Savvy Social
Security Planning:
What CPAs, Attorneys, and Other Professionals Need to Know About Social Security Claiming Strategies
Slide #1
Savvy Social Security Planning:
What CPAs, Attorneys, and Other Professionals Need to Know About
Social Security Claiming Strategies
Script
Welcome everyone, and thank you for coming. Today we are going to talk about Savvy Social Security Planning: what CPAs, attorneys, and other professionals need to know about Social Security claiming strategies. You may have noticed an emerging trend among your baby boomer clients. They are approaching the Social Security question in a whole new way. When their parents retired, they probably didn't think too much about Social Security. They just went down to their local office as soon as they turned 65, or maybe 62 if they retired early, and applied for benefits. They took their benefits for granted and didn't ask very many questions. But baby boomers are studying up on Social Security and asking far more questions than their parents did.
Slide #2
USA Today
The media is jumping on the baby boomer retirement boom. Most of the major publications regularly feature articles on Social Security claiming strategies. That's why it's important for us – the people who advise baby boomers approaching retirement – to stay current on the rules and the various strategies.
Slide #3
Baby boomers want to know:
· Will Social Security be there for me?
· How much can I expect to receive?
· When should I apply for Social Security?
· How can I maximize my benefits?
· Will Social Security be enough to live on in retirement?
Script
Baby boomers want to know: Will Social Security be there for me? They've been told for years that the system is "going broke." But now that it's almost their turn to collect, they want to know: is that really true?
They also want to know how much they can expect to receive. Before they can retire, they have to know how they are going to support themselves. That means doing a budget, lining up all their income sources and knowing how much they can expect to receive from each. Social Security, because it is a relatively known quantity, represents the foundation of that plan.
The big question they are asking is when they should apply for Social Security. Should they take early benefits even though it means their checks will be smaller? How can they be sure delaying benefits is the best move? And what about spousal and survivor benefits? We're going to shed some light on these issues today.
Something their parents probably never asked is this: how can I maximize my benefits? There is absolutely nothing wrong with people using the Social Security rules to their advantage. Today I'm going to show you five ways your clients can maximize their Social Security benefits simply by knowing the rules and making smart decisions.
And finally, boomers are wondering if Social Security will be enough to live on in retirement. They probably already know the answer to this. Social Security represents about 40 percent of the average retiree's total income – less for high-income clients. But by coordinating Social Security with the rest of their retirement income plan, they can pursue the universal dream of a comfortable, worry-free retirement.
Slide #4
Baby Boomer Social Security Question #1
Will Social Security be there for me?
Answer: Yes.
Script
OK. Let's get one of the biggest concerns out of the way first. Social Security benefits for baby boomers are not in jeopardy. Here's why.
Slide #5
OASDI Trust Fund still growing
Trust fund balance on 12/31/11: $2.677 trillion
2012 results
• Total income: $840 billion
• Total expenditures: $786 billion
• Net increase in assets: $ 54 billion
Trust fund balance on 12/31/11: $2.732 trillion
Script
Social Security was designed as a pay-as-you-go system. Payroll taxes from current workers go into a trust fund and are immediately paid out to current retirees. Because baby boomers have been in their peak earning years, the trust fund has accumulated more than needed for current benefits. Right now the trust fund holds about $2.7 trillion, which is invested in special-issue Treasury securities. As baby boomers start retiring, these trust fund assets will gradually be drawn down.
Slide #6
Long-term projections: without reform benefits fall to 75% in 2033
[Chart from OASDI Trustees Report]
Script
Over the next 75 years, costs will begin to exceed income. There are enough reserves that the system will be able to pay 100% of promised benefits until 2033. After that, if nothing is done to reform the system, income will be sufficient to cover just 75% of promised benefits.
Slide #7
What would it take to restore solvency to the system?
Reform proposals being studied
· Increase the maximum earnings subject to Social Security tax
(currently $113,700 in 2013)
· Raise the normal retirement age
(currently 66 for individuals born between 1943 and 1954; 67 for those born in 1960 or later)
· Lower benefits for future retirees
(escalate benefits based on increases in consumer prices rather than wages)
· Reduce cost-of-living adjustments (COLAs) for all retirees
Script
Although the Social Security system is not in imminent danger, most people agree that the earlier reforms are instituted, the less painful they will be on everyone. Here are just a few of the ideas that have been proposed:
One is to increase the maximum earnings subject to Social Security tax, currently $113,700.
Another reform proposal calls for raising the normal retirement age as life expectancies increase. Currently, full retirement age is 66 for people born between 1943 and 1954, and 67 for people born in 1960 or later.
Still another reform proposal would change the benefit formula so that future increases would happen at a slower pace. This would affect the benefits of future retirees.
And some are talking about changing the formula for cost-of-living adjustments. This could give retirees smaller benefit increases going forward, although the changes are expected to be minimal. You can learn more about Social Security reform proposals from the American Academy of Actuaries at their website: actuary.org.
Slide #8
Baby Boomer Social Security question #2
How much can I expect to receive?
Answer depends on:
1) How much you earned over your working career
2) When you apply for benefits
Script
Now that we've addressed the solvency issue, let's look at how to answer baby boomer question number 2: how much can they expect to receive? The answer will depend on how much they earned over their working career, and at what age they apply for benefits.
Slide #9
How Social Security is calculated
• At age 62, each year’s earnings are tallied up and indexed for inflation
• Highest 35 years of earnings are averaged (AIME)
• AIME is divided by three “bend points” to determine your primary insurance amount (PIA). This is the amount you'll receive at full retirement age.
• Benefit is increased each year by cost-of-living adjustments (COLAs)
Script
First let's look at the formula for calculating Social Security. This background is important for understanding how earnings affect the amount of the benefit.
The general process goes like this. First Social Security looks at your annual earnings over your entire lifetime, indexes them for inflation, and picks the 35 highest years' earnings to include in the formula. The indexed earnings are totaled and divided by 420 to come up with the average indexed monthly earnings. If you don't have 35 years of earnings, the missing years will be filled in with zeroes.
Next, a formula is applied to your average indexed monthly earnings to determine your primary insurance amount. This is the amount you will receive when you reach full retirement age. As mentioned earlier, if you were born between 1943 and 1954, your full retirement age is 66.
Each year, annual cost-of-living adjustments are applied to your benefit to help you keep up with the cost of living.
Slide #10
Example of benefit formula
· Baby boomer age born in 1950
· Maximum Social Security earnings every year since age 22
· AIME = $8,238
· PIA formula:
$767 x .90 = $690.30
$3,857 x .32 = 1,234.24
$3,614x .15 = 542.10
Total $2,466.64
PIA = $2,466.60
Amount worker will receive at full retirement age
Script
Here is an example of how the benefit formula would work for a baby boomer who was born in 1950 and who earned the Social Security maximum every year since the age of 22. His average indexed monthly earnings would work out to be $8,238. In calculating his primary insurance amount, the first $767 would be multiplied by 90%. The amount between $767 and $4,624, or $3,857, would be multiplied by 32%. And the amount over $4,624, or $3,614, would be multiplied by 15%. These amounts would be totaled to come up with a PIA of $2,466.60. This is the amount the worker would receive at full retirement age.
Slide #11
Full Retirement Age (FRA)
Year of Birth Full Retirement Age
• 1943-54 66
• 1955 66 and 2 months
• 1956 66 and 4 months
• 1957 66 and 6 months
• 1958 66 and 8 months
• 1959 66 and 10 months
• 1960 and later 67
Script
Full retirement age is the age at which you can claim full, unreduced benefits. It used to be 65 for everyone. But now we are seeing a higher full retirement age being phased in as a result of the 1983 amendments. For everyone born between 1943 and 1954, full retirement age is 66. For everyone born in 1960 and later, full retirement age is 67. For those born in 1955 through 1959, full retirement age is 66 plus some number of months.
Slide #12
What if you apply for early benefits?
You will receive a percentage of your PIA
Apply at age / If FRA = 66 / If FRA = 6762 / 75.0% / 70%
63 / 80.0% / 75%
64 / 86.7% / 80%
65 / 93.3% / 86.7%
66 / 100% / 93.3%
67 / 100%
Script
Now, remember that I said that your primary insurance amount, or PIA, is the benefit you will receive at full retirement age. So what happens if you apply for Social Security before full retirement age? Well, your benefit will reduced. You will receive a percentage of your PIA depending on when you apply. If your full retirement age is 66 and you apply at age 62, you will receive 75% of your PIA. At 63, 80% and so on. If your full retirement age is 67 and you apply at 62, you will receive 70% of your PIA. These amounts are actually prorated monthly, so you can apply anytime after the age of 62 and your benefit will be reduced by the appropriate amount.
Slide #13
What if you apply after FRA?
You will earn delayed credits
Apply at age / Benefit will be % of PIA if FRA = 66 / Benefit will be % of PIA if FRA = 6766 / 100% / 93.3%
67 / 108% / 100%
68 / 116% / 108%
69 / 124% / 116%
70 / 132% / 124%
Script
If you apply for Social Security after full retirement age, you will earn delayed credits of 8% for each year you delay. So if your full retirement age is 66 and you apply at 67, your benefit will be 108% of your PIA. At 68 it will be 116%, and so on. After age 70 you can't earn any more delayed credits, so it doesn't pay to wait until after age 70 to apply for Social Security.
Slide #14
How to estimate your Social Security benefits
· Obtain your annual Social Security statement at www.socialsecurity.gov/mystatement
· Go to www.socialsecurity.gov, click on "Estimate Your Retirement Benefits"
· Use one of the calculators on the SSA website (may be more accurate)
Script
There are several ways clients can get an estimate of their Social Security benefit.
One, they can refer to their annual Social Security statement. The annual Social Security statement used to be mailed to everyone once a year. Now it is only mailed to people over 60. However, everyone can access their Social Security statement online at www.socialsecurity.gov/mystatement. First you have to set up an account by answering a number of security questions.
The second way is to use the Retirement Estimator on the Social Security website. This calculator taps into your specific earnings history after you enter your personal identifying information including your birth date, Social Security number, and mother's maiden name.
The annual statement and the Retirement Estimator do not factor cost-of-living adjustments into future benefit estimates. This means the actual benefit will likely be higher than the amount shown. But our calculators do adjust for COLAs, so if a client knows his primary insurance amount, or PIA – this is the amount shown that he will get at full retirement age -- we can help clients project their future benefits.
You and your clients also might try one of the three calculators on the Social Security website at www.ssa.gov/planners/benefitcalculators.htm. Feel free to browse around the site and play with the calculators.
Slide #15
Baby Boomer Social Security Question #3
When should I apply for benefits?