Social Security Planning
Social Security was established in 1935 as a form of social insurance to protect individuals from hardships, such as disability, death and retirement. Employers and employees are legally required to pay into the system for benefits they will receive later in life when disabled, retire or die. The amount you receive is calculated by how much you pay in. Social Security was not intended to be America’s retirement plan however with the disappearance of pensions and the responsibility shifting to each retiree it is more important than ever. The two biggest concerns most retirees face are rising healthcare costs and running out of money. The role of Social Security and Medicare in your healthcare and your financial security is crucial to your long-term plans and should be the bedrock of your financial strategy.
For most of Americans, Social Security and Medicare are the foundation of their retirement. Given what a crucial role they play, Hanson Financial Group takes a holistic approach to helping people understand the fundamental ways these programs work individually and together and the role they work into one’s overall financial plan. Once the foundation is in place we can then look at other financial products if needed to assure you do not run out of money. Social Security should be considered an asset not just a benefit! It is your asset that you will never outlive (assuming your 55 or older), adjusts for inflation, is backed by the government and is tax-advantaged. Because it is so complicated, many advisors do not deal with Social Security strategies and Social Security is not allowed to recommend or advise you. We can help you with this important decision using dedicated software that spells out all of your options and helps you find the strategy that best fits your financial and personal goals.
This is not intended to be a course on Social Security but here are some important considerations to know before you apply. Keep in mind the strategies, survivor benefits, spousal benefits, minor benefits are beyond the scope of what we trying to accomplish in a few minutes on a website. For a more in depth personalized consultation, please call us to see if we can be of some assistance.
What’s your number?
Before you can begin calculating you need to understand the Full Retirement Age or FRA. If you were born between 1943 and 1954, you can collect your “Primary Insurance Amount or PIA” at 66. The FRA rises gradually to 67 for those born between 1955 and 1960. The chart below shows the gradual rises and the corresponding FRA. Once you have your FRA, you can see when you receive 100% of your PIA.
|Year Born||FRA||Apply for SS at age||If your FRA is 66||If your FRA is 67|
|1955||66 and 2 mos.||63||80.00%||75%|
|1956||66 and 4 mos.||64||86.70%||80%|
|1957||66 and 6 mos.||65||93.30%||86.70%|
|1958||66 and 8 mos.||66||100%||93.30%|
|1959||66 and 10 mos.||67||100%|
|1960 and later||67|
With the chart above let’s take a look at some of the options available. For a retiree reaching FRA at 66, if you were to claim your benefits at 62, they would be permanently reduced by 25% compared to what you would receive at 66. Let’s say your PIA at FRA was $1000, if you claimed at 62 you would receive $750 plus your “Cost of Living Adjustment”, COLA, permanently.
But there is an alternative called delayed credits if you work past your FRA. Let’s say your FRA is 66 but you continue to work to 70, you get a delayed retirement credit of 8% for each year you wait past your full retirement age. Let’s say your benefit is $2,000 at your FRA of 66. If you claim at 62, you get $1,500, but if you wait until 70, your benefit jumps to $2,640! That’s 76% more than if you claim early. Keep in mind that number doesn’t include COLA while you wait! How do you compute your benefit, let’s look at your “Averaged Indexed Monthly Earnings” or AIME.
AIME- YOUR EARNINGS
Your Social Security benefits are calculated based on your thirty five highest earning years in which you paid into Social Security. Your earnings are charted and a table of value’s are assigned to put them equal footing with today’s earnings, Social security uses ANYPIA (Social Security’s detail calculator found on www.ssa.gov). Once you turn 60, your base year, your earnings are not indexed. Social Security will identify the highest thirty-five years, average them, and divide by twelve to come up with your Average Indexed Monthly Earnings or AIME. If you do not have thirty-five years of earnings the years you didn’t work are counted as zeroes. So an extra year of work can have a substantial impact on your AIME and mean higher benefits. Sometimes a year of earnings can be missing from your record, to check this and make sure all of your earnings have been reported, set up your account at www.ssa.gov.
PIA- CRITICAL CONCEPT
Your Primary Insurance Amount or PIA is by definition the amount you will receive if you elect to begin receiving retirement benefits at your FRA. The PIA is the sum of three separate percentages of proportions, called “bend points” of your AIME (Averaged Index Monthly Earnings). The bend points change every year based on the national wage so you want to make sure you use the correct bend points in the year you become eligible. The proportions depend on the year in which a worker attains age 62, becomes disabled before 62, or dies before attaining age 62.
For 2015 these proportions are the first $826, the amount between $826 and $4,980 and the amount over $4,980. The formula that is used 90% for the first $826, 32% for the amount between $826-$4,980 and 15% over the $4,980.
Mary’s AIME has been calculated in today’s dollars to be $60,000 per year or $5,000 a month.
|90% of $826||826 X .9||$746.10|
|32% of $4,154||4154 X .32||$1,329.28|
|15% of $20||20 X .15||$3|
|TOTALS $5,000 (AIME)||$2,078.38 (PIA)|
Mary’s PIA would be $2,078.30 (rounded to lowest dime).
While complicated and abstract, understanding how this is calculated in important, because it is the building block of all benefits. The coordination of spousal benefits depends on the relative PIA of each spouse, as do survivor benefits paid to surviving spouses or surviving ex-spouses.
COLA- not the usual soft drink
Let’s talk about “Cost of Living Adjustment”, COLA, for a moment and how it relates to Social Security benefits. This is important because it is your inflation protection and can help you keep up with rising living expenses during retirement. This benefit is automatic and valuable in hedging against inflation. The percentage is calculated based on the changes in a federal consumer price index; the size of the COLA is largely dependent on broad inflation levels determined by the government. If we look at some historical rates, 1980 had the highest COLA at 14.3%, while 2010 and 2011 had 0%, it came back in 2012 at 3.6% and in 2015 it was 1.7%. One important point to make here is the larger your benefit the bigger the COLA impact will have on your benefit and survivor benefits. If you combine this with delayed credits it can have a substantial increase in your monthly benefit.
Let’s take a continued look at Mary in the example above with her FRA at 66 and her PIA at $2,078.30.
If she delays retirement until age 70 and we use a COLA of 2.8% (estimated inflation) we can see the significant impact it has in the monthly benefit. At age 70 Mary will have almost $1,100 more a month. If the high wage earner employs this strategy and is outlived by his wife the higher benefit will be available as her survivor benefit. This is critical if the higher wage earner passes away and the surviving spouse are relying on one check from Social Security.
|Mary’s PIA at FRA (66)||Delayed Credit 8%||COLA 2.8%||Adjusted PIA|
There are so many books, articles and calculators available that go into the hundreds of strategies available for retirees that it is mind numbing. While there are tremendous available but the thing you need to realize is that your situation is unique. While one strategy may work for your friend or relative it may not be the best option for you. The strategy that works for you needs to consider, your age, health, where you live, assets (qualified and unqualified), insurance, children, life expectancy and income needs. Your entire financial and personal picture should be looked at carefully from all angles and coordinated with your personal goals and situation, not on a standalone basis. We at Hanson Financial Group would be happy to discuss the strategies that might apply to you, please contact us for a consultation or an educational seminar.
A COUPLE OF IMPORTANT ITEMS THAT YOU MIGHT NOT KNOW…..
- Did you know up to 85% your Social Security Benefits can be taxed?
- In 1984 Social Security lost its tax-free status and the thresholds for taxing have not been changed since then. A married couple with a combined income of more than $32,000 may have to pay income taxes on up to 50% of their benefits.
- Heard of the “earnings test”? If you take Social security benefits while working you forfeit $1 for every $2 you earn over $15,720 in 2015.
- Your distribution or Required Minimum Distribution may cause your Social Security to be taxed.
- Ex-spouses may be eligible to a Social Security benefits under certain circumstances!
- If your ex-spouse is claiming/suspended Social Security benefits your minor children may be eligible for benefits.
- The maximum benefit for 2015 is $2,663
- If your spouse dies before you and you are at FRA you can receive 100% of that benefit, if you remarry before age 60 you cannot get that survivor benefit. If you remarry after age 60 you may be eligible for benefits based on your ex-spouses earnings record.
- If you delay credits until age 70 you receive an 8% increase in benefits for each year you delay!