Doug Lindsey, CFP MGM, LLC Albuquerque, NM

Doug Lindsey, CFP MGM, LLC Albuquerque, NM 505-346-3434 doug@mgm-llc.com www.mgm-llc.com Copyright 2013 Horsesmouth, LLC. All Rights Reserved. 1 Savvy Social Security Planning: What Financial Professionals Need to Know About Social Security Copyright 2015 Horsesmouth, LLC. All Rights Reserved. 2 Best Bets for the Texans 2015 3 1

4 Your clients want to know: Will Social Security be there for me? How much can I expect to receive? When should I apply for Social Security? How can I maximize my benefits? Will Social Security be enough to live on in retirement? 5 Social Security Question #1 Will Social Security be there for me? Answer: Yes. 6 2

Will Social Security be there? Payroll Tax 6.2% FICA + 1.45% Medicare 34% of 2014 revenue at almost $1 trillion August 2015 nearly 150 million employees OASDI Trust Fund at $2.8 trillion Depleted in 2034, then tax covers 75% Government has the authority to create money Political challenge: cut benefits or raise taxes 7 What would it take to restore solvency to the system? Benefit Reductions Raise the retirement age Reduce COLA Lower benefits for future retirees Use means testing ( progressive indexing ) Revenue Increases Raise payroll taxes Increase maximum earnings subject to SS tax Make benefits 100% taxable (like pensions) Include all workers 8 Play the Social Security Game Benefit Reductions Gradually Raise retirement age (20%) Don t change COLA Lower benefits for future retirees by 5% (31%) Don t use means testing Revenue Increases Don t increase payroll taxes Increase maximum earnings subject to SS tax (37%) Make benefits 100% taxable (14%) Don t include all workers http://www.actuary.org/content/play-social-security-game 9 3

George W. s Failed Attempt 10 Baby Boomer Social Security Question #2 How much can I expect to receive? Answer depends on: 1) How much you earned over your working career 2) When you apply for benefits 11 How Social Security benefits are calculated At age 62, each year s earnings are tallied up and indexed for inflation Highest 35 years of earnings are averaged (AIME) AIME is divided by three bend points to determine your primary insurance amount (PIA). This is the amount you'll receive at full retirement age. Benefit is increased each year by cost-of-living adjustments (COLAs) 12 4

Example of benefit formula Baby Boomer born 1953 Maximum SS earnings every year since age 22 AIME = $9,066 PIA formula: $826 x.90 = $743.40 $4,154 x.32 = $1,329.28 ($4,980 - $826 = $4,154) $4,086 x.15 = $612.90 ($9,066 - $4,980 = $4,086) Total = $2,685.58 PIA = $2,685.50 Amount worker will receive at full retirement age 13 More Crazy Acronyms WEP IF earn pension at job that doesn t pay SS taxes AND then 2 nd job qualifies you for SS benefit THEN SS benefit reduced Lowers first 90% bend point 2015 max reduction=$413 GPO IF earn pension at job that doesn t pay SS taxes AND you qualify for spousal or survivor SS benefits THEN SS benefit reduced SS benefit reduced by 2/3 of your government pension SS could be reduced to $0 http://www.socialsecurity.gov/planners/retire/wep-chart.html http://www.socialsecurity.gov/gpo 14 Full Retirement Age (FRA) Year of Birth Full Retirement Age 1943-54 66 1955 66 and 2 months 1956 66 and 4 months 1957 66 and 6 months 1958 66 and 8 months 1959 66 and 10 months 1960 and later 67 15 5

What if you apply for early benefits? You will receive a percentage of your PIA Apply at age If FRA = 66 If FRA = 67 62 75.0% 70% 63 80.0% 75% 64 86.7% 80% 65 93.3% 86.7% 66 100% 93.3% 67 100% 16 What if you apply after FRA? You will earn 8% annual delayed credits Apply at age Benefit will be % of PIA if FRA = 66 Benefit will be % of PIA if FRA = 67 66 100% 93.3% 67 108% 100% 68 116% 108% 69 124% 116% 70 132% 124% 17 How to estimate your Social Security benefits Obtain your annual Social Security statement at www.socialsecurity.gov/myaccount (20M accounts) Go to www.socialsecurity.gov, click on Retirement Estimator (credit freeze issues) Use one of the calculators on the SSA website: www.ssa.gov/planners/benefitcalculators.htm Online calculator http://www.ssa.gov/planners/retire/anypiaapplet.html 18 6

$240/month Estimation Error On your SS statement, page 2, Your Estimated Benefits at your current earnings rate, if you continue working until If her FRA is 66+10 months, payment $1696 But What if she retires EARLY at 56? The SS estimation could be too high 10 fewer years working! Use ANYPIA software to determine payment $1456 http://www.ssa.gov/oact/anypia/anypia.html 19 You Know You ve Been There 20 Baby Boomer Social Security Question #3 When should l apply for Social Security? Answer depends on: 1. Health status 2. Life expectancy 3. Need for income 4. Whether or not you plan to work 5. Survivor needs 21 7

Breakeven Analysis (Different calc for reinvesting) 22 Retirement Spending Analysis 23 SS as Longevity Insurance Life expectancy 60 year old woman=86.2, man=83.5 (born 1955) 65-year-old couple 50% odds that one spouse lives to 94 25% odds that one spouse lives to 98 SS is NOT an investment it is an INSURANCE POLICY Do you recommend break-even analysis on homeowner insurance? NO. You focus on the worst-case scenario. 24 8

Valuation of SS Benefit If you were to buy a deferred fixed income annuity Male at age 60, living in NM Cover self and wife, also 60 ( joint life only ) Funding source is non-qualified with 2% annual increase Backed by the US government Average benefit $1294 per month Start age 62 Investment = $356,290 Two policies = $712,580 Maximum benefit $3545 Start age 70 Investment = $539,118 Two policies = $1,078,236 https://www.fidelity.com/annuities/immediate-fixed-income-annuities/overview 25 SS History: The Woolworth Card What was the most misused SSN ever? Answer: 078-05-1120 26 Baby Boomer Social Security Question #4 How can I maximize my benefits? Answer: 1. Improve your earnings record 2. Delay the start of benefits 3. Take advantage of spousal and survivor benefits 4. Minimize taxes on benefits 5. Coordinate Social Security with overall retirement income plan 27 9

Strategy #1 for maximizing your benefits Improve your earnings record Consider the following strategies: Work longer Earn more 28 Strategy #2 for maximizing your benefits Benefits of Delaying to FRA You can file and suspend to turn on spousal benefit and/or protect ability to claim a lump sum if you change your mind You get 100% of your own or your spousal benefit You can start earning delayed retirement credits (DRC) Even if you started collecting early, you can suspend your retirement benefit and earn DRC You are no longer subject to the earnings test You can collect spousal benefit (or ex-spouse or survivor benefits) AND earn DRC on your own benefit Up to six months retroactive pay for spousal or survivor benefit 29 Suspend vs Withdraw Suspend At or after FRA Suspend between ages of 66-70 to begin earning DRC (even if you started SS at age 62) Insurance of lump sum Safe for single filers, but if married: By filing for your own benefit, you forfeit forever your ability to file for any other benefit Withdraw Repay all benefits Within one year of filing Once in a lifetime Reapply to resume (doesn t automatically restart at 70) 30 10

Why delay benefits? Bigger checks to start Age at which benefits are claimed % of PIA if FRA = 66 Benefit without COLAs Benefit with COLAs 62 75% $1,875 $1,875 63 80% $2,000 $2,054 64 87% $2,167 $2,285 65 93% $2,333 $2,527 66 100% $2,500 $2,781 67 108% $2,700 $3,085 68 116% $2,900 $3,403 69 124% $3,100 $3,736 70 132% $3,300 $4,084 Assumes PIA = $2,500 and 2.7% annual COLAs 31 Why delay benefits? More income later on Benefit at age If claim at 62 If claim at 70 70 $2,320 $4,084 75 $2,651 $4,666 80 $3,029 $5,331 85 $3,460 $6,090 90 $3,953 $6,958 95 $4,517 $7,949 100 $5,160 $9,082 Assumes PIA at 66 = $2,500 and 2.7% annual COLAs 32 Strategy #3 for maximizing your benefits Take advantage of spousal and survivor benefits Consider the following strategies: Married couples determine which spouse gets the spousal benefit Divorced spouses claim on former spouse s record Widow(er)s coordinate survivor and retirement benefits 33 11

Rules for spousal benefits Primary worker must have filed for benefits (but can suspend to build delayed credits if over FRA) Spouse must be at least 62 for reduced benefit or 66 for full benefit No delayed credits on spousal benefits after 66 Spousal benefit = ½ the primary worker s PIA if started at FRA 34 Divorced-spouse benefits Same as spousal benefits if: Marriage lasted 10 years or more Person receiving divorced-spouse benefit is currently unmarried The ex-spouse is at least age 62 If divorce was more than two years ago exspouse does not need to have filed for benefits 35 Social Security offers survivor benefits Both spouses living After husband dies $2,000 $1,200 $2,000 36 12

Rules for survivor benefits Couple must have been married at least 9 months at date of death (except accidents). Survivor must be at least 60 for reduced benefit (50 if disabled), or FRA for full benefit. Survivor benefit not available if widow(er) remarries before age 60 (or 50 for disabled survivor), unless that marriage ends. Divorced-spouse survivor benefit available if the marriage lasted at least 10 years. 37 File and suspend At FRA, higher-earning spouse applies for his benefit and asks that it be suspended Lower-earning spouse files for spousal benefit Higher-earning spouse claims benefit at 70 Example: Kanye and Kim are 66 Kanye s PIA is $2,000; Kim does not qualify for SS Kanye wants to delay his benefit to age 70. Kim wants to file for her spousal benefit now Kanye files and suspends at 66. This entitles Kim to her spousal benefit while Kanye s benefit continues to earn delayed credits Caution: File and suspend may not be done before FRA 38 Claim now, claim more later At FRA, higher-earning spouse restricts his application to his spousal benefit (lower-earning spouse must have filed for benefits on her record) At 70, higher-earning spouse switches to his own maximum benefit Example: Ben and Jennifer are 66 Ben s PIA is $2,000; Jennifer s PIA is $1000 Jennifer files for her benefit at 66 Ben files for his spousal benefit at the same time and begins collecting $500 (half of Jennifer s PIA) SS income from 66-70 is $1500 per month When Ben turns 70, he switches to his max benefit of $2,640 Caution: Higher-earning spouse may not do this before FRA 39 13

Start, Stop, Start Any time after FRA and before age 70, you can suspend your benefit, regardless of when you started it For example: Start at 62, Suspend at FRA, Start again at 70 Reason #1 your pension starts at 65 and you need the income at 62 Reason #2 your older (say 66) spouse could collect spousal benefits, particularly relevant if you have short life expectancy Reason #3 you have children under 16 who could collect benefits and your current spouse could collect child-in-care spousal benefit 40 Is your advice worth: 41 MAXIMUM Scenario Summary MINIMUM 42 14

Strategy #4 for maximizing your benefits Minimize taxes on benefits Consider the following strategies: Draw down IRAs before 70-1/2 to reduce RMDs Convert IRAs to Roth Shift to tax-advantaged investments (not muni-bonds) Note: complete a W-4V for voluntary withholding 43 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 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% 0 Up to 50% Up to 85% Married filing separately and living with spouse Over 0 85% *Provisional income = AGI + one-half of SS benefit + tax-exempt interest 44 SS Taxation: Does it matter? Kanye and Kim AGI $28k + SS $14k Provisional income = $28k+$7k=$35k $3k above $32k threshold; $1500 taxed AGI = $28k + $1500 = $29,500 Ben and Jennifer AGI $58k + SS $24k Provisional income = $58k+$12k=$70k $26k above $44k threshold; $20,400 taxed AGI = $58k + $20,400 = $78,400 45 15

46.25% Marginal Tax Rate Kanye is now single AGI $36k + SS $22k Provisional income = $36k+11k=$47k $13k above $34k threshold; $15,550 taxed 50% of $25k-34k PLUS 85% of $34k-47k AGI = $36k + $15,550 = $51,550 After standard deduction $6100 and one personal exemption $3900, taxable income=$41,550; 25% bracket Kanye takes $1000 from his IRA Income=$48k, taxable SS=$16,400, AGI=$53,400 $53,400-$51,550 = $1850 * 25% = $462.50 $462.50/1000 = 46.25% marginal tax rate https://www.kitces.com/blog/the-taxation-of-social-security-benefits-as-a-marginal-tax-rate-increase/ 46 Strategy #5 for maximizing your benefits Coordinate Social Security with overall retirement income plan Consider: Retirement accounts Investment portfolio Earnings from work 47 Retirement Income Projection 48 16

Baby Boomer Social Security Question #5 Will Social Security be enough to live on in retirement? Answer: Probably not. 49 The Numbers $1294 average benefit 38% SS benefit as percentage of retirement income 51% of workforce has no pension 34% of workforce has no retirement savings 52% of couples (74% singles) get 50% or more of income from SS 22% of couples (47% of singles) rely on SS for 90% or more of income 50 SO, WHAT S THE PLAN? 51 17

Your clients have questions. You can help make a plan. When should I apply for Social Security? What if I want to keep working? What if I've already applied? How much will my benefit be? How can I coordinate spousal benefits? What's the best long-term strategy for my situation? What do I do next? 52 RESOURCES Joseph Stenken s annual book: Social Security & Medicare Facts Get What s Yours (2015) by Laurence Kotlikoff https://www.maximizemysocialsecurity.com/ http://www.horsesmouth.com/ Mary Beth Franklin s blog http://www.investmentnews.com/staff/mbfranklin Michael Kitces blog Nerd s Eye View: https://www.kitces.com/blog/ 53 RESOURCES-continued The SEARCH box on ssa.gov. From the search box, you can find all kinds of interesting stuff: Social Security Rulings and Acquiescence Rulings: http://www.socialsecurity.gov/op_home/rulings/rulings.html Freedom of Information Act (FOIA) all of the Social Security manuals: http://www.socialsecurity.gov/foia/html/manuals.htm The Program Operations Manual System (POMS) the SSA internal book your Social Security representatives use to figure out the hard stuff: https://secure.ssa.gov/poms.nsf/home!readform The Social Security Handbook plain language for use by the public: http://www.socialsecurity.gov/op_home/handbook/handbook-toc.html 54 18