social security claiming strategies after the recent 2015 ... · social security claiming...

Social Security Claiming

Strategies After the Recent

2015 Changes

Dallas - Financial Planning Association William Reichenstein, Ph.D., CFA, Head of Research

Bill Meyer, CEO

January 29, 2016

Social Security Solutions, Inc.

© Social Security Solutions, Inc. All rights reserved. Social Security Solutions, Inc is not affiliated with or endorsed by the Social Security Administration.

Qualification

Our recommendations are based on the current promises of the Social Security Administration and our interpretations of recent changes made to Social Security law. Congress has the right to change these promises at any time.

© Social Security Solutions, Inc. All rights reserved. Social Security Solutions, Inc. is not affiliated with or endorsed by the Social Security Administration.

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Agenda

• Separate Rules for Three Age Groups

• Summary of New Social Security Rules

• Case 1: File and Suspend

• Case 2A: Restricted Application

• Case 2B: Change Relative PIAs and Ages

• Case 3: Couple with Two Earners (both Group 3), Lo PIA ≥ 0.5 Hi PIA


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Agenda

• Case 4A: Couple with One Earner (both Group 3), Lo PIA = $0

• Case 4B: Couple with One Major Earner, Lo’s PIA = $600

• Case 5: Single Client

• Case 6: Spouse of Disabled Wants Spousal Benefits

• Case 7: Disabled Gets Spousal Benefits

• Do You Still Need Software?

© Social Security Solutions, Inc. All rights reserved. Social Security Solutions, Inc.

is not affiliated with or endorsed by the Social Security Administration.

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Separate Rules for Three

Age Groups


Separate rules apply to clients in each of the following three age groups:

1. Clients born 4-30-1950 or earlier (those who “attain” full retirement age by April 29, 2016)

2. Clients born 5-1-1950 to 1-1-1954 (those who “attain” age 62 by end of 2015)

3. Clients born 1-2-1954 or later (those who do not “attain” age 62 by end of 2015)

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Important Dates 6

Married Couples

Divorced, Married 10 Years, Not

Remarried Widow(er)

Parents of

Dependent

Children

Single, Not

Married 10

Years

File and

Suspend

Restricted

Application

File and

Suspend

Restricted

Application

File and

Suspend

Restricted

Application

File and

Suspend File and Suspend

File

an

d S

usp

end

Dat

es

Age 66 or older

on April 30,

2016*

(Born April 30,

1950* or

earlier)

Able to file and

suspend prior

to April 30,

2016*; must

have reached

FRA

Can file a

Restricted

Application at

FRA

Not applicable

New rules do not apply to

widow(er) benefits; can choose

when to begin own or

widow(er) benefits and later

switch

Able to file and

suspend prior

to April 30,

2016*; must

have reached

FRA

Able to file and

suspend prior to

April 30, 2016*;

must have

reached FRA

R

estr

icte

d A

pp

licat

ion

Dat

es

Age 62 or older

in 2015 (Born

January 1,

1954 or earlier)

File and

Suspend not an

option

Can file a

Restricted

Application at

FRA

Not applicable

Can file a

Restricted

Application at

FRA if all other

requirements for

divorced spouse

benefits are met

New rules do not apply to

widow(er) benefits; can choose

when to begin own or

widow(er) benefits and later

switch

Not applicable Not applicable

Younger than

age 62 in 2015

(Born January

2, 1954 or

later)

File and

Suspend not an

option

Restricted

Application not

an option

Restricted

Application not

an option

*Dates are subject to change.

Summary of New Social

Security Rules


The Bipartisan Budget Act was reached behind closed doors with no public discussion of the inclusion of Section 831 or the new Section 202.

1. File and suspend strategy still available to Group 1

clients, but they must file and suspend by 4-29-16.

2. Restricted application available for Groups 1 and 2 clients if spouse has filed for his or her benefits.

3. Group 3 clients cannot file for one type of benefit at full retirement age (FRA) and later switch to another type. Rather, they are “deemed” to be applying for own plus, if eligible, spousal benefit whenever he or she applies for benefits.

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File and Suspend

• “File and suspend” strategy: At FRA or later, one spouse files and suspends his or her own retirement benefits. This makes his or her spouse eligible to file restricted application for spousal benefits at FRA.

• His/her own benefit accrue delayed retirement credits

• This allowed the spouse to begin a spousal benefit

• The change: After 4-29-16, suspending a worker’s benefit now suspends any benefit paid on his record

• Impacts spousal, children’s, and child-in-care benefits

• A worker still can voluntarily suspend his own benefit on or after FRA to earn delayed retirement credits



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“New” File & Suspend Rules

• If clients have already begun a file and suspend strategy, nothing changes.

• Group 1 clients can file and suspend benefits, but only through 4-29-16.

• Groups 2 and 3 clients will not have the opportunity to implement a file and suspend strategy.

TRANSLATION: Through 4-29-16, those who “attain” FRA by 4-30-16 can still file and suspend



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Deemed Filing

• Pre-budget act, the rules for before and after full retirement age were different:

• Before FRA: If you were eligible to receive more than one benefit (i.e., spousal and own), you were “deemed to be filing” for all benefits

• After FRA: You were able to “restrict” the application to one benefit or the other – you could choose which benefit.

• For Group 3 clients, any applicant who files at any age will be “deemed” to be filing for all benefits.


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“New” Deemed Filing Rules

• Groups 1 and 2 clients will be “grandfathered.” They will be able to file a restricted application for spousal benefits at their FRA or later (if their spouse has applied for benefits).

• Group 3 clients will not have the option to file a restricted application.


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Voluntary Suspension

• It remains possible to voluntarily suspend benefits at or after FRA for the purpose of earning delayed retirement credits.

• Delayed retirement credits will continue to be 2/3% of PIA per month (8% per year).

• After 4-29-16, anyone who suspend his benefits will also stop auxiliary benefits (e.g., spousal, child) based on his record.


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Choices When Unsuspending

Suspended Benefits

• Prior to new legislation, a client could suspend benefits at FRA or later can later 1) reinstate benefits back to the suspension date, 2) file for retroactive benefits up to 6 months earlier (only to FRA), 3) begin benefit at that time, or 4) continue to delay as desired out to age 70.

• New Section 202: A Group 2 or 3 client who suspends benefits at FRA or later can later 3) begin benefit at that time or 4) continue to delay as desired out to age 70.



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Widow(er) Benefits

• Nothing in the legislation mentions widow(er) benefits (a.k.a., survivor benefits)


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Divorced Spouse Benefits

• Groups 1 and 2 divorcees (at least 10 year marriage) can still file a restricted application for spousal benefits at FRA if ex-spouse is eligible for benefits (i.e., at least 62 or 62 and one month) and later switch to their higher own benefits.

• Group 3 clients cannot file a restricted application at FRA or later.

• Now, a vindictive ex-husband could suspend his benefits after 4-29-2016 to suspend his ex-wife’s spousal benefits. We expect a change to correct this unintended strategy.


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Case Studies


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“New” Primary Strategy: • Hi files and suspends by 4-29-16. Lo

files restricted application for spousal benefits at 66 (FRA) and switches to her own benefits at 70. Hi begins his own benefits at 70.

Case 1: File and Suspend

Hi: Group 1 Lo: Group 2 1 year younger 65, Jan 2, 1950 64, Jan 2, 1951 PIA of $2,000 PIA of $1,600 Life expectancy 83 Life Expectancy 83 “Old” Primary Strategy: When Lo attains FRA in 2017, Hi files and suspends and Lo files restricted application for spousal benefits. At 70, each partner switches to his or her own retirement benefits.


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Hi's age Lo's age Primary Strategy

Jan-16 Jan-16 $2,000 $1,600

66 65 F&S now 67 66 $1,000

68 67 $1,000

69 68 $1,000

70 69 $2,640 $1,000

71 70 $2,640 $2,112

72 71 $2,640 $2,112

73 72 $2,640 $2,112

74 73 $2,640 $2,112

75 74 $2,640 $2,112

76 75 $2,640 $2,112

77 76 $2,640 $2,112

78 77 $2,640 $2,112

79 78 $2,640 $2,112

80 79 $2,640 $2,112

81 80 $2,640 $2,112

82 81 $2,640 $2,112

83 82 $2,640

84 83

Lessons from Case 1

• Hi must file and suspend by April 29, 2016 so Lo can get spousal benefits of $I,000 per month from age 66 through 68. (Lo gets spousal benefits at 69 because Hi begun his benefits at that time.)


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Simplifying Assumptions in

Cases

• For clarity, we assume “Hi” is male and “Lo” is female.

• Cases assume each spouse receives 12 payments for the first year benefits are received.

• Hi’s life expectancy of 83 means he dies at beginning of year he turns 83. Thus payments cease at end of year he turned 82.

• Benefits are expressed in terms of today’s dollars (i.e., today’s purchasing power). These are also the approximate present values.


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Primary Strategy: At 62, Lo files for her own retirement benefits of $580, so Hi can file as restricted application for spousal benefits of $400. At 70, Hi switches to his retirement benefits of $2,640 and Jane adds spousal benefits of $192 per month for $772 of total. Strategy B: At 70, Hi files for his retirement benefits of $2,640 and at FRA of 66 and 6 months Lo files for spousal benefits of $1,000.

Case 2: Restricted

Application

Hi: Group 2 Lo: Group 3, 4 years younger FRA 66 FRA 66 and 6 months Jan 2, 1953 Jan 2, 1957 PIA of $2,000 PIA of $800 Life exp 89 Life exp 89


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Lessons from Case 2

• If often pays for Lo to begin benefits when Hi turns FRA so Hi can file restricted application for spousal benefits.

• Both spouses must live until Hi would be 89 and 4 months for Strategy B, where Lo waits until FRA to file for spousal benefits, to produce more lifetime benefits.

• If you change their relative PIAs and/or age difference then the maximizing strategy can change.


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Your Job in Case 2


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1. Best claiming strategy for clients depends on their tradeoff between two criteria: 1) maximizing lifetime benefits based on life expectancies and 2) minimizing longevity risk.

2. You might compare their Primary (maximizing) Strategy to another claiming strategy with similar life expectancies. SS Zone suggests comparing Primary Strategy to Strategy B: Hi 70 own and Lo 66&6 months spousal.

3. Once Lo attains age 66 and 6 months, Strategy B produces $228 more per month in joint benefits until first spouse dies. If both spouses live until Hi would be 89 and 4 months then Strategy B would provide more lifetime benefits.

4. Your job is to point out this tradeoff between Primary Strategy and Strategy B to clients so they can make an informed decision as to which strategy they prefer. In Compare tab, create Strategy B (Hi 70 own and Lo 66&6mos spousal) and compare it side-by-side with Primary Strategy.

Lessons from Case 3 • Neither spouse can receive spousal benefits. • Therefore, benefits based on Hi’s earnings record is like a second-to-die

annuity, while benefits based on Lo’s earnings record is like a first-to-die annuity.

• Since benefits based on Hi’s earnings will last until he would be 86 (if still alive), he would maximize their expected joint lifetime benefits if he delays his benefits until 70.

• Since benefits based on Lo’s earnings record will only last until she is 76, she would maximize their expected joint benefits if she begins her benefits at 62.

Case 3: 2 Earner Couple,

Lo PIA ≥ 0.5 Hi PIA


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Hi: Group 3 Lo: Group 3, 4 years younger Jan 2, 1960 Jan 2, 1964 (both FRAs 67) PIA of $2,000 PIA of $1,000 Life Exp 80 Life Expectancy 82

Your Job in Case 3


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1. Best claiming strategy for clients depends on their tradeoff between two criteria: 1) maximizing lifetime benefits based on life expectancies and 2) minimizing longevity risk.

2. Their Primary (maximizing) Strategy calls for Hi to delay till 70 and Lo to begin at 62.

3. You might compare Primary Strategy with Strategy Hi 70 and Lo 65, where Hi delays till 70 but Lo begins at 65. If Hi lives two years longer, SS Zone indicates that this strategy would be the maximizing strategy.

4. Hi 70 and Lo 65 Strategy brings in about $2,000 more per year than Primary Strategy once Lo reaches 65. But it would produce $3,209 less in joint cumulative benefits if they live to their precise life expectancies.

5. Lo beginning at say 65 instead of 62 would lower their longevity risk if Hi lives longer than expected.

6. Your job is to point out this tradeoff to clients so they can make an informed decision as to which strategy they prefer. In Compare tab, create Strategy Hi 70 and Lo 65 and compare it side-by-side with Primary Strategy.

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• Let’s compare the breakeven ages between Strategy 67 (begin at 67, FRA) and Strategy 70 (begin at 70) before recent changes and after the recent changes.

• Before the changes, the breakeven age was 82.5. If either spouse lives beyond age Hi would turn 82.5 then Hi should delay his benefits until age 70. After the recent changes, the breakeven age is about 88 years and 9 months.

• Next slide compares Primary Strategy (Strategy 67) to Strategy 70.

Case 4: 1 Earner Couple,

Lo’s PIA = $0


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Hi: Group 3 Lo: Group 3, same age FRA 67 FRA 67 Jan 2, 1960 Jan 2, 1960 PIA of $2,600 PIA of $0 Life Exp 85 Life Expectancy 88

Lessons from Case 4

• Before changes, earner could file and suspend when nonearner turned FRA, so nonearner could begin spousal benefits at 67. Now, earner must file for benefits for the spouse to get spousal benefits.

• Before recent rule changes, for 1-earner couple in Group 3 the breakeven age between Strategy 67 and Strategy 70 was 82.5. Now, the breakeven age between these strategies is about 88&9mos.

• Conclusion: Many one-earner couples in Group 3 will be better off if earner files for benefits when nonearner turns FRA instead of when earner turns 70.


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Is Strategy 67 or 70 Always this

Couple’s Primary Strategy?


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Is Strategy 67 or 70 Always this

Couple’s Primary Strategy?

• No. Their Primary (maximizing) Strategy varies with their life expectancies.

• If both spouses die by 75, earner should begin benefits at 62.

• If at least one spouse lives to 89 then earner would do well by delaying benefits until 70.

• Conclusion: The lifetime-benefits maximizing strategy calls for the earner to start benefits sometime between 62 and 70 depending on how old the earner would be at second spouse's death.


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Do You Still Need

Software?

• Household types add complexity: married; widowed; receive a pension from job not covered by Social Security; children; divorced.

• Other factors add complexity: taxes, future earnings, already started, breakeven analysis.

• Calculating benefits for FRAs of 66, 66 & 2 months, …, through 70.

• Strategies are still complicated. Consider simplest case: Same-age, 2-earner couple (PIAs $2,400 and $1,600). So, Hi will begin benefits on or after month Lo begins benefits. They have over 4,700 distinct claiming strategies.

• Clients are looking for more retirement income and optimizing Social Security is critical – software makes it quick and simple.

• We help you compare strategies side-by-side for clients.



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