Social Security in Nine Questions Presented by Invesco TR-SSNINE-PPT-1P 12/14TR-SSNINE-PPT-1P 12/14 The information contained in this presentation is as of Nov. 10, 2014 (unless otherwise noted) and is subject to change without notice. The information presented is the most current available. There is no guarantee the outcomes mentioned within this presentation will be realized. Please see slide 19 for important information Invesco Distributors, Inc.Invesco Distributors, Inc.

Agenda TR-SSNINE-PPT-1P 12/142 Nine Questions 1 Is the system in trouble? 2 What is my benefit based on? 3 When can I begin taking benefits? 4 How much money will I get? 5 Can I get Social Security and still work? 6 When should I begin taking benefits? 7 How does Social Security work for my spouse? 8 How does Social Security work for my ex-spouse? 9 What happens if my spouse dies?

Q #1 Is the system in trouble? 1935Social Security Act signed into law 1939Benefits extended to workers’ dependents and survivors 1950First cost of living adjustment (COLA) 1972Enacts automatic COLA increasing benefits annually 1983President Reagan signs law strengthening Social Security 2011Government taps trust fund bond interest to cover costs ≈ 2020Government starts selling trust fund bonds to cover costs 2033Trust fund depleted 2034Social Security taxes cover around 75% of benefits TR-SSNINE-PPT-1P 12/143 Source: whitehouse.gov

Q #2 What is my benefit based on? Retirement benefit eligibility: Earn 40 “quarters of coverage” Federal Insurance Contributions Act (FICA)  Worker and employer each pay 6.2% (self-employed pay 12.4%)  Maximum earnings cap for 2014: $117,000 Retirement benefit: Based on two components  Earnings history: Primary Insurance Amount (PIA)  Age retirement benefits start: Compared to full retirement age (FRA) TR-SSNINE-PPT-1P 12/144 Source: ssa.gov 5 RM OFF M ON M–%

Q #3 When can I begin taking benefits? Determining PIA 1.Take all taxed Social Security earnings. 2.Adjust each year for inflation. 3.From step 2, pick the 35 highest-earning years. 4.Add those 35 years, divide by 420 (number of months) = average indexed monthly earnings (AIME). 5.Apply Social Security Association (SSA) benefit formula; designed to give higher percentage of earnings to lower wage earners (based on “bend points”). TR-SSNINE-PPT-1P 12/145 1Source: ssa.gov, 2014 SSA Benefit Formula 90% of AIME up to the first bend point, $ % of AIME up to the second bend point, $4, % above second bend point Total of all three is PIA

Full Retirement Age (FRA) TR-SSNINE-PPT-1P 12/146 Source: ssa.gov Born 1943–1954 Start payout at age: Benefit as a % of FRA payout: 6275% 6380% % % 66100% 67108% 70132% Delayed Retirement Credits (DRC) Year of BirthFRA 1943– and 2 months and 4 months and 6 months and 8 months and 10 months 1960 and later67

Late retirement  Delaying benefits means an automatic increase or DRC.  Increase is based on length of time from FRA until benefits begin or until age 70, whichever comes first. TR-SSNINE-PPT-1P 12/147 Source: ssa.gov DRC Example: Born 1943–1954 Start payout at age : Benefit as a % of FRA payout: 66 FRA100% 67108% DRC 68116% 69124% 70132% No DRC after 70

COLAs  Purpose: To ensure that the purchasing power of Social Security benefits is not eroded by inflation.  Based on the percentage increase of Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).  If there is no increase, there can be no COLA. TR-SSNINE-PPT-1P 12/148 Source: ssa.gov COLAs 2003 – 1.4% 2004 – 2.1% 2005 – 2.7% 2006 – 4.1% 2007 – 3.3% 2008 – 2.3% 2009 – 5.8% 2010 – 0.0% 2011 – 0.0% 2012 – 3.6% 2013 – 1.7% 2014 – 1.5%

TR-SSNINE-PPT-1P 12/149 Q #4 How much money will I get? Things that may affect benefits  Working while receiving early retirement benefits  Taxation of Social Security benefits  If you worked in the public sector during your career

Q #5 Can I get Social Security and still work? If you’re working and begin receiving benefits before FRA, benefits are reduced up until FRA. (Only individual wages are considered; spouse’s wages are not.) TR-SSNINE-PPT-1P 12/1410 Source: ssa.gov This hypothetical example is for illustrative purposes only. Age2014 Limit Under FRA $1 of benefits withheld for every $2 in earnings above limit $15,480 a year Year of FRA (for the months prior to FRA) $1 of benefits withheld for every $3 in earnings above limit $41,400 a year FRA and beyondUnlimited Example: Bob, age 65 (FRA 66) starts collecting $24,000 in benefits and earns $40,000. $40,000 - $15,480 $24,520 ÷$2 - $12,260benefit reduction $24,000 - $12,260 $11,740benefit

Taxation of Social Security benefits Taxation depends on:  Worker’s filing status.  Provisional income. 1 TR-SSNINE-PPT-1P 12/1411 1Provisional defined by the Internal Revenue Service (IRS) as the sum of wages, taxable and nontaxable interest, dividends, pensions, self- employment and other taxable income plus half (50 percent) of your annual Social Security benefits Source: ssa.gov SingleMarried Filing Jointly Base amount $25,000Base amount $32,000 $25,000 – $34,000 = up to 50% taxable $32,000 – $44,000 = up to 50% taxable $34,000+ = up to 85% taxable$44,000+ = up to 85% taxable

Windfall reduction/government pension offsets Some workers do not pay into Social Security.  Pay into other public pension system, i.e. Civil Service Retirement System, in some states; a teacher, police or firefighter pension system  If worker’s only job, not eligible for Social Security Some workers pay into both systems; thus entitled to both.  Social Security designed to replace higher percentage of low-income workers’ pay and smaller percentage of higher income pay  SSA calculation provided benefits to worker as if low wage, while worker collected benefits from another public pension Windfall Elimination Provision (WEP) designed to correct.  Calculation formula modified, results in smaller Social Security benefit Government Pension Offset Rule  A surviving spouse benefit reduced by two-thirds of pension amount TR-SSNINE-PPT-1P 12/1412

Issues  The break-even question  Coordinating Social Security benefits  Ex-spousal benefits  Survivor benefit TR-SSNINE-PPT-1P 12/1413

Q #6 When should I begin taking benefits? The break-even question  Example: John’s benefit at age 62 is $1,320/month; at 66, it is $1,810/month. –John’s break-even age is 76 years, 6 months. He will receive the same total amount in benefits either way by that point. –The probability of John at age 66 reaching the break-even age is 73.8%. 1 –Analysis does not include COLAs or taxation of benefits.  Other considerations (beyond the break-even age): –Health of John (and spouse) may prevent delaying retirement. –John may need to continue working to get 35 years of earnings. –Working during early retirement may be beneficial.  See ssa.gov retirement estimator for customized projections. TR-SSNINE-PPT-1P 12/ Source: ssa.gov, based on “Period Life Table,” 2007

Q #7 How does Social Security work for my spouse? Coordinating Social Security benefits  Spouses have dual entitlements to benefits. –Larger of 100% of their own or up to 50% of spouse’s PIA  Primary worker must apply for benefits (but can suspend). –File and suspend: Primary worker files for benefits, but immediately suspends receipt; allows his/her spouse to claim a spousal benefit, while primary worker lets own benefits grow. –Cannot be done online. May want to bring Social Security Legislative Bulletin that explains file and suspend. –“Spousal Benefits only:” Primary worker files and suspends and spouse files for spousal benefit only. Spouse must be FRA. –No DRCs on spousal benefits after FRA. –Spousal benefits are not limited to low-earning spouse. TR-SSNINE-PPT-1P 12/1415 Source: ssa.gov Technically: When spouse files for spousal benefits, SSA checks to see if she/he has earned benefits on own record. If yes, pays those first. If those benefits are less than spousal benefits, SSA adds the difference to the monthly payment.

Q #8 How does Social Security work for my ex-spouse? A divorced spouse can apply for benefits on an ex-spouse’s work record if:  He/She had been married to the worker for at least 10 years,  He/She had been divorced for at least two years,  And he/she is age 62 or older. A divorced spouse does not have to wait for ex-spouse to file.  A divorced spouse collecting benefits does not prevent his/her ex-spouse’s new spouse from collecting spousal benefits.  If a divorced spouse remarries, he/she collects benefits from the new spouse’s work record. TR-SSNINE-PPT-1P 12/1416 Source: ssa.gov

Q #9 What happens if my spouse dies?  Survivor benefit  Upon death, one time $255 death benefit is paid to: surviving spouse; if none, to eligible child; if none, not paid.  Spouse or ex-spouse: 100% of worker’s benefit at FRA –If taken at age 60 — reduced to 71.5% of FRA benefit –If spouse remarries before age 60, benefit lost  Spouses under age 50 with a child under age 16 can receive 75% up to family maximum.  Spouse may claim survivor benefit at age 60, then his/her own benefit at age 62 to 70, without reduction. TR-SSNINE-PPT-1P 12/1417 Source: ssa.gov

Have more questions?  Social Security is a complex and evolving program with many moving parts.  To learn more read: Introduction To Social Security.  If you are contemplating the best strategy to maximize your payout, read: Retiring Early: How Long Should You Wait?  Available at ssa.gov. TR-SSNINE-PPT-1P 12/1418

Important information The information contained in this presentation is as of Nov. 10, 2014, (unless otherwise noted) and is subject to change without notice. The information presented is the most current available. There is no guarantee the outcomes mentioned within this presentation will be realized. All data provided by Invesco unless otherwise noted. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation. The opinions in this piece are not necessarily those of Invesco. Information in this report does not pertain to any Invesco product and is not a solicitation for any product. The tax information presented is based on federal income tax law. State and local income tax laws may differ from federal income tax law. The information in this presentation does not constitute tax advice. Please contact your tax advisor for your particular tax situation TR-SSNINE-PPT-1P 12/1419 Invesco Distributors, Inc.

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