This subject is very fluid, so stay current. I recommend that you establish a relationship with a local Social Security representative in order for you to have a go-to person. Americans are starving for this information and their decisions are as individual as all of us are. How many of you believe Social Security will be there for you, in the exact same way it is today, when you retire? If you had a bucket of money, let’s say, $250,000, $500,000, or even $750,000, would you at least check the statements periodically? Of course you would, and that’s exactly what Social Security could mean to you and your clients.
Let me bring you up to date with Social Security’s most helpful websites. The first one is for financial planners. It is socialsecurity.gov/financialplanners. You do not have to be a CFP to use that website. The second website is socialsecurity.gov/estimator. Here you can create “what if” scenarios for you and your clients. You can also create or help your clients create their own account online. The website is socialsecurity.gov/myaccount.
Are you familiar with the five-year Social Security statement? It is sent to individuals not receiving a benefit or who have not set up an account online. It begins at age 25 and goes in five-year intervals to age 60, in other words, ages 25, 30, 35, 40, 45, 50, 55, and 60. After age 60, people will receive the benefit statement each year, approximately three months before their birthday. Do you use this as a planning tool? Have your clients access their statement online, and follow up by asking these three questions:
- “Have you reviewed your most recent Social Security statement?” The two areas most people study first are their retirement numbers and their income history. Under current law, Social Security takes your 35 highest years of earnings—again, your 35 highest years of earnings—and plugs them into a multiple-step formula.
- “Do you have any questions about your statement?” If they do, answer them. If you cannot answer them, repeat the website or give them Social Security’s toll-free number, 1-800-772-1213. At a minimum, this will add value for you.
- “Are you happy with the amounts you see?” Guess what most people say? No! Your response: “All the more reason you need me!”
What really is Social Security? You see, there are eight numbers on that statement, three of them retirement numbers. What does that speak to? Annuities, cash value life insurance, and securities. There is one disability number, which speaks to disability insurance. There are four survivors’ numbers, which, depending on the makeup of your family, speaks to life insurance. In fact, Social Security is defined as “people paying into a system to receive future benefits when needed.” Some would say that Social Security is, in one word, insurance. Use this statement as a way to get in front of your clients.
As you all should know, the file-and-suspend strategy is gone. If you did not turn 66 by April 30, 2016, you can no longer file and suspend. The filing restricted strategy, however, sometimes called “claim now, claim more later,” is in play if you turn 66 by December 31, 2019. Here’s how it works: Assuming spouses are the same age, the lesser income person files at full retirement age, and the greater earning spouse will collect 50 percent and delay his or her benefit until age 70, thereby getting an 8 percent increase per year.
Let’s talk retirement. How early can you begin taking your Social Security retirement benefits? At age 62. Today, full retirement age is 66, or those born between 1943 and 1954. Under current law, delayed retirement is age 70. Do you ever get the question “I’m thinking of taking my Social Security retirement benefit early; what do you think?” Do you know the percentage reduction in monthly benefits should you take your Social Security retirement benefit early? The answer is 5/9% each month prior to full retirement age. Then there is a formula where they bring in 5/12% each month. I will use my father as an example.
My dad’s full retirement age was age 65. He took the retirement benefit as early as he could, at age 62. How many years early is that? Three. How many months early is that? Thirty-six. So, 36 x 5 = 180/9 = 20 percent. In this example, Dad would take a 20 percent reduction in his benefits.
Let’s assume Dad’s benefit at age 65 was $1,000. At age 62, after a 20 percent reduction, he would receive $800 per month. Now, some people think this is great. I can take my Social Security retirement benefits early and receive $800 per month for three years, and when I turn age 65, I can get $1,000 per month. To that you would say . . . no! It’s like a settlement option—once you’re in, you’re in! But for potential cost of living adjustments (COLAs). Now, remember the question, “I’m thinking of taking my Social Security retirement benefit early; what do you think?” Let’s figure out Dad’s breakeven point. Dad had $800 per month, for 36 months, in his pocket. That’s $28,800, plus potential COLA and the time value of money. Know this—most people who take their Social Security retirement benefits early are living on it, not investing it. So let’s just use the $28,800. How much did he give up? $200 per month, or $2,400 per year. $2,400 into $28,800 is 12 years. So the average breakeven point is 10‒14 years. In this case, Dad’s breakeven point is 12 years, or age 77. In other words, if Dad dies prior to age 77, he would have made a good decision. If he lives beyond age 77, perhaps he should have waited. Hindsight is perfect.
There are nine considerations here. The first is life expectancy. A man reaching age 65 today will live to be about age 82. A woman age 65 today could live to age 85. Remember, the breakeven age in this example is age 77.
The second consideration is, how is your own health and your family health history? If it’s not good, and you have no spouse or children who would receive your benefits, you may want to consider taking Social Security early retirement benefits.
The third consideration is, are you going to work for remuneration? You see, the 2018 earnings limitation is $17,040. If you are under full retirement age and collecting your retirement benefit early, for every $2 you earn—not passive or portfolio income, but earnings, W-2 if you are an employee, net profit if you are self-employed—then your Social Security retirement benefit is reduced by $1. Most times, it doesn’t make a lot of sense to take your retirement benefit early from Social Security, lock into a lesser amount, and then continue to earn at a level that would negate it.
Fourth, health insurance is a consideration at age 62, since Medicare eligibility is age 65.
Fifth, is it an election year? Who is the incumbent, and what is the candidate saying about Social Security?
Sixth, do you need it? And if you need it, nothing else matters.
Seventh, is it going to be there? Since January 1940, Social Security has not missed a payment; it pays out millions of benefit checks each month.
Eighth, do you have a nonworking spouse? If you take a reduction in your benefit, you reduce your spousal benefit.
Finally, my father lived almost to age 80. Let’s call it 80. Had he waited, he would have received $2,400 more per year for three years, or a total of $7,200. Some would say that Dad made a $7,200 mistake, and in dollars and cents, he did. However, understand that his quality of life was better between ages 62 and 65 compared to ages 77 to 80. Does that make sense?
Now, where do we come in? It’s what I call “funding the gap.” With proper planning along the way, through annuities, cash value life insurance, and securities, our products can make up the difference of the reduction of the $200 per month.
Let’s talk delayed retirement. Perhaps you have gotten the question, “I’m thinking of delaying my Social Security retirement benefit; what do you think?” I will use myself as an example. My full retirement age is 66 and 4 months. Under current law, delayed retirement is age 70. It’s possible they may advance it five years beyond full retirement age. For the sake of illustration, let’s say they do, and it’s age 71 and 4 months. If you were born in 1943 or later, the incentive to delay your retirement benefit is 8 percent! If my retirement benefit at full retirement age is $1,000, what is 8 percent of $1,000? $80. Multiplied by five years, it is $400. So, at age 71 and 4 months, my retirement benefit per month would be $1,400. Now, how much did I give up to receive the extra $400 per month? $60,000 plus 5, potential COLA, and time value of money. To get how much more per month? $400. Per year? $4,800. $4,800 into $60,000 = 12 1/2 years. My breakeven point is age 83 and 10 months.
Now, let’s look at the same considerations we did for early retirement. Life expectancy I made, so who cares? Personal or family health history? Again, I made it to 83 and 10 months. The earnings limitation only comes into play prior to full retirement age. Health insurance is not an issue as we are on Medicare and hopefully have a Medicare Supplement. Of course, we need to know what is happening politically regarding Social Security. If you need it, you’ve got to have it. I’ve already addressed if Social Security is going to be there and, by delaying, how you help your spouse. So it only leaves one real consideration: What is my quality of life at age 83 and 10 months? In this example, I would have increased my spouse’s benefit by $200 per month, assuming she is collecting off my record. Again, with proper planning at the right time, through the use of annuities, cash value life insurance, and securities, by “funding the gap,” we can give our clients the option to delay their benefit.
Something we don’t talk about enough is the fact that two seniors are each receiving a Social Security check, depending upon them both. When one dies, one check goes away. Yet, they need both to live on. How do we protect that Social Security check? Life insurance.
Let’s move to taxation of Social Security. There are three areas: FICA, the earnings limitation, and modified adjusted gross income. FICA stands for Federal Insurance Contribution Act. In some circles, it’s still called OASDI (Old Age Survivor’s Disability Insurance). Most administrations call it payroll tax. And still others simply call it Social Security and Medicare. In most years, an employee will pay 7.65 percent, and an employer will match the 7.65 percent. A self-employed person will pay 15.3 percent. In most years, the 7.65 percent is broken down as follows: Social Security is 6.2 percent. The 6.2 percent goes to retirement, disability, and survivors and family benefits. Medicare is 1.45 percent. The 2018 cap on the Social Security percentage is $128,700. Oftentimes, higher earning individuals and couples will reach this income threshold and will say that they just got a raise from Social Security. Fund your own retirement! What a perfect time for us to talk about flexible premium deferred annuities, term to permanent insurance conversions, securities, and long-term care insurance.
The earnings limitation is next. You can continue to work and receive full retirement benefits. Your earnings in and after the month you reach your full retirement age will not affect your Social Security benefits. However, your benefits will be reduced if your earnings exceed certain limits for the months before you reach your full retirement age. Here’s how it works: If you are under full retirement age, $1 in benefits will be deducted for each $2 in earnings you have above the annual limit of $17,040 in 2018. In the year you reach your full retirement age, your benefits will be reduced $1 for every $3 you earn over a different limit. Once you reach full retirement age, you can work without any reduction in the amount of your monthly benefit, no matter how much you earn. Social Security counts only the earnings you make from a job or your net profit if you are self-employed. This includes compensation, such as bonuses, commissions, and vacation pay. It doesn’t include pensions, annuities, investment income, interest, Social Security, and veterans or other government benefits.
The last area of taxation is modified adjusted gross income. It’s broken down into four categories:
- An individual with between $25,000 and $34,000 of AGI
- An individual with over $34,000 of AGI
- A couple married filing jointly with between $32,000 and $44,000 of AGI
- A couple married filing jointly with over $44,000 of AGI
Here the government takes half of the Social Security that an individual or a couple is receiving and adds it into his or her adjusted gross income. Once this is done, the term changes to modified adjusted gross income. Depending on the bracket you are in will determine if either 50 or 85 percent of your Social Security benefit is subject to tax. The benefit for financial planners here is twofold: First, they can inform their clients prior to collecting Social Security about the law. Second, they can take some vehicles where interest is reported as taxable (CD interest) and move it into annuities/Roth IRAs where the interest is tax deferred/tax free.
Robin Mueller, LUTCF, entered the life insurance business in 1979. He is a past president of both NAIFA–Milwaukee and NAIFA–Wisconsin and a distinguished service award recipient of each of those associations. For three years, Mueller served as president of the Foundation for Insurance and Financial Education in Wisconsin. He has authored two of NAIFA's programs in a box: Multiline Transitioning and Ethics. Currently, Mueller travels America as a motivational speaker and entertainer.
