1. 1. 1 Contents Meet the Authors ............................................... 2 What Your Clients Dont Know About Social Security .................... 4 The Important Role of Spousal Benefits ............................... 8 Video: Social Security - The Important Role That Spousal Benefits Can Play ... 13 Engaging Clients in this Critical Conversation ......................... 14 Video: Social Security - Engaging Clients in this Critical Conversation ....... 17 Social Security - How Do Taxes Affect Benefits? ........................ 18 Social Security - Spousal Benefits for Divorced Individuals ................ 20 Youre in Good Company with Principal Funds ........................ 22 Disclosures ................................................... 23
2. 2. 2 Meet the Authors Kevin R. Hansen, CFP , CRPC Director of Business Development, Retirement Solutions Hansen.Kevin@principal.com Kevin is responsible for developing retirement and income planning initiatives that focus on the technical expertise and training of financial professionals in advanced sales concepts. He has over 20 years of investment industry experience, including nine years in direct sales. Kevin joined the Principal Financial Group in 2004. Kevin previously held positions with Wells Fargo Investments, Brenton Investments (an Iowa-based bank broker/dealer), and American Express Financial Advisors. He earned his B.B.A. in Finance from Iowa State University. He holds FINRA Series 7, 9, 10, 24, 53, 63, and 66 securities licenses. He has also obtained the Certified Financial Planner (CFP ) and Chartered Retirement Planning Counselor (CRPC ) designations from the College for Financial Planning.
3. 3. 3 Joe Moklebust, CRPC Director of Business Development, Retirement Solutions Moklebust.Joe@principal.com Joe began his career in higher education as an administrator and faculty member. In the mid-1980s he transitioned to financial services and worked as a Registered Representative and Financial Planner. Joe joined the Principal Financial Group in 1999 and has been active in the development of products and strategies to address the needs of Baby Boomers approaching retirement. Currently, he serves as a member of the Principal Advanced Retirement Team, focusing on IRA rollovers and distributions. Joe conducts training for Registered Representatives and presents client seminars throughout the United States. He received his Masters Degree from the University of Iowa and has FINRA Security Licenses (Series 6, 7, 24, and 66). He also carries the Chartered Retirement Planning Counselor (CRPC ) designation from the College for Financial Planning.
4. 4. 4 What Your Clients Dont Know About Social Security Learn about the most important Social Security considerations with this engaging ebook that provides insight on ways to help clients maximize their Social Security benefits. If youre not sure how to approach clients to discuss Social Security, this ebook can help - with simplified, accurate information. Many individuals do not understand Social Security, which puts them at a risk of not taking full advantage of their retirement benefits. Without assistance, they can make costly, often irreversible, mistakes. The Importance of Full Retirement Age As you engage clients in discussions about Social Security, I suggest that you focus initially on the topic of Full Retirement Age (FRA), which may have the greatest potential to impact their Social Security benefits. FRA is the age at which individuals qualify for their full Social Security benefit. It is important to discuss FRA with clients to help them determine the optimal age to elect their benefits. Believe it or not, many of your clients wont know their FRA. I recommend sharing this chart to help them pinpoint their FRA.
5. 5. 5 When to Take BenefitsEarly vs. Late In simplest terms, those who elect Social Security benefits before their FRA receive reduced benefits, while those who wait until after their FRA receive additional creditsincreasing their benefits when they do elect. I have found that offering this simple explanation helps clarify the impacts of FRA on the decision to take benefits early or late. Consider the hypothetical example of a worker with a Social Security monthly benefit of $1,000 at an FRA of 66. As you can see, this individuals benefit amount decreases significantly if they elect to take benefits early (62 is the minimum age to file for benefits). Correspondingly, their benefit amount increases if the individual elects to take benefits later (up to age 70, at which time no additional delayed credits are earned).
6. 6. 6 The Longer Your Clients Live, the More They Need Social Security While Social Security benefits are designed to be actuarially fair, there are ways to help ensure that your clients get the most they can from Social Security. Research has shown that a majority of individuals are receiving reduced benefits. This tells me that they are not considering longevity issues that may increase their reliance on Social Security as they age and spend down their assets. Retirees who underestimate the effects of longevity may be increasing the likelihood that Social Security will become their primary income source later on. Longevity is an important consideration for determining when to elect benefits. Lets consider: 73% of retired Americans are receiving reduced benefits.1 32% of retirees rely on Social Security for their primary income.2 69% of employees plan on Social Security being their secondary source of income.2 1 Social Security Administration Annual Statistics Supplement, 2013. 2 Principal Financial Well-Being Index, Q4 2010.
7. 7. 7 Depending on your clients unique circumstances, there may be advantages or disadvantages to electing benefits early or late. So having a careful conversation about when to begin collecting benefitsearly or lateis a critical first step in helping your clients get the most from Social Security. You are the Key As more and more individuals face the realities of retirement today, the need for financial guidance will explode. That is why the services you offer are so important. You can position yourself as a valued resource by becoming familiar with all facets of Social Securityso you can help those prospects and clients make smart decisionsand avoid costly mistakes. The key to determining when your clients should elect Social Security benefits in order to maximize income is to answer these all-important questions: How healthy are they and what is their family history of longevity? Will they continue working after collecting Social Security? Are they entitled to individual, spousal, or survivor benefits? What are their other sources of retirement income? Remember, each individuals situation is unique. But when these questions are considered along with the type of retirement your client desires, a comprehensive, realistic retirement income plan becomes possible. Reviewing their retirement assets and Social Security options together may put you into an ideal position to start conversations about their retirement goals, which can help make you even more valuable to them. Learn More Social Security can be an intimidating topiceven for the most skilled financial professional. So, before you approach your clients, you need to understand the ins and outs of Social Security. I encourage you to learn more about these and other Social Security topics by downloading our new thought capital piece, What You May Not Know About Social Security Retirement Benefits. For additional information on the Social Security resources available to you, contact Principal Funds at 800-787-1621.
8. 8. 8 The Important Role of Spousal Benefits I spend a great deal of time working with financial professionals by educating them to better identify opportunities to add value to their client relationships. Today a very real opportunity exists for financial professionals to help their clients identify when and how to take their Social Security benefits in an effort to maximize them. This section focuses on the important role of spousal benefits. Currently or previously married individuals have an option to take their own benefit or their spousal benefit if they qualify. So it is critical to know if an individual qualifies for spousal benefits and when it makes sense to take them. In my experience, many clients arent aware of spousal benefits because they are not mentioned on their annual Social Security statements. Who Qualifies for Spousal Benefits? Claiming spousal benefits is an option that allows a spouse (typically the lower-earning spouse), prior to Full Retirement Age (FRA), to claim their own benefit and then receive an additional amount based on 50% of their spouses Full Retirement Age (FRA) benefit. At their own FRA they can choose to claim only a spousal benefit equal to 50% of their spouses FRA benefit. This would allow their own benefit to earn delayed credits. (This strategy is called Claim Now, Claim More Later.) Use these guidelines to determine who is eligible to file for spousal benefits:
9. 9. 9 Qualifying for Spousal Benefits Spouses currently married Divorced spouses Clients must be married for at least one year (and recognized by the Federal Government as spouses). Both must be at least age 62 (or spouse must be caring for a child under age 16 or over 16 and disabled before age 22). The spouse (whose benefits are being collected upon) must have filed for benefits. Must have been married at least 10 years. Both ex-spouses must be at least age 62 (or caring for a child under age 16 or over 16 and disabled before age 22). Ex-spouse filing for spousal benefits cannot currently be remarried. Covered worker can be remarried and if divorced for 2 years does not need to have filed for benefits. Claiming Spousal Benefits Here are two examples that demonstrate the important role that spousal benefits can play in maximizing Social Security benefits. Example 1 Sam and Ann Using the chart below, lets show an example. Assume Sam and Ann are both 62, and their FRA is 66. Sam is the greater wage earner in this example. At 62, Sams individual benefit is $1,562 and Anns individual benefit is $675. However, at that same age her spousal benefit (half of Sams benefit at FRA reduced because she has not yet reached her FRA) is $724. In this case if Sam has claimed, it would benefit Ann to claim spousal benefits.
10. 10. 10 It is important to note that if Ann decides to wait until she reaches FRA, she can elect to defer her individual benefit and take a spousal-only benefit of $1,035 while her individual benefit continues to accrue delayed credits. At age 70, she files for her individual benefit of $1,180. (Claim Now, Claim More Later strategy) Example 2 Ted and Alice In our second example, we will also assume Ted and Alice are both age 62, and their Full Retirement Age is 66. However in this example, the earnings disparity is not as large and Alice is the higher wage earner. At 62, Teds individual benefit is $1,065 and his spousal benefit is $797 (half of Alices benefit at FRA reduced because he has not yet reached his FRA). In this case, if Ted claims (at age 62) he will receive his own benefit.
11. 11. 11 However, there is another option. If he waits until he reaches FRA, Ted can take just the spousal benefit (now $1,138 per month) and let his individual benefit continue to earn delayed credits. At 70, he would now be eligible to claim an individual benefit of $1,786 using the Claim Now, Claim More Later strategy. These are just two examples of how careful examination of a couples spousal and individual benefits can make a big difference to their retirement income plan. And, it is something the Social Security administration doesnt necessarily make individuals aware of. Thats where you come in. You are the Key Each individuals situation is unique. The spousal benefit provision is an opportunity for you to position yourself as a valued resource. You can help your clients make smart decisionsand avoid costly mistakes.
12. 12. 12 Learn More Social Security can be an intimidating topic even for the most skilled financial professional. I encourage you to learn more about key Social Security topics by downloading our new white paper for financial professionals, What You May Not Know About Social Security Retirement Benefits. For additional information on the Social Security resources available to you, contact Principal Funds at 800-787-1621.
13. 13. 13 Video: Social Security - The Important Role That Spousal Benefits Can Play
14. 14. 14 Engaging Clients in this Critical Conversation One of the most critical but under-discussed retirement planning topics is Social Security. Most individuals simply accept what Social Security decides for them rather than actively pursuing information about Social Security. Financial professionals have the opportunity to engage their clients in conversations about Social Security and help them make what could be one of the most important financial decisions theyll ever make. But where do you start? Here Ill offer my thoughts on how best to approach your clients about Social Security. Determining When to Reach Out and to Whom As you consider how to help your clients understand Social Security and maximize their benefits, I recommend taking a planned approach that involves: Identifying priority targets. Determining when to begin Social Security discussions. Deciding the most effective way to engage clients. Identifying Priority Targets Consider your clients who may benefit the most from understanding Social Security. While Social Security education is relevant to all clients, those who may benefit most are: Those who are within ten years of retirement. Those who are currently married (or who were previously married for at least 10 years). Married couples should be considered priority targets because spousal benefits can make them eligible for a number of benefit-maximizing strategies. Navigating and making the most of these strategies requires the skilled guidance of a financial professional like you.
15. 15. 15 Determining When to Begin Social Security Discussions Because most individuals qualify, I believe that discussing Social Security is a critical first step in the retirement income planning process. Social Security benefits account for approximately 40% of the average retirees pre-retirement income. Help your clients understand their estimated benefits and the actions they can take to get the most from Social Security. Timing your Social Security discussions with clients is important because several key factors that determine Social Security benefits relate to age and employment status. Ive learned that the greatest success is when you engage clients in Social Security discussions well in advance of retirementtypically five to ten years ahead of their projected retirement date. This enables clients to make informed decisions about factors such as benefit election age, whether to continue working, and the option of collecting spousal benefits. Deciding the Most Effective Way to Engage Clients The approach you use should be based on the nature of your working relationship with a client. For example: If youve already begun retirement income planning discussions, consider addressing Social Security in one-on-one planning sessions with your clients. Having both spouses present can be valuable, as decisions involve spousal benefits are key to both parties. If you want to approach clients or prospects with retirement income planning discussions, consider hosting a client event that focuses on Social Security. A client event can offer unique benefits especially if you have multiple clients youd like to introduce to the topic of Social Security. Approaching Clients can be Simpler than You Think Ive found that engaging clients and prospects in person is the preferred delivery method for many financial topics and that is especially true with Social Security due to its complexity. To build on the in-person experience, and still maximize
16. 16. 16 your time and efforts, consider hosting a client event. The potential benefits to you are clear. You can: Enhance your reputation as a trusted Social Security resource. Foster client trust and loyalty. Generate business and gain referrals. Maximize your time and efforts by engaging several clients (or prospects) at the same time. How to Plan a Client Event Delivering a Social Security client seminar takes some planning but the steps and tools are ready for your use and are available from Principal Funds. Take a look at some of the client seminar tools newly available from Principal Funds, including: Build Your Business with Client Events - a step-by-step seminar planning guide. Getting the Most from Social Security - an event-ready client presentation that comes with customizable invitations, follow-up communications, and a client guide that includes a lead generation tool for you. Learn More Regardless of how you engage clients, Principal Funds offers you a robust lineup of Social Security resources to help enable your success. To access additional Social Security resources, including a white paper titled, What You May Not Know About Social Security Retirement Benefits, visit our Marketing Materials Library. For additional information on the Social Security resources available to you, contact Principal Funds at 800-787-1621.
17. 17. 17 Video: Social Security - Engaging Clients in this Critical Conversation
18. 18. 18 Social Security - How Do Taxes Affect Benefits? I discuss the topic of Social Security with financial professionals every day. One thing Ive learned is that clients often dont understand how much their Social Security benefits could be impacted by their income. Your client might have to pay federal income taxes on their Social Security benefits depending on their income. Investment earnings such as wages, interest, or dividends, and taxable distribution from employer retirement plans, IRAs, and annuities. Thats why its important for them to consider the impact of taxes on their Social Security benefits. The table below is a general illustration of how income influences the taxes on Social Security benefits. Provisional income is adjusted gross income (income from all sources) plus any tax-exempt interest and 50% of your clients Social Security benefits. The Social Security Benefit Statement (Form SSA-1099) that your client receives each January shows their benefits from the year before, which they can use to find out how their benefits are taxed. If their benefits are taxed, they have two options for paying their taxes: they can either make regular estimated tax payments or have the taxes withheld from their benefits.
19. 19. 19 Learn More Principal Funds offers comprehensive Social Security resources to help you help your clients. To access additional Social Security resources, including a new white paper titled What You May Not Know About Social Security Retirement Benefits, visit our Marketing Materials Library. For additional information on the Social Security resources available to you, contact Principal Funds at 800-787-1621.
20. 20. 20 Social Security - Spousal Benefits for Divorced Individuals When I talk to financial professionals, I find that many dont realize the opportunities that exist to help their clients get the most from Social Security. When you discuss Social Security benefits with your divorced clients, you can help them find ways to maximize their benefits by educating them on all their options. Just like married couples, divorced individuals may qualify for higher Social Security benefits based on their former spouses work. However, because spousal benefits arent included in Social Security statements, theyre often overlooked. Your Divorced Client May be Eligible to Receive Spousal Benefits Based on an Ex-Spouses Earnings if: They were previously married for at least 10 years. Theyve been divorced for at least two years. Theyre at least 62 years old. Theyre currently unmarried. Their former spouse is entitled to Social Security benefits. Their benefits are less than their former spouses. How do the Benefits Break Out? If your client is eligible to receive their own benefits, that amount will be paid first. However, If your clients benefits are less than half of their former spouses Full Retirement Age (FRA) benefit, they may receive a combination of benefits, resulting in a higher amount. If your client has reached FRA and has not yet elected Social Security benefits, they can opt to receive their divorced spousal benefits now and their own benefits later which could result in a higher benefit amount.
21. 21. 21 Its important to note that the benefits one divorced spouse receives does not affect the benefits of the other divorced spouse. Learn More Principal Funds offers comprehensive Social Security resources to help you help your clients. To access additional Social Security resources, including a white paper titled What You May Not Know About Social Security Retirement Benefits, visit our Marketing Materials Library. For additional information on the Social Security resources available to you, contact Principal Funds at 800.787.1621.
22. 22. 22 Youre in Good Company with Principal Funds Global Investment Management. Asset Allocation Expertise. Retirement Leadership. At Principal Funds, were honored to be a part of your investment strategy. And we have the solutions to help make it a success. Our global investment management means you get access to institutional-quality investments. Our asset allocation expertise provides an easier way to invest. And, our recognized retirement leadership helps you plan for and enjoy your retirementno matter what your stage in life.
23. 23. Disclosures Carefully consider a funds objectives, risks, charges, and expenses. Contact your financial professional or visit principalfunds.com for a prospectus, or summary prospectus if available, containing this and other information. Please read it carefully before investing. Investing involves risk, including possible loss of principal. This content is based on reliable source material and is believed to be correct. Social Security benefits are subject to change without notice. While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. Principal Funds are distributed by Principal Funds Distributor, Inc. For Financial Professional/Institutional Use Only. May Not be Used With the Public. MM5946-2 l 12/2014 l t14031001rb