2. ©2015, College for Financial Planning, all rights reserved. Session 13 Retirement & Selecting Optimum Social Security Benefit CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Financial Plan Development Course

3. Start Recording This class is being recorded so you may review it at a future time. 13-2

4. Retirement Basics Current 4-legged stool 1. Social Security and other government resources 2. Employer-provided plans 3. Employment during retirement 4. Personal assets Lifestyle choices related to controlling spending patterns may need to be incorporated into concepts for clients. 13-3

5. OASDI 3 main components of Old Age, Survivors, and Disability Insurance: 1. Retirement (old age) 2. Disability (disability of wage earner) 3. Survivorship (death of wage earner) 13-4

6. Average Indexed Monthly Earnings (AIME) Step 1 Inflation adjustment of every year you had earnings—base year is year you attain age 60 Step 2 Compute lifetime average earnings— looking at best 35 years after inflation adjustment even if some are at zero—e.g., worked for a few years for a state and not covered under Social Security Step 3 Average Indexed Monthly Earnings Used to create PIA 13-5

7. Results of PIA Formula Source: Czarnowski 3/19/2014 13-6

8. Full Retirement Age (FRA) BornFull Retirement AgeAge 62 Benefit Before 19386580% 1938-194265 plus monthly adjustment75-80% 1943-19546675% 1955-195966 plus monthly adjustment70-75% After 19606770% 13-7

9. Benefit Adjustments Due to Age Primary Benefit is based on PIA at full retirement age (FRA). Persons beginning benefits prior to FRA will have benefits permanently reduced: o By 5/9 of 1% per month for the first 36 months=20% reduction. o Plus an additional reduction of 5/12 of 1% per month over the remaining months. o FRA at 66=25% reduction at 62. Persons beginning benefits after FRA, until age 70, delayed retirement credit (DRC)=annual 8% benefit increase or monthly.666% benefit increase—FRA at 66 = 132% increase at 70. 13-8

10. Benefit Adjustments Due to Age Spousal benefit is 50% of spouse’s PIA at full retirement age (FRA). Persons beginning benefits prior to FRA will have benefits permanently reduced: o By 25/36 of 1% per month for the first 36 months=25%. o Plus an additional reduction of 5/12 of 1% per month over the remaining months (5% for 12 months). o FRA at 66 = 35% of spouse’s PIA. Spousal benefit does not include DRC. Survivor benefit=100% with DRC. 13-9

11. Benefit Adjustment Due to Age Age Wage earner— retirement benefit will be reduced to Spouse— retirement benefit will be reduced to 6275%35% 6380%37.5% 6486.7%41.7% 6593.3%45.8% 66100%50% 70132%50% Source: Social Security Administration (www.socialsecurity.gov/retirement/1943.html) 13-10

12. Social Security Benefit Review Benefits will be paid to: RetirementDisabilityDeath Worker, under FRAReduced PIA100% of PIAN/A Worker, FRA & over100% of PIADisability benefits cease; retirement benefits begin N/A Spouse, age 60 or 61No benefit 100% of PIA, reduced Spouse, age 62 to FRA50% of PIA, reduced 100% of PIA, reduced Spouse, FRA or older 50% of PIA 100% of PIA Spouse, any age, caring for child under age 16 or disabled 50% of PIA (subject to family maximum) 75% of PIA, reduced (worker was currently insured) Unmarried child under age 18 (19 if in high school) or any age if disabled 50% of PIA (subject to family maximum) 75% of PIA, reduced (worker was currently insured) 13-11

13. Benefit Reductions Due to Earnings AgeYou will lose Amount (2014) Prior to year of FRA $1 in benefits for every $2 of earnings above $15,480 Year you reach FRA $1 in benefits for every $3 of earnings above $41,400 After reaching FRA No benefit reductionUnlimited 13-12

14. Retirement Earnings Test Example At FRA, Social Security will review what you received, and perform an “Adjustment to the Reduction Factor” (ARF) and adjust your payments accordingly. (Landis) ItemAmount Total Social Security benefits prior to FRA $20,000 Earnings$41,080 Social Security earnings limit (2014)  $15,480 Excess earnings$25,600 Reduction in Social Security benefits (50% of excess earnings)  $12,800 Net Social Security benefits$ 7,200 13-13

15. Income Tax on Social Security Benefits Threshold income: joint filers Threshold income: single filers Percent of Social Security retirement benefit subject to income tax Less than $32,000Less than $25,000None $32,000 to $44,000$25,000 to $34,000Up to 50% Greater than $44,000Greater than $34,000Up to 85% 13-14

16. Income Tax on Social Security Benefits Thresholds are arrived at by using “provisional income.” Main components of provisional income are: AGI Tax-exempt interest income (muni bonds) One-half of OASDI benefits 13-15

17. Income Tax on Social Security Benefits Threshold income: joint filers Threshold income: single filers Percent of Social Security retirement benefit subject to income tax Less than $32,000Less than $25,000None $32,000 to $44,000$25,000 to $34,000Up to 50% Greater than $44,000Greater than $34,000Up to 85% 13-16

18. Dowler Social Security $335,183 difference in today’s dollars! 13-17

19. Illustration of Impact on Retirement Success Increase from 69% to 77% confidence if file and suspend! It’s a big deal! So why aren’t we using file and suspend and staying with age 70? 13-18

20. 13-19

21. Social Security Quick Calculator Great to do with clients if you don’t have their benefit info! Information You Submitted Date of birth: 6/15/1952 Current earnings:$117,000 Benefit in year 2014 dollars Retirement Benefit Estimates Retirement ageMonthly benefit amount 1 62 and 1 month in 2014$1,723 66 in 2018$2,371 70 in 2022$3,236 1 Assumes no future increases in prices or earnings. 13-20

22. Selecting Optimum Social Security Benefit Key Ages for Beginning Benefits Age 62—($1,723) o Do over—stop & refund within 12 months o Voluntary suspension at FRA o Reduce AIME o Benefit reduced due to age—75% with FRA at 66 o Benefit reduced due to earned income o Deemed filing for benefit based upon own earnings & spouse’s earning with highest benefit paid FRA—66 ($2,371) o Receive 100% of PIA o No reduction due to earned income o New options—file & suspend and restricted application Age 70 ($3,236) o Receive 8% annual DRC o Upon death, spouse (or ex-spouse) could receive DRC 13-21

23. Selecting Optimum Social Security Benefit Compare benefits paid until age 80 Benefit at 62 1 month = $1,723 = $372,168 at 80 Benefit at 66 (FRA) = $2,371 = $398,328 at 80 Benefit at 70 = $3,236 = $388,320 at 80 70------------------80--------------90+ 13-22

24. Life Expectancy Problems using SSA life expectancy Ralph Pulls oxygen tank to get to SS office, heavy smoker, alcoholic, morbidly obese, diabetic, high blood pressure, irregular heartbeat, sedentary lifestyle, etc. SSA life expectancy=83 Interactive calculator=Is he still alive? Alice Slim trim, almost professional level tennis player, gym 5 times week, frequent 5ks, 10ks, marathons, never smoked, rarely drinks SSA life expectancy=86 Interactive calculator=100+ 13-23

25. Interactive Live Expectancy Calculators Living to 100 Life Expectancy Calculator: https://www.livingto100.com/ Lifespan Calculator: http://media.nmfn.com/tnetwork/lifespan/#0 Life Expectancy Calculator: http://www.peterrussell.com/Odds/VirtualAge.php How long will I live?: http://gosset.wharton.upenn.edu/mortality/perl/CalcF orm.html 13-24

26. Selecting Optimum Social Security Benefit for Single Income need may dictate when to start Short life expectancy, cumulative benefits leans toward starting as soon as possible Long life expectancy, cumulative benefits lean toward delaying start of benefits Meyer & Reichenstein also argue that delaying the benefit would increase the life of a portfolio worth $500,000 or $700,000 13-25

27. Selecting Optimum Social Security Benefit for Single Life of portfolio about the same with life expectancy around age 80 Lower level of wealth increases importance of choosing correct age to start Social Security (Source: Reichenstein, W. & Meyer, W. (2011). Social Security Strategies.) Portfolio 1 with $500,000 delaying to age 70 adds 15 years to life of portfolio Portfolio 2 with $700,000 delaying to age 70 adds 6 years to life of portfolio Portfolio 3 with $1,000,000 delaying to age 70 adds 3 years to life of portfolio 13-26

28. Selecting Optimum Social Security Benefit: Couple Definition of spouse On June 26, 2013, the Supreme Court ruled that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional. Therefore, Social Security no longer is prevented from recognizing same-sex marriages for purposes of determining entitlement to or eligibility for benefits. Social Security is now processing some retirement, surviving spouse and lump-sum death payment claims for same-sex couples, and paying benefits where they are due. Source: SSA Web site—view FAQs—Same Sex Couples https://faq.ssa.gov/link/portal/34011/34019/ArticleFolder/407/Same-Sex-Couples 13-27

29. Selecting Optimum Social Security Benefit: Couple Both spouses can claim benefit based on their own earnings record One spouse with much higher PIA, other spouse can claim spousal benefit = 50% o Benefit reduced prior to FRA (could start at 62) 1 st 36 months—25/36 of 1%/month (25% reduction) Additional months—5/12 of 1%/month (5% reduction next 12 months) If FRA at 66, benefit at 62 = 35% of spouse’s PIA 13-28

30. Selecting Optimum Social Security Benefit: Couple John’s PIA = $1,000; Marsha’s options for spouse benefit: = 50.0% of PIA = $500 Age 66 FRA 12 months early = 45.8% of PIA = $458 Age 65 24 months early = 41.7% of PIA = $417 Age 64 48 months early = 35.0% of PIA = $350 Age 62 13-29

31. Selecting Optimum Social Security Benefit: Couple To file spousal benefit, other spouse must have filed At FRA o higher PIA spouse could use file & suspend to allow other spouse to claim spouse’s benefit, & then add 8%/year to personal benefit until age 70 o either spouse, but only one, could use “restricted application” taking spousal benefit to allow personal benefit to increase 8% year to age 70 Death of first, survivor gets highest benefit including any DRC deceased had! 13-30

32. Selecting Optimum Social Security Benefit: Couple Rule for Primary Wage Earner Base choice on last-to-die life expectancy (Meyer & Reichenstein) Assume Ralph and Alice are same age and married. Ralph has a much higher PIA—even though his life expectancy may be short, he should base his benefit on Alice’s long life expectancy. Ralph takes benefit at age 70 = 132% of PIA (if PIA had been $2,000=$2,640 at 70). Assume Ralph used file & suspend at FRA so that Alice could begin spouse benefit at FRA = 50% of Ralph’s PIA = $2,000 x 50% = $1,000. Upon Ralph’s death in early 70s, Alice begins receiving benefit Ralph was receiving (i.e., $2,640 plus COLA adjustments). 13-31

33. Selecting Optimum Social Security Benefit: Couple Rule for Lower Wage Earner Base choice on first-to-die life expectancy (Meyer & Reichenstein) Assume George and Myrtle are similarly healthy as Ralph & Alice, but Myrtle is four years younger than George. George’s PIA = $2,000. At FRA (66) George files & suspends. Myrtle could then file for spouse benefit = 35% of $2,000 = $700. George waits until age 70 and begins receiving $2,640. Upon George’s death in early 70s, Myrtle would begin receiving $2,640 + COLA for the rest of her life. 13-32

34. Divorced Spouse Requirements o Married at least 10 years and divorced at least two years (waived if worker was eligible for benefits prior to divorce) o Both parties must be at least 62—age reduction applies to benefits prior to FRA o Unmarried, even if ex-spouse has remarried o Person can begin receiving benefits on ex-spouse’s earnings even if the ex has not filed o Not subject to family maximum & does not limit benefits for ex-spouse and/or the ex-spouse’s new family Married more than once (must be for at least 10 years) can choose which would pay the most Survivor benefit—as long as not remarried before age 60 13-33

35. Just Like Social Security Understand employer plans Explore distribution strategies Become good at creating Excel analysis with various alternatives (e.g., reverse mortgages, immediate annuities, integration of life insurance as alternative to joint and survivor pensions). 13-34

36. Employer-Provided Plans: Details to Master Rules of the plan before retirement: Vesting Matching Type of contributions – pre-tax and post- tax Investment options Use of company stock Restrictions and valuation of company stock Rules concerning concentrations and when it can be diversified Restrictions based on company position, hours, etc. Loan provisions 13-35

37. Employer-Provided Plans: Details to Master Rules of the plan in year preceding and year of retirement: Loans at time of retirement and pre- or post-payment Distribution options Investment options after retirement Restrictions on changes after retirement Valuation of company stock dates and implications Impact of elections in year prior to retirement Important dates and deadlines Nonqualified plans need special attention to detail 13-36

38. Next Class Estate Planning & Legal Documents Read Chapter 7 Plan Development boxes #26, #27, #28, #29, & #30 13-37

39. ©2015, College for Financial Planning, all rights reserved. Session 13 End of slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Financial Plan Development Course