wages fall under the maximum. 13

Step 2: Multiply the Total Earnings Column by the Index Factor and enter results in the Indexed Earnings column. Year Maximum Total Index Indexed Earnings Earnings Factor Earnings 1968 $7,800.00 $2,340.00 7.4794733 $17,501.97 1969 $7,800.00 $4,920.00 7.0708393 $34,788.53 1970 $7,800.00 $3,039.00 6.7365362 $20,472.33 1971 $7,800.00 $1,355.00 6.4142399 $8,691.30 1972 $9,000.00 $1,479.00 5.8417435 $8,639.94 1973 $10,800.00 $835.00 5.4977507 $4,590.62 1974 $13,200.00 $3,501.00 5.1892760 $18,167.66 1975 $14,100.00 $3,535.00 4.8284343 $17,068.52 1976 $15,300.00 $3,525.00 4.5167637 $15,921.59 1977 $16,500.00 $5,517.00 4.2613718 $23,509.99 1978 $17,700.00 $7,841.00 3.9478696 $30,955.25 1979 $22,900.00 $10,549.00 3.6302953 $38,295.99 1980 $25,900.00 $11,163.00 3.3303203 $37,176.37 1981 $29,700.00 $12,560.00 3.0257408 $38,003.30 1982 $32,400.00 $14,344.00 2.8678587 $41,136.57 1983 $35,700.00 $14,541.00 2.7346397 $39,764.40 1984 $37,800.00 $16,316.00 2.5828106 $42,141.14 1985 $39,600.00 $17,206.00 2.4772659 $42,623.84 1986 $42,000.00 $18,628.00 2.4058575 $44,816.31 1987 $43,800.00 $21,162.00 2.2616236 $47,860.48 1988 $45,000.00 $20,651.00 2.1554641 $44,512.49 1989 $48,000.00 $23,084.00 2.0733713 $47,861.70 1990 $51,300.00 $23,988.00 1.9818275 $47,540.08 1991 $53,400.00 $24,389.00 1.9106269 $46,598.28 1992 $55,500.00 $28,088.00 1.8170075 $51,036.11 1993 $57,600.00 $28,382.00 1.8015140 $51,130.57 1994 $60,600.00 $30,211.00 1.7544268 $53,002.99 1995 $61,200.00 $33,492.00 1.6868131 $56,494.74 1996 $62,700.00 $34,087.00 1.6081651 $54,817.52 1997 $65,400.00 $38,265.00 1.5195008 $58,143.70 1998 $68,400.00 $40,586.00 1.4439276 $58,603.25 1999 $72,600.00 $43,166.00 1.3677075 $59,038.46 2000 $76,200.00 $43,351.00 1.2960368 $56,184.49 2001 $80,400.00 $36,774.00 1.2658384 $46,549.94 2002 $84,900.00 $30,870.00 1.2532695 $38,688.43 14

2003 $87,000.00 $31,604.00 1.2233639 $38,663.19 2004 $87,900.00 $33,084.00 1.1690189 $38,675.82 2005 $90,000.00 $33,960.00 1.1277541 $38,298.53 2006 $94,200.00 $33,096.00 1.0781969 $36,684.00 2007 $97,500.00 $32,921.00 1.0313905 $33,954.41 2008 $102,000.00 $30,132.00 1.0081979 $30,379.02 2009 $106,800.00 $31,422.00 1.0236350 $32,164.66 2010 $106,800.00 $32,679.00 1 $32,679.00 2011 $106,800.00 $34,107.00 1 $34,107.00 Step 3: Choose the highest 35 years and add these amounts together. The highlighted years in the table above represent the highest 35 years of indexed earnings. When added together the sum is $1,522,370.54. Step 4: Divide the total from Step 3 by 420 (35 years times 12) and round down to the next lowest dollar. This will give you the Average Indexed Monthly Earnings (AIME). $1,522,370.24 / 420 = $3624.00 Step 5: Multiply the first $767 of the AIME by 90%. This is the first bend point. $767 *.90 = $690.30 Step 6: Multiply the amount of the AIME over $767 and less than or equal to $4,624 by 32%. This is the second bend point. ($3,624 - $767) *.32 = $914.24 Step 7: Multiply the amount of the AIME over $4517 by 15%. Does Not Apply Step 8: Add the totals from 5 and 6 then round down to the next lowest dollar. This is the monthly retirement benefit at full retirement age. $690.30 + $914.24 = $1,604.54 15

Now you should have a good grasp of how to calculate your monthly benefit at full retirement age (FRA). There are of course other options besides waiting until you reach FRA, and these will be covered in the chapters ahead. The big takeaway of this chapter is the fact that you can calculate your benefits yourself. Having access to your most recent Annual Social Security Statement will save you considerable time by providing a log of your earnings. All you need to do from there is follow the formula outlined above. Perhaps the best part of learning the benefits formula is you won t have to rely on anyone else for answers. The phone lines and walk-in traffic at your local Social Security office will cost you hours of wait time. And through all that waiting you might not even get a direct answer to your question! The government is deflecting the responsibilities to you for getting the information about your case. The rest of this book will help you become proactive and self-sufficient in these matters. 16

Chapter 2: Options for Single Individuals Options for single individuals who are not entitled to benefits from someone else s work record are limited. Basically you are limited to age-related choices. You can file for benefits any time after age 62 and your monthly benefit amount will be based on your full retirement age (FRA) benefit and your age when you begin to receive benefits. Important things to take into consideration as an individual when deciding when to file for benefits are your health, family medical history, and of course your financial health. If you have a financial advisor you may want to seek their advice before making your decision. Social Security is a good base retirement for your other retirement income as it is a lifetime benefit. That being said, once you file your application the options for changing your decision are limited. For more information on this subject see Do Over Provision in Chapter 11. Reduction Factors Individuals who claim benefits prior to the full retirement age have their full benefits multiplied by a reduction factor. This factor is generally equal to five-ninths of 1 percent (0.56 percent) for each month the person claimed prior to FRA. The reduction factor changes to five-twelfths of 1 percent (0.41 percent) if benefits are received more than 36 months before FRA. In this case a 20% penalty is also applied for the first 36 months. If you elect to begin receiving Social Security benefits within 36 months of FRA the monthly payment will be reduced 5/9 of 1% (0.56%) for each of those months. This number is known as the reduction factor. If you elect to begin receiving Social Security benefits when there are more than 36 months before FRA the monthly payment will be reduced 20% for the first 36 months plus 5/12 of 1% (0.41%) for each month in excess of 36. The good news is there is a much easier way to calculate how reduction factors will affect your monthly benefits. You can use a formula that allows you to enter reductions in terms of months to simplify calculations. Let me show you how this works. 17

If the reduction factor (number of months prior to FRA) is 1 through 36, subtract 180 by the reduction factor and then multiply it by the FRA benefit amount. Then divide that total by 180. This will equal your monthly benefit amount. Example: 36 months or less before FRA Say your FRA is age 66 and your benefit is $1500 and you begin to receive Social Security benefits at age 63. The reduction factor (number of months prior to FRA) is then 36. To calculate your monthly benefit you would use the formula below: 180 36 = 144 144 x $1500 = 216000 216000 / 180 = $1200 Your monthly benefit at age 63 would be $1200. *All monthly benefit amounts are rounded down to the next dime. If the reduction factor (number of months prior to FRA) is more than 36 your Social Security benefits will be determined using a different formula. Subtract 192 by the number of months in excess of 36 and multiply it times the FRA benefit amount. Then divide that total by 240. This will equal your monthly benefit amount. Example: 37 months or more before FRA If your FRA is age 66 and your benefit is $1500 and you begin to receive Social Security benefits at age 62, your reduction factor will be 47 (see the note below). To calculate your monthly benefit you would use the formula below: 192 11 = 181 181 x $1500 = 271500 271500 divided by 240 = $1131 Your monthly benefit at age 62 would be $1131. 18

Note - Benefits are not payable for any month before you are age 62 for the entire month. Social Security determines you reach the age of your birthday the day before your birthday. Only those individuals born on the 2 nd of the month will be eligible to receive benefits the month of their 62 nd birthday. In that case, the maximum reduction factor for someone whose FRA is age 66 is 48. For everyone else the maximum reduction factor is 47. Benefits Options for Individuals The basic options available to single individuals who are not entitled to benefits on another s work record are: Receive Benefits at Age 62 Receive Benefits at FRA (currently age 66) Receive Benefits at Age 70 If you take benefits at age 62 you will receive a reduction of about 25% in monthly benefits over FRA. Earnings in excess of $14,640 will affect monthly benefits. Social Security will deduct $1 in benefits for every $2 you earn over $14,640. These figures increase in the year you reach FRA to $38,880 for only those months before the month you reach FRA and $1 of benefits are deducted for every $3 you go over the $38,880. If you delay benefits past FRA you will receive a 5/8 of 1% for each month you delay benefits which equals 8% per year. You will receive a 32% increase in monthly benefits over FRA if you wait until age 70. The following is an example of monthly benefits and what you might expect to receive over your lifetime in Social Security benefits: (Continued on next page) 19

Date of Birth: 12/28/1949 FRA Benefit: $2094 Expected Death Age: 83.88 years No cost of living increases were included. Options Age 62 benefit Monthly benefit $1579 (lifetime benefit $413,698) Age 66 benefit Monthly benefit $2094 (lifetime benefit $450,210) Age 70 benefit Monthly benefit $2764 (lifetime benefit $461,755) 20

Chapter 3: Options for Couples Options for couples include the normal age based choices as well as choices that will maximize benefits for both individuals. Delaying either of your individual payments will allow payments to be made while still building monthly benefits. Each member of the couple is free to file for benefits as they desire, but if you want to maximize your benefit and maximize survivor benefits you will need to look at other options that both individuals need to consider. As with anyone, you and your spouse can file for benefits any time after age 62. You and your spouse s monthly benefit amounts will be based on each of your full retirement age (FRA) benefits and the ages at which you begin to receive benefits. You both need to take into consideration your health, family medical histories, and financial stability when making your decision. If you have a financial advisor you may want to seek their advice before making your decision. Social Security provides a nice foundation for your retirement income, but most people will need to combine it with other retirement incomes to lead the lifestyle they desire. It is a lifetime benefit that provides benefit payments not only for your lifetime but also that of your spouse. Once you file your applications your options are limited on what you can do to change your decisions. For more information on this subject see Do Over Provision in Chapter 11. The reductions for receiving early benefits are similar to the individual reductions discussed in the previous chapter. The big difference comes in the administration of spousal benefits. To keep things consistent I will cover all couples scenarios from the beginning. If you and/or your spouse elect to begin receiving Social Security benefits within 36 months of FRA the monthly payment will be reduced 5/9 of 1% (0.56%) for each of those months. This number is known as the reduction factor. If you and/or your spouse elect to begin receiving Social Security benefits when there are more than 36 months before FRA the monthly payment 21

will be reduced 20% for the first 36 months plus 5/12 of 1% (0.41%) for each month in excess of 36. There is an easy way to calculate how reduction factors will affect your monthly benefits. You can use a formula that allows you to enter reductions in terms of months (as opposed to the percentages) to simplify the formula. Let me show you how this works. If the reduction factor (number of months prior to FRA) is 1 through 36, subtract 180 by the reduction factor and then multiply it by the FRA benefit amount. Then divide that total by 180. This will equal your monthly benefit amount. Example: 36 months or less before FRA Say your FRA is age 66 and your benefit is $1500 and you begin to receive Social Security benefits at age 63. The reduction factor (number of months prior to FRA) is then 36. To calculate your monthly benefit you would use the formula below: 180 36 = 144 144 x $1500 = 216000 216000 / 180 = $1200 Your monthly benefit at age 63 would be $1200. If the reduction factor (number of months prior to FRA) is more than 36 your Social Security benefits will be determined using a different formula. Subtract 192 by the number of months in excess of 36 and multiply it times the FRA benefit amount. Then divide that total by 240. This will equal your monthly benefit amount. (Continued on next page) 22

Example: 37 months or more before FRA If your FRA is age 66 and your benefit is $1500 and you begin to receive Social Security benefits at age 62, your reduction factor will be 47 (see the note below). To calculate your monthly benefit you would use the formula below: 192 11 = 181 181 x $1500 = 271500 271500 divided by 240 = $1131 Your monthly benefit at age 62 would be $1131. Note - Benefits are not payable for any month before you are age 62 for the entire month as discussed on Page 18 of this book. Spousal Benefits If your spouse is alive and receiving Social Security retirement benefits, you may be eligible to receive a spousal benefit, even if you do not have enough work credits of your own. Eligibility begins at age 62. The maximum spousal benefit is 50% of what your husband or wife receives. In cases where you have both worked, it is possible to make a claim for your own benefits and claim the greater of your own benefit or the spousal benefit. This should be carefully planned to maximize the overall benefit to the spouse. If either you or your spouse is eligible to receive spousal benefits you can begin to receive those benefits as early as age 62. As with receiving benefits on your own work record before FRA, the benefits will be reduced for age. The reduction for each of the first 36 months of reduction is 25/36 of 1%. The reduction for each month greater than 36 is 5/12 of 1%. The reduction amount is based solely on the number of months involved. 23

Reduced spousal benefits (prior to FRA) are computed as follows: If the number of reduction months is 1 through 36 you subtract the number of reduction months from 144 and multiply that figure by the original benefit. Divide that figure by 144 to determine the monthly benefit amount. Example: 36 months or less before FRA If your FRA is age 66 and your benefit is $500 and your spouse s FRA benefit is $2000 and you begin to receive Social Security benefits at age 63, your reduction factor (number of months prior to FRA) will be 36. To calculate your monthly benefit you would use the formulas below: Your Own Benefit: 180 36 = 144 144 x $500 = 72000 72000 divided by 180 = $400 Your Spousal Benefit: $2000 divided by 2 = $1000 $1000 - $500 = $500 144 36 = 108 108 x $500 = 54000 54000 divided by 144 = $375 $400 + $375 = $775 Your monthly benefit at age 63 would be $775. 24

Example: 37 months or more before FRA If the number of reduction months prior to FRA is 37 through 60 you subtract the number of reduction months in excess of 36 from 180 and multiply that figure by the original benefit. Divide that figure by 240 to determine the monthly benefit amount. If your FRA is age 66 and your benefit is $500 and your spouse s FRA benefit is $2000 and you begin to receive Social Security benefits at age 62, your reduction factor (number of months prior to FRA) will be 47 (see the note below). To calculate your monthly benefit you would use the formulas below: Your Own Benefit: 192 11 = 181 181 x $500 = 90500 90500 divided by 240 = $377 Your Spousal Benefit: $2000 divided by 2 = $1000 $1000 - $500 = $500 47 36 = 11 180 11 = 169 169 x $500 = 84500 84500 divided by 240 = $352 $377 + $352 = $729 Your monthly benefit at age 62 would be $729. *All monthly benefit amounts are rounded down to the next dime. Note - Benefits are not payable for any month before you are age 62 for the entire month as discussed on Page 18 of this book. 25

The original benefit is equal to ½ of your spouse s FRA benefit. If you are also entitled to benefits from your own work record, the original benefit is equal to ½ of your spouse s FRA benefit minus your FRA benefit. Basic Options Available to Couples: Receive Benefits at Age 62 (either individual or both) Receive Benefits at FRA (currently age 66) (either individual or both) Receive Benefits at Age 70 (either individual or both) Additional Strategies Discussed in this Chapter File and Suspend With File and Suspend the higher lifetime wage earner applies for benefits at FRA, but then immediately suspends the benefit payments. What this does is establish the amount that the lower wage earning spouse can receive in spousal benefits. So it creates an opportunity to claim spousal benefits while at the same time allowing the higher wage earner s own benefits to continue increasing in value until they reach age 70. Restricted Application A Restricted Application is also valuable for increasing lifetime benefits in situations where both spouses have a good wage record and one wants to continue to work after FRA. Here, the working spouse applies for spousal benefits on the other s record. This allows him or her to receive spousal benefits while continuing to work and increase their own benefit until age 70. The working spouse files a "restricting an application" to other s benefits only. When the working spouse chooses to retire, they begin to draw their own higher benefit (which 26

will have fully matured). As a bonus, the spouse who retired first would get a higher survivor benefit in the future, if that happens. Spousal Benefits Reductions and Credits If you take benefits at age 62 your benefit will be reduced from your FRA benefit. Earnings in excess of $14,640 before your FRA will also affect you and your spouse s monthly benefits. Social Security will deduct $1 in benefits for every $2 you earn over $14,640. These figures increase in the year you reach FRA to $38,880 for only those months before the month you reach FRA and $1 of benefits are deducted for every $3 you go over the $38,880. If you delay your own benefits past FRA you will receive a 5/8 of 1% for each month you delay benefits which equals 8% per year. You will receive a 32% increase in monthly benefits over FRA if you wait until age 70. Examples These are some examples of how certain application options can affect what you and your spouse might receive over your lifetimes in Social Security benefits. The following assumptions were made: Husband Date of Birth: 08/28/1948 FRA Benefit: $2090 Expected Death Age: 81.17 years Wife Date of Birth: 05/29/1948 FRA Benefit $1387 Expected Death Age: 84.08 *No cost of living increases were included in the options that follow. 27

Option 1: Husband "claims and suspends" August 2014 when both reach Full Retirement Age. Wife files restricted application for spousal benefit August 2014 ($1045). Wife files for own benefit May 2018 at Age 70 ($1830). Husband files for own benefit August 2018 at Age 70 ($2758). Husband receives $369,572 Wife receives $385,991 Total Lifetime benefits $755,563 Option 2: Wife files for own benefit May 2014 at FRA ($1387). Husband files restricted application for spousal benefit August 2014 at FRA ($693). Husband files for own benefit August 2018 at Age 70 ($2758). Husband receives $402,836 Wife receives $344,851 Total Lifetime benefits $747,687 Option 3: Wife "claims and suspends August 2014 when both reach Full Retirement Age. Husband files restricted application for spousal benefit August 2014 at FRA ($693). Wife files for own benefit May 2018 at Age 70 ($1830) Husband files for own benefit August 2018 at Age 70 ($2758). Husband receives $402,836 Wife receives $338,966 Total Lifetime benefits $741,802 Option 4: Wife files own benefit August 2011 at Age 63 ($1132). Husband files restricted application for spousal benefit August 2014 at FRA ($693). 28

Husband files own benefit August 2018 at Age 70 ($2758). Husband receives $402,836 Wife receives $335,032 Total Lifetime benefits $737,868 Option 5: Husband files own benefit August 2011 at Age 63 ($1672. Wife files restricted application for spousal benefit May 2014 at FRA ($1045). Wife files for own benefit May 2018 at Age 70 ($1830). Husband receives $364,496 Wife receives $359,430 Total Lifetime benefits $723,926 Option 6: Wife files own benefit May 2014 at FRA ($1387). Husband files own benefit August 2018 at Age 70 ($2758). Husband receives $369,572 Wife receives $344,851 Total Lifetime benefits $714,423 Option 7: Wife files own benefit August 2011 at Age 63 ($1132). Husband files own benefit August 2018 at Age 70 ($2758). Husband receives $369,572 Wife receives $335,032 Total Lifetime benefits $704,604 Option 8: (Continued on next page) 29

Wife files own benefit August 2014 at FRA ($1387). Husband files own benefit August 2014 at FRA ($2090). Husband receives $380,380 Wife receives $323,475 Total Lifetime benefits $703,855 Option 9: Wife files own benefit August 2011 at Age 63 ($1132). Husband files own benefit August 2014 at FRA ($2090). Husband receives $380,380 Wife receives $313,656 Total Lifetime benefits $694,036 Option 10: Husband files own benefit August 2011 at Age 63 ($1672). Wife files own benefit August 2011 at Age 63 ($1132). Husband receives $364,496 Wife receives $300,280 Total Lifetime benefits $664,776 Note: In all options, the wife s benefit converts to widows benefits which equal the husbands benefit at the time of his death. The bottom line is the longer you delay taking benefits the more money you will receive over the long term. However, this does not mean you and your spouse both have to wait until age 70 to significantly expand the value of your lifetime benefits. Using file and suspend or restricted applications can create a number of opportunities for your household to receive benefits at age 66, while at the same time growing your primary benefits and widow/widower benefits for the future. 30

Chapter 4: Options for Widows/Widowers Widows and Widowers have options not offered to others. You can file for widows/widowers benefits any time after age 60 (age 50 if disabled). These monthly benefits will be based on the deceased individual s full retirement age (FRA) benefit and your age when you begin to receive benefits. You can choose between widows/widowers benefits and your own benefit when you are ready to file. You can switch to the benefit you didn t originally take at any time. As you will read in this chapter, it is important to calculate all possible scenarios to make a decision that is best for your own situation. Consider your health, family medical history, and your financial health in making your decision. If you have a financial advisor you may want to seek their advice before making your decision. Once again, Social Security can provide a good foundation to your complete retirement income picture. You can take benefits in such a way as to maximize your Social Security benefit once you reach FRA or age 70. If you elect to begin receiving Social Security benefits before your FRA (whether it is the widows/widowers benefit or your own benefit) your benefit will be reduced. The reductions for receiving your own benefits early are similar to the individual reductions discussed in Chapter 2. The difference with widows/widowers is the additional death benefits from their spouse, which is dependent on when or if they received benefits before passing away. To keep things consistent I will cover all scenarios from the beginning. Individual Benefits If you elect to begin receiving your Social Security benefits within 36 months of FRA the monthly payment will be reduced 5/9 of 1% (0.56%) for each of those months. This number is known as the reduction factor. If you elect to begin receiving your Social Security benefits when there are more than 36 months before FRA the monthly payment will be reduced 20% for the first 36 months plus 5/12 of 1% (0.41%) for each month in excess of 36. 31

There is an easy way to calculate how reduction factors will affect your monthly benefits. You can use a formula that allows you to enter reductions in terms of months (as opposed to the percentages) to simplify the formula. Let me show you how this works. If the reduction factor (number of months prior to FRA) is 1 through 36, subtract 180 by the reduction factor and then multiply it by the FRA benefit amount. Then divide that total by 180. This will equal your monthly benefit amount. Example: 36 months or less before FRA Say your FRA is age 66 and your benefit is $1500 and you begin to receive Social Security benefits at age 63. The reduction factor (number of months prior to FRA) is then 36. To calculate your monthly benefit you would use the formula below: 180 36 = 144 144 x $1500 = 216000 216000 / 180 = $1200 Your monthly benefit at age 63 would be $1200. If the reduction factor (number of months prior to FRA) is more than 36 your Social Security benefits will be determined using a different formula. Subtract 192 by the number of months in excess of 36 and multiply it times the FRA benefit amount. Then divide that total by 240. This will equal your monthly benefit amount. Example: 37 months or more before FRA If your FRA is age 66 and your benefit is $1500 and you begin to receive Social Security benefits at age 62, your reduction factor will be 47 (see the note below). To calculate your monthly benefit you would use the formula below: (Continued on next page) 32

192 11 = 181 181 x $1500 = 271500 271500 divided by 240 = $1131 Your monthly benefit at age 62 would be $1131. Note - Benefits are not payable for any month before you are age 62 for the entire month as discussed on Page 18 of this book. Widows/Widowers Benefits Even if you file for early benefits yourself, you can still wait to file for widows/widowers benefits at FRA with no reduction. If your deceased spouse did not receive a reduced retirement benefit you will be entitled to 100% of the deceased spouse s benefit plus any applicable delayed retirement credits. If your deceased spouse was receiving reduced retirement benefits you will be entitled to the higher of what he/she would be receiving if he/she were still alive or 82.5% of his/her FRA amount. If you take widows/widowers benefits first AND before your FRA AND your deceased spouse did not take benefits before their FRA, your benefits will be reduced from your deceased spouses FRA amount including any entitlement to delayed retirement credits. If your deceased spouse took his/her benefits before FRA, then your widows/widowers benefit will be reduced using the following formula: 1. Widows/widowers benefit based on the higher of the deceased s death benefit at FRA or fictitious life benefit at FRA with any applicable delayed retirement credits using the applicable fraction; 2. 821/2 % of the deceased spouses death benefit at FRA; 3. Determine the deceased spouse s death benefit as if now alive. 4. Arrange the results obtained in 1, 2, and 3 in order from the lowest amount to the highest amount and identify each by type. 33

5. Locate the sequence of results obtained in step 4 on the following chart. The benefit payable is underlined. NOTE: Bring all FRA amounts up to effective date of widows/widowers entitlement using any applicable cost of living adjustments. Determine the deceased workers FRA benefit at the time of his death. You then have to determine what your benefits will be by reducing the benefit based on your age, what the benefits would be based on 82.5% of the FRA benefit and the amount of benefit the deceased individual was receiving at the time of his/her death. Put those 3 figures in the boxes below by putting the lowest of the 3 amounts in column 1, the middle amount in column 2 and the highest of the 3 amounts in column 3. Based on how the amounts work out in lowest to highest order determines which sequence you will use to determine your monthly benefit amount. Depending on which sequence you fall, the underlined amount is what you will receive. Low Amount Mid Amount High Amount Sequence 1 Sequence 2 Sequence 3 Sequence 4 Sequence 5 Sequence 6 Reduced Widows/Widowers Reduced Widows/Widowers 82.5% Death FRA Amount Deceased Spouses Retirement Benefit Deceased Spouses Retirement Benefit 82.5% Death FRA Amount Reduced Widows/Widowers 82 % Death FRA Amount Deceased Spouses Retirement Benefit Deceased Spouses Retirement Benefit Deceased Spouses Retirement Benefit Reduced Widows/Widowers 82.5% Death FRA Amount Deceased Spouses Retirement Benefit Reduced Widows/Widowers 82.5% Death FRA Amount 82.5% Death FRA Amount Reduced Widows/Widowers 34

A method of computing a reduced widow/widower benefit requires the use of the total possible reduction factor (RF) based on your date of birth. That number will vary from 60 to 84. That method is: (FRA or Unreduced Benefit) x RF x.285 Total possible RF for claimant's date of birth = Reduction Amount Round the result up to the next dime. The result is the amount of reduction. Subtract the Reduction Amount from the FRA or Unreduced Benefit for the amount payable. EXAMPLE: A widow born on 08/31/1951 is entitled beginning 08/2011. Her FRA is age 66. Her RF is 66 while the total possible RF is 66. The Unreduced Benefit is $2094. Using the above formula: $2094 x 66 x.285 = $596.79 rounded up = 596.80 66 $2094 596.80 = $1497.20 reduced to the next full dollar amount or $1497.00 payable. Benefits Options for Individuals The basic options available to widows/widowers are: Age 60 - Receive widows/widowers benefits only AND: Stay on widows/widowers benefits. Switch to own benefit at Age 62. Switch to own benefit at FRA. Switch to own benefit at Age 70 and receive applicable delayed retirement credits. Age 62 File for own benefit only AND: Switch to widows/widowers benefit at FRA. 35