CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Financial Plan Development Course
Session 13
Retirement & Selecting
Optimum Social Security
Benefit
©2015, College for Financial Planning, all rights reserved.
Start Recording
This class is being recorded
so you may review it at a
future time.
13-2
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
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
Average Indexed Monthly Earnings (AIME)
Used to create PIA
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
Step 1
Inflation adjustment of every
year you had earnings—base
year is year you attain age
60
13-5
Results of PIA Formula
Source: Czarnowski 3/19/2014
13-6
Full Retirement Age (FRA)
Born
Full Retirement Age
Age 62 Benefit
65
80%
1938-1942
65 plus monthly adjustment
75-80%
1943-1954
66
75%
1955-1959
66 plus monthly adjustment
70-75%
After 1960
67
70%
Before 1938
13-7
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
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
Benefit Adjustment Due to Age
Age
Wage earner—
retirement benefit
will be reduced to
Spouse—
retirement benefit
will be reduced to
62
75%
35%
63
80%
37.5%
64
86.7%
41.7%
65
93.3%
45.8%
66
100%
50%
70
132%
50%
Source: Social Security Administration
(www.socialsecurity.gov/retirement/1943.html)
13-10
Social Security Benefit Review
Benefits will be paid to:
Retirement
Disability
Death
Worker, under FRA
Reduced PIA
100% of PIA
N/A
Worker, FRA & over
100% of PIA
Disability benefits cease;
retirement benefits
begin
N/A
No benefit
No benefit
Spouse, age 60 or 61
Spouse, age 62 to FRA
Spouse, FRA or older
Spouse, any age, caring
for child under age 16
or disabled
Unmarried child under
age 18 (19 if in high
school) or any age if
disabled
100% of PIA,
reduced
50% of PIA, reduced
100% of PIA,
reduced
50% of PIA
100% of PIA
50% of PIA
(subject to family maximum)
75% of PIA, reduced
(worker was
currently insured)
50% of PIA
(subject to family maximum)
75% of PIA, reduced
(worker was
currently insured)
13-11
Benefit Reductions Due to Earnings
Age
You 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 reduction
Unlimited
13-12
Retirement Earnings Test Example
Item
Amount
Total Social Security benefits prior
to FRA
$20,000
Earnings
$41,080
Social Security earnings limit (2014)

$15,480
Excess
earnings
$25,600
At FRA,
Social Security will review what you received,
and
perform an “Adjustment to the Reduction Factor” (ARF) and
adjust your
payments
accordingly.
(Landis) 
Reduction
in Social
Security
benefits
$12,800
(50% of excess earnings)
Net Social Security benefits
$ 7,200
13-13
Income Tax on Social Security Benefits
Percent of Social Security
retirement benefit
subject to income tax
Threshold income:
joint filers
Threshold income:
single filers
Less than $32,000
Less than $25,000
None
$32,000 to $44,000
$25,000 to $34,000
Up to 50%
Greater than $44,000
Greater than $34,000
Up to 85%
13-14
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
Income Tax on Social Security Benefits
Percent of Social Security
retirement benefit
subject to income tax
Threshold income:
joint filers
Threshold income:
single filers
Less than $32,000
Less than $25,000
None
$32,000 to $44,000
$25,000 to $34,000
Up to 50%
Greater than $44,000
Greater than $34,000
Up to 85%
13-16
Dowler Social Security
$335,183 difference in today’s dollars!
13-17
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
13-19
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 age
62 and 1 month in 2014
Monthly benefit amount
$1,723
66 in 2018
$2,371
70 in 2022
$3,236
1
1
Assumes no future increases in prices or earnings.
13-20
Selecting Optimum Social Security Benefit
Key Ages for Beginning Benefits
•
Age
o
o
o
o
o
o
•
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
62—($1,723)
Do over—stop & refund within 12 months
Voluntary suspension at FRA
Reduce AIME
Benefit reduced due to age—75% with FRA at 66
Benefit reduced due to earned income
Deemed filing for benefit based upon own
earnings & spouse’s earning with highest benefit
paid
13-21
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
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
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
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
Selecting Optimum Social Security Benefit for Single
Life of portfolio about the same with life expectancy around age 80
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
Lower level of wealth increases importance of choosing correct age
to start Social Security
(Source: Reichenstein, W. & Meyer, W. (2011). Social Security Strategies.)
13-26
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
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)
• 1st 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
Selecting Optimum Social Security Benefit: Couple
John’s PIA = $1,000; Marsha’s options for spouse benefit:
Age
66
FRA
Age
= 50.0%
of PIA
= $500
65
Age
12 months
early
64
Age
24 months
early
62
48 months
early
= 45.8%
of PIA
= 41.7%
of PIA
= 35.0%
of PIA
= $458
= $417
= $350
13-29
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
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
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
Divorced Spouse
•
Requirements
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
o
•
•
Survivor benefit—as long as not remarried before age 60
13-33
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
Employer-Provided Plans: Details to Master
Rules of the plan before retirement:
• Vesting
• Matching
• Type of contributions – pre-tax and posttax
• 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
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
Next Class
Estate Planning & Legal Documents
Read
Chapter 7
Plan Development
boxes
#26, #27, #28,
#29, & #30
13-37
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Financial Plan Development Course
Session 13
End of slides
©2015, College for Financial Planning, all rights reserved.