1. Copyright © 2014, The American College. All rights reserved. Used with permission. Making the Best Social Security Claiming Decisions David Littell, JD, ChFC ®, CFP ® RICP Program Director Director of the NYLCRI The American College

2. Leadership Dave Littell, JD, ChFC ®, CFP® Director, Joseph E. Boettner Chair in Research, Professor of Taxation Jamie Hopkins, Esq, JD, MBA Associate Director, Associate Professor of Taxation Mission Elevate the retirement-income planning knowledge of financial services professionals in order to improve retirement security for all Americans Current Priorities & Initiatives Video Library www.theamericancollege.edu/retirement www.theamericancollege.edu/retirement Retirement Income Certified Professional ® (RICP ® ) Thought Leadership and Visibility RICP ® Retirement Income Literacy Index

3. www.theamericancollege.edu/retirement Researchers Ameriks Babbel Basu Blanchett Finke Milevsky Pfau Reichenstein Sass Vanderhei Warshawsky Educators Franklin Hegna Jordon Rappaport Timmermann Practioner/ Experts Baldwin Caudill Cloake Kitces Guyton Newman Schiff Rosen Tools Freitag Hegna Malholtra Meyer Pechter Huxley

4. Copyright © 2014, The American College. All rights reserved. Used with permission. RICP® Three college level course designation Based on video and outline content Includes over 40 experts in retirement income planning Students are finding it extremely practical Fastest rollout of a designation –5,000 + enrolled and 1,000+ completed – Approved by 38 companies and all regulatory jurisdictions www.designationcheck.com

5. Copyright © 2014, The American College. All rights reserved. Used with permission. Framing the Claiming Decision

6. Copyright © 2014, The American College. All rights reserved. Used with permission. Retirement Income Planning Meet client’s income needs throughout retirement (replace paycheck) Meet other financial goals (legacy/emergency fund) Plan has to have some way to address all the risks faced in retirement

7. Copyright © 2014, The American College. All rights reserved. Used with permission. Benefit of Deferring Social Security Deferring past age 62 results in a 7-8% increase for each year of deferral Benefit at 70 is 176% of benefit at age 62 A married couple’s continues to receive the larger of the two benefits after the first death—so that benefit is payable for a joint life time

8. Copyright © 2014, The American College. All rights reserved. Used with permission. Effect on a Retirement Income Plan Helps meet primary goal of meeting income needs Builds a bigger income floor with a low-risk investment Benefits payable for life—addressing longevity risk Benefits receive COLA—addressing inflation risk Regular fixed payments addresses all the elements of excess withdrawal risk Couple defers larger benefit—addresses loss of spouse risk Retirees with greater amounts of guaranteed income are more satisfied, worry less, and show fewer signs of depression

9. Copyright © 2014, The American College. All rights reserved. Used with permission. Two-third’s of Retirees receive more than half their income from Social Security

10. Copyright © 2014, The American College. All rights reserved. Used with permission. Maximum Benefit 2015 $1,997 a month ($23,967 a year) at 62 $2,663 ($31,965 a year) at age 66 $3,515 ($42,182 a year) at age 70 Couple both earning maximum benefit –Age 66 $63,930 –Age 70 $84,364

11. Copyright © 2014, The American College. All rights reserved. Used with permission. Trends in Claiming Behavior Sex/Birth CohortClaim at 62Claim at 63-64Claim at 65+ Male 1930-3455.3%23.1%21.5% Male 1940-4446.4%16.4%37.1% Female 1930-3457.3%18.3%24.9% Female 1940-4449%17.2%33.8% SOCIAL SECURITY CLAIMING: TRENDS AND BUSINESS CYCLE EFFECTS Owen Haaga and Richard W. Johnson: Center for Retirement Research WP 2012-5

12. Copyright © 2014, The American College. All rights reserved. Used with permission. Getting the Most From the System Some believe that the best bet is to take early because they won’t get their money’s worth unless they live a long life. This is betting on dying young—a bad gamble— since losing means living a long life with too little income. A better way to frame the question is what is least expensive way to increase guaranteed lifetime income?

13. Copyright © 2014, The American College. All rights reserved. Used with permission. Frame as Annuity Purchase Value is a life annuity in the amount of the increased benefits due to deferral Cost is the lost payments as result of deferral Compare to actual price of purchasing inflation adjusted annuity

14. Copyright © 2014, The American College. All rights reserved. Used with permission. Value of Deferring Married couples larger benefit Single women Single men Married couples smaller benefit

15. Copyright © 2014, The American College. All rights reserved. Used with permission. Money’s Worth Analysis Add up the present value of payments assuming life expectancy With the current real riskless rate of return being approximately zero, add together benefits paid Cumulative benefits for single beneficiaries taking at any age from 62 to 70 are approximately the same if live to age 80 For single beneficiaries life expectancy does impact total cumulative benefits Live substantially beyond age 80 and deferring to 70 makes sense

16. Copyright © 2014, The American College. All rights reserved. Used with permission. Single worker Example –Arnie is 62 considering retirement –Arnie has $350,000 in a 401(k) –Arnie wants to get the best deal from Social Security and expects to live to age 79 Considerations –Let’s not forget to look at the big picture—can he afford to retire and how does the decision fit into his retirement income plan? –Main decision is claiming age—using money’s worth best age may be 67 but……

17. Copyright © 2014, The American College. All rights reserved. Used with permission. Married Beneficiaries Example: –Bob and Barbara are both age 62. Bob’s PIA is $2,000 and Barbara’s is $900. –Bob’s life expectancy is age 78 Barbara’s is 90 –Barbara’s survivor benefit is $1,650 if Bob claimed at 62, $2,000 if he claimed at age 66 and $2,640 if he claimed at age 70 –Essentially Bob’s benefit is paid until age 90 –Barbara’s benefit is paid to age 78

18. Copyright © 2014, The American College. All rights reserved. Used with permission. Married Beneficiaries Make claiming decision for larger benefit based on joint life expectancy Make claiming decision for smaller benefit based on life expectancy of first to die In almost all cases it makes sense to defer larger benefit to age 70

19. Copyright © 2014, The American College. All rights reserved. Used with permission. Social Security Benefit Calculations

20. Copyright © 2014, The American College. All rights reserved. Used with permission. Workers Benefit Calculation PIA formula (2015) (year attainment of age 62) –90% of first $826 AIME –32% of AIME x ($4,980 - $826) –15% x AIME in excess of $4,980 Average indexed monthly earnings (AIME) –Wages indexed to age 60 –35 years of wage history –Maximum earnings—TWB ($118,500 in 2015)

21. Copyright © 2014, The American College. All rights reserved. Used with permission. Worker’s Benefits Claiming Early Benefit is reduced 5/9 of 1% for each month before full retirement age up to 36 months. If the number exceeds 36, then the benefit is further reduced 5/12 of 1% per additional month Example: Jamie, who retires and claims benefits four years early, will receive a monthly benefit 25% smaller than her PIA. (5/9 x 36 = 20) + (5/12 x 12 = 5) (total 25%). If Jamie would have received $1,500 per month at full retirement age, she would get $1,125 at age 62.

22. Copyright © 2014, The American College. All rights reserved. Used with permission. Worker’s Benefit—Claiming Late Claiming after full retirement age increases benefits by 2/3 of 1% for each month of deferral up to age 70 (8% a year) Example: With a full retirement age of 66, an individual waiting until age 70 to claim earns 132 percent of the PIA There is no advantage to further delay benefits beyond age 70!

23. Copyright © 2014, The American College. All rights reserved. Used with permission. Spousal Benefit Once a worker has claimed benefits, a spouse is entitled 50% of PIA at full retirement age Benefits can begin early as age 62, but again will be subject to an early-retirement reduction based on the spouse’s age Benefits subject to earnings limit restrictions— earnings by worker or spouse count Spousal benefit does not increase for deferral beyond full retirement age

24. Copyright © 2014, The American College. All rights reserved. Used with permission. Other Retirement Benefits? Workers with fully insured status once they claim, then –Nonworking spouses 62 or older –Spouse of any age if caring for child under 16 –Dependent, unmarried children under 18 (under 20 if in secondary school) –18 or older and disabled from a disability that started before age 22. –Family maximum may apply if 3 or more benefits –Unmarried divorced spouse if marriage lasted 10 years

25. Copyright © 2014, The American College. All rights reserved. Used with permission. Spousal Survivor Benefits Eligible for larger of own worker’s benefit or survivor benefit Full survivor benefit available at full retirement age or reduced benefit as early as age 60 (earnings test applies) Benefit is greater of deceased spouse’s monthly benefit or 82.5% of PIA Deceased spouse’s benefit includes deferred credits (either received or eligible for)

26. Copyright © 2014, The American College. All rights reserved. Used with permission. Suspension of Benefits Mandatory suspension under the earnings test –Benefits reduced if begin prior to full retirement age and earn more than threshold –$15,720 is the earnings limit for 2015 –At full retirement age benefits are automatically recalculated –Example: Individual loses 6 months of payments due to earnings test. At full retirement age benefits are recalculated based on a retirement age 6 months later than initial calculation.

27. Copyright © 2014, The American College. All rights reserved. Used with permission. Voluntary Suspension After full retirement age, an individual can elect to voluntarily suspend Can be used to trigger spousal benefits Suspension again allows a recalculation of benefits when they begin again Only a valuable option for worker’s benefits

28. Copyright © 2014, The American College. All rights reserved. Used with permission. File and Suspend as a Hedge Generally, beyond full retirement age when first claiming you can request benefits retroactively up to six months and receive a lump sum If you file and suspend with the intention of collecting a larger benefit later, you can change your mind and collect a lump sum retroactively back to the point of your initial filing — even if that is longer than six months.* *Social Security Spokesperson Kia Anderson explained to Mary Beth Franklin in a blog Dec. 2 in Investment News

29. Copyright © 2014, The American College. All rights reserved. Used with permission. Eligibility for Multiple Benefits Spousal benefits taken first –At or after full retirement age, a married (or divorced) spouse may be able claim the spousal benefit and claim the worker’s benefit later –Married spouses cannot both elect the spousal benefit –Not available before full retirement age because of the deemed-filing rule Worker’s benefits taken first –Spouse claim smaller workers benefit at 62 –Claim spousal benefit once worker begins benefits

30. Copyright © 2014, The American College. All rights reserved. Used with permission. Eligibility for Multiple Benefits Widow(er)s benefit options –A widow eligible for both widow’s benefits and worker’s benefits can choose one benefit and later choose the other –Example: A widow could take a reduced widow’s benefit at age 60 or 62 and then switch to her maximum retirement benefit when she reaches age 70.

31. Copyright © 2014, The American College. All rights reserved. Used with permission. Divorced Spouse’s Benefits Divorced spouses (married for at least 10 years) may be eligible for spousal retirement and widower benefits based on former marriage Divorced spousal benefits do NOT effect benefits of worker and current family Divorced spousal retirement benefits can begin as early as age 62, even if the former spouse has not claimed benefits –As long as the worker is eligible for retirement benefits –The couple has been divorced for at least 2 years.

32. Copyright © 2014, The American College. All rights reserved. Used with permission. Divorced Spouse’s Benefits Spousal retirement benefits for divorced spouses are paid to unmarried individuals only, so an individual remarried will be disqualified Widow(er)’s benefit is a bit different as remarriage after age 60 does not disqualify the former spouse from eligibility for the widow(er) benefit from the former spouse

33. Copyright © 2014, The American College. All rights reserved. Used with permission. Other Factors that Reduce Benefits Windfall-elimination –Special benefit formula applies when “noncovered” employment –90 percent drops to 40 percent with less than 20 years of SS coverage Government offset provision –2/3 of the government-pension reduces spousal and widow benefits dollar-for-dollar –Katie has Social Security income of $12,000 per year and her husband Arthur is a noncovered state employee who receives a $15,000 annual pension from the state. Arthur is not entitled to a spousal benefit and will only be entitled to a $2,000 a year survivor benefit.

34. Copyright © 2014, The American College. All rights reserved. Used with permission. Social Security Case Studies

35. Copyright © 2014, The American College. All rights reserved. Used with permission. Single Client Case Study Cindy is 62 still working and has asked you about when to claim Social Security benefits. Her family died young so she is considering retirement sooner than later. She has a SS PIA of $1,800 and $450,000 in a 401(k) plan. She needs about $4,000 a month to meet expenses. Because of her short-lived family she expects to live to age 78, but doesn’t have any current health problems. Calculate her SS benefits at 62, 66, and 70 How would you look at her decision to claim? What do you think she should do?

36. Copyright © 2014, The American College. All rights reserved. Used with permission. Single Client Solution Monthly benefit at 62 = 1,350 Monthly benefit at 66 = 1,800 Monthly benefit at 70 = 2,376 With a 4% withdrawal rate she can withdraw only $1,500 a month— along with Social Security benefits she is short of her $4,000 a month goal Based solely on a break even analysis, she should take sometime before age 70. However, even though her own expectation is that she will live only to 78, there are no health reasons why should take early. SS decision has to be part of the retirement income plan. Her best bet is to defer retirement as long as possible, to allow her assets to grow and be able to afford retirement. With a larger SS benefit and more assets she is closer to her goal of $4,000 a month. If she retires before 70 she may still be better off deferring SS and drawing down her 401(k)

37. Copyright © 2014, The American College. All rights reserved. Used with permission. Married Couple 1 Case Study A couple is about to retire and they need funds. They also know that deferring benefits has some value. The worker is Age 66 worker with a $2,000 PIA with a 62 year old nonworking spouse, - Could the spouse claim now and the worker defer? - What is the spousal benefit that is paid if spouse claims now? - Why would the spouse wait to age 66 to claim benefits? - Is there any reason for the spouse to defer past full retirement age? - What happens if the worker waits to age 70 to begin receiving benefits? - How much does the spouse get if her husband dies at age 75, assuming that the husband’s benefit started at 70? What if the husband had started at age 66?

38. Copyright © 2014, The American College. All rights reserved. Used with permission. Married Couple 1 Solution - Could the spouse claim now and the worker defer? Yes if the worker files and suspends - What is the spousal benefit that is paid if spouse claims now? $700 - Why would the spouse wait to age 66 to claim benefits? To get the full benefit and/or the spouse is working prior to 66. - Is there any reason for the spouse to defer past full retirement age? No - What happens if the worker waits to age 70 to begin receiving benefits? Worker receives $2,640 - How much does the spouse get if her husband dies at age 75, assuming that the husband’s benefit started at 70? $2,640 - What if the husband had started at age 66? $2,000

39. Copyright © 2014, The American College. All rights reserved. Used with permission. Married Couple 2 Case Study Both Spouse’s are age 66 and entitled to benefits with PIAs of $2,500/$2,000. They are determined to defer the larger benefit to age 70 but are ambivalent about the second benefit. What are the options and why might they choose one strategy over the other?

40. Copyright © 2014, The American College. All rights reserved. Used with permission. Married Couple 2 Solution Option 1: At 66 spouse with smaller benefit claims $2,000 a month and other spouse does a restricted filing for the $1,000 spousal benefit. At 70 the spouse with the larger benefit claims $3,300. Option 2: Spouse with larger benefit claims and suspends to trigger restricted filing for other spouse in the amount of $1,250. At 70 each claim worker’s benefits and receive $2,640 and $3,300. If one is not in good health—or they really need the money consider option 1. If both are in great health elect option 2.

41. Copyright © 2014, The American College. All rights reserved. Used with permission. Widow Case Study Wanda is age 60 and sadly her 64 year old husband passed away. She is not currently working but may in the future. Her husband’s PIA was $2,500. Her PIA based on her own wages is $1,200. She has some other resources but money is tight and she’s anxious to claim SS benefits. What are her options? What do you think she should do?

42. Copyright © 2014, The American College. All rights reserved. Used with permission. Widow Solution Widow benefits can begin as early as age 60— but they are subject to the earnings test and a benefit reduction If Wanda is desperate for SS benefits she can choose a worker’s benefit at 62 (reduced) and switch to the full widow’s benefit at age 66 She can also switch from the widow’s benefit to the spousal benefit—but given these facts it may not be helpful

43. Copyright © 2014, The American College. All rights reserved. Used with permission. Divorce Bill ($2,500 PIA) and Hillary ($2,000 PIA) are divorced after a 12 year marriage and neither remarried. Both are age 62. Can they claim spousal benefits even though the other hasn’t claimed a worker’s benefit? What are their best options?

44. Copyright © 2014, The American College. All rights reserved. Used with permission. Divorce Solution Bill ($2,500 PIA) and Hillary ($2,000 PIA) are divorced after a 12 year marriage and neither remarried. Both are age 62. Can they claim spousal benefits even though the other hasn’t claimed a worker’s benefit? Yes, as long as the divorce occurred two years or more ago What can they do if they both wait until 66 to claim? File a restricted filing for spousal benefit and defer worker’s benefit

45. Copyright © 2014, The American College. All rights reserved. Used with permission. Married Couple Age Differences Couple 1: Husband age 62 with a $2,500 with a PIA is married with a wife who is age 56 with a $1,700 PIA. Husband has somewhat compromised health spouse is expected to live to age 95. How does their age difference affect planning strategies? Couple 2: Husband age 55 with a $2,500 PIA has a wife with a $1,700 PIA who is 65. How does their age difference affect their choices?

46. Copyright © 2014, The American College. All rights reserved. Used with permission. Here is a video player with some of the best Social Security Videos from The American College’s NYLCRI.Social Security Videos NYLCRI Here is a link to an excellent booklet on the value of deferring Social Security “Efficient Retirement Design”Efficient Retirement Design Here is a link to the Towers, Watson article “Annuities and Retirement Happiness”Annuities and Retirement Happiness Here is a blog from Mary Beth Franklin on the advantages of claim and suspend. advantages of claim and suspend http://retirement.theamericancollege.edu