Social Security: Choices, Opportunities, and Decisions A Retirement Benefit Planning Overview By Mark J. Snodgrass September 1, 2016 Money Tree Software, Ltd. 2430 NW Professional Dr. Corvallis, OR 97330 2016 Money Tree Software, Ltd.
Social Security: Choices, Opportunities, and Decisions A Retirement Benefit Planning Overview Social Security is a comprehensive federal program delivering American workers and their dependents retirement income, disability income, survivorship payments, and death benefits. The Social Security Act was passed in 1935 as part of President Franklin D. Roosevelt's New Deal plan to lift the U.S. out of the Great Depression. A primary provision of the act created a social insurance program designed to pay retired workers of a certain age a continuing income after retirement. America s Social Security system is one of the world s largest government programs, paying out hundreds of billions of dollars per year. The program is funded through payroll Social Security taxes collected from employees and companies. Employment tax revenues are placed in the Social Security Trust Fund and payments are managed by the Social Security Administration and Federal Reserve Board. Based on year of birth, number of years worked, the amounts earned, and when one applies to begin benefits, retirement benefits can vary greatly. For those with sufficient work history to qualify, the minimum retirement benefit is $818 per month, and the maximum is $3,576. In 2015, the average estimated individual monthly Social Security retirement benefit check is $1,341. Retirement benefits automatically adjust for inflation annually, and are designed to keep up as the cost of living increases. Retirement benefits may begin as early as age 62, and increase, if deferred, up to age 70. Waiting beyond age 70 does not result in a further increase of benefits. The calculation of retirement benefit income amount is based on the average wages earned over the worker's lifetime. Spouses may also receive Social Security retirement income benefits, even with limited or non-existent earning records. 9/1/2016 2016 Money Tree Software, Ltd. Page 2 of 6
How Benefit Choices Affect Retirement Many factors influence consumers Social Security decisions. Understanding the basics of Social Security, including application age, primary benefits, spousal benefits, restricted filing, and suspended filing options are an essential part of making informed choices appropriate for individual situations. Social Security is a somewhat flexible system that particularly offers couples many combinations of when and how to take the benefits to which they may be entitled. Retirement is already a complex interaction of assets, growth, incomes, expenses, debts, and taxes. In many cases, deciding when to start taking social security retirement benefits is important, and has a lasting impact on a couple s financial security. Analyzing Social Security benefits can be simple or detailed. While the idea of getting monthly checks at the earliest possible age is appealing, financial advisors can help clients make informed choices about their benefits, and assist them in taking full advantage to maximize the benefits they have earned. If workers still have some years before they need to make their application choice, general education and a good explanation of benefit concepts is a valuable first step. For consumers age 62 or older, facing the choice right now, it is critical to examine their potential benefit stream, and help them fully understand how benefits will fit into their retirement income picture now and in the future. Discussing clients Social Security choices can sometimes be a little awkward, because the math affecting the decision logic is significantly affected by unknown life expectancy variables. The planning tradeoff is taking lower benefits early is better now, but the higher benefits available with the delayed payouts are more advantageous over a long lifetime. Asking people to estimate how long they will live is always a little touchy; but helping people understand Longevity Risk, and how higher benefits affect a surviving spouse s security, is worth the effort. Ultimately, it comes down to making a decision based upon values, need, comfort level, and the desire for some money now versus more money later. For some, Social Security is a core foundation of their retirement. For others, benefits may be a welcome addition to already sufficient income. Whatever its level of relevance, understanding how benefits are affected by application ages and strategies can maximize the positive impact of benefits on lifetime retirement finances. Choices individuals and couples make may be affected by intuition, by necessity, or by careful examination of the tradeoffs of taking smaller benefits early, or waiting for larger benefits. 9/1/2016 2016 Money Tree Software, Ltd. Page 3 of 6
Americans Are Living Longer According to the U.S. Census Bureau, Americans are now four times more likely to live beyond age 90 than when Social Security began. In 1935, a 65-year-old retiree would live an average of another 12 years. Today the average 65-year-old man can expect to live another 19 years, and the average woman will get 21 more years. When considering a couple, the math of joint life expectancies shows that on average, one will live to age 92, and there is a one-in-five chance that one will live to age 95. What these longer life expectancies can mean for Social Security and retirement funding is that there exists a higher possibility that a couple s retirement assets will have to last them thirty years, or more. Particular situations may differ, but looking at averages and probabilities suggests it s prudent to prepare for at least one individual in a couple to be getting Social Security benefits into their 90s. So-called longevity risk makes the tradeoff of earlier smaller benefits versus later but larger benefits, balance more towards waiting a few years to apply for the larger retirement and survivor Social Security benefits. Social Security as Inflation Protection Social Security is designed to automatically adjust for increases in Americans cost of living. As a result, benefits can act as an important hedge against inflation. This effect becomes more important as the length of retirement grows. While the cost of living adjustments affect any level of benefit, the adjustment impact is greatest on the later retirement years when the initial benefit starts out large. Inflation adjusted benefits offer a core safety net that may help protect against outliving financial assets. Waiting for higher benefits can also produce larger annual cost of living increases. For couples, the results are greater annual gains to retirement and spousal benefits, and ultimately higher survivor payments. 9/1/2016 2016 Money Tree Software, Ltd. Page 4 of 6
Primary Application Options File Early: Social Security retirement benefits can be started as early as age 62. For those that need the income, this may be the only choice. Taking early benefits lowers payouts permanently. Benefits are reduced 5/9 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month. File on Time: If the applicants can wait until Full Retirement Age, they receive what Social Security considers their full benefits. Waiting for full benefits results in higher primary, spousal, and survivor payments. What Social Security considers an individual s Full Retirement Age is determined by the year of their birth. Full Retirement Age by Year of Birth 1943--1954 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 File Late: Delaying application beyond Full Retirement Age raises benefits 8% per year up to age 70, for a maximum potential increase of from 24% to 32%. In situations where one or both of a married couple are healthy, and/or have a history of longevity in their family, filing late may increase the total value of the lifetime benefit payout, and potentially reduce the longevity risk of outliving financial assets. File Restricted : For married couples who qualify, it can make sense to use a two-step claiming process. Those who turned 62 before Jan. 2, 2016 are eligible to use Restricted filing. Restricted filing makes sense when both have substantial earnings records. If the first spouse claims benefits on their own record, and the second spouse has reached Full Retirement Age, the second spouse may file an application Restricted to just their spousal benefit, which is half the first spouse s benefit. Meanwhile, the second spouse s full benefit increases until they claim it on their own record at age 70. 9/1/2016 2016 Money Tree Software, Ltd. Page 5 of 6
Discussing Social Security Educating clients about their options, and discussing the advantages and tradeoffs of different potential Social Security benefit application ages, can offer advisors a valuable insight to clients needs, concerns, and values. Being aware of how the Social Security benefits program works, and how the retirement benefit income stream impacts clients current and future finances, can make advisors an important resource for clients as they look forward to successfully reaching their retirement goals. Choices: Americans are looking to plan for when, and how, they may apply for Social Security. Their benefit choices can permanently affect current and future lifestyles, financial stability, and impact their potential longevity risk. Opportunities: Having answers to clients questions, and offering clear explanations of the particular strategies best suited to a client s needs make you an invaluable resource for clients feeling confident navigating a convoluted benefit system. Decisions: Social Security decisions are potentially complex and emotional. Visualizing their best available options, and reviewing example results, can help clients better understand the mix of their choices and opportunities, so they feel more informed, and can become comfortable making a decision that fits their situation and values. Additional Concepts for Client Discussions Social Security benefits are an important retirement issue that American workers need to understand as they transition to retirement. Offering explanations, concepts, and illustration results allow your clients to make more informed judgments about the choices, and help make you the go-to expert. Discussing areas around the Social Security benefit decision topic can help you explore client thoughts and values. Early benefits may be expensive in the long run. How do you value some money now, versus more later? What are clients needs for cash flow? Can clients afford to defer benefits? Benefit choices can permanently affect current and future lifestyle, financial stability, and longevity risk. The opportunity cost of deferring benefit application to full or optimal ages can pay off big, if either spouse survives significantly beyond average life expectancy. Sometimes waiting just a little longer to apply for benefits can pay off in the long run. Does either spouse have health issues? How do they feel about longevity risk? How long did their parents live? Do they have any superannuated family members? About the Author: Mark Snodgrass, President of Money Tree Software, has been working with advisors to develop professional financial planning models and reports for over twenty-five years. Please address correspondence or questions regarding this paper to support@moneytree.com or to Mark Snodgrass, Money Tree Software, 2430 NW Professional Dr., Corvallis, OR 97330 9/1/2016 2016 Money Tree Software, Ltd. Page 6 of 6