Social (In)Security

Retirement Planning and Social Security

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What’s at stake?

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Social Security is extremely popular

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What are we talking about?

Social Security represents on average 84.3 percent of income for Americans age 65 and older who are in the lowest income quintile (income below $12,554); 17.3 percent of income for Americans age 65 and older who are in the highest income quintile (income above $57,957); and on average, 36.7 percent of income for all Americans age 65 and older.

Source: The Social Security Administration’s Income of the Aged Chartbook, 2010

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It’s very valuable

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Hypothetical illustration; assumes $2,000 monthly Social Security benefit at full retirement age and average life expectancy of 82.5 for a man and 85.1 for a woman.

It’s very valuable

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What are we talking about?

“At the end of 2012, [Social Security] was providing benefitpayments to about 57 million people….

“During the year, an estimated 161 million people had earningscovered by Social Security and paid payroll taxes.

“Total expenditures in 2012 were $786 billion.”

Source: THE 2013 ANNUAL REPORT OF THE BOARD OF TRUSTEES OF THE FEDERAL OLD-AGE ANDSURVIVORS INSURANCE AND FEDERAL DISABILITY INSURANCE TRUST FUNDS

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What are we talking about?

Social Security will exhaust its trust fund surplus by 2033, after which the payroll tax will fund three‐quarters of scheduled benefits through 2087, a projection that is unchanged from last year’s projections.

Source: THE 2013 ANNUAL REPORT OF THE BOARD OF TRUSTEES OF THE FEDERAL OLD-AGE AND SURVIVORS INSURANCE AND FEDERAL DISABILITY INSURANCE TRUST FUNDS

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Demographics

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How long will you live?

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Demographics

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In 1950, the likelihood of survival from age 80-90 was 15-16% for women and 12% for men, compared with 37% and 25%, respectively, in 2002, and there’s

no sign of this longevity growth slowing down.Danish Aging Research Center at the University of Southern Denmark

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Potential fixes include:

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Raising income cap Increasing full retirement age Lowering COLA Privatization Benefit cuts Means testing

Note: Medicare is a much bigger problem

The public’s view

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Choices

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Most popular claiming age?

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74% of those collecting Social Security retirement benefits are receiving reduced amounts

Source: Social Security Administration’s Annual Statistical Supplement, 2011

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This GAO report argues “that individuals [should] delay receipt of Social Security benefits until reaching at least full retirement age and, in some cases, continue to work and save, if possible.”

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Bridging the Gap

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Strategies

Claiming Strategies

“Rat holes” – specific times at which a retiree should not claim Social Security (e.g., Single retirees whose full retirement age (FRA) is 66 and who aren't affected by the earnings test should not claim Social Security in any month near FRA nor three years prior to FRA)

When a worker claims Social Security and is married to someone who is taking care of a child under the age of 16 or taking care of a disabled child, that spouse can collect 50 percent of the benefits regardless of the spouse’s age.

Unmarried children (step-, adopted or dependent grand-) are eligible for benefits if their parent is retired, disabled or deceased, subject to a family limit.

A surviving spouse can receive benefits at age 60 (not 62) —assuming there are no eligible children

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Claiming Strategies

A surviving-divorced spouse qualifies for a benefit if the marriage lasted at least 10 years. (The benefit is the same as the current surviving spouse but is not included in the family maximum, unless the benefit is based on caring for the worker’s eligible child; if the surviving-divorced spouse remarries before age 60, benefits aren't payable unless and until the subsequent marriage ends; remarriage after age 60 does not stop entitlement to benefits).

Beware the “government pension offset.” The SSA has made age 66 the "full" retirement age for people

born during 1943-1954 (and it increases for those born thereafter). Someone born in this period who applies for Social Security at age 62 receives a lower benefit by 25 percent.

“File and suspend.” Benefit to delay: 8 percent accumulation rate between ages 66

and 70.

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Claiming Strategies

Social Security benefits are calculated based on one’s 35 highest earning years in the workforce. If fewer than 35 years are worked, zeros are averaged into the calculation.

Married couples are eligible to claim benefits based on their own work record or up to 50 percent of the higher earner's benefit, whichever is higher. However, spousal benefits are reduced if you claim them before your full retirement age.

Dual-earner couples who have reached their full retirement age may be able to claim spousal benefits and then later switch to payments based on their own work record, which will then be higher due to delayed claiming.

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Claiming Strategies

People under their full retirement age who earn more than $14,640 in 2012 will have $1 withheld for each $2 they earn above the limit. For the year you reach your full retirement age, the earning limit jumps to $38,880, and the penalty decreases to $1 withheld for every $3 earned above the limit. Once you reach the month of your full retirement age, there are no restrictions on how much you can earn while receiving benefits and your payments will be recalculated to reflect the withheld payments.

Your Social Security payout may be taxable, depending on how much income you will have in retirement. If the sum of your adjusted gross income, nontaxable interest, and half of your Social Security benefits is between $25,000 and $34,000 ($32,000 and $44,000 for couples), income tax could be due on up to 50 percent of your benefits. If those three items total more than $34,000 ($44,000 for couples), up to 85 percent of your Social Security income may be taxable.

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QUESTIONS?