copyright © 2014, the american college. all rights reserved. used with permission. making the best...

Copyright © 2014, The American College. All rights reserved. Used with permission.

Making the Best Social Security Claiming

Decisions

David Littell, JD, ChFC®, CFP®

RICP Program Director Director of the NYLCRIThe American College

Leadership

Dave Littell, JD, ChFC®, CFP®

Director, Joseph E. Boettner Chair in Research, Professor of Taxation

Jamie Hopkins, Esq, JD, MBA

Associate Director, Associate Professor of Taxation

Mission•Elevate the retirement-income planning knowledge of financial services professionals in order to improve retirement security for all Americans

Current Priorities & Initiatives•Video Library www.theamericancollege.edu/retirement•Retirement Income Certified Professional® (RICP®)•Thought Leadership and Visibility•RICP® Retirement Income Literacy Index

http://www.theamericancollege.edu/retirement

www.theamericancollege.edu/retirement

Researchers•Ameriks•Babbel•Basu•Blanchett•Finke•Milevsky•Pfau•Reichenstein•Sass•Vanderhei•Warshawsky

Educators•Franklin•Hegna•Jordon•Rappaport•Timmermann

Practioner/Experts

•Baldwin•Caudill•Cloake•Kitces•Guyton•Newman•Schiff•Rosen

Tools•Freitag•Hegna•Malholtra•Meyer•Pechter•Huxley


RICP®

• Three college level course designation • Based on video and outline content• Includes over 40 experts in retirement

income planning• Students are finding it extremely

practical• Fastest rollout of a designation

– 5,000 + enrolled and 1,000+ completed– Approved by 38 companies and all

regulatory jurisdictions• www.designationcheck.com


Framing the Claiming Decision


Retirement Income Planning

• Meet client’s income needs throughout retirement (replace paycheck)

• Meet other financial goals (legacy/emergency fund)

• Plan has to have some way to address all the risks faced in retirement


Benefit of Deferring Social Security

• Deferring past age 62 results in a 7-8% increase for each year of deferral

• Benefit at 70 is 176% of benefit at age 62

• A married couple’s continues to receive the larger of the two benefits after the first death—so that benefit is payable for a joint life time


Effect on a Retirement Income Plan

• Helps meet primary goal of meeting income needs• Builds a bigger income floor with a low-risk investment• Benefits payable for life—addressing longevity risk• Benefits receive COLA—addressing inflation risk• Regular fixed payments addresses all the elements of

excess withdrawal risk • Couple defers larger benefit—addresses loss of spouse

risk• Retirees with greater amounts of guaranteed income

are more satisfied, worry less, and show fewer signs of depression


Two-third’s of Retirees receive more than half

their income from Social Security


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– Age 66 $63,930– Age 70 $84,364


Trends in Claiming Behavior

Sex/Birth Cohort

Claim at 62

Claim at 63-64 Claim at 65+

Male 1930-34 55.3% 23.1% 21.5%Male 1940-44 46.4% 16.4% 37.1%Female 1930-34

57.3% 18.3% 24.9%

Female 1940-44

49% 17.2% 33.8%

SOCIAL SECURITY CLAIMING: TRENDS AND BUSINESS CYCLE EFFECTSOwen Haaga and Richard W. Johnson: Center for Retirement Research WP 2012-5


Getting the Most From the System

• Some believe that the best bet is to take early because they won’t get their money’s worth unless they live a long life.

• This is betting on dying young—a bad gamble—since losing means living a long life with too little income.

• A better way to frame the question is what is least expensive way to increase guaranteed lifetime income?


Frame as Annuity Purchase

• Value is a life annuity in the amount of the increased benefits due to deferral

• Cost is the lost payments as result of deferral

• Compare to actual price of purchasing inflation adjusted annuity


Value of Deferring

• Married couples larger benefit• Single women• Single men• Married couples smaller benefit


Money’s Worth Analysis

• Add up the present value of payments assuming life expectancy

• With the current real riskless rate of return being approximately zero, add together benefits paid

• Cumulative benefits for single beneficiaries taking at any age from 62 to 70 are approximately the same if live to age 80

• For single beneficiaries life expectancy does impact total cumulative benefits

• Live substantially beyond age 80 and deferring to 70 makes sense


Single worker• Example

– Arnie is 62 considering retirement– Arnie has $350,000 in a 401(k) – Arnie wants to get the best deal from Social

Security and expects to live to age 79

• Considerations– Let’s not forget to look at the big picture—can

he afford to retire and how does the decision fit into his retirement income plan?

– Main decision is claiming age—using money’s worth best age may be 67 but……


Married Beneficiaries

• Example: – Bob and Barbara are both age 62. Bob’s PIA

is $2,000 and Barbara’s is $900.– Bob’s life expectancy is age 78 Barbara’s is

90– Barbara’s survivor benefit is $1,650 if Bob

claimed at 62, $2,000 if he claimed at age 66 and $2,640 if he claimed at age 70

– Essentially Bob’s benefit is paid until age 90– Barbara’s benefit is paid to age 78


Married Beneficiaries

• Make claiming decision for larger benefit based on joint life expectancy

• Make claiming decision for smaller benefit based on life expectancy of first to die

• In almost all cases it makes sense to defer larger benefit to age 70


Social Security Benefit Calculations


Workers Benefit Calculation• PIA formula (2015) (year attainment of age

62)

– 90% of first $826 AIME

– 32% of AIME x ($4,980 - $826)

– 15% x AIME in excess of $4,980

• Average indexed monthly earnings (AIME)

– Wages indexed to age 60

– 35 years of wage history

– Maximum earnings—TWB ($118,500 in 2015)


Worker’s Benefits Claiming Early

• Benefit is reduced 5/9 of 1% for each month before full retirement age up to 36 months. If the number exceeds 36, then the benefit is further reduced 5/12 of 1% per additional month

• Example: Jamie, who retires and claims benefits four years early, will receive a monthly benefit 25% smaller than her PIA. (5/9 x 36 = 20) + (5/12 x 12 = 5) (total 25%). If Jamie would have received $1,500 per month at full retirement age, she would get $1,125 at age 62.


Worker’s Benefit—Claiming Late

• 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!


Spousal Benefit• 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


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


Spousal Survivor Benefits

• Eligible for larger of own worker’s benefit or survivor benefit

• Full survivor benefit available at full retirement age or reduced benefit as early as age 60 (earnings test applies)

• Benefit is greater of deceased spouse’s monthly benefit or 82.5% of PIA

• Deceased spouse’s benefit includes deferred credits (either received or eligible for)


Suspension of Benefits• Mandatory suspension under the earnings

test – Benefits reduced if begin prior to full retirement

age and earn more than threshold– $15,720 is the earnings limit for 2015– At full retirement age benefits are automatically

recalculated– Example: Individual loses 6 months of payments

due to earnings test. At full retirement age benefits are recalculated based on a retirement age 6 months later than initial calculation.


Voluntary Suspension

• After full retirement age, an individual can elect to voluntarily suspend

• Can be used to trigger spousal benefits• Suspension again allows a recalculation

of benefits when they begin again• Only a valuable option for worker’s

benefits


File and Suspend as a Hedge

• Generally, beyond full retirement age when first claiming you can request benefits retroactively up to six months and receive a lump sum

• If you file and suspend with the intention of collecting a larger benefit later, you can change your mind and collect a lump sum retroactively back to the point of your initial filing — even if that is longer than six months.*

*Social Security Spokesperson Kia Anderson explained to Mary Beth Franklin in a blog Dec. 2 in Investment News


Eligibility for Multiple Benefits• Spousal benefits taken first

– At or after full retirement age, a married (or divorced) spouse may be able claim the spousal benefit and claim the worker’s benefit later

– Married spouses cannot both elect the spousal benefit– Not available before full retirement age because of

the deemed-filing rule

• Worker’s benefits taken first– Spouse claim smaller workers benefit at 62– Claim spousal benefit once worker begins benefits


Eligibility for Multiple Benefits

• Widow(er)s benefit options– A widow eligible for both widow’s benefits

and worker’s benefits can choose one benefit and later choose the other

– Example: A widow could take a reduced widow’s benefit at age 60 or 62 and then switch to her maximum retirement benefit when she reaches age 70.


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.


Divorced Spouse’s Benefits

• Spousal retirement benefits for divorced spouses are paid to unmarried individuals only, so an individual remarried will be disqualified

• Widow(er)’s benefit is a bit different as remarriage after age 60 does not disqualify the former spouse from eligibility for the widow(er) benefit from the former spouse


Other Factors that Reduce Benefits

• Windfall-elimination– Special benefit formula applies when “noncovered”

employment– 90 percent drops to 40 percent with less than 20 years of

SS coverage

• Government offset provision– 2/3 of the government-pension reduces spousal and

widow benefits dollar-for-dollar– Katie has Social Security income of $12,000 per year and

her husband Arthur is a noncovered state employee who receives a $15,000 annual pension from the state. Arthur is not entitled to a spousal benefit and will only be entitled to a $2,000 a year survivor benefit.


Social SecurityCase Studies


Single Client Case Study

• Cindy is 62 still working and has asked you about when to claim Social Security benefits. Her family died young so she is considering retirement sooner than later.

• She has a SS PIA of $1,800 and $450,000 in a 401(k) plan. She needs about $4,000 a month to meet expenses. Because of her short-lived family she expects to live to age 78, but doesn’t have any current health problems.

• Calculate her SS benefits at 62, 66, and 70• How would you look at her decision to claim?• What do you think she should do?


Single Client Solution

• Monthly benefit at 62 = 1,350• Monthly benefit at 66 = 1,800• Monthly benefit at 70 = 2,376 • With a 4% withdrawal rate she can withdraw only $1,500 a

month—along with Social Security benefits she is short of her $4,000 a month goal

• Based solely on a break even analysis, she should take sometime before age 70. However, even though her own expectation is that she will live only to 78, there are no health reasons why should take early. SS decision has to be part of the retirement income plan.

• Her best bet is to defer retirement as long as possible, to allow her assets to grow and be able to afford retirement.

• With a larger SS benefit and more assets she is closer to her goal of $4,000 a month.

• If she retires before 70 she may still be better off deferring SS and drawing down her 401(k)


Married Couple 1 Case Study

• A couple is about to retire and they need funds. They also know that deferring benefits has some value. The worker is Age 66 worker with a $2,000 PIA with a 62 year old nonworking spouse, - Could the spouse claim now and the worker defer? - What is the spousal benefit that is paid if spouse

claims now? - Why would the spouse wait to age 66 to claim

benefits? - Is there any reason for the spouse to defer past full

retirement age?- What happens if the worker waits to age 70 to begin

receiving benefits?- How much does the spouse get if her husband dies at

age 75, assuming that the husband’s benefit started at 70? What if the husband had started at age 66?


Married Couple 1 Solution

- Could the spouse claim now and the worker defer? Yes if the worker files and suspends

- What is the spousal benefit that is paid if spouse claims now? $700

- Why would the spouse wait to age 66 to claim benefits? To get the full benefit and/or the spouse is working prior to 66.

- Is there any reason for the spouse to defer past full retirement age? No

- What happens if the worker waits to age 70 to begin receiving benefits? Worker receives $2,640

- How much does the spouse get if her husband dies at age 75, assuming that the husband’s benefit started at 70? $2,640

- What if the husband had started at age 66? $2,000


Married Couple 2 Case Study

• Both Spouse’s are age 66 and entitled to benefits with PIAs of $2,500/$2,000. They are determined to defer the larger benefit to age 70 but are ambivalent about the second benefit. What are the options and why might they choose one strategy over the other?


Married Couple 2 Solution

• Option 1: At 66 spouse with smaller benefit claims $2,000 a month and other spouse does a restricted filing for the $1,000 spousal benefit. At 70 the spouse with the larger benefit claims $3,300.

• Option 2: Spouse with larger benefit claims and suspends to trigger restricted filing for other spouse in the amount of $1,250. At 70 each claim worker’s benefits and receive $2,640 and $3,300.

• If one is not in good health—or they really need the money consider option 1. If both are in great health elect option 2.


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?


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 spousal benefit—but given these facts it may not be helpful


Divorce

• Bill ($2,500 PIA) and Hillary ($2,000 PIA) are divorced after a 12 year marriage and neither remarried. Both are age 62.

• Can they claim spousal benefits even though the other hasn’t claimed a worker’s benefit?

• What are their best options?


Divorce Solution

• Bill ($2,500 PIA) and Hillary ($2,000 PIA) are divorced after a 12 year marriage and neither remarried. Both are age 62.

• Can they claim spousal benefits even though the other hasn’t claimed a worker’s benefit? Yes, as long as the divorce occurred two years or more ago

• What can they do if they both wait until 66 to claim? File a restricted filing for spousal benefit and defer worker’s benefit


Married Couple Age Differences

• Couple 1: Husband age 62 with a $2,500 with a PIA is married with a wife who is age 56 with a $1,700 PIA. Husband has somewhat compromised health spouse is expected to live to age 95. How does their age difference affect planning strategies?

• Couple 2: Husband age 55 with a $2,500 PIA has a wife with a $1,700 PIA who is 65. How does their age difference affect their choices?


• Here is a video player with some of the best Social Security Videos from The American College’s NYLCRI.

• Here is a link to an excellent booklet on the value of deferring Social Security “Efficient Retirement Design”

• Here is a link to the Towers, Watson article “Annuities and Retirement Happiness”

• Here is a blog from Mary Beth Franklin on the advantages of claim and suspend.

http://retirement.theamericancollege.edu

copyright © 2014, the american college. all rights reserved. used with permission. making the best...

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