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Determining Optimal SS Claiming Strategies: New Business Opportunity Presented by: Lawrence C. Starr, CPC, QPFA Lawrence C. Starr, President Qualified Plan Consultants, Inc. 46 Daggett Drive West Springfield, MA 01089 413-736-2066 (office) 413-781-5997 (fax) [email protected]

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What This Is Not! • Not a session on the basics of SS • Not a session on how to determine SS benefits – We did that last year – The outline is available (was uploaded with this outline, but if not, send me an email requesting it)

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Special Thanks • Special thanks to: – Mary Beth Franklin • InvestmenNews Contributing Editor • http://www.investmentnews.com/section/retirement2

– Her eBook is the basis of this outline

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Maximizing SS Benefits • Maximizing your client’s SS benefits is what this is all about

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Maximizing SS Benefits • Maximizing your client’s SS benefits is what this is all about • It is not easily understood and most people don’t understand it.

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Maximizing SS Benefits • Maximizing your client’s SS benefits is what this is all about • It is not easily understood and most people don’t understand it. • Most advisors don’t understand it.

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Maximizing SS Benefits • Maximizing your client’s SS benefits is what this is all about • It is not easily understood and most people don’t understand it. • Most advisors don’t understand it. • You can be the hero

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Maximizing SS Benefits • Maximizing your client’s SS benefits is what this is all about. • It is not easily understood and most people don’t understand it. • Most advisors don’t understand it. • You can be the hero. • You can get PAID for being the hero!

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Maximizing SS Benefits • Deciding how and when to claim SS benefits is one of the most important retirement income decisions that your clients will ever make!

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Maximizing SS Benefits • Deciding how and when to claim SS benefits is one of the most important retirement income decisions that your clients will ever make! • YOU can (AND SHOULD!) help them

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Maximizing SS Benefits • Baby boomers are turning 66 at the rate of 10,000 people PER DAY! – That will continue for the next 15 years

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Maximizing SS Benefits • Baby boomers are turning 66 at the rate of 10,000 people PER DAY! – That will continue for the next 15 years

• They will be looking for advice – More and more of them are becoming aware that there are alternatives that they need to consider

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Maximizing SS Benefits • If you don’t provide them the service, someone else will! • If you handle their assets, that “someone else” may just grab the assets too!

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Maximizing SS Benefits • If you don’t provide them the service, someone else will! • If you handle their assets, that “someone else” may just grab the assets too! – You need to at least be defensive to hold on to what you’ve got. – And, you can develop an entire new practice area (and revenue source) at the same time.

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Maximizing SS Benefits • SS is the single largest source of income for the majority of Americans 65 and older. – Represents ½ or more of total income for 53% of married couples • Singles: it’s ½ or more for 74% of them.

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Maximizing SS Benefits • For our higher income clients, an informed decision about when and how to claim SS benefits can mean: – Thousands of extra retirement dollars per year – Tens of thousands over a lifetime! – For a married couple, the right SS claiming decisions could boost their joint lifetime income by $100,000 or more!

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Maximizing SS Benefits • Is it worth it for them to pay someone who knows what their doing to help them make the right decision?

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Maximizing SS Benefits • Married couples have the most flexibility in the claiming game

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Maximizing SS Benefits • Married couples have the most flexibility in the claiming game – Singles, divorced and surviving spouses, same-sex couples, families with minor dependent children can all gain from a well-designed claiming strategy.

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Maximizing SS Benefits • Married couples have the most flexibility in the claiming game – Singles, divorced and surviving spouses, same-sex couples, families with minor dependent children can all gain from a well-designed claiming strategy.

• There is a large amount of misinformation out there about this crucial retirement income decision. 21

Maximizing SS Benefits • We are going to talk about various claiming strategies.

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Maximizing SS Benefits • We are going to talk about various claiming strategies. • But, the only way you are going to get it right, is to have good software that does the work for you.

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Maximizing SS Benefits • We are going to talk about various claiming strategies. • But, the only way you are going to get it right, is to have good software that does the work for you. • Not very different from what we do in the retirement business. – Anybody still using Lotus to do retirement plan admin?

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The Basics • The majority of retirees still claim benefits as early as age 62. – Why? • Because they can! • But they often shouldn’t

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The Basics • The majority of retirees still claim benefits as early as age 62. – Why? • Because they can! • But they often shouldn’t

• Deciding when to retire and when to claim SS benefits are two separate decisions. – They don’t need to occur at the same time.

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The Basics • Delay taking benefits: – Get an 8% per year increase in benefit.

• Delay from 66 to 70 – Get a 32% increase in your benefits!!! • Probably actually larger because of COLA during those intervening years

– Note: no increases for delays after age 70

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The Basics • Take benefits early: – Take at 62 instead of 66 • Lose 25% of your benefits

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The Basics • Take benefits early: – Take at 62 instead of 66 • Lose 25% of your benefits

• Delaying benefits may be the best return they can get in this economic environment – But we probably want healthy clients who are likely to exceed average life expectancy • And have other assets to draw on in the interim

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The Basics • As time goes on – Full retirement age becomes 67 • That results in a 24% increase at age 70

– Interest rate may tick up to a more historical norm – So maybe claiming earlier will make sense • Invest the funds (if not needed) on their own for later spending

• Advisors need to be able to adjust strategies to reflect changes in the investment environment. – And even better mortality over time

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The Basics • When are you going to die? – Critical question in the claiming game.

• SS estimates a male, age 65, can expect to live (on avg) to age 84 • SS estimates a female, age 65, can expect to live (on avg) to age 86. • Joint life expectancy (50% chance that at least one of the two, age 65, will make it) is age 91!

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The Basics • As your clients are moving up on the full retirement age (FRA) – You need to adjust your claiming strategies to match

• FRA is the “magic age” – The age at which full SS benefits can be obtained – Earnings cap disappears (they can work and keep their full SS benefits) – Open up the opportunity for married couples, parents of dependent minor children, divorced spouses, singles: • For creative claiming strategies

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The Basics • Considering the earnings cap…. – What you lose due to earnings prior to FRA is not lost forever • It’s really just deferred

– When you get to FRA, SS recalculates the benefits • Say the amount you lost because you claimed at 62 is 24 months worth of benefits • At FRA (66), SS will recalculate and add the two years back and calculate your reduction as if you retired at 64. • So, maybe it’s not such a bad idea to take SS benefits early?

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The Basics • Considering the earnings cap…. – What you can’t get back is the ability to engage in these creative claiming strategies that could result in significantly increased lifetime benefits!

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Creative Claiming • There are two major SS claiming strategies that are used – File and Suspend

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Creative Claiming • There are two major SS claiming strategies that are used – File and Suspend – Filing a restricted claim for spousal benefits only

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Creative Claiming • There are two major SS claiming strategies that are used – File and Suspend – Filing a restricted claim for spousal benefits only

• File and Suspend – Applies to numerous situations • Married couples, singles, parents with dep minor children

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Creative Claiming • There are two major SS claiming strategies that are used – File and Suspend – Filing a restricted claim for spousal benefits only

• File and Suspend – Applies to numerous situations • Married couples, singles, parents with dep minor children

• Filing a restricted claim for spousal benefits – Applies only to married couples (and some divorce situations)

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File and Suspend • Client files for SS benefits, but only to trigger benefits for spouse (or dep minor children).

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File and Suspend • Client files for SS benefits, but only to trigger benefits for spouse (or dep minor children). • Client immediately suspends his own benefits – His benefits will be worth more in the future because of deferral

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File and Suspend • Good for married couples where one spouse is the primary earner and the other has little or no work history. – Spouse gets benefits, but primary continues to accrue delayed retirement credits. – Gets “some now, bigger benefit later”.

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File and Suspend • By delaying higher earning spouse to 70: – We maximize retirement benefits AND – Maximize survivor benefits as well

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File and Suspend • By delaying higher earning spouse to 70: – We maximize retirement benefits AND – Maximize survivor benefits as well

• Survivor benefit is worth 100% of what the deceased worker received (or was entitled to receive) at time of death if surviving spouse collects at FRA – Less if claimed earlier

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File and Suspend • Legally married same-sex couples are now entitled to the same SS benefits and claiming strategies as heterosexual couples.

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File and Suspend • Legally married same-sex couples are now entitled to the same SS benefits and claiming strategies as heterosexual couples. • File and Suspend can also trigger benefits for minor dependent children while parent’s own benefit continues to accrue delayed retirement credits. – If parent collects retirement or disability benefits, dependent child up to 18 (19 if still in HS) can collect benefits worth up to half of the parent’s full retirement benefit • Subject to family maximums

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File and Suspend • File and suspend can be an insurance policy – During the suspension period, the individual has the right to request all payments that would have been made during the suspension period as a lump sum • Any delayed retirement credits earned would be forfeited

– Particularly useful for an unmarried individual who now needs a lump sun rather than the large payment later • Think of an individual who has contracted a terminal disease

– Will now be paid his appropriate monthly benefit determined as of the date he suspended benefits

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File and Suspend • Retroactive payments are usually limited to six months: – Individual with FRA of 66 claims benefits at 67. • That individual can request retroactive lump sum payment, but SS may only pay for six months back.

• But under File and Suspend – Individual can get lump sum payout back to beginning of suspension period instead of being limited to six month maximum

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Married Couples • In most cases, it makes sense for the higher earning spouse to delay claiming SS benefits for as long as possible. – This locks in the largest possible benefit for the couple during their lifetime – It also locks in the highest possible survivor benefit for the remaining spouse after the death of the first spouse. • Assumes relatively healthy clients • Assumes they can afford to delay (other resources to live on) • Assumes spouses are close in age.

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Married Couples – Spousal benefit is worth up to 50% of the worker’s PIA if collected at spouse’s FRAA • Less if collected earlier • Spousal benefits are available as early as age 62

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Married Couples – Statistics: Lower earning wives, same age or younger than husbands, are likely to outlive their spouses. (SORRY GUYS! I don’t make them up; I just report them!) – Often makes sense for wife to collect reduced retirement benefits as early as age 62 and switch to a larger survivor benefit “later”. • Assumes beneficiaries are not working or not earning too much to have their benefits wiped out by the earnings test

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Married Couples

• Yes, their RETIREMENT benefits are permanently reduced if they collect early – But would have no impact on survivor benefits so long as they are at least at FRA when they collect

• Survivor benefit is worth 100% of what the deceased worker was receiving (or eligible to receive) at time of death if surviving spouse collects at FRA – Reduced if collected earlier – Survivor benefits available as early as age 60!

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Married Couples • However, if higher earning spouse collects reduced SS benefits early – Their retirement benefits will be permanently reduced – Surviving spouse may have a lifetime of reduced benefits as well.

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“Traditional” Married Couples

• What strategy to for “traditional” couple where one spouse has earned little or no SS retirement benefits? – If “wife” has no earnings (minimum 40 quarters), she can’t collect anything until husband claims

• In this case, H at FRT (66) can file and suspend to trigger spousal benefits for W, but deferring his own benefits until they are bigger later. – W must be at least 62 can then begin collecting spousal benefit. • Her benefit will be LESS THAN 50% of his PIA if she is younger than her FTA when she first claims benefits.

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“Traditional” Married Couples

• In many cases, lower earning spouse may be eligible to two types of SS benefits. – Retirement benefit based on own work record – A spousal benefit

• SSA will pay the individual’s OWN retirement benefit first, and if spousal is larger, pay a special supplement to bring payment up to larger amount. • Clients who claim before FRA cannot choose which benefit to receive; must get largest benefit to which they are entitled. – If they wait until FRA, there are other choices.

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“Traditional” Married Couples

• One example to show how complicated it is: – H FRA benefit (PIA) is $2,400 month. – Max spousal is 50% of that, or $1,200 month IF W is at least FRA when she claims – Assume W PIA is $800 month. • Spousal differential (difference between ½ of his PIA and her PIA) is $400 ($1,200 – 800).

– Wife decides to claim own retirement benefit early at 62 • H has not yet claimed his benefit.

– She will get $600 month ($800 x 75%), a 25% reduction because she is going 4 years early. • No spousal benefit for her to claim at this point

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“Traditional” Married Couples • One example to show how complicated it is: – When H claims (or files and suspends to trigger her spousal benefit), she will step up to a larger benefit. – Assuming she is at FRA, the $400 spousal differential will be added to her reduced benefit of $600, for a total of $1,000.

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“Traditional” Married Couples

• One example to show how complicated it is: – When H claims (or files and suspends to trigger her spousal benefit), she will step up to a larger benefit. – Assuming she is at FRA, the $400 spousal differential will be added to her reduced benefit of $600, for a total of $1,000. • That’s less than the maximum spousal benefit of $1,200 (50% of his PIA) because she collected her own retirement benefit early. • If H claims or files and suspends before his wife reaches FRA, her combined benefit will be reduced further.

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“Traditional” Married Couples • One example to show how complicated it is: – Once H claims his maximum retirement benefit of $3,168 ($2,400 x 1.32% for delay to age 70) and later dies…. • W will begin collecting that entire amount as her survivor benefit. • Her smaller retirement benefit of $1,000 month disappears!

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“Traditional” Married Couples • One example to show how complicated it is: – Once H claims his maximum retirement benefit of $3,168 ($2,400 x 1.32% for delay to age 70) and later dies…. • W will begin collecting that entire amount as her survivor benefit. • Her smaller retirement benefit of $1,000 month disappears!

– Even though her retirement benefits were permanently reduced because she claimed early, her full survivor benefit (100% of what H received during his lifetime) is payable because she was at least at FRT when she collected the survivor benefit

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Dual Income Married Couples

• How to maximize?

– Filing a restricted claim for spousal benefits only!

• If one spouse claims SS benefits, the other (who is at least FRA) can use this method. • Assume W retires at 62 and collects reduced SS benefits early on her own work history – She’s entitled to $1,000 month at 66 • Early reduction makes that $750 month

• Also assume H is 66 and still working and doesn’t plan on collecting anything until 70. – Now that he’s at FRT, he can request to collect spousal benefit only, which is 50% of W’s full benefit • $500 month (1/2 of what she would have gotten at age 66) • Not ½ of the reduced benefit of $750 that she’s actually getting

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Dual Income Married Couples • How to maximize? – Filing a restricted claim for spousal benefits only!

• H doesn’t have to worry about the earnings cap because he is at FRA. • Because he has restricted his claim to spousal benefits only, his own retirement benefit continues to grow at 8%/year to the max at 70. – Meanwhile, he collects ½ of her benefit, the $500 month for an extra $6,000 year until he switches to his own max benefit at age 70

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Dual Income Married Couples • How to maximize? • Think you can do this without software? – Wait, there’s lots more!

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High Income Couples • Best Claiming Strategy? – If both spouse have similar earnings and are close in age • They can exercise a combo strategy

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High Income Couples

• Best Claiming Strategy?

– If both spouse have similar earnings and are close in age • They can exercise a combo strategy

– At 66, one spouse can file and suspend to trigger the other spouse’s benefits – The other spouse, at 66, can file a restricted claim for spousal benefits only • Because neither is claiming their own retirement benefits, both can continue to earn delayed retirement credits until their benefits reach the maximum amount at age 70.

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High Income Power Couples

• Best Claiming Strategy?

– Example: Both spouses are 66 and each eligible to collect $2,400 at FRA. • At 66, H files and suspends; triggering spousal benefits – He collects NOTHING for four years (until age 70)

• W files restricted claim for spousal benefits only – Collects $1,200 month (1/2 of his full benefit)

• Household income is increased by $14,400 per year for four years! • At age 70, each collects max benefit of $3,168 month – ($2,400 x 132%)

• Together, they collect more than $76,000 year of SS ben. – Guaranteed, plus cola benefits, for the rest of their lives!!!

• Do you see a value to your potential services???

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High Income Couples • Can client restrict SS claim to spousal benefits only at 62 and switch to their own full retirement age benefit at 66?

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High Income Couples

• Can client restrict SS claim to spousal benefits only at 62 and switch to their own full retirement age benefit at 66? – No – To restrict claim to spousal benefits only, must wait until FRA to do so • If they claim prior to FRA, can’t use creative claiming strategies • If they claim prior to FRA, must collect the largest benefit to which they are entitled – Their retirement benefits (but not necessarily survivor benefits) will be reduced for the rest of their lives

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High Income Couples • H filed and suspended benefits so W could collect spousal benefits – Can he now restrict his claim to spousal benefits only and collect half of her benefit?

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High Income Couples • H filed and suspended benefits so W could collect spousal benefits – Can he now restrict his claim to spousal benefits only and collect half of her benefit? – No. • Each SS recipient is entitled to one and only one restricted claim – This guy made his – He elected to file and suspend to trigger spousal benefits – He cannot now file a restricted claim for spousal benefits only

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High Income Couples • Can both spouses file for each other’s spousal benefits and defer collecting his or her own until they are worth the maximum amount?

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High Income Couples

• Can both spouses file for each other’s spousal benfits and defer collecting his or her own until they are worth the maximum amount? • No – In order to restrict a claim for spousal benefits, one spouse needs either to be claiming retirement benefits or to have filed and suspended his/her benefit in order to trigger a benefit for the other spouse. – If neither spouse has filed for retirement benefits, no spousal benefit exists for the other to collect!

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High Income Couples • H defers claiming retirement benefits until it is worth the maximum at 70. – Will spouse collect half that amount?

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High Income Couples

• H defers claiming retirement benefits until it is worth the maximum at 70. – Will spouse collect half that amount?

• No – Max spousal benefit is based on 50% of spouse’s FRA benefit (PIA). • Spousal benefits do not earn delayed retirement credits

– SURVIVOR BENEFITS (on the other hand) are worth 100% of what deceased worker actually collected (or was entitled to collect) at time of death if collected at FRA or later. • Including delayed retirement credits • Real value of higher earning spouse delaying to age 70 is to lock in the maximum survivor benefit for the other spouse.

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High Income Couples • H is 70, retired and collecting SS; • W is 67, still working, and plan to postpone benefits until 70, just like him. – What should she do now?

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High Income Couples

• H is 70, retired and collecting SS; • W is 67, still working, and plan to postpone benefits until 70, just like him. – What should she do now? – She is leaving unclaimed SS spousal benefits on the table • She can file a restricted claim for spousal benefits only and collect half of her husband’s FRA benefit (and 66 benefit) – Her own retirement benefit will continue to accrued delayed credits – However, she has missed a year of spousal benefits » Luckily, she is entitled to a lump sum payment of SIX months of retroactive benefits.

– At 70, she should switch to her maximum benefit, which should be worth 132% of her FRA amount • Plus intervening annual cost of living adjustments.

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High Income Couples • What happens when the higher earning spouse is younger? – Example: Married couple, W 62 and H 57 – W did not get enough work credit to be eligible for her own SS benefits. • H will receive a monthly benefit of $2,388 at his FRA of 66 and 6 months

– Can wife claim spousal benefit at her FRA of 66 when H would be 61?

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High Income Couples

• What happens when the higher earning spouse is younger? – Can wife claim spousal benefit at her FRA of 66 when H would be 61? • No. • W is not entitled to her own retirement benefits • W must wait for H to file for his own benefit – Until then, there is NO spousal benefit

• The earliest H can file is age 62 (she will be 67 at that time) • Her spousal benefit at that point will be worth 50% of his FRA benefit – Even if he claimed a reduced benefit earlier – Because he is claiming at her FRA – BUT, we are not done yet…..

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High Income Couples • This could cause additional problems – Because H is younger than W, if he collects at 62 • He can’t file and suspend • He will have to accept his reduced retirement benefit • Will be subject to earnings cap before FRA – If he earns too much, his retirement benefits could be temporarily reduced or even wiped out – So could W’s since she is collecting on his record

• He will lock in a lower survivor benefit – Survivor benefit will be 100% of what he collected

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High Income Couples • This could cause additional problems – Because H is younger than W, if he collects at 62 • He can’t file and suspend • He will have to accept his reduced retirement benefit • Will be subject to earnings cap before FRA – If he earns too much, his retirement benefits could be temporarily reduced or even wiped out – So could W’s since she is collecting on his record

• He will lock in a lower survivor benefit – Survivor benefit will be 100% of what he collected

• So, what should they do?

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High Income Couples • Have to consider what is more important to this couple – Creating SS income for the wife as soon as possible – Or locking in a bigger survivor benefit • To do that, H would have to wait until his FRA of 66 and 6 months to file and suspend – That would trigger spousal benefits for W who will be 71

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High Income Couples

• Have to consider what is more important to this couple – Creating SS income for the wife as soon as possible – Or locking in a bigger survivor benefit • To do that, H would have to wait until his FRA of 66 and 6 months to file and suspend – That would trigger spousal benefits for W who will be 71

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But you can show them the options If you don’t, who will? If you don’t, would they be able to figure it out Do you think this analysis is worth being paid for?

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Widows and Widowers • Most valuable aspect of SS for married clients:

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Widows and Widowers • Most valuable aspect of SS for married clients: – SURVIVOR BENEFITS FOR THE SPOUSE LEFT BEHIND

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Widows and Widowers • Most valuable aspect of SS for married clients: – SURVIVOR BENEFITS FOR THE SPOUSE LEFT BEHIND • Widows and Widowers (WW) have more flexibility than other SS beneficiaries because retirement benefits and survivor benefits represent two different pots of money – A surviving spouse can choose one benefit first and switch to the other benefit later if it produces a larger result

– To be eligible for SS survivor’s benefit • WW must have been married to the deceased worker at time of death – And for at least nine months prior to the worker’s death – Some exceptions: accidental death; line of duty as actively serving in uniformed service

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Widows and Widowers • Spousal benefits are worth a maximum of 50% of the higher earners FRA benefit if collected at FRA

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Widows and Widowers • Spousal benefits are worth a maximum of 50% of the higher earners FRA benefit if collected at FRA • Survivor benefits are worth 100% of what the deceased worker collected or was entitled to collect at time of death – Provided survivor collects the benefits at FRA or later • Both types of benefits are reduced if collected before FRA

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Widows and Widowers • But, a survivor cannot collect more than the worker collected – IF H’s FRA benefit is $2,000 and he collects early at 62, he gets $1,500 per month • 25% reduction for collecting four years early

– If he later dies, the max the widow could collect is $1,500 • If she claims at her FRA or later – Less if claimed before then

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Widows and Widowers • Goal for most married couples should be to maximize survivor benefits by having the highest earning spouse delay retirement as long as possible up to age 70 – The largest retirement benefit will continue as a survivor benefit for the remaining spouse – The smaller retirement benefit will disappear upon the death of the first spouse

• Generally, the earliest age for collecting retirement or spousal benefits is 62. – Survivor benefits, however, are available as early as 60. • But there are exceptions in both cases for younger spouses who can claim benefits earlier if they are caring for a minor dependent child of a retired, disabled or deceased worker.

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Widows and Widowers • W takes her benefit at age 62; H (age 60)defers his benefit until his FRA or later – What benefit passes to W upon H's death? – Will she get his full benefits or will it be reduced because she claimed her retirement benefits early?

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Widows and Widowers • W takes her benefit at age 62; H (age 60)defers his benefit until his FRA or later – What benefit passes to W upon H's death? – Will she get his full benefits or will it be reduced because she claimed her retirement benefits early? • Example: W's projected retirement benefit at FRA 66 is $1,700 per month. H’s is $2,400 per month. • If W claims her retirement benefit at 62, she will receive 75% of her full benefit or $1,275 per month. – assume she is no longer working/earns less than the earnings cap

• If H waits until FRA 66 to claim benefits, he'll receive $2,400 per month. – W will not collect a spousal benefit at that time because the $1,275 month she receives on her own earnings record exceeds half of his primary insurance amount — $1,200 — at his full retirement age.

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Widows and Widowers • W takes her benefit at age 62; H (age 60)defers his benefit until his FRA or later – Now assume H dies before W, and W has reached her FRA • She will receive survivor benefit of $2,400 month – 100% of H’s monthly retirement benefit

• Even if she collected reduced retirement benefit early – Retirement Benefits and Survivor Benefits represent two different pots of money!

– If H had delayed collecting retirement until 70, it would have been worth $3,168 – including 4 years of COLAs. • That’s the amount W would have received as a survivor benefit.

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Widows and Widowers • Good example of what sometimes makes sense for lower earning spouse to claim benefits early. – W’s reduced SS benefits increase household income by $15,300/year ($1,275 x 12). • Even though retirement benefit permanently reduced, it will not affect her survivor benefit if he dies first – As long as she is at least FRA when she collects survivor benefit

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Widows and Widowers • In some cases, beneficiaries may want to choose survivor benefits first and defer collecting their own retirement benefit if it will be worth more later. – Why?

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Widows and Widowers • In some cases, beneficiaries may want to choose survivor benefits first and defer collecting their own retirement benefit if it will be worth more later. – Why? – Because retirement benefits continue to accrue delayed retirement credits worth 8%/year (up to age 70)

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Widows and Widowers • In some cases, beneficiaries may want to choose survivor benefits first and defer collecting their own retirement benefit if it will be worth more later. – Why? – Because retirement benefits continue to accrue delayed retirement credits worth 8%/year (up to age 70)

• But this makes sense only if the enhanced retirement benefit (including the delayed retirement credits) will be worth more than the survivor benefits. – Often true for surviving widowers who have substantial lifetime earnings, – But not necessarily so for surviving widows with a spotty work history.

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Widows and Widowers • Can a surviving spouse collect a survivor benefit first and delay collecting his or her own retirement benefit until 70?

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Widows and Widowers • Can a surviving spouse collect a survivor benefit first and delay collecting his or her own retirement benefit until 70? – Yes. – Example: Widower entitled W’s survivor benefit of $1,500 per month if he collects it at his full retirement age of 66; less if he collects earlier. – Assume his retirement benefit is worth $2,000 per month at his FRA. • He may want to collect the survivor benefit for four years starting at 66 and switch to his own retirement benefit at 70 when it will be worth $2,640 per month ($2,000 x 1.32%).

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Widows and Widowers • The widower could have collected a survivor benefit as early as 60, but it would be worth just $1,072 per month — 71.5% of the FRA amount because he claimed it six years early. – But if he collects any Social Security benefits before his full retirement age and continues to work, he will be subject to earnings cap restrictions, losing $1 in benefits for every $2 earned above the $15,480 limit in 2014. – The earnings cap disappears at full retirement age • at that point, he could collect Social Security benefits while continuing to work without forfeiting any benefits.

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Widows and Widowers • Can one increase a survivor benefit by waiting until 70 to collect it?

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Widows and Widowers • Can one increase a survivor benefit by waiting until 70 to collect it? – No. – Survivor benefits, if collected at FRA or later, are worth 100% of the deceased worker's benefits • including any delayed-retirement credits the worker may have accrued at time of death.

– But a surviving spouse cannot increase the amount of his or her survivor benefit by waiting until 70 to collect it. • Survivor benefits are frozen in time upon the date of the worker's death. They do not accrue delayed-retirement credits after the death of the worker.

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Widows and Widowers • Widow age 62: Should she collect her retirement benefit or her survivor benefit, which is much larger? – She’s still working part time.

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Widows and Widowers • Widow age 62: Should she collect her retirement benefit or her survivor benefit, which is much larger? – She’s still working part time. – Many people will collect the bigger benefit first. – But a wise financial adviser might recommend patience. • The key issue in deciding which benefit to collect first is to compare the amount of each benefit and any reductions for early collection or increases for delayed collection. • She could claim her reduced retirement benefit first, even if she forfeited some of her benefits due to earnings cap restrictions. • Once she reached her FRA of 66, she could switch to her larger survivor benefit, which would be worth 100% of her late husband's retirement benefit, creating a larger base for cost-of-living adjustments for the rest of her life. – Even if she continued to work, her benefits would not be reduced, because the earnings cap restrictions disappear at full retirement age.

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Widows and Widowers • Widow age 62: Should she collect her retirement benefit or her survivor benefit, which is much larger? • YOU SHOULD BE THAT WISE FINANCIAL ADVISOR!

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Widows and Widowers • Widow age 62: Should she collect her retirement benefit or her survivor benefit, which is much larger? – In cases like this where the retirement benefit is much smaller than the survivor benefit, it makes no sense to delay collecting a survivor benefit beyond normal retirement age, as they do not earn delayed-retirement credits

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Widows and Widowers • Widow age 62: Should she collect her retirement benefit or her survivor benefit, which is much larger? – In cases like this where the retirement benefit is much smaller than the survivor benefit, it makes no sense to delay collecting a survivor benefit beyond normal retirement age, as they do not earn delayedretirement credits – Compare this with the earlier example where the widower's own retirement benefit was larger than his survivor benefit. • In that case, it made sense to collect the smaller survivor benefit first while allowing his retirement benefit to accrue delayed-retirement credits until it was worth the maximum amount when he turned 70.

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Widows and Widowers • Important eligibility requirement to keep in mind: – After age 60, a WW’s (or surviving divorced spouse’s) remarriage will not prevent that individual from being entitled to benefits on his or her prior deceased spouse’s Social Security Record – A WW’s (or surviving divorced spouse’s) remarriage before age 60 will prevent entitlement (unless the subsequent marriage ends)

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Divorce and Social Security •

In many cases, divorced spouses have the same rights to Social Security benefits as if they were still married. – But there are specific rules that must be met. – In order for a client to collect spousal benefits on his or her ex-spouse's earnings record, their marriage must have lasted at least 10 years, both spouses must be at least 62 years old and the client must be unmarried.

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In addition to the 10-year rule, there is a special rule that applies only to divorced spouses: – a divorced spouse can claim benefits on a former spouse's earnings record even if that former spouse has not yet claimed retirement benefits. – However, to take advantage of this special rule, the couple must be divorced for at least two years.

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This ability to collect spousal benefits independently is something that married couples can't do. – Married couples either have to wait for one spouse to claim benefits or for one spouse to file and suspend at full retirement age to trigger benefits for the other married spouse.

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Otherwise, when it comes to collecting Social Security benefits as a divorced spouse, the regular rules regarding age and work apply.

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Divorce and Social Security •

Anyone who claims Social Security benefits before full retirement age must collect the largest benefit to which they are entitled — – whether based on their own work record, their ex-spouse's or a combination of the two. – They can't choose which benefit to collect. •

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If one wants to collect spousal benefits only, he or she must wait until full retirement age to file a restricted claim for spousal benefits.

A divorced client's spousal benefit is equal to up to half of the former spouse's full retirement age amount if the client begins collecting benefits at his or her full retirement age. – The client can collect spousal benefits on a former spouse as early as 62, but those benefits will be worth just 35% of the ex-spouse's benefit because collection began four years early.

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If clients collect benefits before full retirement age while they continue to work, they also will be subject to earnings cap restrictions. – That means they will forfeit $1 in Social Security benefits for every $2 they earn over $15,480 in 2014. – In the year they reach their full retirement age, a more generous earnings cap applies in the months leading up to their 66th birthday: They will forfeit $1 in benefits for every $3 they earn over $3,450 per month or $41,480 for the year. – Once they reach 66, the earnings cap disappears.

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Divorce and Social Security

• But if your clients wait until full retirement age to claim benefits, they can file a restricted claim for spousal benefits only and collect half of their ex's full-retirement-age benefit while allowing their own retirement benefit to accrue delayed-retirement credits worth 8% per year up until 70. – Financial advisers have to crunch the numbers to make sure that that strategy is appropriate. – It would make sense for a client to file a restricted claim for spousal benefits if his or her full-retirement-age benefit, plus a 32% increase due to the delayed- retirement credits, will be worth more than the spousal benefit. – But if his or her own retirement benefit is unlikely to ever exceed the spousal benefit amount, he or she should go ahead and file for Social Security benefits without any restrictions.

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Divorce and Social Security • Can a divorced client who remarries continue to collect Social Security retirement benefits on an ex-spouse?

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Divorce and Social Security • Can a divorced client who remarries continue to collect Social Security retirement benefits on an ex-spouse? – No. – A divorced client who remarries can no longer collect Social Security benefits on his or her former spouse's earnings record unless his or her subsequent marriage ends, whether by death, divorce or annulment. A client must be unmarried to collect benefits on an ex-spouse.

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Divorce and Social Security • What happens when a client's ex-spouse dies? Can the client collect survivor benefits?

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Divorce and Social Security • What happens when a client's ex-spouse dies? Can the client collect survivor benefits? – Yes. – If your client's ex-spouse dies, he or she is entitled to the same survivor benefits as if your client were still married, assuming that the marriage lasted at least 10 years. • And even if the former spouse remarries, your client can still collect full survivor benefits. It will not affect the benefits of the ex-spouse's new family, nor will it reduce the survivor benefit your client can collect.

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Divorce and Social Security • A client is collecting Social Security survivor benefits on her late ex-husband's earnings record. She plans to remarry. Will she lose her survivor benefits?

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Divorce and Social Security • A client who is collecting Social Security survivor benefits on her late ex-husband's earnings record. She plans to remarry. Will she lose her survivor benefits? – As long as she waits until she is at least 60 for that next trip down the aisle, she can keep her survivor benefits. • That assumes the survivor benefits are larger than a spousal benefit on her new mate. – She can collect one or the other benefit, but not both.

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Divorce and Social Security • A client has been married and divorced twice. The first marriage lasted more than 10 years and the second one 22 years. • Can the client claim Social Security benefits on either ex-spouse's earnings record or does she lose the ability to draw off the first spouse because she remarried, even though she divorced again?

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Divorce and Social Security • A client has been married and divorced twice. The first marriage lasted more than 10 years and the second one 22 years. • Can the client claim Social Security benefits on either ex-spouse's earnings record or does she lose the ability to draw off the first spouse because she remarried, even though she divorced again? – The client can collect spousal benefits based on the earnings record of either ex-spouse as long as each of the marriages lasted at least 10 years and she is currently unmarried. • The client can choose to claim on whichever spouse would result in a higher Social Security benefit.

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Divorce and Social Security • Clients were married for 19 years and are now divorced. The husband, now 66, began collecting Social Security benefits early at 62. The ex-wife is now 55. • Can she draw on the ex-husband's Social Security benefits at 62 and defer her own until 70?

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Divorce and Social Security

• When the ex-wife turns 62, she can claim reduced benefits. – But when claiming benefits before full retirement age, Social Security will pay the largest benefit to which she is entitled, whether it is on her own work record or as a spouse. – She can't choose which benefit to receive.

• Because she is claiming before her full retirement age, which in her case is 66 years and 8 months, her retirement benefits will be reduced by 28.3% at 62. – Or if her benefit is larger as a spouse than on her own earnings record, her spousal benefit would be worth 33.3% of her husband's full-retirement-age benefit if she collected them at 62.

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Divorce and Social Security • Same example: Is her benefit worth half of his reduced benefit or half of his full-retirementage benefit?

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Divorce and Social Security • Same example: Is her benefit worth half of his reduced benefit or half of his full-retirementage benefit? – Even though the ex-husband collected a reduced retirement benefit early, spousal benefits are based on half of his full-retirement-age benefit if claimed at full retirement age; less if collected earlier

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Divorce and Social Security

• Same example: Is her benefit worth half of his reduced benefit or half of his full-retirement-age benefit? – Even though the ex-husband collected a reduced retirement benefit early, spousal benefits are based on half of his full-retirement-age benefit if claimed at full retirement age; less if collected earlier

• To recap: The ex-wife can draw reduced Social Security benefits as early as 62 – But if she wants to restrict her claim to spousal benefits, she has to wait until her full retirement age of 66 and 8 months. – If she claims before full retirement age, she cannot choose which benefit to collect and she forfeits the chance to earn delayed-retirement credits worth 8% for each year between her full retirement age and 70.

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Divorce and Social Security • A client was married for nine years and three months. Is she entitled to Social Security survivor benefits based on her ex-husband's earnings record?

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Divorce and Social Security • A client was married for nine years and three months. Is she entitled to Social Security survivor benefits based on her ex-husband's earnings record? – No. – For an ex-spouse to be eligible to collect retirement benefits or survivor benefits, the marriage must have lasted at least 10 years. • This client lost out by nine months.

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Divorce and Social Security

• A client was married for nine years and three months. Is she entitled to Social Security survivor benefits based on her ex-husband's earnings record? – No. – For an ex-spouse to be eligible to collect retirement benefits or survivor benefits, the marriage must have lasted at least 10 years. • This client lost out by nine months.

• Let this be a cautionary tale to financial advisers and their clients (as well as their divorce attorneys). – If a marriage is falling apart and it's close to the 10-year mark, encourage your clients to string out the paperwork so the time between the marriage certificate and the divorce decree is at least 10 years.

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Exceptions to the Rules • Your clients who have worked for city, state or federal governments (or in some cases, public school systems) may be affected by rules that can reduce or even eliminate their Social Security benefits. – That is the case if they worked in jobs where they didn't pay Social Security taxes and receive a pension from non-covered work.

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Exceptions to the Rules • Your clients who have worked for city, state or federal governments (or in some cases, public school systems) may be affected by rules that can reduce or even eliminate their Social Security benefits. – That is the case if they worked in jobs where they didn't pay Social Security taxes and receive a pension from noncovered work. – Problems can arise if clients worked in other jobs during their career and accrued enough quarters to be eligible for Social Security benefits. • They may not realize that those benefits may be reduced or even wiped out because their Social Security benefit estimate — the one they receive in the mail or can go online to retrieve — may not reflect the reduction.

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Exceptions to the Rules • A rule known as the Windfall Elimination Provision (WEP) affects how retirement or disability benefits are calculated when clients receive a pension from work where Social Security taxes were not taken out of their pay. – The Windfall Elimination Provision applies only to a worker's retirement benefits, not to SS spousal or survivor benefits. • A separate rule, called the Government Pension Offset rule, affects those benefits.

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Exceptions to the Rules • The Windfall Elimination Provision can reduce the size of a worker's retirement benefit, not eliminate it. – For 2014, the maximum reduction under the provision is $408 per month. • However, it could be less. • The Windfall Elimination Provision reduction is limited to no more than one-half of the amount of the pension from employment that is not covered by Social Security. – For example, if your client's government pension is $500 per month, the reduction could not exceed $250 per month.

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Exceptions to the Rules • However, public-sector employees who also worked in the private sector and paid Social Security taxes on 30 years of "substantial earnings" are not affected by the Windfall Elimination Provision rules. – You can read all about it in the Windfall Elimination Provision fact sheet (ssa.gov/pubs/10045.pdfssa.gov).

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What About The Children? • Social Security provides benefits to a dependent child when a parent claims retirement or disability benefits.

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What About The Children? • Social Security provides benefits to a dependent child when a parent claims retirement or disability benefits. – Hint: If that extra income goes into a Section 529 plan, SS may pay for the child’s college education!

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What About The Children? • The combination of high divorce rates and remarriage of older men to younger women has led to older dads with young children. – The second-family phenomenon can have a huge impact on a parent's retirement-planning strategy – It can influence when a parent should claim Social Security benefits.

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What About The Children? • To be eligible for Social Security benefits, a child must be unmarried and under 18, or under 19 if still a full-time high school student. – Disabled people over 18 are also eligible for benefits as long as the total disability began before 22.

• The child can be a client's natural child, legally adopted child, or stepchild – And, in some cases, a grandchild if the child's parents are dead or disabled and the child is the client's dependent.

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What About The Children? • The child's benefit is based on 50% of the parent's primary insurance amount at full retirement age. – Even if the parent claims reduced retirement benefits early or larger benefits by delaying his full retirement age, the child's benefit is still based on half of the parent's full retirement benefit. • The same calculation applies if there is more than one child.

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What About The Children? • The child's benefit is based on 50% of the parent's primary insurance amount at full retirement age. – Even if the parent claims reduced retirement benefits early or larger benefits by delaying his full retirement age, the child's benefit is still based on half of the parent's full retirement benefit. • The same calculation applies if there is more than one child. • And a spouse regardless of age (as the caregiver of a minor child) could also receive up to half of the worker's retirement benefit until the youngest child turns 16.

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What About The Children? • The total amount paid on a worker's record is capped at the family maximum, which falls somewhere between 150% and 180% of a worker's full retirement benefit. – If total family benefits exceed the prescribed family maximum, each dependent's benefit is reduced proportionately, but the worker's own benefit is not affected.

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What About The Children? • A client is 60 and has a 4-year-old son. Should he claim reduced retirement benefits at 62 because it would mean the son could collect dependent benefits longer?

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What About The Children? • A client is 60 and has a 4-year-old son. Should he claim reduced retirement benefits at 62 because it would mean the son could collect dependent benefits longer? – It depends on whether the client is still working. – If he is, and he collects Social Security before his full retirement age, he will be subject to an annual earnings cap restriction. • In 2014, he would lose $1 in benefits for every $2 earned over $14,480. • In addition to reducing his monthly retirement benefits, excess earnings can reduce any spousal or child benefits based on his record. • The earnings cap disappears once a client reaches full retirement age.

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What About The Children?

• A client is 60 and has a 4-year-old son. Should he claim reduced retirement benefits at 62 because it would mean the son could collect dependent benefits longer? – It depends on whether the client is still working. – If he is, and he collects Social Security before his full retirement age, he will be subject to an annual earnings cap restriction. • In 2014, he would lose $1 in benefits for every $2 earned over $14,480. • In addition to reducing his monthly retirement benefits, excess earnings can reduce any spousal or child benefits based on his record. • The earnings cap disappears once a client reaches full retirement age.

• If the client claims his benefits as soon as he is eligible at 62, he will collect about $1,644 per month for the remainder of his life – His son will claim about $1,090 per month — half of his father's fullretirement-age benefit of $2,180 per month. – His son will continue to receive benefits until he graduates from high school or reaches 19, whichever comes first.

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What About The Children? • This decision can be a tough call, depending on the age of the child. – For example, if the client is 62 and has a 14-year-old child, it may be worth it to claim reduced retirement benefits early in order to trigger four years' worth of dependent benefits, assuming that the parent was not working or not earning more than the annual earnings cap restrictions. – If that same parent waits until his or her full retirement age of 66 to claim benefits, the child will be 18 and no longer eligible for benefits (unless still in high school, at which point the child could continue benefits up to 19).

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The Do Over Option • One of the biggest challenges of figuring out when to claim Social Security benefits is determining which strategy will maximize benefits for a client. – The second challenge is to keep up with any rule changes that could undo the initial decision.

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The Do Over Option • One of the biggest challenges of figuring out when to claim Social Security benefits is determining which strategy will maximize benefits for a client. – The second challenge is to keep up with any rule changes that could undo the initial decision.

• Until December 2010, it was possible for an individual to collect reduced Social Security benefits as early as 62, and at any point up to 70: – They could withdraw their application for benefits, repay any benefits they had received and restart their benefits at a higher rate.

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The Do Over Option • Although repayments often exceeded $100,000, it was significantly cheaper than buying an immediate annuity that would generate the same amount of additional guaranteed income. – This do-over strategy essentially amounted to an interest-free loan from the government.

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The Do Over Option • Although repayments often exceeded $100,000, it was significantly cheaper than buying an immediate annuity that would generate the same amount of additional guaranteed income. – This do-over strategy essentially amounted to an interest-free loan from the government. – But the Social Security Administration put a stop to that policy. Now an individual can repay benefits only once in a lifetime and it must be within 12 months of first claiming benefits.

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The Do Over Option • So are these clients out of luck? – Not necessarily.

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The Do Over Option • So are these clients out of luck? – Not necessarily.

• There is a little-known option that allows individuals who have reached their FRA to voluntary suspend — but not repay the Social Security benefits they have received. – The suspended benefits earn delayed-retirement credits worth 8% per year for each year the individual postpones collecting benefits up to 70.

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The Do Over Option • For example, say your client is entitled to retirement benefits of $2,000 per month at his FRA of 66, but he elects to claim reduced benefits early at 62 – He will collect 75% of his PIA, or $1,500 per month.

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The Do Over Option

• For example, say your client is entitled to retirement benefits of $2,000 per month at his FRA of 66, but he elects to claim reduced benefits early at 62 – He will collect 75% of his PIA, or $1,500 per month.

• Later, he regrets his decision to collect reduced benefits early and more than a year has passed since he first claimed Social Security. – If he waits until his full retirement age of 66, he could voluntarily suspend his benefits until 70, boosting his monthly amount to 99% of what it would have been if he had collected them initially at age 66. – Here's how the math works: • 75% (reduced benefits at 62) x 1.32% (delayed-retirement credits from 66 through 70) = 99%

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Can You Provide This Guidance Without Resources? • The practical answer is that it is just too complicated. • To determine the “best” claiming strategy, thousands of potential combinations of inputs must be analyzed.; • That is a clear job for robust software. – In addition, the technical resources need to be available to you to answer those many client questions that will arise. 152

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Resources - Texts • 2014 Social Security & Medicare Facts – The National Underwriter Company

• Social Security Strategies • How To Optimize Retirement Benefits – William Reichenstein and William Meyer » From Social Security Solutions (the software people)

• Social Security: The Inside Story – Andy Landis

• A Social Security Owner’s Manual – Jim Blankenship, CFP

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Resources - Texts • Maximizing Your Client’s SS Retirement Benefits – Mary Beth Franklin (InvestmentNews Contributing Editor) – https://home.investmentnews.com/clickshare/selectItems.do ?CSCategory=maxSocSecBenefit – Special thank to Mary Beth: this outline is based on her ebook

• Guide to Social Security – Mercer – booklet updated annually. 2015 is the 43rd edition – Good for bulk purchases and handout to clients – www.imercer.com/socialsecurity

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Resources - Software • There are many pieces of software out there that are supposed to provide various SS calculations. • Many are simplistic; many produce output that is questionable. • Here are two that are well worth having if you are going to be in this business. – BUY BOTH

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Resources - Software • Social Security Solutions – Social Security Analyzer • On-line software • https://www.ssanalyzer.com/site/index.php • Dr. William Reichenstein, CFA, holds the Pat and Thomas R. Powers Chair in Investment Management at Baylor University. • William Meyer, Founder, Managing Principal • Annual subscription; $1000 for the top of line product

• Maximize My Social Security for Planners • On-line software • https://www.maximizemysocialsecurity.com/ • Laurence Kotlikoff Professor of Economics, Boston University and President of Economic Security Planning, Inc. • Annual Subscription (Professional Version): $200 – There is a personal version available for only $40

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QUESTIONS?

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• Question #1 • Can a spouse, who has not earned sufficient Social Security credits on her own, claim spousal benefits once she turns 62 years old even if her husband has not yet claimed benefits? • Question #2 • Assume both spouses are 62 and each has earned sufficient credits to qualify for Social Security benefits. Can the lower-earning spouse claim reduce benefits on her record now and step up to a higher benefit later when her husband either claims his benefits or files and suspends at 66? • Question #3 • How can a married couple, where both spouses have reached full retirement age and each is entitled to benefits based on his or her own work record, maximize their lifetime Social Security benefits? • Question #4 • If a husband decides to postpone collecting his Social Security benefit until 70, will the wife's spousal benefit be worth half of that larger amount?

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• Question #5 • If spousal benefits don't qualify for delayed retirement credits, what's the point of postponing benefits until 70? • Question #6 • Does claiming a reduced spousal benefit early affect the survivor benefit amount? • Question #7 • Take a married couple where both spouses are 62 years old and neither has claimed Social Security. The husband dies at 62. The wife is still working and earns about $50,000 per year — substantially less than her late husband's earnings. Should she claim survivor benefits now? • Question #8 • Would collecting survivor benefits at 66 affect her ability to accrue delayed retirement credits on her own benefits at 70? 159

• Question #9 • Assume both spouses are 62 and neither has begun collecting benefits. The higher-earning husband dies at 62. The wife works part time and earns about $15,000 per year. Should she claim survivor benefits now? • Question #10 • Assume a 62-year-old father has a 14-year-old child. He wants to file and suspend to trigger benefits for his son while his own benefits continue to grow up until age 70. Can he do that? • Question #11 • Can a divorced woman, who was married for more than 10 years, collect benefits on her ex-husband's earnings record? • Question #12 • A husband and wife are married for 20 years before they divorce. The husband remarries and later dies. The first wife does not remarry. Is the first wife entitled to survivor benefits from her exhusband or does she have to share them with his widow?

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• Question #13 • If a surviving spouse remarries after age 60, can she keep her survivor benefits? • Question #14 • Assume both spouses are age 66 and want to defer collecting benefits until they turn 70. In the meantime, can they collect spousal benefits on each other? • Question #15 • Assume a married couple where the 70-year-old husband is collecting Social Security but the 68-year-old wife is still working and plans to claim benefits at 70. She is leaving money on the table. What should she do? • Question #16 • Normally lump sum payouts are limited to six months of retroactive benefits beginning no sooner than full retirement age. But there's an exception. What is it? 161

• Question #17 • A husband files and suspends to trigger spousal benefits for his wife. Once she begins collecting spousal benefits, he wants to file a restricted claim to collect half of her benefits. Can he do that? • Question #18 • Your client claims reduced Social Security benefits at 62. Six months later, you convince him it's not a good idea. Can he change his mind?

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