Social Security Retirment Workshop (Dominion Investment Group)
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Social Security Retirment Workshop
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Social Security Retirment Workshop (Dominion Investment Group)
- 1. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop SOCIAL SECURITY STRATEGIES “TheFoundationforaSuccessful RetirementIncomePlan”
- 2. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Notice to All Attendees Retirement You® and today’s guest speaker(s) are not affiliated or endorsed by the Social Security Administration or any other governmental agency.
- 3. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop More Information About Your Host Dominion Investment Group We Specialize In: – Retirement Income Planning • Social Security Strategies • 401(k) & IRA Rollovers • RMD & Distribution Planning • Reducing Retirement Taxes 2710 SW Port Saint Lucie Blvd Port Saint Florida 34953 772.204.0741
- 4. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Tonight’s Workshop Agenda 1. Understanding the Basics About Social Security Benefits 2. Understanding Social Security Filing Options & Strategies 3. Case Studies & Social Security Changes Under New Budget 4. Closing the Gaps in Your Retirement Income Plan Our workshop will be approximately 1 hour long and we will cover 4 main topics that will help you better understand Social Security
- 5. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop SOCIAL SECURITY BASICS Common Questions About Social Security Income Benefits
- 6. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop When Can I File for Benefits? • Min/Max Ages – Born After 1937 – Minimum Age 62 – Maximum Age 70 • Full Retirement Age – Born 1943-1954 – FRA Age 66 – See Chart at SSA.gov
- 7. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop How are My Benefits Calculated? • Earnings History – Find on SSA.gov – Top 35 Years – Adjusted for Inflation – Average Indexed Monthly Earnings (AIME) • Primary Insurance Amount – FRA Benefit
- 8. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop How are My Benefits Calculated? • 2016 PIA Formula • 3 “Bend Points” 90% of First $856 + 32% of $856 - $5,157 + 15% Amt. Over $5,157 Primary Insurance Amount
- 9. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop How are My Benefits Calculated? • AIME = $6,500 • Calculate PIA 90% * $856 = $770.40 + 32% * $4,301 = $1376.32 + 15% * $1,343 = $201.45 $2348 PIA Benefit at Full Retirement Age
- 10. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop How Does COLA Impact Benefits? COLA stands for “Cost of Living Adjustment” and is used to protect your Social Security Income from the effects of inflation. COLA Averages • 1975-2015 – 3.88% Per Year • 1996-2015 – 2.25% Per Year NO COLA FOR 2015
- 11. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop How Does COLA Impact Benefits? COLA stands for “Cost of Living Adjustment” and is used to protect your Social Security Income from the effects of inflation. COLA Example • Starting Income – $2,000/month – Starting in 1990 • Ending Income – $3,604/month 2015 – No COLA in 2015 – Over 80% Increase Over 80% Increase
- 12. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop
- 13. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop
- 14. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Can I Work & Collect Benefits? If you begin collecting benefits before reaching Full Retirement Age, the amount of “Earned Income” you can make without penalty is significantly reduced. 2016 Numbers • Before FRA (62-65) – Exempt Amount $15,720 – $1 Reduction/$2 Income • During FRA (66) – Exempt Amount $41,880 – $1 Reduction/$3 Income – Monthly Offset
- 15. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Will My Benefits Be Taxable? Individual Filing • 0% of Benefits Taxable • Less Than $25,000 • 50% of Benefits Taxable • Greater Than $25,000 • Less Than $34,000 • 85% of Benefits Taxable • Greater Than $34,000 Married Filing Jointly • 0% of Benefits Taxable • Less Than $32,000 • 50% of Benefits Taxable • Greater Than $32,000 • Less Than $44,000 • 85% of Benefits Taxable • Greater Than $44,000
- 16. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Required Minimum Distributions Qualified Plans • Starting at Age 70.5 – Includes IRA/401(k)/403(b) • Forced Withdrawal – Starts at 3.64% (27.4 years) – Age 75 4.36% – Age 80 5.34% – Age 85 6.75% • IRS Penalty – 50% of Amount Due
- 17. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop
- 18. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Required Minimum Distributions Qualified Plans • Starting at Age 70.5 – Includes IRA/401(k)/403(b) • Forced Withdrawal – Starts at 3.64% (27.4 years) – Age 75 4.36% – Age 80 5.34% – Age 85 6.75% • IRS Penalty – 50% of Amount Due
- 19. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Additional Updates for 2016 • Social Security Wage Tax – Maximum Taxable Wages • $118,500 (2016) • No Change from 2015 – 6.2% of Earnings W-2 – 12.4% of Earnings 1099 • Maximum Benefit Amount – At Full Retirement Age – $2,639/mo. (2016) • Average Benefit Amounts – All Workers $1,341 – Married Couples $2,212
- 20. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop SOCIAL SECURITY FILING How to Make Sure You Have All the Facts Before Starting Social Security
- 21. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop What to Consider When Planning? • Your Complete Wage History • Desired Retirement Age • Estimated Life Expectancy • Inflation & COLA • Other Sources of Income – Qualified Accounts – Non-Qualified Accounts
- 22. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Finding Your Benefit Information • Social Security Website – www.ssa.gov/myaccount – Create Account – Research Earnings – View Benefits – Sample Statements
- 23. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Longer Wait = More Benefits? • Full Retirement Age – Benefit $2,000/mo. – $24,000/yr. • Minimum Age – 62 – Benefit $1,500/mo. – $18,000/yr. • Maximum Age – 70 – Benefit $2,640/mo. – $31,680/yr.
- 24. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop File and Suspend Benefits • File for Benefits at FRA • Payments are Suspended – Delayed Retirement Credits – 8% Per Year Until Age 70 – 132% of FRA Benefit at Age 70 • Spouse Becomes Eligible to File for Spousal Benefits – 50% FRA Benefit Until Age 70
- 25. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Filing Restricted Application • File for Benefits at FRA • Payments are Restricted – Amount Based on the Remaining Spouse’s Benefit – Delayed Retirement Credits – 8% Per Year Until Age 70 – 132% of FRA Benefit at Age 70 • 1st Spouse Must File for 2nd to be Eligible for Restricted Filing
- 26. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Example of Switching Strategies Tom - Current Age 66 FRA Benefit $2,000/mo. Nancy - Current Age 64 FRA Benefit $1,000/mo. Tom files at age 66 and Suspends his benefits 8% Per Year Benefit Increase 132% FRA At Age 70 Nancy files Restricted 50% Spousal Benefits Receives $1,000/mo Plus COLA for 4 years Switches to her benefit at age 70 132% FRA
- 27. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Example of Switching Strategies Tom - Current Age 66 FRA Benefit $2,000/mo. Nancy - Current Age 64 FRA Benefit $1,000/mo.
- 28. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop What is the “Best Strategy” for You? 9 Years * 9 Strategies = 81 Unique Combinations
- 29. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Everyone’s Plan is Different
- 30. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Questions & Answers
- 31. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop CASE STUDIES & CHANGES Why Social Security is an Important Part of Retirement Income Planning and How the New Budget Impacts Filing Options
- 32. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Assumptions in Case Studies The following case studies assume current age of 66 for all parties, using a life expectancy of 85 for Males and 90 for females. All numbers are based on using any available switching strategies and a cost of living adjustment of 2% per year.
- 33. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Case Study: Single Person • Social Security FRA Benefit – Individual $2000/mo. – Life Expectancy Age 85 • SS Income Filing ASAP –$548,174 • SS Income After Planning –$593,016
- 34. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Case Study: Divorced Person • Social Security FRA Benefit – Individual $1500/mo. – Ex-Spouse $1500/mo. • SS Income Filing ASAP –$547,594 • SS Income After Planning –$661,989
- 35. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Case Study: Married Couple • Social Security FRA Benefit – Spouse #1 $2000/mo. – Spouse #2 $1000/mo. • SS Income Filing ASAP –$1,004,211 • SS Income After Planning –$1,179,160
- 36. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Bipartisan Budget Act of 2015 Background Information • Signed Into Law November 2015 – House Vote 266 to 167 – Senate Vote 64 to 35 • Suspends Debt Ceiling Until 2017 • Removes Sequester Spending Caps • Transfer $150B from Social Security Trust to Fund Disability • Phases Out Social Security “Loopholes” including Suspending & Restricting
- 37. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Bipartisan Budget Act of 2015 Social Security Impact • Disability Funded Until 2022 • File & Suspend Strategy – Phased out 6 months from effective date of new policy – No spousal benefits without collecting • Restricted Application – Phased out over the next 4 years for workers 62 or over – No change to survivor benefits
- 38. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Impact of the New Budget Act Divorced Person • Social Security FRA Benefit – Individual $1500/mo. – Ex Spouse $1500/mo. • Estimated Lifetime Benefit – With Switching $661,989 – No Switching $547,594 – Lost Income $114,395
- 39. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Impact of the New Budget Act Married Couple • Social Security FRA Benefit – Spouse #1 $2000/mo. – Spouse #2 $1000/mo. • Estimated Lifetime Benefit – With Switching $1,179,160 – No Switching $1,004,211 – Lost Income $174,949
- 40. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Why is Planning So Important? According to a Recent Study from SSA, Social Security accounts for approximately 36% of the average individual’s retirement plan. With recent policy changes, the need for additional retirement income sources will increase.
- 41. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop According to a Recent Study from SSA, Social Security accounts for approximately 36% of the average individual’s retirement plan. With recent policy changes, the need for additional retirement income sources will increase. Why is Planning So Important? FOR MOST RETIREES, SOCIAL SECURITY WILL BE YOUR FIRST OR SECOND LARGEST RETIREMENT ASSET AND INCOME SOURCE
- 42. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Steps in the Planning Process When Will You Retire? Life Expectancy File Now vs. File Later “Switching” Strategies What’s at Stake? Current Income Needs Future Income Needs How to Close the Gap Gathering the Information Wage Info from SSA.gov Creating the Social Security Plan Identifying the Income Gaps
- 43. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Retirement Income Planning Joe & Deborah M • Income Need $5,400/mo. • Social Security Income – Joe $2,000/mo. – Deborah $1,000/mo. • Retirement Accounts – Joe $500,000 – Deborah $250,000
- 44. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop BEFORE PLANNING
- 45. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop AFTER PLANNING
- 46. *For educational purposes only, not affiliated or endorsed by Social Security Administration or any other government agency social security retirement workshop Thank You for Attending • Complimentary Consultation – Areas of Interest & Concern – Sign Up Before You Leave – List 2 Best Times – NO CHARGE CONSULTATION • 45-60 Minutes (Nothing Sold) • Complimentary Report ($399 Value) • Please Rate Our Workshop – Content & Guest Speaker – Comments/Suggestions Workshop Evaluation Form (Please Return to Your Presenter)
Notas del editor
- Social Security Planning: Strategies to Maximize Benefits Welcome to tonight’s educational workshop, which is designed to review planning strategies for Social Security retirement income. The presentation will last approximately 1 hour and for everyone in attendance tonight, we will be offering a complimentary 1 hour in office consultation to review your personal planning strategies, as well to provide you with a customized report showing the best strategy to maximize the amount of lifetime income you receive from Social Security. When your parents retired, Social Security was much different. They went to their local office at age 65 or age 62 if they retired early, filed for benefits and that was it. Most people took their benefits for granted and didn't’t ask questions. We have found that in the age of information, the Baby Boomer generation has taken a very different approach and wants to make sure that not only will their benefits be available, but also that they receive the most possible income during their lifetime.
- Notice to All Attendees To make sure everyone attending tonight is aware, we are not affiliated or endorsed by the Social Security Administration or any other governmental agency. The planning strategies discussed are unique to each specific situation and we always recommend considering the tax implications when deciding when to start your Social Security income. It is very likely that this will be the first time you have heard about many of these strategies as they are not provided by SSA employees when you inquire about your benefits. We hope that tonight’s brief overview will help show you what is at stake so that you can see the importance of having a plan in place.
- About Your Speaker My name is (ADVISOR NAME) and I work with (COMPANY NAME). Our office is located on (STREET NAME) in (CITY) and as we have met with our clients to discuss Social Security and their experiences, we have found that SSA employees are not always as informative and have not received the proper training to be as helpful as they should be when it comes to MAXIMIZING BENEFITS. Has anyone here tonight ever tried to reach SSA with questions about their benefit or when to file? I assume your experience was that they are very helpful when it comes to “How to File” but not as helpful or trained on “When to File”. There are often a lot of questions that go unanswered and as you will see with tonight’s presentation, there is a lot at stake if you don’t have all the facts before you file. Let’s take a look at tonight’s presentation topics.
- Tonight’s Workshop Agenda Tonight we will cover 3 key topics to consider when putting together your specific Social Security income plan. First, we will review the basics of Social Security and make sure we are more familiar with some of the terminology used when we discuss your benefits. In addition, we will discuss the age requirements for filing, how your benefits are calculated and possible tax implications that may exist when you file. Second, we will review the Social Security filing options and strategies that are available for individuals, married couples and divorcees. In an effort to close loopholes and simplify the filing process in the long term, the new budget act has created additional confusion about some of the available filing strategies. Third, we will look at 3 specific case studies, depending on marital status and examine the difference between using filing strategies or not. In addition, we will explain how the budget act changed these strategies, who still qualifies and the impact of the new legislation. After covering these 3 main topics, we will review the retirement income planning process, how Social Security comes into play and why it is so important.
- Social Security Basics The first topic tonight is Social Security Basics. This may be a refresher for a lot of you, but it is important to be comfortable with some general information about Social Security before we start to discuss ways to maximize your benefits. We will go through a basic Q&A of the most common questions we receive from our existing clients regarding Social Security. We want to respect your time tonight and have a lot to cover in 60 minutes, so we will try to take a few questions as we go but ask that if you have a question regarding something specific to your Social Security that you wait until after the workshop. Please write down any questions and we will make sure to answer them.
- When Can I File for Benefits? This is easily the most common question we get at our office on a daily basis. For most people in the room today, you will be eligible to apply for benefits at age 62 and your Full Retirement Age (FRA) will be 66. You will hear us refer to Full Retirement Age as FRA for short and this is an important number to remember. Q: Has anyone been told that they should file at age 62 immediately when they are eligible and that this is the way to receive the most benefit? While this may be true for some individuals, it is almost never the best strategy for married couples and can result in the loss of hundreds of thousands in potential benefits over your lifetime. In our example later on, you will see that just by allowing at least 1 spouse to reach full retirement age, we can increase overall lifetime benefits by hundreds of thousands of dollars.
- How are My Benefits Calculated Calculating your FRA benefit can be fairly complicated but we will go over the basic components with you. Thankfully, all this information is readily available online at the SSA.gov and your statement will show what your expected monthly income will be at FRA based on your work history. To calculate your Primary Insurance Amount, which is the amount you are projected to receive at Full Retirement Age, the SSA will use your top 35 years of work history. These earnings will then be adjusted for inflation to determine your AIME. AIME stands for “Average Monthly Indexed Earnings”. There is then a tiered calculation ranging from 15%-90% to determine your Primary Insurance Amount or PIA. Q: Anyone Confused at All? Me too! Thankfully, you will not have to calculate this yourself. You simply want to make sure that your work history is accurate and that you have an accurate copy of your benefit statement so you can start the planning process and decide when to file.
- How are My Benefits Calculated After determining your AIME, we apply the Bend Point Formula (which changes every year) to find out our Primary Insurance Amount (PIA). Your PIA is synonymous with your Full Retirement Age benefit amount so the easiest way to remember this is PIA=FRA. To calculate your benefit, we take 90% of the first $856 of AIME, 32% of the next $4,301 of AIME ($856-$5,157) and finally 15% of any amount over $5,157. Let’s take a look at an example.
- How are My Benefits Calculated Assuming your AIME is $6,500, you can see that after we apply the formula, your Primary Insurance Amount (PIA=FRA) would be approximately $2,348.
- How Does COLA Impact Benefits? COLA stands for “Cost of Living Adjustment” and is used to protect your Social Security Income from inflation and the loss of purchasing power during retirement. It is very important to have at least a portion of your retirement benefits protect against rising inflation and this is one of the key benefits to Social Security Income. Q: Does anyone know what the average COLA adjustment has been since 1975? 3.88% per year has been the average annual increase in benefits. Q: What about the last 20 years from 1996-2015? As you can guess, interest rates and inflation have been lower so the average rate is significantly less at 2.25%. To be conservative, we use a rate of 2% when preparing your Social Security Reports in our office. If the rates are higher, there may be even more at stake if you don’t have a plan. Changes to the CPI benchmark have been discussed in order to extend the trust fund solvency, the current benchmark is the CPI-W and in April of 2013 the introduction of the “Chained CPI” was discussed to decrease future COLAs. While this was not adopted, the New Budget Act changes showed how quickly things can change. Finally, for 2015, similar to 2009 and 2010, there was no COLA in 2015 (due to several factors including decreasing interest rates and oil prices), so there was no increase on January 1, 2016. Long story short, COLA is a very good thing and will help make sure your income wont be worth less as you get further into retirement.
- How Does COLA Impact Benefits? Would it surprise anyone if I told you that you may collect over $500,000 in lifetime Social Security Income if you are a single filer and potentially $1Million or more as a married couple? Lets take a closer look at how COLA works, assuming you retired in 1990 and your initial Social Security Benefits was $2,000 per month. As you can see, each year your income is adjusted for Cost of Living. With the exception of of 2009, 2010 and 2015 there was an increase of between 1.8% and 5.8% each year as determined by the CPI-W (the consumer price index for urban wage earners and clerical works). This amount will vary each year, but the average during this period was 2.4%, as we discussed on the last slide. As you can see in this example, even though the amount started at $2,000 per month is 1990, you would have been receiving $3,604 per month at the end of 2015. There was no COLA in 2015, so all recepients will receive the same amount in 2016 as they did in 2015.
- Will Social Security Go Broke? A major factor in filing for benefits prior to Full Retirement Age is a general uncertainty and lack of knowledge about changes to Social Security. Some key dates to consider before filing exist within the annual OASDI Trustees report. As you can see, the Old Age & Survivors Insurance (OASI) trust hold the assets used to pay Social Security Benefits. The fund’s peak value was in 2011 and costs currently exceed revenue. By 2035, the fund is projected to be depleted if changes to Social Security are not made. Proposed changes include reduction to future COLAs, increase in payroll taxes, increase in FRA for younger workers or a combination of these changes. In addition, if the fund is still unable to sustain itself, the benefits for current retired workers may have benefits reduced. It is important to make sure these risks are taken into consideration, along with other factors that will be discussed later in the planning section. When we look at the sample report later, you will see that we don’t always recommend having both spouses wait as long as possible or even use the “Best Strategy”. It all depends on the best fit for you and your specific situation.
- Will Social Security Go Broke? This chart shows the 3 trust balances and the impact of more people retiring, as well as living longer. As you can see, the OASI balance peaked in 2011 and will start to be rapidly reduced until the 2035 projected date of depletion.
- Can I Work & Collect Benefits? In addition to Social Security Benefits being taxable if you make over a specific income amount, it is important to remember the penalty you may incur if you continue to work and file for benefits before reaching your Full Retirement Age (FRA). For 2016, if you are collecting Social Security Benefits you will only be able to make an income of $15,720 before being penalized. It is important to remember that for income purposes, we are only talking about W-2 earnings or 1099 earnings if you are self employed. Income from pensions, retirement accounts and investments is not included for purposes of calculating the penalty. For every $2 in income you earn per year above $15,720 from ages 62-65, you will have to pay back (or withhold) $1 in Social Security Benefit. This is in addition to any tax you may have to pay at the end of the year on your benefits. During the year you reach your Full Retirement Age (FRA), the Exempt Amount becomes $41,880 (prorated monthly) and you have to pay back $1 in benefit for every $3 in income. *The basis numbers did not increase in 2016 due to no COLA. Let’s Looks at an Example: If you are 65 and decide to collect Social Security Benefits while still working and make $50,000 per year, after subtracting the Exempt Amount of $15,720 our penalty basis becomes $34,280. We have to pay back $1 for every $2 of income so our penalty for the year would be $17,140. This money is not “lost and gone forever” and when you reach FRA you will receive a slight increase to adjust for the penalty paid. As you can see, it is very important to consult an accountant prior to collecting Social Security, especially if you plan to collect before reaching Full Retirement Age (FRA).
- Will My Benefits Be Taxable? Now that we know how benefits are calculated and adjusted for Cost of Living, the next most common question we receive is “Will My Benefits Be Taxable?” We wanted to spend a few minutes tonight discussing how your benefits become taxable for individuals and also for Married Filing Jointly. For individuals, your Social Security does not become taxable until your “Provisional Income” reaches more than $25,000. Provisional Income includes half of your Social Security, along with adjusted gross income from your tax return and any tax exempt interest. This is particularly important if you have “Tax Free Bonds”. Although the interest may not be taxable on your tax return, it is considered a countable source of income for Social Security Purposes. When your provisional income is between $25,000 and $34,000, 50% of your Social Security Income becomes taxable. If provisional income is over $34,000, 85% of your Social Security becomes subject to tax. For married couple filing jointly, the numbers change slightly. There is no tax on benefits until your provisional income is over $32,000. The taxes are 50% on amounts between $32,000 and $44,000. Benefits become 85% taxable when you file jointly and make greater than $44,000 in provisional income. *One special note, if you are married and live together but file separately 85% of your benefits will be taxable regardless of how much provisional income you earn.
- Required Minimum Distributions (RMDs) Q: Please raise your hand if you have a “Qualified Retirement Plan”, a 401(k), IRA, 403(b), etc…does anyone know what happens when you reach 70.5 years old? A: In exchange for allowing you to defer paying tax on your earnings and the portion you contribute to these qualified plans, you are required by law to begin spending down these accounts when you reach age 70.5. We have several clients that do not need all of their Qualified assets to live and are looking for ways to help pass those assets on. This concept, known as RMD or Distribution Planning is becoming increasingly popular. There is no way around taking RMDs, but with some planning we can help reduce the impact to your overall estate value. As you can see, the percentage you have to take from these accounts each year increases as you age and your life expectancy is reduced. By the time you reach age 80, your RMD has increased from 3.64% to over 5%. In addition, if you do not take your RMD, you will be subject to a 50% penalty on any amount you didn’t withdraw. Let’s take a look at an example…
- When we look at retirement risks, the risk of loss and the impact on your income is an important thing to understand. This chart shows the impact of losses on your retirement accounts. If we take a look an example, lets say you have an account that is “at risk”. If you start with $100,000 and lose 20% ($20,000), you are left with $80,000. If you gain back the same 20%, are you back to even? As we can see on the screen, the answer is NO. In order to get back to your original $100,000 you would have to gain back 25%. If we add an additional 5% for RMD’s, we would now have to gain back 33.3% to get back to even. Understanding this concept is one of the keys to a successful retirement income/distribution plan because you no longer have “time on your side”. The last thing we want to do is “run out of money before we run out of time”.
- Required Minimum Distributions (RMDs) Let’s assume at age 80, you have a balance of $500,000 in your 401(k) or IRA. Your life expectancy, based on current uniform tables is 18.7 years, meaning you have to take 5.34% of your balance this year whether you need it or not. If the $26,700 RMD is not taken, the 50% penalty would be $13,350.
- Additional Updates for 2016 We have talked about the main questions and changes to Social Security, but I want to highlight some additional figures for 2015. The maximum taxable wages for Social Security Tax on earnings is $118,500 in 2016, the same as 2015. The Social Security tax is unchanged, at 6.2% of W-2 earnings, which is matched by your employer. If you are self employed, you will responsible for both portion, or 12.4% in the form of self employment tax. We are frequently asked what the Maximum amount of Social Security is. As you can see here, the amount was $2,639/mo in 2016 and will be increased in future years due to AIME and the increase in Taxable Wages. Over 2/3 of current retirees that are collecting Social Security are receiving a reduced benefit due to filing prior to Full Retirement Age. The average monthly benefit amount for those currently collecting is $1,341/mo and for married couples is $2,212/mo. With a little bit of planning, we are confident we can help you increase your number and lifetime benefits by thousands of dollars.
- About Social Security Filing In the next section, we will discuss the steps you need to take to start the filing process, how it works and what to expect. Specifically, we will talk about the variables to consider when deciding how long to wait before starting benefits, what factors to consider when putting your plan in place and a little more about break even analysis.
- What to Consider When Planning? There are several key components to consider when planning for Social Security. The first is your complete work history, which will provide the AIME calculation that we discussed earlier. You will want to make sure this history is accurate and contact SSA if there are any errors. Second is your desired retirement age. This is important because after we maximize Social Security using the strategies we will discuss in a few minutes, you may have to adjust where you pull retirement funds from before your Social Security starts to pay. It is important to remember that the age you retire does not always have to match the age you start Social Security. The next steps are looking at your “Shelf Life”, how long do you expect to live. This is part of your consultation, we will discuss your family history and use our calculator to help you determine your estimated life expectancy. For better or worse guys, the ladies usually have us beat on this one! We already discussed inflation and COLA, generally we use 2% as an average COLA to be conservative, but we can adjust this up or down based on your specific concerns. Finally, you will want to look at your other assets to determine how to fill the income gaps that Social Security won’t provide. Some of you may still be lucky enough to have a Pension that will help fill those gaps, while others might be responsible to creating their own income stream from a 401(k), IRA or savings/brokerage accounts. Social Security is the first step, but in order to maximize your Social Security Income it is important to consider other sources of income as well. Lets take a closer look at how it works…
- Finding Your Benefit Information As we have discussed the planning process it is important to become familiar with where to find your information. Q: Has anyone in here seen their statement online on SSA.gov? Great! For those who haven't, this is also part of our consultation, we will walk you through where to go to find your statement and how to read the statement. There is a great resource available online to help you become more familiar with all the terminology we have discussed today.
- Longer Wait Equals More Benefits? We have discussed the basics of when you are eligible for benefits and when you have reached full retirement age (FRA). Again, for most everyone here tonight, your FRA will likely be age 66. This simply means you will receive 100% of your Primary Insurance Amount. In this example, the benefit at FRA is $2,000 per month or $24,000 per year. If you started benefits at age 62, you would only receive $1,500 per month or $18,000 per year. This is referred to as an actuarial reduction, basically meaning that you will receive benefits longer so your benefit amount will start at a decreased amount. At age 62, you will only receive 75% of your FRA benefit. On the other hand, if you wait until age 70 to start your benefits, you receive 8% each year you wait and you would start with 132% of your FRA benefit. Where this really starts to hit home is when the income starts becoming adjusted. Does everyone remember COLA? Would you rather have COLA on $1,500 or $2,640? Depending on your life expectancy and other assets, it can make a lot of sense to delay benefits as long as possible. We will come back to this in a minute, but first I want to spend a minute on Break Even Analysis. Q: Has anyone ever had an accountant, financial advisor or even a friend tell them that you should file for benefits as soon as possible because it takes so long to break even that you might as well have the money now?
- File and Suspend Benefits The first switching strategy is called “file and suspend”. This strategy is when you file for benefits at age 66 (or FRA) and suspend payments. There are two primary advantages to this filing strategy. The first is that because you are not receiving any benefits, your benefit is still eligible to receive delayed retirement credits of 8% per year until age 70. The second is that by filing and suspending, you are also allowing your spouse to become eligible for “Spousal Benefits” equal to 50% of your FRA benefit. In the previous example using $2,000, you would file at age 66 and not take any benefit payments. Your wife would file the same year and receive $1,000 per month as her spousal benefit. Why do we do this? Even though your spouse is collecting half of your benefit, she is still allowing her benefit to grow until she reaches age 70- and is forced to start collecting her benefits. In the next strategy, we will talk about how she can file for this type of benefit. Before April 2016: File & Suspend will be phased out as result of the New Budget Act, making it even ore important to look at your options as soon as possible. After April 2016: File & Suspend was phased out as a result of the New Budget Act and is no longer available to future filers.
- Filing a Restricted Application Filing a restricted application at Full Retirement Age will allow a second spouse to receive spousal benefits on the first spouse, regardless of whether or not the first spouse is receiving benefits. As in the previous slide and what is often the case is that the first spouse files at age 66 but doesn’t start benefits until age 70, so they are able to receive the delayed retirements credits each year. However, the second spouse can still receive the same credits and collect the spousal benefit at the same time. In this example, the second spouse would receive $1,000 per month the first year and COLA adjustments each year until she reaches age 70 and switches to her benefit. This may sound confusing, so we will walk through an actual example in just a minute. Q: Has anyone ever heard of using these strategies or is anyone currently using them right now? *The New Budget Act also had an impact on the Restricted Application, which we will review in detail before the end of the presentation.
- Examples of Switching Strategies These concepts can be a little confusing, so lets take a closer look at how the process works. Tom is 66 and we will use the same $2,000/mo benefit that we had in the previous slides. Because he has reached FRA, he is able to file and suspend his benefits. When Nancy, who is currently 64 and has a FRA benefit of $1,000/mo, reaches FRA, she is able to file a Restricted application for spousal benefits. She will receive 50% of Tom’s benefit and allow her own benefit to grow at 8% per year. When Tom reaches age, he will start collecting and receive 132% of his benefit (plus COLA). Nancy will collect 50% of Tom’s benefit for 4 years, then switch to her benefit at age 70. Here is what the numbers look like…
- Example of Switching Strategies In the first year, Tom files and Suspends. When he reach age 70, he collects his benefit. In this example, we assume 2% COLA and his projected benefit would $33,600 per year (instead of $24,000/yr if he filed at 66). Nancy files a restricted application at age 66 and receives $12,000/yr plus COLA for 4 years. She then “Switches” to her benefit at Age 70 and will now receive approximately $16,800/yr.
- Combining Strategies Not including each unique month and year combination available, there are 9 years and 9 possible strategies that can be used by a married couple find the best way top maximize Social Security Benefits. This makes 81 possible combinations so your plan may be very different than the couple sitting next to you. The number is actually much higher, as Social Security is calculated on a monthly basis and every person’s life expectancy, income needs and retirement goals will be different.
- Everyone’s Plan is Different The important thing to remember is that everyone’s plan is different and it doesn't hurt to know the best way to maximize your benefits. We have used these planning strategies more and more with our existing clients and the overwhelming response is why we put on this community workshop tonight. Again, we are offering a complimentary 1 hour consultation for everyone who has attended tonight, where we will sit down with you and prepare your customized report at no charge.
- Questions & Answers We have covered a lot of information tonight and I want to take a few minutes for some questions before reviewing the case study. If there is something specific to your situation, we will be around after the workshop or you can write it down so we can cover it when you come in for your report.
- Case Studies and Changes Now that we all have a good grasp on how the basics and how the planning process works, I want to talk more about what's at stake for individuals, married couple and divorced filers. In addition, the New Budget Act made sweeping changes that will impact many Baby Boomers as they plan for retirement.
- Case Studies Assumptions The following case studies assume current age of 66 for all parties, using a life expectancy of 85 for Males and 90 for females. All numbers are based on using any available switching strategies and a cost of living adjustment of 2% per year.
- Case Study: Single Person As we discussed previously, approximately 2/3 of eligible filers collect benefits prior to reaching Full Retirement Age, which may be the right decision for some, but don’t you think it makes sense to get the facts before you file? As you can see here, the difference is almost $50,000 for an individual filer that is currently age 66 and has a FRA benefit of $2,000 per month (Approximately $55k Average Annual Income).
- Case Study: Divorced Person Divorced filers have increased options, as they are able to potentially collect benefits based on the age of former spouses, as long as they were married for at least 10 consecutive years and haven't remarried prior to age 60. In this example, we use a conservative assumption of $1500/mo. for each former spouse. As you can see, the difference between filing at age 62 and using the recommended strategies is over 20% and would result in an estimated lifetime benefit increase of over $100,000.
- Case Study: Married Couple Finally, lets discuss the group of filers with the most at stake when it comes to planning: Married Couples. In this example, we are again assuming conservative numbers for FRA benefit at $2000/mo. And $1000/mo. respectively. Yours may be higher or lower depending on your average annual earnings. In this example, the difference between filing ASAP and using the recommended strategy is over $150,000 and would be even higher if they were younger and decided to before reaching FRA. As we discussed, in these examples, everyone has already reached Full Retirement Age.
- Bipartisan Budget Act of 2015 In order to fund government operations and avoid another shutdown in Washington, the Bipartisan Budget Act of 2015 was passed late last year, a sweeping bill that was negotiated behind the scenes and passed quickly through the House and Senate. This legislation removed the debt ceiling until 2017 and removed sequester spending caps, paving the way for unprecedented government spending across several programs, including defense and domestic spending. Once signed into law, the Appropriations Committees are in charge of determining how the funds are spent. The proposal reallocates $150 Billion from Social Security General Fund to Social Security Disability to avoid a benefit reduction of up to 20 percent.
- Bipartisan Budget Act of 2015 With Disability funded until 2022, the next target in the act became closing some of the “loopholes” created in 2000, which we discussed during tonight’s presentation. These strategies allow married, divorced and survivors to claim spousal benefits while allowing their own benefits to continue to grow. With the law now effectively rewritten, these strategies will begin to be phased out. For the “File & Suspend” Strategy, there will be a 6 month window before the strategy goes away completely. For the “Restricted Application” strategy, those who turn 62 in 2016 or later will be prevented from using the strategy and it will be phased out over the next 4 years. At least initially, surviving spouses will still have the option to file a restricted application and allow their benefit to continue to grow.
- Case Study: Divorced Person If we assume that the strategies we discussed are no longer available, the lost income becomes the difference between using switching strategies and filing without. In other words, Social Security will provide over $100,000 less than it did under previous laws, creating a potential gap in retirement income.
- Case Study: Married Couple Again, for married couples the difference is much more significant. In this example, over $170,000 but in some cases the number will be much higher. The need for coordination of retirement income sources has become more important as Social Security filing options have been eliminated.
- Why is Planning So Important? With the new budget act making the most sweeping changes to Social Security in 15 years, we need to focus on where that additional income will come from. Is it your 401(k), IRA, real estate income or other retirement saving? Do you have a plan? Its ok if the answer is no, that’s what we specialize in. As the amount of filing options decrease, the amount of lifetime income will decrease as well, making the need for additional income planning in retirement a priority. Make sure you know your options and how this new legislation will impact your filing options. Even if you have already filed or have a social security plan, you may still need additional planning so you know the impact of the new budget.
- Why is Planning So Important? For most of us, Social Security will be our first or second largest source of retirement income, so our first goal is to make sure you understand your options and we can use Social Security as the foundation for the rest of your retirement income plan.
- Steps in the Planning Process First we have to gather all the information we will need to prepare your report. You can find your wage info and benefit statements on SSA.gov. Next, you will decide what age you want to retire, again this may not be the same age as you take your Social Security. Finally, what is your “Shelf Life”, or life expectancy. This will give us the initial information needed to start preparing your report. After your 1 hour consultation, you will receive your report showing the difference between filing now and filing later. The report also explains the different strategies available specifically for married couples, known as switching strategies. Finally, you will see your recommended strategy and what's at stake if you don’t incorporate some level of Social Security Planning. From this report and examining your current income needs, we will also provide a supplemental report that will show you the difference between what Social Security will provide and what you will need to keep your standard of living throughout retirement. Again, our goal is not to sell you a product or service, but simply to help you put the pieces in place to allow you to make educated decisions about your Social Security and overall retirement income needs. For some, Social Security will provide adequate income to satisfy all their future income needs. For the vast majority, you will need to take it a step further and look at your pension, 401(k), IRA or other accounts to put together an overall income plan. This supplemental report will help you identify where the gaps exist above and beyond Social Security.
- Case Study: Married Couple Lets take a closer look at how the planning process works, using Joe and Deborah M… Their monthly income need if they were to retire today would be $5,400. From Social Security, with the new budget changes, they expect to receive between $35,000 and $40,000 per year with annual COLA increases steadily increasing that number. Their retirement accounts total $750,000 Will they have enough money to make it through retirement based on their needs and projected income?
- Before Planning Based on conservative assumptions, they will only have about 85% of their income needs covered unless they take steps to secure their retirement income. Our goal is to look at retirement accounts and create income streams that will help ensure you avoid the #1 fear of retirees, Running Out of Money.
- After Planning By taking a closer look at income sources and talking about needs in retirement, we were able to work Joe and Deborah to first maximize their Social Security income and then close the gap created to cover any shortfalls, reducing risk and achieving peace of mind.
- Thank you for Attending Again we appreciate everyone coming tonight and hope that you received some information that will help you navigate through your personal Social Security Planning process. If you would please take out the sheet titled “Workshop Evaluation Form”. We ask that you fill this out so we can make sure we are constantly improving the presentation. On the top, please fill out your information, we do not share this with anyone else and it is 100% confidential. Second, you will see your Areas of Interest and Concern, please check the areas you would like to discuss in your consultation. We have a very busy office, but have set aside time for the next 2 weeks to ensure that everyone is able to receive their complimentary report. If you know a time, please sign up in the back tonight. Otherwise, we ask that you give us two times that you will be available within the next 2 weeks and we will call to confirm your consultation. At the consultation, we will get all the information needed for your report and give you a chance to ask any specific questions you have about tonight's workshop. Finally, on the bottom, we ask that you rate our presentation and the speaker. We take this seriously and our goal is to make sure you really learned something tonight and we have provided a service to everyone who has attended. Thanks again to everyone for coming tonight, we hope you gained something from the workshop and look forward to meeting with everyone to prepare your personal Social Security Report. Please pass your forms in before you leave and we hope you have a great evening.