Social Security Basics - PDF Free Download

Savvy Social Security Planning for Boomers Orientation Series Social Security Basics By Elaine Floyd, CFP Director of Retirement and Life Planning, Horsesmouth, LLC 1

Key things to know How benefits are calculated 2

Key things to know How benefits are calculated Effect of early or delayed claiming 3

Key things to know How benefits are calculated Effect of early or delayed claiming Rules for spouses & divorced spouses 4

Key things to know How benefits are calculated Effect of early or delayed claiming Rules for spouses & divorced spouses Rules for widows and widowers 5

Key things to know How benefits are calculated Effect of early or delayed claiming Rules for spouses & divorced spouses Rules for widows and widowers How working affects benefits 6

Key things to know How benefits are calculated Effect of early or delayed claiming Rules for spouses & divorced spouses Rules for widows and widowers How working affects benefits How COLAs affect benefits 7

Key things to know Windfall Elimination Provision & Government Pension Offset 9

Key things to know Windfall Elimination Provision & Government Pension Offset Medicare 10

Key things to know Windfall Elimination Provision & Government Pension Offset Medicare Solvency issues and reform proposals 11

How benefits are calculated Pages 44-46 of the Financial Advisor s Guide to Savvy Social Security Planning for Boomers 12

How benefits are calculated Steps in calculating primary insurance amount or PIA (SSA does this; you don t) 1. Tally each year's earnings on which Social Security taxes were paid 13

How benefits are calculated Steps in calculating primary insurance amount or PIA (SSA does this; you don t) 1. Tally each year's earnings on which Social Security taxes were paid 2. Apply index factor to each year's earnings (varies with age) 3. Take 35 highest years' earnings and find the total 4. Divide total by 420 (the number of months in 35 years) 16

Benefits based on highest 35 years of earnings up to taxable maximum Maximum Taxable Social Security Earnings Year Max earnings Year Max earnings Year Max earnings 1968 $7,800 1984 $37,800 2000 $76,200 1969 $7,800 1985 $39,600 2001 $80,400 1970 $7,800 1986 $42,000 2002 $84,900 1971 $7,800 1987 $43,800 2003 $87,000 1972 $9,000 1988 $45,000 2004 $87,900 1973 $10,800 1989 $48,000 2005 $90,000 1974 $13,200 1990 $51,300 2006 $94,200 1975 $14,100 1991 $53,400 2007 $97,500 1976 $15,300 1992 $55,500 2008 $102,000 1977 $16,500 1993 $57,600 2009 $106,800 1978 $17,700 1994 $60,600 2010 $106,800 1979 $22,900 1995 $61,200 2011 $106,800 1980 $25,900 1996 $72,700 2012 $110,100 1981 $29,700 1997 $65,400 2013 $113,700 1982 $32,400 1998 $68,400 2014 $117,000 1983 $35,700 1999 $72,600 2015 $118,500 Social Security Administration 20

Average Indexed Monthly Earnings (AIME) for baby boomer born in 1954 Maximum earnings since 1976 $3,961,077 in total indexed earnings 420 months = $9,431 AIME 21

Primary Insurance Amount (PIA) Baby Boomer born in 1954 Maximum Social Security earnings every year since age 22 AIME = $9,431 PIA formula: $856 x.90 = $770.40 $4,301 x.32 = $1,376.32 ($5,157 - $856 = $4,301) $4,274 x.15 = $641.12 ($9,431 - $5,157 = $4,274) Total = $2,787.84 PIA = $2,787.80 Amount worker will receive at full retirement age 22

Effect of early or delayed claiming Pages 47-51 of the Financial Advisor s Guide to Savvy Social Security Planning for Boomers 23

Full retirement age 24

Effect of early or delayed claiming Benefit for baby boomer born 1943-54 Age % of PIA Benefit if PIA is $2,700* 62 75 2,025 63 80 2,160 64 86⅔ 2,340 65 93⅓ 2,520 66 100 2,700 67 108 2,916 68 116 3,132 69 124 3,348 70 132 3,564 *Not counting cost-of-living adjustments 25

Effect of early or delayed claiming Benefit for baby boomer born 1943-54 Age % of PIA Benefit if PIA is $2,700 Benefit with 2.7% COLAs 62 75 2,025 2,025 63 80 2,160 2,218 64 86⅔ 2,340 2,468 65 93⅓ 2,520 2,730 66 100 2,700 3,004 67 108 2,916 3,332 68 116 3,132 3,675 69 124 3,348 4,034 70 132 3,564 4,411 26

Two ways to analyze claiming decision Breakeven age Relative income 27

How to analyze claiming decision Breakeven age Considers cumulative benefits under two claiming scenarios 28

How to analyze claiming decision Breakeven age Considers cumulative benefits under two claiming scenarios Calculates catch-up age at which cumulative benefits from later-claiming scenario overtake cumulative benefits from early-claiming scenario 29

How to analyze claiming decision Relative income Considers relative income under two claiming scenarios 32

How to analyze claiming decision Relative income Considers relative income under two claiming scenarios Compares income at an advanced age (say, 85) under early vs. late claiming scenarios 33

Income How to analyze claiming decision Considers relative income under two claiming scenarios Compares income at an advanced age (say, 85) under early vs. late claiming scenarios Views Social Security as longevity insurance 34

Rules for spouses Pages 51-52, 81-93, 95-103 of the Financial Advisor s Guide to Savvy Social Security Planning for Boomers 36

Rules for spouses Traditional: Nonworking wife receives 50% of husband s PIA if she applies at FRA (or 35% at 62) 37

Rules for spouses Traditional: Nonworking wife receives 50% of husband s PIA if she applies at FRA (or 35% at 62) If wife has own earnings, and if she applies before FRA, she ll receive her own reduced benefit first. If spousal benefit is higher, an amount will be added so combined benefit equals spousal benefit. If spousal benefit is not higher, she will not be paid a spousal benefit. If application is made after FRA, a spouse can choose to receive own or spousal benefit (i.e., can restrict application to spousal benefit and let own benefit build delayed credits. Budget Act update: must be born before 1954 to file restricted application) 39

Rules for spouses Key takeaway: Coordination of spousal benefits is extremely complex. Better to work with actual cases than try to apply rules of thumb. (Estimate benefit amounts and use Spousal Planning Calculator) 42

Strategies from the Center for Retirement Research at Boston College File and suspend Claim now claim more later 43

Strategies from the Center for Retirement Research at Boston College File and suspend High-earning husband files for own benefit at 66 to make wife eligible for her spousal benefit 44

Strategies from the Center for Retirement Research at Boston College File and suspend High-earning husband files for own benefit at 66 to make wife eligible for her spousal benefit Husband suspends own benefit to earn DRCs to age 70 Budget Act update: No spousal or dependent benefits payable on a benefit suspended after April 30, 2016 46

Example of file and suspend Jack and Jill are both 66. 47

Example of file and suspend Jack and Jill are both 66. Jack s PIA = $2,000. He plans to delay his benefit to age 70. 48

Example of file and suspend Jack and Jill are both 66. Jack s PIA = $2,000. He plans to delay his benefit to age 70. JilI s PIA = $800. She wants to start benefits now. 49

Example of file and suspend Jack and Jill are both 66. Jack s PIA = $2,000. He plans to delay his benefit to age 70. JilI s PIA = $800. She wants to start benefits now. If Jill files for Social Security, she will receive her own benefit of $800 per month. She is not eligible for a spousal benefit because Jack hasn t filed. So Jack files and suspends (before April 30, 2016). Jill files for her spousal benefit and receives $1,000 per month. 51

Strategies from the Center for Retirement Research at Boston College Claim now, claim more later or restricted application High-earning husband files a restricted application for his spousal benefit at 66 (wife must have filed for her own benefit) 53

Strategies from the Center for Retirement Research at Boston College Claim now, claim more later High-earning husband files a restricted application for his spousal benefit at 66 (wife must have filed for her own benefit) Husband switches to his own benefit at 70 54

Example of claim now, claim more later Dan and Dora are both 66 56

Example of claim now, claim more later Dan and Dora are both 66 Dan s PIA is $2,000. He wants to delay benefits to age 70. 57

Example of claim now, claim more later Dan and Dora are both 66 Dan s PIA is $2,000. He wants to delay benefits to age 70 Dora s PIA is $1,800. She wants to start benefits now. 58

Example of claim now, claim more later Dan and Dora are both 66 Dan s PIA is $2,000. He wants to delay benefits to age 70 Dora s PIA is $1,800. She wants to start benefits now Dora files for her benefit and receives $1,800 per month Dan files for his spousal benefit and receives $900 per month. 60

Rules for divorced spouses Page 53, 97-98, 101-102 of the Financial Advisor s Guide to Savvy Social Security Planning for Boomers 62

Rules for divorced spouses Same rules as for spousal benefits if applicant: Is at least 62 63

Rules for divorced spouses Same rules as for spousal benefits if applicant: Is at least 62 Was married to worker at least 10 years 64

Rules for divorced spouses Same rules as for spousal benefits if applicant: Is at least 62 Was married to worker at least 10 years Is currently unmarried 65

Rules for divorced spouses Same rules as for spousal benefits if applicant: Is at least 62 Was married to worker at least 10 years Is currently unmarried Former spouse must be at least 62 (does not need to have filed for benefits if divorce occurred more than two years ago) Worker s own benefit (and benefits for current spouse) not affected Strategy for divorced clients: Receive divorced-spouse benefit from 66-70 while delaying own benefit (Budget Act update: must have been born before 1954) 68

Rules for divorced spouses Key takeaway: Ask about former marriages. Integrate divorced-spouse benefits into the planning 69

Rules for widows and widowers Pages 92-93, 95-103 of the Financial Advisor s Guide to Savvy Social Security Planning for Boomers 70

Rules for widows and widowers Survivor benefit = 100% of deceased spouse's benefit including delayed credits (even if benefit is unclaimed due to delaying to 70) 71

Rules for widows and widowers Survivor benefit = 100% of deceased spouse's benefit including delayed credits (even if benefit is unclaimed due to delaying to 70) Can apply for survivor benefit at age 60 but benefit will be reduced; widows should be encouraged to file at 66 to maximize income in old age (can receive own benefit from 62 to 66 if qualify) Remarriage before age 60 negates survivor benefit unless that marriage ends 73

Rules for widows and widowers Key takeaways: High-earning spouse should delay to age 70 in order to maximize survivor benefit. Coordinate survivor and earned benefits for widow(er)s entitled to both. 75

How working affects benefits Pages 53-54, 143-144 of the Financial Advisor s Guide to Savvy Social Security Planning for Boomers 76

How working affects benefits Earnings test if under FRA: $1 in benefits withheld for every $2 earned over $15,720 in 2016 77

How working affects benefits Earnings test if under FRA: $1 in benefits withheld for every $2 earned over $15,720 in 2016 Earnings test in year attain FRA, in months before birth month: $1 in benefits withheld for every $3 earned over $41,880 in 2016 Earnings test applies to all benefits -- retirement, spousal, survivor -- while under FRA At FRA benefit will be adjusted to remove actuarial reduction for months in which benefit was withheld 80

How working affects benefits Key takeaway: Consider client s earnings when deciding when to apply 83

How COLAs affect benefits Pages 54-55, 79-80 of the Financial Advisor s Guide to Savvy Social Security Planning for Boomers 84

How COLAs affect benefits Cost-of-living adjustment announced in October; affects benefits received in January 85

How COLAs affect benefits Cost-of-living adjustment announced in October; affects benefits received in January COLAs based on CPI-W from 4 th quarter of one year through 3 rd quarter of next 86

How COLAs affect benefits Cost-of-living adjustment announced in October; affects benefits received in January COLAs based on CPI-W from 4 th quarter of one year through 3 rd quarter of next COLA for 2016: 0% 87

How COLAs affect benefits Key takeaway: COLAs magnify impact of early or delayed benefits. (See Calculators) 89

Taxation of benefits Pages 105-115 of the Financial Advisor s Guide to Savvy Social Security Planning for Boomers 90

Taxation of Social Security benefits Filing status Provisional income* Amount of SS subject to tax Married filing jointly Under $32,000 $32,000 - $44,000 Over $44,000 0 Up to 50% Up to 85% Single, head of household, qualifying widow(er), married filing separately & living apart from spouse Under $25,000 $25,000 - $34,000 Over $34,000 0 Up to 50% Up to 85% Married filing separately and living with spouse Over 0 Up to 85% *Provisional income = AGI + one-half of SS benefit + tax-exempt interest 91

Taxation of benefits Key takeaway: Consider taxation of benefits when deciding when to apply. May be better to delay Social Security and draw from IRAs and other resources first. Engage tax advisor for complete tax analysis. 92

Windfall Elimination Provision Pages 55-57 of the Financial Advisor s Guide to Savvy Social Security Planning for Boomers 93

Windfall Elimination Provision If client worked in non-social Security covered job, Social Security benefit may be reduced 94

Windfall Elimination Provision If client worked in non-social Security covered job, Social Security benefit may be reduced First bend point reduced to 40%-90% depending on how long worked in Social Security-covered job (no reduction if 30 years of substantial earnings; see table on page 56) Maximum WEP reduction for person turning 62 in 2016: $428 Key takeaway: Always ask clients about work history and prepare for WEP reduction if main career was in non Social Security-covered job (most common: civil service, teachers & health care workers who opted out of Social Security) 97

Government Pension Offset Pages 57 and 93 of the Financial Advisor s Guide to Savvy Social Security Planning for Boomers 98

Government Pension Offset Similar to WEP but affects spousal and survivor benefits if wife (or husband) receives a pension from non Social Security-covered job 99

Government Pension Offset Similar to WEP but affects spousal and survivor benefits if wife (or husband) receives a pension from non Social Security-covered job Spousal/survivor benefit reduced by two-thirds of the amount of the pension Example: wife (or husband) receives $3,000/month pension from teaching job. Any spousal or survivor benefits she/he may be entitled to will be reduced by $2,000 (two-thirds of $3,000) 101

Medicare Pages 125-135 of the Financial Advisor s Guide to Savvy Social Security Planning for Boomers 103

Medicare starts at age 65 Medicare 104

Medicare Medicare starts at age 65 If already receiving Social Security, Medicare is automatic 105

Medicare Medicare starts at age 65 If already receiving Social Security, Medicare is automatic If delaying benefits, should apply for Medicare 3 months prior to 65 th birthday; if fail to apply by 4 th month after 65 th birthday, penalty will be added to Part B premium If still working and covered by employer plan (or spouse's group plan) that covers 20 or more employees, can delay applying for Medicare with no penalty 107

Medicare Medicare starts at age 65 If already receiving Social Security, Medicare is automatic If delaying benefits, should apply for Medicare 3 months prior to 65 th birthday; if fail to apply by 4 th month after 65 th birthday, penalty will be added to Part B premium If still working and covered by employer plan (or spouse's group plan), can delay applying for Medicare with no penalty Medicare involves deductibles and copayments and does not cover everything; supplemental insurance may be necessary 108

Medicare Medicare starts at age 65 If already receiving Social Security, Medicare is automatic If delaying benefits, should apply for Medicare 3 months prior to 65 th birthday; if fail to apply by 4 th month after 65 th birthday, penalty will be added to Part B premium If still working and covered by employer plan (or spouse's group plan), can delay applying for Medicare Medicare involves deductibles and copayments and does not cover everything; supplemental insurance may be necessary Medicare does not cover long-term care 109

Medicare Key takeaway: Every boomer needs a crash course in Medicare in order to avoid penalties, take advantage of benefits, and purchase additional coverage as needed. 110

Solvency issues and reform proposals Pages 150-161 of the Financial Advisor s Guide to Savvy Social Security Planning for Boomers 111

Solvency issues and reform proposals According to the 2015 trustees report released in July 2015: The OASDI trust fund currently holds $2.7 trillion in special-issue Treasury securities 112

Solvency issues and reform proposals According to the 2015 trustees report released in July 2015: The OASDI trust fund currently holds $2.7 trillion in special-issue Treasury securities In 2014, total income was $884 billion, total expenses were $859 billion for an increase to the trust fund of $25 billion Income is expected to exceed costs until 2022 Starting in 2022, trust fund Treasury securities will begin to be liquidated By 2034 trust fund will be exhausted; income will be enough to pay 79% of promised benefits Numbers are revised each year as actual experience and assumptions change 117

Where to go for more information 119

Where to go for more information See list of articles and papers in Appendix B 120

Where to go for more information See list of articles and papers in Appendix B Watch your email for biweekly newsletter 121

Where to go for more information See list of articles and papers in Appendix B Watch your email for biweekly newsletter Read all previous newsletters posted on www.savvysocialsecurity.com (Note: newsletters prior to Nov. 2, 2015 were written under the old rules) 122

Where to go for more information See list of articles and papers in Appendix B Watch your email for weekly newsletter Read all previous newsletters posted on www.savvysocialsecurity.com (Note: newsletters prior to Nov. 2, 2015 were written under the old rules) Post questions on www.savvysocialsecurity.com 123

Good luck! 126