Webinar Slides Flashcards

1
Q

Your client works for Beta Corp and earns $150,000. The Social Security taxable wage base for the year is $100,000. How much Social Security and Medicare tax will your client pay in the current year? A. $11,475 B. $9,300 C. $8,375 D. $6,200

A

150000x 1.45 plus 100,000 x 6.2 = 8375

Understand 6.2 = Taxable Base….(SS)

1.45 = All Earnings…. (Medicare)

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2
Q

All the following statements concerning Social Security are correct EXCEPT: A. There are two Social Security and two Medicare trust funds B. Earn $10,000 for the current year and you will earn four coverage credits. C. A worker with 35 coverage credits is eligible for retirement benefits at age 62. D. Approximately 96% of working-age Americans are covered by the Social Security system

A

C. A worker with 35 coverage credits is eligible for retirement benefits at age 62 (40 Coverage Credits)

A : 2 SS Funds. Old age and survivor / Disability

2 Med Funds Part A and Part B B: True D: True

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3
Q

• The PIA for those who first become eligible in 2016 – 90 percent of the first $856 of his/her average indexed monthly earnings, plus – 32 percent of his/her average indexed monthly earnings over $856 and through $5,157, plus – 15 percent of his/her average indexed monthly earnings over $5,157

Provides a safety net –

Social Security benefits discriminate in favor of […] paid workers

– The more […] the lower the percentage of final salary that is replaced by Social Security.

– Illustration:

Single person at full retirement age earning $18,800 in 2013 receives benefit replacing 55% of income, earn the taxable wage base each year ($113,700 in 2013) and replace 25% of income.

A

Calculation will not be tested.

Understand Concept : Replacement Ratio:

– Social Security benefits discriminate in favor of lower paid workers –

The more affluent the lower the percentage of final salary that is replaced by Social Security.

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4
Q

Other Retirement Benefits • Workers with fully insured status once they claim, then –

Nonworking spouses 62 or older –

Spouse of any age if caring for child under 16 –

Dependent, unmarried children under 18 (under 20 if in secondary school) –

18 or older and disabled from a disability that started before age 22. –

Family maximum may apply if 3 or more benefits –

Unmarried divorced spouse if marriage lasted 10 years

A

spouses 62 or older

any age if caring for child under 16

unmarried children under 18

Family maximum may apply if 3 or more benefits taken

  • Unmarried divorced spouse if marriage lasted 10 years*
    • Does not impact the Family Maximum*
    • Worker does not have to file first.*
    • Will lose benefits if remarried -*
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5
Q

Social Security Statement • Paper statements –

Stopped sending out statements in 2011 –

Restated annual statements at age 60 –

Now send every five years from age 25—unless enroll for online statements •

Online benefit statement – “My Social Security” – Same information as paper statement

A

SS Tried to get people online …

Need to check every 2-3 years …

Same info as paper

Annual Statements if over 60

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6
Q

Statement information –

Full retirement age –

Earnings record –

Benefit estimates at 62,

Full retirement, 70 •

Links to information on – Windfall elimination/government offset – Future of Social Security – Considerations when making choices

A

Benefits at FRA

Benefits at 62 …earliest

Benefits at 70… latest

LINKS…Windfall Elimination / Gov;t offset

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7
Q

• Social Security

– For 1 in 5 retirees SS is only source of income

– For 1 in 3 retirees SS is 90% of income

– For 2 in 3 retirees SS is more than 50% of income.

– Ratios not expected to change over time

– As retirees age they become more dependent

– Widows very dependent on SS

A

• Social Security

– For 1 in 5 retirees SS is only source of income

– For 1 in 3 retirees SS is 90% of income

– For 2 in 3 retirees SS is more than 50% of income.

– Ratios not expected to change over time - no change in trends are currently noticed

– As retirees age they become more dependent - Assets are being spent down …decumulation

– Widows very dependent on SS…Surviving spouse often seem to have tougher financial times.

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8
Q

Theories of why people claim early

– Financial ignorance

– Social norms

– Those with DB plans claim when they retire—those with a DC plan can choose larger

withdrawals to support deferral

– Fear of Social Security failing

– Break-even, concerned about dying young

A

Theories of why people claim early

– Financial ignorance - More literate tend to wait longer

– Social norms - Anchor points —Seems like the thing to do..duh I’m 65!!!

– Those with DB plans claim when they retire—those with a DC plan can choose larger withdrawals to support deferral

–Less flexibility with DB Plans than DC plans…DB doesn’t start til 65 for example.

Fear of Social Security failing - Stupid. Will change but not be gone

– Break-even, concerned about dying young - Failure to understand Insurance against longevity concept.

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9
Q

Benefit Calculation

  • Use PIA formula in year attain age 62
  • Formula uses AIME (average indexed monthly earnings)

– Earnings prior to age 60 are indexed for inflation

– Earnings are capped at the taxable wage base

– Considers the highest 35 years of earnings

(less than 35 years of work—zero’s in calculation of average earnings

A

Benefit Calculation

  • Use PIA formula in year attain age 62 regardless of when claimed
  • Formula uses AIME (average indexed monthly earnings)

Earnings prior to age 60 are indexed for inflation

– Earnings are capped at the taxable wage base

– Considers the highest 35 years of earnings

(less than 35 years of work—zero’s in calculation of average earnings

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10
Q

Full Retirement Age - determined by Birth Date

• 1943 – 1954 66

• 1955 to 1959 +2 months each year

• 1960 and later 67

A

Full Retirement Age

  • 1943 – 1954 66 (1943 plus 11 = 1954)
  • 1955 to 1959 +2 months each year6
  • 1960 and later 67 (Sixty - Sixty Seven)
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11
Q

What is your client’s full retirement age if she was born August 11, 1957?

A. 66

B. 66

C. 66 and 6 months

D. 66 and 10 months

A

What is your client’s full retirement age (Get FULL PIA) if she was born August 11, 1957? 1960 = 67 1954 66 +

1955 2/ mo

1956 4/ mo

1957 6/ mo

A. 66

B. 66

C. 66 and 6 months

D. 66 and 10 months

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12
Q

Claiming Workers Benefits

  • Must apply to Social Security Administration
  • Earliest claiming age is 62
  • Actuarial reduction prior to full retirement age
  • Actuarial increase after full retirement but only to age 70
  • Wages for continued work always affects benefit calculations
  • Withdrawal of application

– Can undo claiming decision for worker’s benefits (not survivors)

– Only can request once

– Must pay back all workers and any other benefits (no interest)

– Must pay back within 12 months of the first month for which the retiree is entitled to

benefits

A

Claiming Workers Benefits

  • Must apply to Social Security Administration
  • Earliest claiming age is 62
  • Actuarial reduction prior to full retirement age
  • Actuarial increase after full retirement but only to age 70
  • Wages for continued work always affects benefit calculations

• Withdrawal of application

– Can undo claiming decision for worker’s benefits (not survivors)

Only can request once

Must pay back all workers and any other benefits (no interest)

Must pay back within 12 months of the first month for which the retiree is entitled to benefits

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13
Q

• Reduction factor

– Benefit is reduced 5/9 of one percent of PIA for each month of retirement before full retirement age up to 36 months

– If number exceeds 36 the benefit is further reduced 5/12 of one percent of the PIA per month

• Example

– Julie claims benefits four years early. She will have a 25% reduction in her PIA.

– (5/9 x 36 = 20) + (5/12 x 12 = 5) (total 25%)

– PIA of $1,500 would be $1,125 at age 62

A

• Reduction factor

– Benefit is reduced 5/9 of one percent of PIA for each month of retirement before full retirement age up to 36 months

– If number exceeds 36 the benefit is further reduced 5/12 of one percent of the PIA ====20% Reduction per month

18mo’s = 10%

• Example

– Julie claims benefits four years early. She will have a 25% reduction in her PIA.

– (5/9 x 36 = 20) + (5/12 x 12 = 5) (total 25%)

– PIA of $1,500 would be $1,125 at age 62

18 = 10

18 = 10

12 = 5

12 = 5

Max is 70% Reduction

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14
Q

Your single client Nina has a full retirement age of 67. Her PIA is $2,500. She loses her job and is forced to claim benefits at age 63 and 3 months. Her monthly benefit will be:

A. $1,750

B. $1,875

C. $1,906

D. $2,500

A

Your single client Nina has a full retirement age of 67. Her PIA is $2,500. She loses her

job and is forced to claim benefits at age 63 and 3 months. Her monthly benefit will be:

A. $1,750

B. $1,875

C. $1,906

D. $2,500

5/9 36mo = 20

5/12 9mo = 3.75

76.25% of 2500 = 1906

66.12 minus 63.3 equals 3yrs 9 months

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15
Q

Delayed Claiming

  • Claiming after full retirement age increases benefits by 2/3 of 1% for each month of deferral up to age 70 (8% a year)
  • Example: With a full retirement age of 66, an individual waiting until age 70 to claim earns 132 percent of the PIA
  • There is no advantage to further delay benefits beyond age 70!
A

Delayed Claiming Fast Dirty 8% per Year

Claiming after full retirement age increases benefits by 2/3 of 1% for each month of deferral up to age 70 (8% a year)

  • Example: With a full retirement age of 66, an individual waiting until age 70 to claim earns 132 percent of the PIA
  • There is no advantage to further delay benefits beyond age 70!
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16
Q

Your married client Mick delays claiming Social Security 18 months beyond his full retirement age. If his monthly PIA was $2,000 he will receive an adjusted PIA of:

A. $2,000

B. $2,160

C. $2,240

D. $2,320

A

Your married client Mick delays claiming Social Security 18 months beyond his full retirement age. If his monthly PIA was $2,000 he will receive an adjusted PIA of:

A. $2,000

B. $2,160

C. $2,240

D. $2,320

8% per year = 12 months and 6 month = 4% = 12% more

2000 x 1.12 =

$2240

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17
Q

• COLAs

– COLAS are based on the 3rd quarter to 3rd quarter change in the average CPI-W

– Effective in December and paid in January

– PIA formula used for the year in which an individual attains age 62—deferring past

age 62 means receiving COLA for each year of deferral.

• Medicare premiums and SS COLA

– The Medicare premium increase cannot be greater than the COLA that a client

receives

– No SS COLA no increase allowed for Medicare premiums

– Defer SS and you do not get that protection (2016 premium is $121.80—if on SS in

2015 pay $104.90

A

• COLAs

– COLAS are based on the 3rd quarter to 3rd quarter change in the average CPI-W

– Effective in December and paid in January

PIA formula used for the year in which an individual attains age 62—deferring past age 62 means receiving COLA for each year of deferral.

• Medicare premiums and SS COLA

The Medicare premium increase cannot be greater than the COLA that a client receives

– No SS COLA no increase allowed for Medicare premiums

– Defer SS and you do not get that protection (2016 premium is $121.80—if on SS in

2015 pay $104.90

CPI - E Better for seniors in future….currently would increase across the board because of Health Care……

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18
Q

Impact of Deferring Past 62

  • Each year of delay means approximately a 7 to 8 percent increase
  • A 4-year delay increases monthly benefits by about one-third
  • An 8-year delay (age 62 to age 70) increases monthly

benefits by 76 percent

• When spousal benefits paid replacement ratio is drastic

– Over 30% replacement at age 62 and over 60% replacement at 70

• Benefits also receive COLA and increase for additional wages

A

Impact of Deferring Past 62

  • Each year of delay means approximately a 7 to 8 percent increase
  • A 4-year delay increases monthly benefits by about one-third
  • An 8-year delay (age 62 to age 70) increases monthly

benefits by 76 percent

• When spousal benefits paid replacement ratio is drastic

– Over 30% replacement at age 62 and over 60% replacement at 70

• Benefits also receive COLA and increase for additional wages

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19
Q

DO NOT MEMORIZE

Maximum Benefit 2015

  • $1,997 a month ($23,967 a year) at 62
  • $2,663 ($31,965 a year) at age 66
  • $3,515 ($42,182 a year) at age 70
  • Couple both earning maximum benefit
A

Maximum Benefit 2015

  • $1,997 a month ($23,967 a year) at 62
  • $2,663 ($31,965 a year) at age 66
  • $3,515 ($42,182 a year) at age 70
  • Couple both earning maximum benefit
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20
Q

Windfall Elimination

• Social Security PIA provides a 90% on the lowest wage—intended to provide a safety

net

• Individual who has a working career with 25 years of noncovered employment and 10

years of covered employment will appear to be low income

• Formula is adjusted if noncovered employment

– 90 percent drops to 40 percent if less than 20 years of covered service

– No reduction if 30 years of covered service

– Modified formula if 20 to 30 years of service

A

Windfall Elimination – WORKERS BENEFITS

FORMULA IS NOT NECESSARY FOR THE EXAM

  • Social Security PIA provides a 90% on the lowest wage—intended to provide a safety net
  • Individual who has a working career with 25 years of noncovered employment and 10 years of covered employment will appear to be low income
  • Formula is adjusted if noncovered employment

– 90 percent drops to 40 percent if less than 20 years of covered service

No reduction if 30 years of covered service

– Modified formula if 20 to 30 years of service

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21
Q
  • 2/3 of the government-pension reduces spousal and widow benefits dollar-for-dollar
  • Example: Katie claims worker’s benefits at full retirement age and receives $12,000 per

year. Her husband Arthur is a noncovered state employee who receives a $15,000

annual pension from the state.

  • 2/3 of Arthur’s pension is $10,000
  • Arthur would normally be eligible for a $6,000 spousal benefit and a $12,000 survivor

benefit

• With the $10,000 offset he is not entitled to any spousal benefit and a $2,000 a year

survivor benefit.

A

ON EXAM

• 2/3 of the government-pension reduces *spousal and widow* benefits dollar-for-dollar

  • Example: Katie claims worker’s benefits at full retirement age and receives $12,000 per year. Her husband Arthur is a noncovered state employee who receives a $15,000 annual pension from the state.
  • 2/3 of Arthur’s pension is $10,000
  • Arthur would normally be eligible for a $6,000 spousal benefit and a $12,000 survivor benefit
  • With the $10,000 offset he is not entitled to any spousal benefit and a $2,000 a year survivor benefit.
22
Q

• Born 1st or 2nd day of month

– Deemed to attain age on day prior to birthday (born on Jan. 1—treated as born in prior year)

• Juan is born January 1, 1957—his full retirement age is 66 and 4 months (1956

birthdate) and not 66 and 6 months

– Can only receive benefit for month if eligible for whole

month (only can retire at 62 if born on the 2nd. Others

wait until following month—62 and one month)

A

• Born 1st or 2nd day of month

– Deemed to attain age on day prior to birthday (born on Jan. 1—treated as born in prior year)

• Juan is born January 1, 1957—his full retirement age is 66 and 4 months (1956

birthdate) and not 66 and 6 months

– Can only receive benefit for month if eligible for whole

month (only can retire at 62 if born on the 2nd. Others

wait until following month—62 and one month)

To Get Benefits one must be at age the ENTIRE Month.

23
Q

DEFINITE TEST ITEM

• Provisional income is equal to AGI plus ½ of the Social Security income, plus other nontaxable interest (such as interest on tax-exempt bonds

A

DEFINITE TEST ITEM

• Provisional income is equal to AGI plus ½ of the Social Security income, plus other nontaxable interest (such as interest on tax-exempt bonds

24
Q

Tax Torpedo

• Who pays taxes on Social Security

– 68% no tax

– 16% fully phased in (pay tax on 85%)

– 16% partially phased in

  • When partially phased in each dollar of taxable income (401k withdrawals) results in a higher percentage of Social Security taxed
  • Reverse tax torpedo – Minimize effects by taking taxable income before Social Security begins, which increases SS and reduces the taxable income required later (smaller percentage of SS taxed).
A

Tax Torpedo

• Who pays taxes on Social Security

– 68% no tax

– 16% fully phased in (pay tax on 85%)

– 16% partially phased in

  • When partially phased in each dollar of taxable income (401k withdrawals) results in a higher percentage of Social Security taxed
  • Reverse tax torpedo – Minimize effects by taking taxable income before Social Security begins, which increases SS and reduces the taxable income required later (smaller percentage of SS taxed).

RMD’s and deferred comp and 401K try to spend DOWN before taking Social Security.

25
Q

WILL NOT TEST THRESHHOLD AMOUNTS…..

EARNINGS TEST ONLY APPLIES IF YOU ARE EARNINBG INCOME AND RECIEVING SOCIAL SECURITY PRIOR TO YOUR FRA.

  • Applies prior to full retirement age (FRA)
  • Only applies to current earnings from employment (no pension/deferred compensation/investment income)
  • Reduces benefits $1 for every $2 over the threshold ($15,480 in 2014)
  • Retire in middle of year and can earn up to 1/12 of limit times number of months before claiming
  • Higher threshold ($41,400 in 2014) and $1 to 3 reduction in year of attainment of full

retirement age

• Earnings test is a forced suspension of benefits–Benefit recomputed at FRA

A

WILL NOT TEST THRESHHOLD AMOUNTS

  • Applies prior to full retirement age (FRA)
  • Only applies to current earnings from employment (no pension/deferred compensation/investment income)
  • Reduces benefits $1 for every $2 over the threshold ($15,480 in 2014)
  • Retire in middle of year and can earn up to 1/12 of limit times number of months before claiming
  • Higher threshold ($41,400 in 2014) and $1 to 3 reduction in year of attainment of full retirement age
  • Earnings test is a forced suspension of benefits–Benefit recomputed at FRA
26
Q

Spousal Benefits _ TRIGGER (NO LONGER FILE AND SUSPEND)

Once a worker has claimed benefits, a spouse is entitled 50% of WORKERS PIA (WHICH IS CALCULATED AT 62 REGARDLESS OF WHEN BENEFITS ARE TAKEN) at SPOUSES full retirement age

(THERE IS NO INCREASE IN BENEFITS PAST FRA IN SPOUSAL BENEFITS)(NO DEFERRAL CREDITS

  • Benefits can begin early as age 62, but again will be subject to an early-retirement reduction based on the spouse’s age
  • Benefits subject to earnings limit restrictions—earnings by worker or spouse
  • Spousal benefit does not increase for deferral beyond full retirement age

MUST KNOW FOR EXAM

Early retirement reduction 25/36 for each month up to 36 then 5/12 additional months

A

Spousal Benefits

  • Once a worker has claimed benefits, a spouse is entitled 50% of PIA at full retirement age
  • Benefits can begin early as age 62, but again will be subject to an early-retirement reduction based on the spouse’s age
  • Benefits subject to earnings limit restrictions—earnings by worker or spouse count
  • Spousal benefit does not increase for deferral beyond full retirement age
  • Early retirement reduction 25/36 for each month up to 36 then 5/12 additional months
27
Q

Your clients have currently married for 35 years. Bob never worked outside the home.

Heide has a PIA of $2,000 a month and defers claiming until age 70. Bob is a bit younger

and will be 62 when Heide claims at age 70. How much per month is Bob’s Social

Security spousal benefit?

A. $1,320

B. $1,000

C. $700

D. $500

A

Your clients have currently married for 35 years. Bob never worked outside the home.

Heide has a PIA of $2,000 a month and defers claiming until age 70. Bob is a bit younger

and will be 62 when Heide claims at age 70. How much per month is Bob’s Social

Security spousal benefit?

A. $1,320

B. $1,000

C. $700

D. $500

Assume Bob’s FRA is 66

25/36 X 36 + 5/12 X 12 = 30%

Hence - $1000 x .70 = $700

28
Q

DO NOT IMPACT SPOUSAL OR WORKER BENEFITS

Survivor receives larger of their own benefit or the survivor benefit

• Full survivor benefit available at full retirement age

Claim as early as age 60—subject to reduction factor and earnings test

– No increase in benefits past full retirement age

• Survivor benefit is generally the benefit that the other spouse was actually receiving

– Death before attaining full retirement age and before claiming benefits and receive PIA

– Death after full retirement age and before claiming and receive PIA plus deferral credits to the date of death (Example: worker dies at 67 and full retirement age was 66 spouse receives 108% of PIA)

• Survivor benefit and workers are separate benefits

Worker Can switch back to workers benefits if it makes sense.

A
  • Survivor receives larger of their own benefit or the survivor benefit
  • Full survivor benefit available at full retirement age

– Claim as early as age 60—subject to reduction factor and earnings test

– No increase in benefits past full retirement age

• Survivor benefit is generally the benefit that the other spouse was actually receiving

– Death before attaining full retirement age and before claiming benefits and receive PIA

– Death after full retirement age and before claiming and receive PIA plus deferral credits to the date of death (Example: worker dies at 67 and full retirement age was 66 spouse receives 108% of PIA)

• Survivor benefit and workers are separate benefits

29
Q

Divorced Spouse’s Benefits

• Divorced spouses (married for at least 10 years) may be eligible for spousal retirement

and widower benefits based on former marriage

  • Divorced spousal benefits do NOT effect benefits of worker and current family
  • Divorced spousal retirement benefits can begin as early as age 62, even if the former spouse has not claimed benefits

– As long as the worker is eligible for retirement benefits

– The couple has been divorced for at least 2 years

  • Must be unmarried to claim spousal benefit
  • Can still be eligible for survivor benefit if remarried after age 60.
A

Divorced Spouse’s Benefits

• Divorced spouses (married for at least 10 years) may be eligible for spousal retirement

and widower benefits based on former marriage

  • Divorced spousal benefits do NOT effect benefits of worker and current family
  • Divorced spousal retirement benefits can begin as early as age 62, even if the former

spouse has not claimed benefits

– As long as the worker is eligible for retirement benefits

– The couple has been divorced for at least 2 years

  • Must be unmarried to claim spousal benefit
  • Can still be eligible for survivor benefit if remarried after age 60.
30
Q

Decision Framework Should Consider Possibility of Change

  • Decisions could be impacted by future changes
  • Consult the annual Trustees report
  • Discuss possibilities like means testing
  • Consider how grandfathering provisions might work
A

Decision Framework Should Consider Possibility of Change

  • Decisions could be impacted by future changes
  • Consult the annual Trustees report
  • Discuss possibilities like means testing
  • Consider how grandfathering provisions might work
31
Q

Summary of Social Security Changes

  • Core benefits remain unchanged
  • New rules eliminate two opportunities

– A spouse may no longer claim a spousal benefit before the worker begins to receive benefits (file and suspend)

– Married and divorced individuals will no longer have the option to claim a spousal benefit and subsequently change it to a worker’s benefit (claim now claim more

later)

• Widow can still choose between worker’s benefit and survivor benefit

A

Summary of Social Security Changes

  • Core benefits remain unchanged
  • New rules eliminate two opportunities

– A spouse may no longer claim a spousal benefit before the worker begins to receive benefits (file and suspend)

– Married and divorced individuals will no longer have the option to claim a spousal benefit and subsequently change it to a worker’s benefit (claim now claim more later)

• Widow can still choose between worker’s benefit and survivor benefit

32
Q

Grandfather Rules

• Application of grandfather rules

– Everyone who has already chosen these strategies are fully grandfathered

– Option to file and suspend ends May 1, 2016

– Restricted filing continues for those age 62 in 2015 or earlier

A

Grandfather Rules

• Application of grandfather rules

– Everyone who has already chosen these strategies are fully grandfathered

– Option to file and suspend ends May 1, 2016

– Restricted filing continues for those age 62 in 2015 or earlier

33
Q

Application Example

• John is age 65 on January 1, 2016 and his wife Mary is 65 on March 1, 2016. John’s PIA

is the maximum benefit and Mary’s is $2000

• Under the old planning strategies

– John would file and suspend when he attained 66

– Mary would do a restricted filing for her spousal benefit when she attained 66

– Both would file for worker’s benefits at age 70

A

Application Example

• John is age 65 on January 1, 2016 and his wife Mary is 65 on March 1, 2016. John’s PIA

is the maximum benefit and Mary’s is $2000

• Under the old planning strategies

– John would file and suspend when he attained 66

– Mary would do a restricted filing for her spousal benefit when she attained 66

– Both would file for worker’s benefits at age 70

34
Q

Application Example (cont.)

• New rules

– This strategy no longer works as John cannot file and suspend since he will not be

age 66 before May 1, 2016

– If both wait to age 70 to receive worker’s benefits they will receive no benefits prior

to this date

– Mary can claim her worker’s benefit at 66, John would do a restricted filing for a

spousal benefit—because he had attained age 62 before 2016

A

Application Example (cont.)

• New rules

– This strategy no longer works as John cannot file and suspend since he will not be

age 66 before May 1, 2016

– If both wait to age 70 to receive worker’s benefits they will receive no benefits prior

to this date

– Mary can claim her worker’s benefit at 66, John would do a restricted filing for a

spousal benefit—because he had attained age 62 before 2016

35
Q

Testing of Social Security Strategies

  • No reference to file and suspend as a way to trigger spousal benefits
  • No reference to claim now claim more later (also called a restricted filing for spousal benefits)
  • No reference to triple dip (spousal/worker/survivor)
  • Still reference to file and suspend as a way to increase benefits

• Still reference to maximizing widow benefits

• Still reference to survivor strategy

A

Testing of Social Security Strategies

  • No reference to file and suspend as a way to trigger spousal benefits
  • No reference to claim now claim more later (also called a restricted filing for spousal benefits)
  • No reference to triple dip (spousal/worker/survivor)
  • Still reference to file and suspend as a way to increase benefits
  • Still reference to maximizing widow benefits
  • Still reference to survivor strategy
36
Q

Voluntary Suspension of Benefits

  • Prior to full retirement age there is mandatory suspension under the earnings test
  • After full retirement age there is voluntary suspension
  • Voluntary suspension results in an increase in benefits

– Somnath is a new client. He is 66 and had claimed Social Security at age 62. He tells you that he doesn’t really need the money and after reading a lot about this he regrets having filed. Somnath can suspend and defer to 70

• Earn deferral credits during suspension period—stop at 66 and start at 70 and increase benefit that was being paid by 32%.

A

Voluntary Suspension of Benefits

  • Prior to full retirement age there is mandatory suspension under the earnings test
  • After full retirement age there is voluntary suspension
  • Voluntary suspension results in an increase in benefits

– Somnath is a new client. He is 66 and had claimed Social Security at age 62. He tells

you that he doesn’t really need the money and after reading a lot about this he

regrets having filed. Somnath can suspend and defer to 70

• Earn deferral credits during suspension period—stop at 66 and start at 70 and increase

benefit that was being paid by 32%.

37
Q

Maximize the Survivor Benefit

  • The Social Security system does not provide actuarial equivalent benefits for married men—because of the calculation of the survivor benefit
  • Married men claiming at 62 are leaving money on the table even if both spouses live an average life expectancy
  • The wife’s survivor benefit rises 7 to 8 percent each year he postpones claiming up to full retirement age and 8 percent for full retirement age to age 70.

– A husband’s later claiming age has a long positive effect on the expected present value of his wife’s survivor benefit.

– If survivor benefits are claimed early (prior to full retirement age), they are reduced.

– Husband with higher benefit with PIA of $2,500 passes on $2,500 a month to lower earning spouse if claim at 66, $1,800 if claim at 62 and $3,300 if claim at 70

A

Maximize the Survivor Benefit

• The Social Security system does not provide actuarial equivalent benefits for married

men—because of the calculation of the survivor benefit

• Married men claiming at 62 are leaving money on the table even if both spouses live

an average life expectancy

• The wife’s survivor benefit rises 7 to 8 percent each year he postpones claiming up to

full retirement age and 8 percent for full retirement age to age 70.

– A husband’s later claiming age has a long positive effect on the expected present

value of his wife’s survivor benefit.

– If survivor benefits are claimed early (prior to full retirement age), they are reduced.

– Husband with higher benefit with PIA of $2,500 passes on $2,500 a month to lower

earning spouse if claim at 66, $1,800 if claim at 62 and $3,300 if claim at 70

38
Q

Widow Case Study

• Wanda is age 60 and sadly her 64 year old husband passed away. She is not currently working but may in the future. Her husband’s PIA was $2,500. Her PIA based on her own wages is $1,200. She has some other resources but money is tight and she’s

anxious to claim SS benefits. What are her options? What do you think she should do?

A

Widow Solution

  • Widow benefits can begin as early as age 60—but they are subject to the earnings test and a benefit reduction
  • If Wanda is desperate for SS benefits she can choose a worker’s benefit at 62 (reduced) and switch to the full widow’s benefit at age 66
  • She can also switch from the widow’s benefit to the worker’s benefit—but given these facts it may not be helpful
39
Q

Practice Question

All of the following statements about claiming Social Security later to increase the portfolio’s longevity strategy are correct EXCEPT

A. The desirability of this strategy increases as the expected returns on investments increase.

B. This strategy works best for those with $200,000 to $700,000 of assets.

C. Claiming Social Security early can cause a tax torpedo.

D. Social Security is generally less expensive than a comparable commercial annuity.

A

Practice Question

All of the following statements about claiming Social Security later to increase the portfolio’s longevity strategy are correct EXCEPT

A. The desirability of this strategy increases as the expected returns on other investments increase. eg getting 20% on 401K might suggest taking SS first.

B. This strategy works best for those with $200,000 to $700,000 of assets. - Below this level not much impact .

C. Claiming Social Security early can cause a tax torpedo.

D. Social Security is generally less expensive than a comparable commercial annuity.

40
Q

Section 6: Optimal Claiming Age

• Key components of a Social Security educational program

– Use a comprehensive planning approach

– Focus on the desired replacement ratio

– Care for the surviving spouse

– Understand the Social Security annuity advantage. “Buy an inflation-adjusted annuity by delaying the S/S claiming age.”

– Prepare to live long and prosper

– Avoid irrational thinking

A

Section 6: Optimal Claiming Age

• Key components of a Social Security educational program

– Use a comprehensive planning approach

– Focus on the desired replacement ratio

– Care for the surviving spouse

– Understand the Social Security annuity advantage. “Buy an inflation-adjusted annuity by delaying the S/S claiming age.”

– Prepare to live long and prosper

– Avoid irrational thinking

41
Q

Educational Program

• Change faulty perceptions

– Retirement age and claiming age must be the same

– Worried about losing out on payments from SS—should be concerned about running out of resources in retirement

• Key components

– Use a comprehensive planning approach

– Focus on the desired replacement ratio

– Care for the surviving spouse

– Social Security annuity advantage

Prepare to live long and prosper

– Avoid irrational thinking

A

Educational Program

• Change faulty perceptions

– Retirement age and claiming age must be the same

– Worried about losing out on payments from SS—should be concerned about running out of resources in retirement

• Key components

– Use a comprehensive planning approach

– Focus on the desired replacement ratio

– Care for the surviving spouse

– Social Security annuity advantage

– Prepare to live long and prosper

– Avoid irrational thinking

42
Q

Funding Status

• Those who are fully funded for retirement

– Looking for the best deal and may use the break even approach

– Still don’t forget the implication of deferring on survivor benefits

• Those underfunded for retirement

Continuing to work to support deferral may be the next deal

– If work is not realistic need to look for another way to address income needs during a bridge period

A

Funding Status

• Those who are fully funded for retirement

– Looking for the best deal and may use the break even approach

– Still don’t forget the implication of deferring on survivor benefits

• Those underfunded for retirement

– Continuing to work to support deferral may be the next deal

– If work is not realistic need to look for another way to address income needs during a bridge period

43
Q

Break Even

Net present value break-even approach

– Compares net present value of X dollars for Y months (early start) to net present value of “X plus” dollars for “Y minus” months (later start)

– Live past the breakeven age benefit more from deferral

• Break even

– Social security is balanced actuarially using a life expectancy of 84 and a 3% risk free rate of return

– Today’s risk free rate of return is 0% deferring assuming average life expectancy can mean a 3% return

– Also means that the break-even age is lower—age 80

A

Break Even

• Net present value break-even approach

– Compares net present value of X dollars for Y months (early start) to net present value of “X plus” dollars for “Y minus” months (later start)

– Live past the breakeven age benefit more from deferral

• Break even

– Social security is balanced actuarially using a life expectancy of 84 and a 3% risk free rate of return

  • Outdated actuarial tools used. Today it is widely accepted that claiming at 70 should be the norm AND you need a reason to justify claiming earlier. If you are alive at 62….wait!*
  • ASSUME we should take benefits at 70.*

– Today’s risk free rate of return is 0% deferring assuming average life expectancy can mean a 3% return

– Also means that the break-even age is lower—age 80

44
Q

Breakeven for Couples

• When should the higher earning spouse claim?

– If the husband (the higher wage earner) is 60 and the wife (the lower wage earner) is 54, and the wife is expected to live to 85, then the husband’s benefits will be expected to last until he turns (or would have turned) 91. So it pays for him to delay to age 70.

• When should the lower earning spouse claim?

– If one spouse is in bad health take the smaller benefit earlier

A

Breakeven for Couples

• When should the higher earning spouse claim?

– If the husband (the higher wage earner) is 60 and the wife (the lower wage earner) is

54, and the wife is expected to live to 85, then the husband’s benefits will be

expected to last until he turns (or would have turned) 91. So it pays for him to delay

to age 70.

• When should the lower earning spouse claim?

– If one spouse is in bad health take the smaller benefit earlier

45
Q

Analyze the process of framing the claiming age decision as insurance against longevity risk

Inflation Adjusted Annuity

• Pros of deferring

– Larger inflation adjusted annuity

– Reverse tax torpedo

– Transfer market risk

– Lower fees for investing

• Pros for claiming early

Loss of liquidity if need to use assets during bridge period

Rate of return may be higher with investments

A

Analyze the process of framing the claiming age decision as insurance against longevity risk

Inflation Adjusted Annuity

• Pros of deferring

– Larger inflation adjusted annuity

– Reverse tax torpedo

– Transfer market risk

46
Q

Why a break-even age viewpoint may be flawed:

– The fundamental concern needs to be planning for an adequate retirement income

– Break-even incorrectly assumes that insurance value of delayed Social Security is zero

• Why insurance perspective

– Addresses serious concern of a shortfall later in life

A

Why a break-even age viewpoint may be flawed:

– The fundamental concern needs to be planning for an adequate retirement income

– Break-even incorrectly assumes that insurance value of delayed Social Security is zero

• Why insurance perspective

– Addresses serious concern of a shortfall later in life

47
Q

Not on Exam But

Replacement Rate

  • Married couple with one worker earning $80,000
  • Claim at 62 replace 31% of income
  • Claim at 66 replace 42% of income
  • Claim at 70 replace 57% of income
A

Replacement Rate

  • Married couple with one worker earning $80,000
  • Claim at 62 replace 31% of income
  • Claim at 66 replace 42% of income
  • Claim at 70 replace 57% of income
48
Q

Factors in Decision Process

  • Ability to continue work
  • Marital status
  • Wealth/income sources other than SS
  • Risk tolerance
  • Investment savvy
  • Financial reliance on SS
  • Available SS benefits

  • Impact of more wages on SS benefit
  • Age disparity—spouses
  • Earnings disparity
  • Work in noncovered employment
  • Divorce
  • Taxation of benefits
A

Factors in Decision Process

  • Ability to continue work
  • Marital status
  • Wealth/income sources other than SS
  • Risk tolerance
  • Investment savvy
  • Financial reliance on SS
  • Available SS benefits

  • Impact of more wages on SS benefit
  • Age disparity—spouses
  • Earnings disparity
  • Work in noncovered employment
  • Divorce
  • Taxation of benefits
49
Q

Spouse Age Disparity

– If the age disparity differs greatly from the average, this has an impact on the survivor-benefit analysis

– Example, wife is 10 years younger than husband, then likelihood of widowhood for a substantial period of time is substantially increased

A

Spouse Age Disparity

– If the age disparity differs greatly from the average, this has an impact on the survivor-benefit analysis

– Example, wife is 10 years younger than husband, then likelihood of widowhood for a substantial period of time is substantially increased

50
Q

Changes to Social Security

  • Social Security must change in the next 25 years
  • If we are talking about a break-even, the thought process will remain unchanged
  • People at or near pay status may be exempt from Social Security changes and their repercussions
A

Changes to Social Security

  • Social Security must change in the next 25 years
  • If we are talking about a break-even, the thought process will remain unchanged
  • People at or near pay status may be exempt from Social Security changes and their repercussions
51
Q

Good to know not a test item

Single Person Case

• Barbara, single, never married, and underfunded with the risk of funds running out, or her standard of living being compromised, prior to death.

– Barbara should probably make the claim for Social Security benefits based on the desire to decrease her risk of portfolio failure and protect against longevity risk.

– If Barbara is able, she should be encouraged to work longer. Additional years of earnings will help her to replace any “zero years.”

– Even if Barbara is unable to continue employment she is probably better off claiming at age 70 (for longevity insurance!)

A

Single Person Case

• Barbara, single, never married, and underfunded with the risk of funds running out, or her standard of living being compromised, prior to death.

– Barbara should probably make the claim for Social Security benefits based on the desire to decrease her risk of portfolio failure and protect against longevity risk.

– If Barbara is able, she should be encouraged to work longer. Additional years of earnings will help her to replace any “zero years.”

– Even if Barbara is unable to continue employment she is probably better off claiming at age 70 (for longevity insurance!)