Planning for Social Security

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Social Security Retirement BenefitsSocial Security was originally intended toprovide older Americans with continuingincome after retirement. Today, though thescope of Social Security has been widened toinclude survivor's, disability, and otherbenefits, retirement benefits are still thecornerstone of the program.

How do you qualify forretirement benefits?When you work and pay Social Security taxes(FICA on some pay stubs), you earn SocialSecurity credits. You can earn up to 4 creditseach year. If you were born after 1928, youneed 40 credits (10 years of work) to beeligible for retirement benefits.

How much will your retirementbenefit be?Your retirement benefit is based on youraverage earnings over your working career.Higher lifetime earnings result in higherbenefits, so if you have some years of noearnings or low earnings, your benefit amountmay be lower than if you had worked steadily.Your age at the time you start receivingbenefits also affects your benefit amount.Although you can retire early at age 62, thelonger you wait to retire (up to age 70), thehigher your retirement benefit.

You can estimate your retirement benefitonline based on your actual earnings recordusing the Retirement Estimator calculator onthe Social Security website, www.ssa.gov.You can create various scenarios based oncurrent law that will illustrate how differentearnings amounts and retirement ages willaffect the benefit you receive.

Retiring at full retirement ageYour full retirement age depends on the yearin which you were born.

If you were born in: Your full retirementage is:

1943-1954 661955 66 and 2 months1956 66 and 4 months1957 66 and 6 months1958 66 and 8 months1959 66 and 10 months1960 and later 67

Note: If you were born on January 1 of anyyear, refer to the previous year to determineyour full retirement age.

If you retire at full retirement age, you'llreceive an unreduced retirement benefit.

Retiring early will reduce yourbenefitYou can begin receiving Social Securitybenefits before your full retirement age, asearly as age 62. However, if you retire early,your Social Security benefit will be less than ifyou wait until your full retirement age to beginreceiving benefits. Your retirement benefit willbe reduced by 5/9ths of 1 percent for everymonth between your retirement date and yourfull retirement age, up to 36 months, then by5/12ths of 1 percent thereafter. For example, ifyour full retirement age is 67, you'll receiveabout 30 percent less if you retire at age 62than if you wait until age 67 to retire. Thisreduction is permanent--you won't be eligiblefor a benefit increase once you reach fullretirement age.

Still, receiving early Social Security retirementbenefits makes sense for many people. Eventhough you'll receive less per month than ifyou wait until full retirement age to beginreceiving benefits, you'll receive benefitsseveral years earlier.

Delaying retirement willincrease your benefitFor each month that you delay receivingSocial Security retirement benefits past yourfull retirement age, your benefit will increaseby a certain percentage. This percentagevaries depending on your year of birth. Forexample, if you were born in 1943 or later,your benefit will increase 8 percent for eachyear that you delay receiving benefits. Inaddition, working past your full retirement agehas another benefit: It allows you to add yearsof earnings to your Social Security record. Asa result, you may receive a higher benefitwhen you do retire, especially if your earningsare higher than in previous years.

Working may affect yourretirement benefitYou can work and still receive Social Securityretirement benefits, but the income that youearn before you reach full retirement age mayaffect the amount of benefit that you receive.

Today, though the scope ofSocial Security has beenwidened to includesurvivor's, disability, andother benefits, retirementbenefits are still thecornerstone of the program.

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Here's how:

• If you're under full retirement age: $1 inbenefits will be deducted for every $2 inearnings you have above the annual limit

• In the year you reach full retirement age:$1 in benefits will be deducted for every $3you earn over the annual limit (a differentlimit applies here) until the month youreach full retirement age

Once you reach full retirement age, you canwork and earn as much income as you wantwithout reducing your Social Securityretirement benefit.

Retirement benefits for qualifiedfamily membersEven if your spouse has never worked outsideyour home or in a job covered by SocialSecurity, he or she may be eligible for spousalbenefits based on your Social Securityearnings record. Other members of yourfamily may also be eligible. Retirementbenefits are generally paid to family memberswho relied on your income for financialsupport. If you're receiving retirement benefits,the members of your family who may beeligible for family benefits include:

• Your spouse age 62 or older, if married atleast one year

• Your former spouse age 62 or older, if youwere married at least 10 years

• Your spouse or former spouse at any age,if caring for your child who is under age 16or disabled

• Your children under age 18, if unmarried• Your children under age 19, if full-time

students (through grade 12) or disabled• Your children older than 18, if severely

disabledYour eligible family members will receive amonthly benefit that is as much as 50 percentof your benefit. However, the amount that canbe paid each month to a family is limited. Thetotal benefit that your family can receive basedon your earnings record is about 150 to 180percent of your full retirement benefit amount.If the total family benefit exceeds this limit,each family member's benefit will be reducedproportionately. Your benefit won't be affected.

How do you sign up for SocialSecurity?You should apply for benefits at your localSocial Security office or on-line two or threemonths before your retirement date. However,the SSA suggests that you contact your localoffice a year before you plan on applying forbenefits to discuss how retiring at a certainage can affect your finances. Fill out anapplication on the SSA website, or call theSSA at (800) 772-1213 for more informationon the application process.

Planning for Earned Income in RetirementIf you're like a lot of people, retirement won'tbe the world of gardening, golfing, traveling,and tennis you once envisioned. Rather,retirement will mean relaxing and working.Maybe you've retired from your "regular" joband started a business, or perhaps you wantto work part-time just to stay busy. However, ifyou work after you start receiving SocialSecurity retirement benefits, your earningsmay affect the amount of your benefit check.

How your earnings affect yourbenefitYour earnings in retirement may increaseyour retirement benefit

Your monthly Social Security retirementbenefit is based on your lifetime earnings.When you become entitled to retirementbenefits at age 62, the Social SecurityAdministration (SSA) calculates your primaryinsurance amount (PIA) upon which yourretirement benefit will be based. Later, your

PIA will be recalculated annually if you havehad any new earnings that might substantiallyincrease your benefit. So if you continue towork after you start receiving retirementbenefits, these earnings may eventuallyincrease your PIA and thus your retirementbenefit.

Your earnings in retirement may decreaseyour retirement benefit

If you earn income over a certain limit byworking after you begin receiving retirementbenefits, your benefit may be reducedproportionately. This limit, known as theretirement earnings test exempt amount,affects only beneficiaries under normalretirement age. The benefit reduction is basedon your annual earnings and is notpermanent; your monthly benefit is reducedstarting in January of the year following theyear you had excess earnings and will bereduced until the excess earnings are usedup.

If you expect you will havesubstantial earnings afteryou retire and you have notyet reached normalretirement age, you may beable to time yourpost-retirement earnings toprevent withholding of all orpart of your Social Securityretirement benefit.

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Example: Emily is entitled to a Social Securityretirement benefit of $800. When she was 64,her annual earnings exceeded the retirementearnings test exempt amount, so her benefitwas reduced by $600. Consequently, inJanuary of the following year, she receivedonly a $200 monthly benefit check ($800minus $600 equals $200). However, inFebruary, she again received an $800 monthlybenefit check.

How much is the retirementearnings test exempt amount?In 2012, the annual exempt amount is $14,640($14,160 in 2011) for beneficiaries undernormal retirement age. However, in the yearyou reach full retirement age, a different limitapplies. The limit in 2012 is $38,880 ($37,680in 2011), which applies to earnings up to, butnot including, the month you reach normalretirement age.

How much benefit is withheld ifyou exceed the annual earningslimit?If you're under normal retirement age, $1 inbenefits is withheld for every $2 of earnings inexcess of the annual exempt amount.

Example: Ida was a self-employed potatofarmer. After she began receiving SocialSecurity retirement benefits at age 62, shecontinued to sell potatoes at her producestand outside of Boise. Since she exceededthe annual retirement earnings test exemptamount by $380, $190 was withheld from herbenefit check the following January.

In the year you reach normal retirement age,$1 in benefits is withheld for every $3 ofearnings in excess of the special exemptamount that applies that year, but onlycounting money earned before the month youreach normal retirement age.

Example: In the year that Ida reached normalretirement age, she earned $3,200 more thanthe special earnings limit that applies in thatyear. However, she earned $500 of that aftershe had reached normal retirement age, sothat amount wasn't counted in calculating howmuch benefit would be withheld. Instead, theremaining $2,700 was used in the calculation,and $900 was withheld from Ida's benefit ($1for every $3 in excess of the earnings limit).

What kinds of earnings mayaffect your benefit?Earnings that might reduce your benefit

• Wages you earned as an employee(counted for the taxable year they'reearned)

• Net earnings from self-employment (usuallycounted in the year earnings are received)

• Other types of work-related income, suchas bonuses, commissions, and fees

Earnings that won't reduce your benefit

• Pensions and retirement pay• Workers' compensation and unemployment

compensation benefits• Prize winnings from contests, unless part of

a salesperson's wage structure, or enteringcontests is your "business"

• Tips that are less than $20 a month• Payments from individual retirement

accounts (IRAs) and Keogh plans• Investment income• Income earned in or after the month you

reach normal retirement ageOther types of earnings may affect yourbenefit. If you have additional questions abouthow the Social Security Administration definesearnings, contact the SSA at (800) 772-1213.

Which of your benefits may beaffected by excess earnings?Your own retirement benefit

Your Social Security retirement benefit may bereduced if you earn income over theretirement earnings test exempt amount.

Benefits paid to your spouse or child

If you have retired and your spouse and/orchild receives benefits based on your SocialSecurity record, any excess earnings youhave may reduce their benefits. In addition,any excess earnings they have may reducetheir own benefits but not your benefit.

Example: Bill is 63 and receives a SocialSecurity retirement benefit. His wife Betty,who is also 63, receives a retirement benefitbased on Bill's earnings that is equal to 50percent of Bill's benefit. If Bill earns $200 overthe retirement earnings test exempt amount,his benefit is reduced by $100 ($200 dividedby 2) the following January. Betty's benefit isreduced by 50 percent of that amount, or $50.

If you have retired and yourspouse and/or child receivesbenefits based on yourSocial Security record, anyexcess earnings you havemay reduce their benefits.

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However, assume that Betty also works andearns $200 over the retirement earnings testexempt amount. Her benefit will be reduced by$100 ($200 divided by 2). Her benefit isreduced an additional $50 by Bill's excessearnings. Bill's benefit, however, is reduced by$100 because of his own excess earnings butis not affected by Betty's excess earnings.

Benefits paid to your survivors

If you die and a member of your familyreceives a survivor's benefit, that benefit maybe reduced if the family member earns moneyin excess of the retirement test exemptamount.

Example: When Bill dies, Betty, his widow,begins receiving survivor's benefits based onBill's Social Security record. Since she earns$200 more than the exempt amount that year,Betty's survivor's benefit of $825 is reduced by$100 in January of the following year.

The earnings test is different inthe first year of retirementEarnings from an employer

In the first year of retirement, the earnings testis applied differently than in later years.Normally, the earnings test is based on theamount of income you earned annually;however, in the first year of retirement, theearnings test can be based on the amount ofincome you earned monthly, if that wouldbenefit you. You can receive a full SocialSecurity benefit check for any whole month inwhich your earnings don't exceed 1/12th of theannual exempt amount.

Example: Caleb retired on July 31 at age 62.From January through July of that year, heearned $40,000. After he retired, he beganworking part-time and earned only $300 amonth from August to December (each month,less than the monthly earnings exemptamount). Thus, even though his annualearnings during the year he retired greatlyexceeded the annual earnings exemptamount, Caleb's benefit check was notreduced the following year.

Earnings from self-employmentIf you're self-employed, the SSA alsoconsiders whether you perform substantialservices in your business. You will receive fullbenefits for any month you're not substantiallyself-employed. In general, you're consideredto be substantially self-employed if youworked as a self-employed person more than

45 hours in one month. If you work less than15 hours in one month, you will not beconsidered substantially self-employed, andyou probably will receive your full retirementbenefit for that month. If you work between 15hours and 45 hours a month, you may or maynot be considered substantially self-employedby the SSA, and your retirement benefit maybe affected.

How you can keep yourpost-retirement earnings fromexceeding the earnings exemptamountTime your post-retirement earnings

If you expect you will have substantialearnings after you retire and you have not yetreached normal retirement age, you may beable to time your post-retirement earnings toprevent withholding of all or part of your SocialSecurity retirement benefit.

Create a self-employment loss

If you're self-employed, you may be able togenerate a self-employment loss to offsetexcess self-employment income.

Incorporate a sole proprietorship

If you incorporate a sole proprietorship as anS corporation, you may be able to reduce yourself-employment earnings by receiving profitdistributions that will not be consideredself-employment income for the purposes ofthe retirement earnings test.

Shift earnings to others

You may be able to reduce your netself-employment earnings if you shift earningsto others by forming a partnership with yourspouse or employing minor children.

Caution: The SSA may scrutinizequestionable retirement arrangements. Underthe law, you are entitled to work and combineyour Social Security benefits and earnings insuch a way as to get the most income youcan. However, you should not understate yourearnings or establish fictitious businessarrangements.

Questions & AnswersQ: If you earn more than the retirementearnings exempt amount, when will all orpart of your benefit be withheld due toexcess earnings?

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A: Your excess earnings will be withheldstarting in January of the year following theyear you had excess earnings.

Q: If you receive Social Securityretirement benefits based on yourex-spouse's Social Security earningsrecord, will your benefit be reduced ifyour ex-spouse works after retirement andearns more than the exempt amount?

A: No. If you've been divorced for more thantwo years, your benefits will not be reduced ifyour ex-husband has excess earnings. Theonly way your benefit will be reduced is if youhave excess earnings.

Q: How does the SSA know how muchyou earn after you retire?

A: The SSA knows how much you earnbecause you are required to estimate yourearnings when you apply for Social Securitybenefits. Later, the SSA will get informationabout your earnings from your IRS W-2 form(submitted annually by your employer) or, ifyou are self-employed, from your annualincome tax return. They also may ask you tosend them an earnings estimate annually. Inaddition, if you think the earnings used tocalculate your benefit may be incorrect,contact the SSA at (800) 772-1213 so thatyour benefit can be accurately calculated.

How Earnings Affect Social SecurityIf you begin to receive Social Security retirement (or survivor's) benefits before you reach fullretirement age, money you earn over a certain limit will reduce the amount of your Social Securitybenefit. In 2012, your benefit will be reduced by $1 for every $2 of earnings in excess of$14,640.*

The chart below shows the effect of annual earnings of $10,000, $20,000, and $30,000 on a$12,000 annual Social Security benefit ($1,000 monthly) for someone who hasn't yet reached fullretirement age.

Source: Social Security Administration, 2011

*Special rules apply in both the year you reach full retirement age and the year you retire if youhave not reached full retirement age.

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Timing Your Earnings in Retirement to OptimizeYour Social Security Retirement BenefitIf you work after you begin receiving SocialSecurity retirement benefits, you may lose allor part of your retirement benefit if yourearnings exceed the retirement earningsexempt amount. However, you won't losebenefits due to excess earnings once youreach normal retirement age, and it's possibleto time your earnings in retirement in order tooptimize your benefit.

Example: Lewis retired in 2011 at age 62. In2012, he goes back to work and earns$15,280 working part-time. Since the annualretirement earnings test exempt amount is$14,640 in 2012, Lewis's retirement benefit isreduced by $320 the following year ($1 inbenefits was withheld for every $2 of excessearnings). If Lewis had reached his normalretirement age when he went back to work, hewouldn't have lost any retirement benefit dueto excess earnings.

Who can benefit from using thisstrategy?If you're under normal retirement age and earnmore than the annual retirement earnings testexempt amount by working after you retire,you may benefit from timing your earnings inretirement.

Tip: Remember, though, if your monthlybenefit is reduced in the short term due toyour earnings, you'll receive a higher monthlybenefit later. That's because the SSArecalculates your benefit when you reach fullretirement age, and omits the months in whichyour benefit was reduced.

How to do itPostpone your earnings

The easiest way to avoid losing all or part ofyour Social Security benefit due to excessearnings is to postpone your earnings.

You can postpone your earnings in two ways:

The first way is to determine when youactually work and earn income: If you'reworking for an employer, your wages arecounted as income in the year you earn them.Because earnings at normal retirement age orlater will never reduce your Social Securityretirement benefit, you might postponeworking after retirement until you reach normalretirement age if you expect to have excess

earnings.

Example: Leslie was bored after she retired.When she was 65, she thought about workingas a used-car salesperson at the localdealership. However, she thought that shecould sell a lot of cars and make a lot ofmoney, so she decided to wait until she turned66 (her normal retirement age) beforeapplying at the dealership so that any excessearnings she had would have no effect on herretirement benefit.

The second way is to postpone when youreceive your earnings: If you're self-employed,you can limit the effect of excess earnings onyour retirement benefit by postponing whenyou receive your earnings. This is becauseearnings from self-employment are treated asearnings in the year they're received.

Example: By December 1, 2012, Keith (whois 63) makes $10,000 for the year workingpart-time as a carpenter. Since $10,000 isbelow the retirement earnings test exemptamount for 2012 ($14,640), Keith knows thathis 2011 earnings won't affect his SocialSecurity retirement benefit. Then, he takes a$5,500 job on December 26 and becomesconcerned that the job will affect his retirementbenefit by pushing his 2012 earnings over theretirement test exempt amount. His wifereminds him that because he wouldn't be paidfor the job until January, those earningswouldn't count toward the retirement testexempt amount until 2013.

Bunch your earnings

If you believe that you will lose all of yourretirement benefit in one year due to excessearnings, you may be able to bunch yourearnings for that year in order to avoid losingbenefits the following year.

Example: Consider the following case:

Situation: Allen receives a monthly SocialSecurity retirement benefit. When he is 63, heopens his own painting business and, bySeptember, has already earned $30,000 morethan the retirement earnings test exemptamount for that year. Since $1 of hisretirement benefit will be withheld for every $2he has in excess earnings, he knows that hisentire annual benefit will be withheld. Sincebusiness is good, he also knows that nextyear his retirement benefit will probably beaffected by excess earnings as well.

If you work after you beginreceiving Social Securityretirement benefits, you maylose all or part of yourretirement benefit if yourearnings exceed theretirement earnings exemptamount.

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Question: In October of that year, Allen hasthe chance to earn over $8,000 by painting abusiness. However, the owner isn't in a hurryto pay, and Allen thinks about waiting tocollect his fee until January of the followingyear. Should he?

Solution: No, Allen should collect his fee rightaway. His entire retirement benefit is alreadygoing to be withheld due to excess earnings,so the $8,000 fee won't affect his benefit at allbecause any remaining excess earnings won'tbe carried forward to the next year. However,if Allen waits until the following year to collecthis fee, that fee may affect his Social Securityretirement benefit because net earnings fromself-employment are considered earned (forretirement test purposes) in the year they'rereceived.

Time the start of benefits

Special rules apply to excess earnings duringthe first year of retirement. You might benefitfrom electing to begin receiving retirementbenefits during a year in which you expectyour earnings to be particularly high. Duringthe first year you receive retirement benefits, ifyour wages from an employer are more thanthe annual retirement earnings test exemptamount, your retirement benefit will bereduced by the lesser of: (1) the reduction inbenefits that would occur if the annual testapplied, or (2) the benefit you received in themonth or months that you earned more than1/12th of the annual retirement earnings testexempt amount.

Example: Consider the following case:

Jeff retires on September 30, 2012 at age 62.Before he retires, he earns $50,000 during theyear. In October, he begins working part-timeand earns $1,000 per month for the last threemonths of the year. Even though his earningsfor the year greatly exceed the 2012 annualretirement earnings test exempt amount of$14,640, Jeff still receives a full SocialSecurity benefit for October, November, andDecember. This is because his earnings inthose months do not exceed 1/12 of theannual earnings test exempt amount of $1,220per month in 2012. However, beginning in2013, the annual retirement earnings testamount will apply to him because he will bebeyond his first year of retirement.

Jeff's case illustrates that the effect of excessearnings on your Social Security retirementbenefit can be lessened somewhat if you electto start receiving retirement income in a yearin which you expect to have high excessearnings.

Caution: This monthly test for excessearnings only applies if your wages are froman employer. If you are self-employed, theexcess earnings test applies in a differentmanner.

StrengthsYou can avoid losing part or all of yourSocial Security retirement benefit

By postponing or bunching your earnings inretirement, you may be able to avoid earningmore than the retirement earnings test exemptamount. By timing when you first beginreceiving Social Security retirement benefits,you may be able to lessen the impact ofearned income on those benefits.

TradeoffsThe Social Security retirement benefit youkeep may not be enough to offset theearnings from working that you lose

Example: Phillip (age 63) receives a SocialSecurity retirement benefit of $1,000, or$12,000 per year. Phillip earns $27,640 in2012, exceeding the earnings limit of $14,640by $13,000. Phillip loses $1 in benefits foreach $2 over the earnings limit, a total of$6,500 in benefits. Phillip's income for 2012 is:

Social Security retirementbenefit

$5,500

Employment earnings $27,640Total income $33,140

If Phillip decided that he didn't want to loseany Social Security retirement benefits bylimiting his earnings from his job to $14,640,his income in 2012 would have been:

Social Security retirementbenefit

$12,000

Employment earnings $14,640Total income $26,640

Even though Phillip lost part of his SocialSecurity retirement benefit due to excessearnings, the money he earned from his jobmore than made up for the lost benefit.

Questions & AnswersQ: How will earnings during the year youreach normal retirement age affect yourretirement benefit?

A: Earnings after normal retirement age won't

By postponing or bunchingyour earnings in retirement,you may be able to avoidearning more than theretirement earnings testexempt amount.

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affect your retirement benefit. But few peoplereach their normal retirement age on January1. What if you have earnings during the yearbefore you reach normal retirement age? Theanswer is that you are entitled to a specialearnings exemption for the months thatprecede your birthday. For example, if youreach normal retirement age on December 1,2012, you will be entitled to earn up to$38,880 during the months that precede your

birthday without reducing your benefit, andonce you reach your birthday, none of yourearnings will reduce your benefit. So, as longas your earnings from January throughNovember of 2011 don't exceed $38,880, youwill receive all of your retirement benefit.However, if your earnings do exceed $38,880,you'll lose $1 for every $3 of earnings thatexceed the limit.

Sources of Retirement Income: Filling the SocialSecurity GapAccording to the Social Security Administration, more than nine out of ten individuals age 65 andolder receive Social Security benefits. But most retirees also rely on other sources of retirementincome, as shown on this chart:

Note: Data may not total 100% due to rounding.

Source: Fast Facts & Figures About Social Security, 2011, Social Security Administration

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Disclosure Information -- Important -- Please Review

March 21, 2012Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012

Forefield Inc., the author of this article, does not provide legal, tax, or investment advice. All contentprovided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to itsmaterials, or for the accuracy of information provided by other sources.Hourly, fee-only financial planning and investment advisory services are offered through Cole FinancialConsulting, LLC, an investment advisory firm registered in New Mexico and Colorado. Material presented isbelieved to be from reliable sources and we make no representations as to its accuracy or completeness. Allinformation and ideas should be discussed in detail with your advisor prior to implementation. This documentshall in no direct or indirect way be construed or interpreted as a solicitation to sell or offer to sell investmentadvisory services to any residents of any state other than the states in which Cole Financial Consulting, LLCis registered or eligible to provide advisory services under applicable de minimis rules.

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