Just
What Everyone Should Know
About Retiring
[PRESENTER NAME]
[PRESENTER TITLE]
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A Little History
Created over 75 years ago, Social Security was
originally designed to help senior citizens avoid
poverty during the Great Depression. It was
created as a self-financing program that would
collect payroll taxes from workers which would
immediately be paid out in benefits to retirees.
Millions of Americans depend on Social Security
as their primary source of retirement income.
Major Benefits of Social Security
Lifetime Income: Provides what every retiree wants: an income that
never runs out.
Predictable, Steady Income: After qualifying, the income you
receive is set and does not change.
Inflation-adjusted Income: Every year, Social Security benefits are
increased for inflation purposes. These cost-of-living (COLAs) are a
big help to seniors.
Survivor Benefits: Even after a spouse dies, their benefits are paid to
surviving spouses and dependents.
How Are Benefits
Calculated?

When you turn 62, your exact amount is
calculated. Annual earnings are indexed to
account for wage inflation.

After every year’s earnings are indexed, the
government tallies your highest 35 years of
earnings. If you worked less than 35 years, any
missing years are counted as zeroes. Every year
of earnings are totaled and divided by 35 which
gives you your “indexed monthly earnings”; also
known as AIME.
Calculating Benefits Cont’d
Every year, the maximum wages
subject to Social Security Tax has
increased. The government
takes your inflation-adjusted
indexed monthly number (AIME)
and applies a 3-part formula to
arrive at your primary insurance
amount or PIA calculation. This
PIA is your guaranteed monthly
benefit. There are tools available
online to determine PIA at the
government’s Social Security
web site.
Receiving Benefits

Full retirement age for people born between 1943 and
1954 is 66 – the age you can begin receiving your full,
unreduced primary insurance amount (PIA)

Early eligibility begins at 62 but reduces benefits

Timing is one of the most crucial aspects of Social Security
planning

“The bread winner will delay” is an important concept that
means the longer the primary earner (individual or
married) delays, the larger the monthly income will be but
it depends on every client’s situation.
Social Security Eligibility

You become eligible for Social Security by
working in a Social Security-covered job for at
least 10 years

To be more precise, you need 40 credits

You can earn up to 4 credits per year by earning
a certain minimum dollar amount

If you earn 4 credits every year for 10 years,
you accumulate the 40 credits needed
Receiving Benefits Cont’d

Benefits can increase approximately 8%
“guaranteed” for each year you wait.

Timing depends on each client, each situation
and the client’s retirement plans. If one is not
working and has limited funds, they may have
to take Social Security. Everyone’s situation is
different.

First, it is important to understand the impact of
what Social Security terms Full Retirement Age
(FRA).
Full Retirement Age

FRA is based on your birth year, and can
gradually move from age 65 to 67.
Applying Early for Benefits

If you apply when you first become eligible at 62, your benefit will
equal 75% of your PIA.

So if “Boomer Bill” has a calculated PIA of $2,466 for example, and
applies in 2012 when he turns 62, his monthly benefit would be 75% of his PIA or
approximately $1,850.*

This is the amount he would receive for the rest of his life, only increased by
COLAs annually.
*To understand how to calculate PIA, visit www.ssa.gov
The Power of Timing: Applying After
FRA

At age 66, you obtain your full retirement age. Now you
can start receiving your full, unreduced PIA.

However, if you delay the onset of benefits past age 66,
you will earn what are called delayed actuarial credits.

Delayed credits are the first step to increasing your income
in order to maximize retirement planning.

For each year you delay the start of your benefits, your
benefit will increase by 8% per year up to age 70.

So if Boomer Bill waits until age 70 to apply, his $2,466 PIA
will increase by 32% to $3,255 (excluding COLAs)
Delayed Credits and Spousal
Benefits

This is the key area for retirement planning

Leveraging the delayed credit system
allows you to optimize spousal benefits
through two key “switch strategies”

By using these two strategies, pre-retirees
can maximize benefits and then redirect
these additional funds into a tax-deferred
annuity as one valuable option.
Working While Receiving Early SS Benefits
Maximum earnings (wages) between age 62 and normal Social Security
Retirement age before Social Security benefits are reduced $1 for every
additional $2 earned:
$15,120
Social Security Taxation



Depending on your earnings, you are
responsible for paying income taxes on
a portion of your benefits.
The IRS adds half of an individual's
Social Security benefits plus all other
income (such as pensions, CD/bond
interest or capital gains) to calculate
the income taxes owed
In fact, up to 85% of your benefits
could be taxed…
Social Security Taxation
These All Count!
Interest and Capital Gains from these types of investments all add
to your income, which triggers the taxation of your Social Security.
Certificates of Deposit
Mutual Funds
Bonds (Even Tax Free Muni’s)
Stocks
Rental Income
Avoid the Social Security
Tax Trap

It’s important to know that deferred annuity & life
insurance interest is not included in the year it is
earned. It is only included in the year it is
withdrawn.

By repositioning your assets into annuities & life
insurance you can defer the interest earnings
until you choose to withdraw them, you could
save thousands and thousands of dollars in taxes.

You’ll be able to defer income taxes on your
interest earnings and reduce or eliminate income
taxes on your Social Security benefits – a double
win.
Meet The Triplets
Earl
Stan
Del
Monthly Benefit Amounts Differ Based on the
Age You Decided to Start Receiving Benefits
Del
Stan
Earl
This example assumes a benefit of $1,000 at a full retirement age of 66.
The Social Security Gamble
Earl
Earl
•
Believes taking out SS benefits early will
be most lucrative.
•
Plans to bank each check and let it
accumulate.
•
Thinks his money will outgrow either of his
brothers’
Earl’s Social Security Payments
Reduced by
To
25% $750
/month
Early
• $750/month
• $9,000 in annual savings
Earl
• $36,000 over four years
Standard
Stan
•
Waiting until age 66 to start taking SS.
•
He would receive $1,000 instead of $750.
•
Looking to outpace the amount Earl would
receive
Earl
Must tap savings to supplement income
$250/month
from savings.
How many years would this $36,000
be able to provide the extra
$250/month?
12 Years
3% interest rate
16 Years
Delayed
Del
•
Delaying receiving SS until age 70, EIGHT years later than Earl.
•
He would receive $1,320/month.
•
Would be $570 more than Earl and $320
more than Stan.
Who Wins?
Earl
Stan
Del
Del better live a long time!
•
•
•
•
Del
Waited until age 70
$1,320/month
$570 more than Earl
Would have to live until age 84 to
receive more benefits.
Who Wins?
It’s a
virtual Tie!
Earl
Stan
Social Security Period Life Table
Earl would win by dying before age 81.4
Stan would win by living beyond age 82.4
MALE
FEMALE
AGE
DEATH
PROBABILITY
NUMBER
OF LIVES
LIFE
EXPECTAN
CY
DEATH
PROBABILIT
Y
NUMBER
OF LIVES
LIFE
EXPECTANC
Y
62
0.013289
83,217
19.40
.008322
89,895
22.31
66
0.018154
78,351
16.48
.011702
86,537
19.10
Important Factors
• What if interest rates rise?
• Length of life makes a difference!
You Need To Plan!
HOW IMPORTANT IS TAX DEFERRAL?
Triple Compounding Interest
Interest on your principal
(simple interest)
Interest on your interest
(compounding interest)
Interest on deferred taxes
(triple compounding)
THE MAGIC DOUBLING DOLLAR
$1
$2
$4
$8
$16
$32
How much do we have after the 20th double?
$1,048,000.00
THE MAGIC TAXABLE DOUBLING DOLLAR
How much money would we have
if each time we doubled the dollar
we withheld 25% for taxes?
I.E. – C.D., Mutual Funds, Stocks
Just over $74,000
THE STOCK MARKET
Mutual Funds
Stocks
Bonds
Commodities
THE STOCK MARKET CASINO
Trillions Lost in Retirement Accounts
THE STOCK MARKET
Fact or Fiction?
“Over a long period of
time, the stock market
will always go up.”
The Stock Market
1970 - 2000
Between 1970 – 2000, this has been generally true –
the stock market has gone up
1970
1975
* Source: Google Finance
1980
1985
1990
1995
2000
THE STOCK MARKET
1970 - 2000
Between 1970 – 2000, this has been generally true –
the stock market has gone up
2000
2001
2002
* Source: Google Finance
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
THE STOCK MARKET
Pros
• High potential returns
• Dividends
• Long-term capital gains
tax may be lower than
income tax level
Cons
• High potential losses
• Research integrity
• Taxable dividends
• Corporate fraud
• Many fees
• Commissions
• Management
• Maintenance
WHAT ABOUT BONDS?
Even Municipal Bonds?
When interest rates go up, bond values go down!
BONDS
Pros
•
•
•
•
More Conservative
Tax-Free Muni-Bonds
Guaranteed Interest
Historical Data
Cons
• Still some risk (do you
want to buy a bond issued
by L.A. County?)
• Interest may affect tax
on social security income
• Time Commitments
WHAT ABOUT THE BANK?
CDs
Savings
Checking
Money Market
BANKS
Pros
• Liquidity
• FDIC insured
• Local branches
Cons
• Taxable interest
• Low rates
• Bank instabilities
COMMODITIES
Gold
Silver
Oil
Currencies
COMMODITIES
Cons
Pros
•
•
•
•
Diversification
Inflation Hedge
Tangibles
Non Correlation to the
stock market
•
•
•
•
Risk
Knowledge Base
Accessibility
Liquidity
Types of Annuities
Immediate Annuities (your pensions)
This is your grandfather’s annuity. This is the oldest form of annuity. Matter of
fact annuities date back all the way to 1720 and the Presbyterian Church. The
purpose was to provide a secure retirement to aging ministers and their
families, and was later expanded to assist widows and orphans.
Deferred Fixed Annuities (5-year 3% fixed)
Then in the early 1970’s the first fixed annuities started being offered. The
problem is, a fixed annuity earnings, doesn’t waiver with inflation and this
created a problem!
Variable Annuities
Variable annuities came to be more
attractive after regulatory agencies got
on board in the 1970s and 1980s, and
because of increased fear of inflation
(possibly tied to the high inflation during
parts of these decades).
Fixed Index Annuities
ANNUITIES
Pros
• NO RISK to PRINCIPAL
• Tax Deferred Growth
Cons
• Time Commitment
• Surrender Charges
(for early withdrawal)
• 10% Penalty Free Withdrawals
• High Potential Returns
• Dollar for Dollar Reserves
• Do not receive all index gains
• No dividends
SOCIAL SECURITY TAX
Seniors can REDUCE
or ELIMINATE double taxation
on social security income.
The Smith Family CD Plan
$400,000 in CDs
+ 5% interest
= $20,000/year
- 25% fed & state tax
46.25%
Marginal Tax Bracket
= $15,000/year
- 85% taxable SS income
= $10,750
The Smith Family Split Annuity
10 year period
Immediate Annuity
$400,000
Fixed Indexed Annuity
$150,000
Income
$250,000
Growth
$1,500/month
v
v
v
(Only 14% of this income
is taxable) In a 15% tax
bracket your net monthly
income is $1,468.50
v
$180,000
Income
Estimated 7%
Return
v
$500,000
5% CD vs. Split Annuity
CD
Split Annuity
Annual Income:
$20,000
$18,000
Taxable Income:
$20,000
$2,520
After Tax Income:
$10,750
$17,622
25%
15% Bracket
Split Annuity vs. CD
•
$6,872 more net income than the CD
•
This Split Annuity reduced their tax bracket
from 25% to 15%
•
Increase $400,000 to $500,000
The Smith family no longer pays taxes
on any of their social security income.
https://www.planfacts.com/CamDressander/SSE
Thank you for your time!
Please complete your program
evaluation.
We are happy to answer any questions you
may have now or in the future!
Dan Hopwood
(309) 696-8905