Retirement Income Strategies: How Can Maximize Client s Lifestyle, Legacy, and Livelihood Karen Remmele 2013 This material is not intended to replace the advice of a qualified attorney, tax advisor, investment professional, or insurance agent. Before making any financial commitment regarding the issues discussed here, consult with the appropriate professional advisor. Not FDIC insured May lose value No bank guarantee By the Numbers 74% percent of households with incomes > $200,000 expect advice from a financial planner* 57% of couples age 60-66 would switch advisors if their current advisor couldn t help them with represents at least 44% of the retirement income for 80% of Americans** Sources: * Timing and Market Tools: Planning: A Cornerstone of Your Financial Practice? ** Income of The Population 55 or Older, Administration, March 2012 25312-02-0113 December 2012 Page 2 Agenda How Benefits Are Calculated Maximizing Income for Married Couples Maximizing After-Tax Income with 25312-02-0113 December 2012 Page 3 1
How Are Benefits Calculated? Eligibility 40 quarters of work Calculation Look at average of 35 highest earning years of work 25312-02-0113 December 2012 Page 4 Full Retirement Age Is Dependent on Year of Birth Year of birth Full Retirement Age (FRA) 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 Sources: Full Retirement Age: Administration http://www.socialsecurity.gov/pubs/10035.html accessed 07/14/2011 Age 62 Benefit Calculation found at http://www.socialsecuritydisability.tv/glossary/primary-insurance-amount accessed 07/15/2011 25312-02-0113 December 2012 Page 5 What Happens if Clients Claim at? Age Amount 62 until Full Retirement Age Full Retirement Age Benefits reduced up to 30% Permanent reduction Exception if fully and permanently disabled Receive 100% of annual benefit 66 if born between 1943 1959 67 if born in 1960 or later Full Retirement Age until 70 Credit of 8% per year of waiting Permanent increase Maxes out at age 70 Be sure to sign up for Medicare at age 65. 25312-02-0113 December 2012 Page 6 2
What Happens If a Client Stops Working before 62? Can they collect benefits before 62 since they are no longer working? Most likely no. Exceptions may apply for complete and permanent disability Will they get the same benefits as if they had waited to retire at 62? Probably not. Benefits averaged over 35 years. 25312-02-0113 December 2012 Page 7 Can Clients Work and Receive Benefits? Benefits May Be Reduced if Income Exceeds Certain Thresholds Age 62 until year attaining Full Retirement Age Year of attaining Full Retirement Age After Full Retirement Age Benefit Reduction Lose $1 in Benefits for every $2 earned above limit Lose $1 in Benefits for every $3 earned above limit No benefit reduction 2013 Earned Income Limits $15,120 ($1,260 per month if retired in middle of year) $40,080 No limit on earnings A client must still pay Medicare and taxes if they are working & receiving benefits Source: How Work Affects Your Benefits, SSA Publication No, 05-10069, January 2011 25312-02-0113 December 2012 Page 8 Collecting before and after Full Retirement Age Reduction in Benefits is Permanent, Credit also Permanent Assumes Full Retirement Age is 66 40% 30% 24% 32% 20% 16% 10% 0% -10% 8% FRA 62 63 64 65 66 67 68 69 70-7% -20% -30% -25% -20% -13% Source: ssa.gov/pubs/retirechart.htm accessed July 20, 2011 Assumes a client were born between 1943 and 1960 25312-02-0113 December 2012 Page 9 3
Benefit per Month Based on Beginning Age $1,400 $1,200 $1,000 Assumes Monthly Benefit of $1,000 at Full Retirement Age of 66 $866 $800 $800 $750 $1,240 $1,160 $1,080 $1,000 $933 $1,320 $600 $400 $200 $0 62 63 64 65 66 67 68 69 70 Source: When to Start Receiving Retirement Benefits, SSA Publication No, 05-10147, July 2008 25312-02-0113 December 2012 Page 10 When a Client Claims Could Impact Their Lifestyle Where Could You Live in Retirement? Collect at 62 Collect at 66 Collect at 70 Mobile Home Updated Brick Home Chalet with Mountain Views Source: ashevillerent.com, accessed 11/21/2012 25312-02-0113 December 2012 Page 11 Agenda How Benefits Are Calculated Maximizing Income for Married Couples Maximizing After-Tax Income with 25312-02-0113 December 2012 Page 12 4
What About the Spouse? Spousal Benefit Survivor Benefit Payment Period Maximum benefit Partial benefit While primary worker is still alive and applied for After primary worker passes away Spouse of primary worker must be Full Retirement Age when first claiming Maximum benefit is 50% of worker s benefit at FRA No delayed spousal credit after FRA Surviving spouse must be Full Retirement Age Maximum is 100% of worker s benefit at death Spouse of primary worker must be at least 62 to receive a partial benefit Receives 32%-49.9% of worker s full benefit at FRA Reduction in benefit is permanent Surviving spouse is between 60 and Full Retirement Age Receives 71%-99% of primary worker s benefit If both spouses worked, receive greater of personal benefit or Spousal / Survivor benefit Source: Do you qualify for benefits on someone else s record? ssa.gov/retire2/applying6.htm accessed July 20, 2011 25312-02-0113 December 2012 Page 13 What if the Client Is Divorced? Eligible for Spousal/ Survivor Benefits if all the following conditions are met: Married for at least 10 years Did not remarry* Eligibility ages 62 for spousal benefits 60 for survivor benefits If both of spouses worked, receive higher of personal benefit or the spousal/survivor benefit * If a client remarries, they lose the spousal benefit from the first marriage unless the second spouse dies or the marriage ends in divorce. In that case, a client can claim benefits from the ex-spouse who would generate the greatest payment. 25312-02-0113 December 2012 Page 14 Loss of Spouse Surviving Spouse Will Still Receive Some Benefits Receive greater of: Benefits based on their earnings history OR Benefits based on their spouse s earnings history Spousal benefit is discontinued 25312-02-0113 December 2012 Page 15 5
Case Study: What if Only One Spouse Worked? Husband Sole Provider for Family James and Linda James is 62 He earned average wages over his lifetime His wife Linda never worked. What will be the household benefits and the survivor benefit if retires at: 62 66 70 This case study is a hypothetical illustration only. Source: Virginia P. Reno and Joni I. Lavery: When to Take Benefits: Questions to Consider, Brief, January 2010 National Academy of Insurance. Assumptions: He is medium earner and has career average earnings close to the average wage of all workers (about $42,000 in 2009). Monthly benefits at: 62- $950, 66- $1,500, 70- $2,000 25312-02-0113 December 2012 Page 16 Cat food or Caviar? Taking at 62 reduces household income by up to 55% Poverty line (Married Couple) $30,000 $25,000 $20,000 $10,000 $5,000 $0 $15,350 Start at 62 Start at 66 Start at 70 $25,500 $33,500 while both alive This case study is a hypothetical illustration only. Source: Virginia P. Reno and Joni I. Lavery: When to Take Benefits: Questions to Consider, Brief, January 2010 National Academy of Insurance Assumptions: He is medium earner. Monthly benefits at: 62- $950, 66- $1,500, 70- $2,000. Poverty line for married couples in 2012 was $15,130 25312-02-0113 December 2012 Page 17 Cat food or Caviar? Taking at 62 reduces survivor benefit by up to 55% Poverty line (Married Couple) $30,000 $25,000 $20,000 $10,000 $5,000 $0 $15,350 Start at 62 Start at 66 Start at 70 $25,500 $33,500 while both alive $11,500 $18,000 $24,500 during widowhood Poverty line (Single) This case study is a hypothetical illustration only. Source: Virginia P. Reno and Joni I. Lavery: When to Take Benefits: Questions to Consider, Brief, January 2010 National Academy of Insurance Assumptions: He is medium earner. Monthly benefits at: 62- $950, 66- $1,500, 70- $2,000. She is two years younger. She collects as soon as possible. When she is 62, receives 32% of his benefit, If she waits until she is 64 (he is 66), she receives 41.7% of his benefit. If she waits until he she is 66, she receives 50% of his benefits. Her spousal benefit is capped at 50% of his year 66 benefit. Poverty level for a single person was $11,170 in 2012 25312-02-0113 December 2012 Page 18 6
Retirement Income and Legacy Husband is sole provider James and Linda want to know how long their personal assets will last if they start at: 62 66 70 Retirement assets at age 62 = $170,000* Desired retirement income of $52,000** Sources: * EBRI Issue Brief September, 2012 **Consumer Expenditure Survey, U.S. Bureau of Labor Statistics, September, 2012; Table 3. Age of reference person: Average annual expenditures and characteristics, 65-74 years 25312-02-0113 December 2012 Page 19 Retirement Income and Legacy Delayed credit improves chance assets will last both lifetimes How Long Assets Last in Retirement 20 Fast Fact 15 10 5 0 5 years 10 years 19 years Collected at 62 Collected at 66 Collected at 70 36% of retirees have not estimated how long their assets and investments might last Source: The Financial Recovery for Retirees Continues a study conducted by the Society of Actuaries (SOA), LIMRA and the International Foundation for Retirement Education (InFRE), June 2011 This case study is a hypothetical illustration only. Assumptions: He starts off with $170,000 at age 62 (see previous slide). Annual rate of return is 5% throughout all calculations. He starts at 62: He receives $11,500 in per year; she collects spousal ($3,850) when she turns 62; withdraw $36,650 annually He starts at 66: He works until 66 and doesn t touch his personal assets until he retires at 66. At 66, he receives $18,000 in per year; she claims < FRA and receives reduced spousal: $7,500. withdraws $26,500 annually while he is alive. He starts at 70: He works until 70 and doesn t touch his personal assets until he retires. He claims at 70 and receives his benefit + delayed retirement credit = $24,000. She receives full spousal =.5 of his 66 benefit = $9,000. Withdraw $18,500 annually while he s alive. 25312-02-0113 December 2012 Page 20 Husband Is Sole Provider Advanced claiming strategies with spousal benefits James and Linda want to know if there are any additional options available to them Their advisor introduces them to File and Suspend 25312-02-0113 December 2012 Page 21 7
File and Suspend: Available at Age 66 Accrues 8% credit per year of waiting 67 68 69 70 At 70 James Claims Receives 132% of original FRA amount FRA 66 James is FRA Files for benefits Immediately suspends Because James filed, Linda can apply for spousal benefits Spousal benefits do Spousal not benefits do not accrue delayed benefits accrue delayed benefits File and suspend can only be implemented if the working spouse has attained Full Retirement Age. If the spouse claiming the spousal benefit is under Full Retirement Age, their spousal benefit and personal retirement benefit (if applicable) is permanently reduced. 25312-02-0113 December 2012 Page 22 What if Both Spouses Worked? Comparing when spouses collect based only on work histories David is 66 His wife Susan is 64 and worked most of her life. What will be their retirement benefits if: Both claim as soon as David retires Each claim at their respective FRA Each claim at 70 This case study is a hypothetical illustration only. Source: Virginia P. Reno and Joni I. Lavery: When to Take Benefits: Questions to Consider, Brief, January 2010 National Academy of Insurance. Assumptions: Assumptions: He is medium earner and has career average earnings close to the average wage of all workers (about $42,000 in 2009). Monthly benefits at: 66- $1,500, 70- $2,000. She is a low earner who s career-average earnings are about $19,000 in 2009. Monthly benefits at: 66- $900, 70- $1200. 25312-02-0113 December 2012 Page 23 Conventional Wisdom: Wait until 70 to Maximize $40,000 $30,000 $20,000 Annual benefits based only on earnings Household : His Benefit Her Benefit $39,500 Household : $27,500 $9,500 Household : $29,000 $11,000 $10,000 $18,000 $18,000 $24,500 $0 Both collect when he Both collect at Both collect at 70 reaches FRA respective FRA FRA stands for Full Retirement Age which is 65, 66 or 67 (Depending on the year the client was born) This case study is a hypothetical illustration only. Source: Virginia P. Reno and Joni I. Lavery: When to Take Benefits: Questions to Consider, Brief, January 2010 National Academy of Insurance. Assumptions: Both claim at his FRA: He receives full benefit of $18,000. Since she is under FRA, she receives higher of her reduced benefit or her reduced spousal benefit (she can not pick and choose benefits if under FRA). In this case, reduced personal benefit is greater than reduced spousal Both claim at FRA: He receives his full benefit of $18,000. She chooses her full benefit of $11,000 which is greater than spousal benefit of $9,000 (0.5*$18,000=$9,000) Both claim at 70: He first claims when he is 70 and earned delayed retirement credit for waiting. When she reaches 70, she claims on her earnings history. 25312-02-0113 December 2012 Page 24 8
Timing and a Client s Legacy For each strategy, David and Susan want to know Lifetime income Legacy left at their death Assumptions: He starts off with $235,00 in his Traditional and Roth IRA and she has $130,000 in her Traditional and Roth IRA (c.f. EBRI Issue Brief September, 2012); Assume both pass away at life expectancy of a 62 year old per SSA (83 for him, 86 for her) 25312-02-0113 December 2012 Page 25 Lifetime and Legacy: Basic Claiming Strategies Claiming before FRA may dramatically reduce legacy Household Lifetime $585,000 $590,000 Legacy $654,000 $195,000 $305,000 $22,500 Both claim at his FRA (Susan is < FRA) Both claim at their FRA Both Claim at 70 FRA stands for Full Retirement Age which is 66 or 67 (Depending on the year you were born) This case study is a hypothetical illustration only. Assumptions: He starts off with $235,00 in his Traditional and Roth IRA and she has $130,000 in her Traditional and Roth IRA (c.f. EBRI Issue Brief September, 2012); they want $52,000 in annual income (c.f. Consumer Expenditure Survey, U.S. Bureau of Labor Statistics, September, 2012). Assume both pass away at life expectancy of a 62 year old per SSA (83 for him, 86 for her) Both claim at his FRA: Immediately start withdrawing from personal assets: $24,500 annually while both alive, $34,000 annually after his death Both claim at their FRA: They live off her earnings + his until she retires; withdraw $23,000 while both alive, $34,000 after his death Both claim at 70: He retires at FRA; they live off her earnings until she reaches FRA; from her FRA until 70 they live off of assets; when he is 70, he collects, she starts spousal benefits. She switches to her at 70; withdraw $13,000 during both lives; $28,000 after his death 25312-02-0113 December 2012 Page 26 Are there other Options if Both Spouses Worked? Advanced claiming strategies with spousal benefits David and Susan heard that they might be able to change between spousal benefits and their personal benefit based They are wondering How it works If there are restrictions What will be their household benefits if they incorporate spousal benefits 25312-02-0113 December 2012 Page 27 9
Household Income Household Income Advanced Spousal Claiming Strategies: Start with spousal, change to personal benefit (if higher) Strategy: Higher Earner Delays until 70 Maximizes his benefit Maximizes survivor benefit Still collect a small benefit while waiting for High Earner turns 70 How it works- Choose between: Change-up Super File and Suspend Ideal Couple: Spouses within 3 years of age Restrictions: Must be FRA to restrict application to spousal only Let s see how this works! 25312-02-0113 December 2012 Page 28 Super File & Suspend: David files and suspends; Susan collects spousal; at 70 both claim + credit $40,000 His Benefit Her Benefit $30,000 She continues with spousal: She turns 70: Changes over to her full benefit + credit: $20,000 Both are FRA He turns 70: He claims full retirement benefit + credit: After he passes away, she receives his benefit $10,000 He files and suspends This allows her to collect spousal benefits He continues to receive delayed credits on his benefits $0 Susan turns 70 David passes away David turns 70 This case study is a hypothetical illustration only. Assumptions: When Both are FRA: He files for and suspends his benefits. This allows her to claim spousal benefits. Plus, he receives delayed retirement credit. She receives spousal benefits based on his record. Because she is FRA, the spousal is 0.5* his benefit at 66= 0.5*$18,000 = $9,000 When He turns 70: He claims his benefit plus the delayed retirement credits. She continues with the spousal benefit in order to maximize the benefit based on her earnings. Total household income is $33,000 ($24,000 for him plus her $9,000 spousal) When She turns 70: She switches to her benefit plus the credit. Total household income is $39,000 ($24,000 for him plus for her) 25312-02-0113 December 2012 Page 29 Change-up: Susan claims ; David starts with spousal, changes over to his benefit plus credits at 70 $40,000 His Benefit Her Benefit $30,000 She continues to receive her full benefit: $20,000 $10,000 Both are FRA Her full benefit He turns 70: Changes over to his full benefit + credit: After he passes away, she receives his benefit His spousal $0 David turns 70 David passes away This case study is a hypothetical illustration only. Assumptions: No Cost of Living Adjustments (to keep the concept understandable) When Both are Full Retirement Age (FRA): She files for and collects $11,000. He receives his spousal. Because he is FRA, the spousal is 0.5* her benefit = 0.5*$11,000= $5,500 When He turns 70: He switches to his plus the delayed retirement credits ($24,000). Total Household amount is When She turns 70: She continues with her benefit. She did not receive delayed retirement credit because she claimed at FRA 25312-02-0113 December 2012 Page 30 10
Lifetime and Legacy: Advanced spousal strategies may increase lifetime income and legacy $700,000 $654,000 Lifetime $643,000 Legacy $672,000 $500,000 $300,000 $305,000 $320,000 $350,000 $100,000 Both Claim at 70 Change-up Super File and Suspend This case study is a hypothetical illustration only. Assumptions: Assumptions: He starts off with $235,00 in his Traditional and Roth IRA and she has $130,000 in her Traditional and Roth IRA (c.f. EBRI Issue Brief September, 2010); Assume both pass away at life expectancy of a 62 year old per SSA (83 for him, 86 for her) Both claim at 70: Both work until their respective age of 70 and then retire Change-up: He retires at 66; they live off of her earnings until his age 68 (her age 66). When She is 66, she retires and claims on her benefits ($11,000). He files for spousal benefits ($5,500) and switches to his benefit at 70. They withdraw from their IRAs to make up the difference in income File and Suspend: He retires at 66; they live off of her earnings until his age 68 (her age 66). When She is 66, she retires. He files for benefits and suspends. They receive her spousal and supplement with withdrawals from IRA. When each is 70, they claim their own benefits. 25312-02-0113 December 2012 Page 31 Collecting before FRA Both Spouses Worked Can a client pick and choose between spousal or personal benefit before FRA? What if both spouses claim before FRA? No. Choosing between personal benefit and spousal only available if both are 66 (Full Retirement Age) Both receive higher of: reduced personal benefit reduced spousal benefit What if one spouse claims before FRA? FRA is Full Retirement Age. See slide 8 for details Adjusted spousal benefit only applies if a client claims before FRA, and then their spouse claims at a later date. The adjustment is: Spousal Benefit Personal Benefit. This amount (if positive) is added to the client s current benefit Receive reduced benefit based on his/her earnings record When second spouse claims : the first spouse automatically receive higher of : reduced Personal Benefit adjusted Spousal Benefit 25312-02-0113 December 2012 Page 32 Agenda How Benefits Are Calculated Maximizing Income for Married Couples Maximizing After-Tax Income with 25312-02-0113 December 2012 Page 33 11
May Be Taxable at Federal Level Income determines whether or not benefits are taxable Single Married filing jointly benefits not taxable < $25,000 in income < $32,000 in income Up to 50% of benefits taxable Up to 85% of benefits taxable $25,000 - $34,000 $34,001 + $32,000 - $44,000 $44,001 + These thresholds were set in 1983 and are not indexed for inflation. 25312-02-0113 December 2012 Page 34 Calculating Taxable Portion of See IRS Form 1040 to determine if benefits are taxable Pioneer does not offer tax advice. The information on this slide serves as a guide and does not replace the advice of a qualified tax advisor. Please contact a qualified tax advisor for specifics on a client s individual circumstance. 25312-02-0113 December 2012 Page 35 What Is Provisional Income? Determines taxable portion of ; only 50% of included AGI + Tax Exempt 50% of Income Income* + = Provisional Income ( Used to determine taxable portion of benefits) AGI (Adjusted Gross Income) is the last line of page 1 of the IRS Form 1040 (U.S. Individual Income Tax Return) *May have to add in other exclusions such as deductions for interest on qualified educational loans and exclusions for savings bonds used for higher education. See IRS Info 2009-0073 for further details. Pioneer does not offer tax advice. The information on this slide serves as a guide and does not replace the advice of a qualified tax advisor. Please contact a qualified tax advisor for specifics ona client s individual circumstance. Sources: IRS Publication 915, Handbook question 2501 and IRS Info 2009-0073 25312-02-0113 December 2012 Page 36 12
Case Study: Comparing Taxes Based on Income John and Barbara Robert and Mary Income Traditional IRA Withdrawal Total Income $50,000 $50,000 Will their taxes be the same? 25312-02-0113 December 2012 Page 37 Increasing May Decrease Taxes Only 1/2 of included in Provisional Income John and Barbara Total Income Traditional IRA Taxes Taxes = $2,400 Robert and Mary Traditional IRA Taxes = $0 Assumes couple is married, filling jointly. Standard deduction of $11,400, exemptions of $7300. Assumes Traditional IRA withdrawal is entirely pre-tax This case study is a hypothetical illustration only. Pioneer does not offer tax advice. The information on this slide serves as a guide and does not replace the advice of a qualified tax advisor. Please contact a qualified tax advisor for specifics on a client s individual circumstance. 25312-02-0113 December 2012 Page 38 Items Excluded from Provisional Income Maximizing excluded items may minimize taxes Roth IRA Distributions Qualified Charitable Deductions Non-taxable Pensions and Annuities Child Support Inheritance/ Gifts Life Insurance Proceeds Pioneer does not offer tax advice. The information on this slide serves as a guide and does not replace the advice of a qualified tax advisor. Please contact a qualified tax advisor for specifics on a client s individual circumstance. 25312-02-0113 December 2012 Page 39 13
Case Study: After-Tax Income with and without Roth John and Barbara Michael and Patricia Income Traditional IRA Withdrawal Roth IRA Withdrawal Total Income $50,000 0 $20,000 $50,000 Will their taxes be the same? 25312-02-0113 December 2012 Page 40 Strategically Using Roth IRA May Control Taxes during Retirement John and Barbara Traditional IRA Taxes = $2,400 Michael and Patricia Traditional IRA $20,000 Roth IRA Taxes = $0 Assumes couple is married, filling jointly. Standard deduction of $11,400, exemptions of $7300. Assumes Traditional IRA is entirely pre-tax This case study is a hypothetical illustration only. Pioneer does not offer tax advice. The information on this slide serves as a guide and does not replace the advice of a qualified tax advisor. Please contact a qualified tax advisor for specifics on a client s individual circumstance. 25312-02-0113 December 2012 Page 41 Re-cap: is the Foundation of Many Clients Income during Retirement 74% percent of households with incomes > $200,000 expect advice from a financial planner* 57% of couples age 60-66 would switch advisors if they didn t receive advice represents at least 44% of the retirement income for 80% of Americans** Sources: * Timing and MarketTools: Planning: A Cornerstone of Your Financial Practice? ** Income of The Population 55 or Older, Administration, March 2012 Create strategies that maximize retirement income and reduce taxes on benefits Focus on the couple s benefits, not the individual benefits Look beyond the numbers; small differences could have a large impact on the longevity of their assets 25312-02-0113 December 2012 Page 42 14
Neither Pioneer, nor its representatives are legal or tax advisors. In addition, Pioneer does not provide advice or recommendations. The investments a client chooses should correspond to a client s financial needs, goals, and risk tolerance. For assistance in determining a client s financial situation, please consult an investment professional. Securities offered through Pioneer Funds Distributor, Inc. Underwriter of Pioneer mutual funds, Member SIPC 60 State Street Boston, Massachusetts us.pioneerinvestments.com 2012 Pioneer Investments 25312-02-0113 December 2012 Page 43 25312-02-0113 December 2012 Page 44 15