1. ©Copyright Wealthcare Capital Management, a division of Financeware, Inc. 2003 All rights reserved P r o v i d i n g W E A L T H C A R E Considerations in Implementing Social Security Benefits in Our Advice George K. Chamberlin, JD Vice President – Financial Strategies Wealthcare Capital Management Powered by Financeware

2. ©Copyright Wealthcare Capital Management, a division of Financeware, Inc. 2003 All rights reserved P r o v i d i n g W E A L T H C A R E PAGE 2 Social Security – Contributions One of the most important components of retirement income for many of our clients is provided by Social Security. The Social Security Administration takes in contributions in the form of taxes and pays out a variety of benefits, including retirement, disability, supplemental security income and survivor benefits. Nearly all wage earners in the United States – including resident aliens - are required to pay a portion of their earnings into Social Security. The combined tax rate is 7.65% of gross income, divided as follows: - 6.2% is for Social Security - 1.45% is for Medicaid Self-employed individuals pay at a rate of 15.3% The amount of wages on which the Social Security tax is payable phases out at $87,900 for 2004. There is no cap on income taxed for Medicaid, however.

3. ©Copyright Wealthcare Capital Management, a division of Financeware, Inc. 2003 All rights reserved P r o v i d i n g W E A L T H C A R E PAGE 3 Social Security Eligibility Requirements The minimum eligibility for retirement benefits requires a wage earner to have at least forty quarters (ten years) of wage earnings with corresponding contributions to Social Security. In 2004, the minimum earnings required to establish credit for a quarter are $900. Substantially the same requirements apply to resident aliens or other non-citizens. Such persons may receive Social Security retirement benefits if a lawful resident of the US for at least ten years who has worked forty quarters paying into Social Security while earning at least the minimum required to be counted. The amount of benefits ultimately payable to a wage earner is based on the earnings record and contributions made by the wage earner as well as the age when benefits are taken. This means that the actual benefits received will vary from person to person based on their own unique individual record.

4. ©Copyright Wealthcare Capital Management, a division of Financeware, Inc. 2003 All rights reserved P r o v i d i n g W E A L T H C A R E PAGE 4 Payment of Social Security Retirement Benefits The earliest date for receiving retirement benefits is age 62 and entitlement to full retirement benefits is determined based on a wage earner’s date of birth. If a wage earner elects to receive retirement benefits prior to attaining full retirement age, the amount of benefits payable are reduced and the reduced amount will be the basis for all future benefit payments. Once the requirements are met, an alien may receive Social Security retirement benefits (at age 62 or later) even if the worker is no longer resident in the US and no longer has a green card. Note that once retirement benefits are being received, they are adjusted automatically each year based on the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers.

5. ©Copyright Wealthcare Capital Management, a division of Financeware, Inc. 2003 All rights reserved P r o v i d i n g W E A L T H C A R E PAGE 5 Age of Eligibility for Full Retirement Benefit Birth dates and ages for full eligibility Year of Birth Retirement Age for Full Benefits 1937 and earlier 65 years 1938 65 years and 2 months 1939 65 years and 4 months 1940 65 years and 6 months 1941 65 years and 8 months 1942 65 years and 10 months 1943-1954 66 years 1955 66 years and 2 months 1956 66 years and 4 months 1957 66 years and 6 months 1958 66 years and 8 months 1959 66 years and 10 months 1960 and later 67 years

6. ©Copyright Wealthcare Capital Management, a division of Financeware, Inc. 2003 All rights reserved P r o v i d i n g W E A L T H C A R E PAGE 6 The Impact of Continued Earnings Once a wage earner has attained his or her full retirement age, earnings will not adversely affect the basic retirement benefit. In fact, continued earnings beyond the full retirement age, with their contributions to Social Security, may result in entitlement to a greater retirement benefit when the wage earner subsequently elects to retire. This advantage applies only to earnings prior to the attainment of age 70 by the wage earner. However, when a wage earner elects to take retirement benefits before full retirement age, earnings in the years prior to full retirement may reduce the amount of benefits paid. Apart from the impact on Social Security retirement benefits, continued earnings may have a significant income tax impact on wage earners. Although federal income tax is not due on retirement benefits where a married couple has less than $32,000 in provisional income, fifty to eighty-five percent of retirement benefits may be taxed where provisional income exceeds $32,000 in any year.

7. ©Copyright Wealthcare Capital Management, a division of Financeware, Inc. 2003 All rights reserved P r o v i d i n g W E A L T H C A R E PAGE 7 Spousal Retirement Benefits When a wage earner is married, special rules for retirement benefits may apply to the benefits determination for the spouse. First, if a spouse contributed to Social Security and is eligible for retirement benefits on his or her own record, that record will be used if it provides the greatest benefit. However, if the the spouse had lower earnings – or even no earnings at all – the spouse may be entitled to a separate, spouse benefit. Thus, even if a spouse never contributed to Social Security, the spouse may be eligible on the wage earner’s record to receive one-half of the wage earner’s full retirement benefit. This benefit may be taken only when the spouse attains retirement age and the amount of the benefit paid will vary depending on the spouse’s age when benefits are taken. How much is the reduction in benefits taken early? At age 62, the spouse would be entitled to only 37.5% of the wage earner’s retirement benefit, at age 63 the benefit is 41.6 percent, while at age 64 the benefit is 45.8 percent.

8. ©Copyright Wealthcare Capital Management, a division of Financeware, Inc. 2003 All rights reserved P r o v i d i n g W E A L T H C A R E PAGE 8 How Retirement Benefits Are Affected at Death When a retired wage earner receiving benefits dies, his or her right to retirement benefits ceases regardless of the amounts of contributions. A retired surviving spouse will be entitled to the greater of the survivor’s own retirement benefit OR the benefit previously paid to the deceased wage earner. When a wage earner dies prior to receiving retirement benefits, a surviving spouse will be entitled to receive retirement benefits on the record of the deceased only at age 60 or later. (There is an exception where the deceased primary wage earner is survived by children under the age of 16, in which case survivor’s benefits may be paid.)

9. ©Copyright Wealthcare Capital Management, a division of Financeware, Inc. 2003 All rights reserved P r o v i d i n g W E A L T H C A R E PAGE 9 Buying Back Benefits When a wage earner has elected to receive Social Security retirement benefits early, the benefits paid are reduced from the “full” benefit payable on the wage earner’s record. What if a wage earner later determines that the election was not appropriate? An application to withdraw the request for early retirement benefits may be filed, using SSA-521. This is a simple two-page form available from Social Security or on-line. In support of the application, the wage earner will have to repay all benefits received under the original, early retirement application. This includes funds withheld to pay Medicare premiums.

10. ©Copyright Wealthcare Capital Management, a division of Financeware, Inc. 2003 All rights reserved P r o v i d i n g W E A L T H C A R E PAGE 10 Considerations in Benefit Buy Back Where the primary wage earner opts to withdraw the application for benefits there are several considerations affecting this decision and its implementation. If an individual elects to withdraw the application, the repayment of the funds received is final and the money can no longer be accessed by the wage earner or family. This is particularly important because an early death means all the contributions and the repayments are lost (except to the extent of applicable survivor benefits and survivor retirement benefits). The enrollment period for Medicare may be affected by the withdrawal of the Social Security retirement benefits application and wage earners should be certain to adhere to filing requirements for Medicare. In addition, there may be income tax consequences arising from the receipt of the original benefits.

11. ©Copyright Wealthcare Capital Management, a division of Financeware, Inc. 2003 All rights reserved P r o v i d i n g W E A L T H C A R E PAGE 11 Modeling Points How best to address modeling issues? First – we assume that the client falls within Social Security entitlement and that the system is viable going forward. Second – best source of information for the advisor is the annual statement provided by Social Security to wage earners. Ask that your clients provide this essential piece – to help with the initial strategies and for ongoing monitoring. Third – assume some standard rate of inflation over time since that affects the annual payments. Fourth – assume that payments are taxable income; most clients will exceed the provisional income levels if they have significant assets, especially qualified retirement plans.

12. ©Copyright Wealthcare Capital Management, a division of Financeware, Inc. 2003 All rights reserved P r o v i d i n g W E A L T H C A R E PAGE 12 Modeling Points - Continued The first steps are simple, now modeling can get more challenging, if we want accuracy and a reasonable basis for our advice. Fifth – make a determination as to the timing of the first death for married persons. This is important in terms of the amount of continuing benefits after that first death. It is more problematic where one dies early, before retirement. (Also look again at the plan ending age). Sixth – check for issues such as alien status, marriage dates and so on. Seventh – Other considerations such as buy back of benefits may be raised in some cases. Implementing Social Security retirement benefits – in all their potential complexity – can be challenging but is necessary for most of our clients.

13. ©Copyright Wealthcare Capital Management, a division of Financeware, Inc. 2003 All rights reserved P r o v i d i n g W E A L T H C A R E PAGE 13 Are there any questions? Thank you, George Chamberlin gchamberlin@financeware.com (804) 644-4711 ext. 138