Social Security Claiming
Strategies are Changing
Morgan F. Scott, JD
VP, Advanced Markets
ADVANCEDMARKETS
For financial professional use only
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Columbus Life Insurance Company, Cincinnati, Ohio is
licensed in the District of Columbia & all states except New York.
Legal and Tax Disclosure
Columbus Life Insurance Company, Cincinnati, OH, and its
representatives, does not give legal or tax advice. Any discussion of
federal taxes in this presentation is not intended to be complete or
cover all situations. The comments are general in nature and should
not be considered tax or legal advice and may not be relied on for
purposes of avoiding any Federal tax penalties. Federal and state
laws and regulations are complex and are subject to change.
Changes in such laws and regulations may have a material impact on
pre-and/or after-tax investment results. You should consult counsel
or other specialized advisor for more complete information
For financial professional use only
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Agenda
- Calculation of retirement benefit
- Claiming at different ages
- Variations for married couples
- Impact of 2015 changes on marital
claiming strategies
For financial professional use only
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Calculation of
Retirement Benefit
Social security retirement benefit is an
“earned” benefit
• Must have accumulated a minimum of 40 credits
to be entitled to a retirement benefit
• This is effectively 10 years of contributing to Social
Security
• Different qualifications apply for disability and
family benefits
Source: SSA.GOV
For financial professional use only
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Calculation of
Retirement Benefit
Primary Insurance Amount
• The monthly benefit that is payable at Full
Retirement Age (FRA), calculated by the Social
Security Administration
• Payments at other ages are increased or
decreased based on this benefit
• Amount is monthly average of 35 years of highest
wages, adjusted for inflation, (AIME) and
multiplied by replacement percentages at several
bend points
Source: SSA.GOV
For financial professional use only
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Calculation Example
Jill
Age 62
Worked since she was 24
• Her earnings for each year are
multiplied by an inflation factor
• The highest 35 years are aggregated
and the result divided by 420 (AIME)
First
Next
Balance
$826 x 90%
($743)
$4,154 x 32%
($1,329 for a
total of $2,155)
x 15%
(for a Maximum
Benefit of $2,663)
For financial professional use only
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Claiming at Different Ages
• When the monthly benefit at Full Retirement Age is
known, the amount that will be payable at other ages
can be determined.
– For purposes of illustration, assume that the full retirement
age benefit is $1,000 per month
• Most workers claim between the ages of 62 and 70
• Claiming early will result in a reduced benefit. After
FRA, benefit will increase by 8% per year with
delayed retirement credits
Source: SSA.GOV
For financial professional use only
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Claiming at Different Ages
Age
% of Benefit
$ per Month
62
66 (FRA)
70
75%
100%
132%
$750
$1000
$1320
• Claiming at other ages will result in pro-ration of benefit.
• Inflation adjustment is not shown
• Percentages will be different if FRA is more than 66
• Once benefit is started it cannot be increased except
through inflation adjustments
Source: SSA.GOV
For financial professional use only
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Claiming at Different Ages
• There is a clear benefit to deferring until age 70 because the
benefit increases by 8% (delayed retirement credits) per
year from 66 to 70
• Not everyone can defer
– Need income earlier
– Short life expectancy (poor health)
– Don’t believe the system will last
• Crossover points
– A higher benefit started later will be more beneficial but only if
the worker lives beyond the crossover point
• FRA (66) v. Earliest possible start (62) - about age 78
• Latest possible start (70) v. FRA (66) – about 81
Source: SSA.GOV
For financial professional use only
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Married Clients
• The previous discussion is still applicable but becomes
more complicated when clients are married because
each spouse may be entitled to their own benefit
• Two additional benefits are available
– a spousal benefit
– a survivor’s benefit
• The general rule for married couples is that a spouse is
entitled to the highest available benefit – either their
– own benefit
– their spousal benefit
– the survivor benefit
Source: SSA.GOV
For financial professional use only
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Married Clients
• The spousal benefit is 50% of the worker’s benefit at FRA.
– The spousal benefit is subject to pro-rata reductions if taken prior to the
spouse’s FRA.
– Delayed retirement credits are not available on the spousal benefit.
• The spousal benefit may be claimed if the working spouse has
filed for benefits and the spouse is at least 62 years old
• The survivor’s benefit is the higher of the benefit the deceased
spouse’s benefit or the spouse’s own benefit
– Surviving spouse can claim as early as 60 (reduced benefit)
– Surviving spouse cannot have remarried prior to age 60
Source: SSA.GOV
For financial professional use only
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Married Clients
Example:
Tom – age 66
Benefit of $1,000 per month
Gloria – age 62
Spousal benefit of $500 per month at
her FRA
Tom files for benefits and Gloria claims a spousal benefit. Gloria
will receive $350 per month (70% of $500)
Variation: Gloria is 66 and Tom is 62. Tom claims his benefit at
age 62 and receives $750 per month. Gloria will receive a
spousal benefit of $500 per month.
For financial professional use only
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Married Clients
A few observations before a discussion of some more sophisticated
strategies:
– Married workers often are eligible for their own SS benefit and a
spousal benefit
– In some circumstances it is possible to switch from one benefit to the
other to obtain delayed retirement credits
– Maximizing the benefit payout will also result in a surviving spouse
receiving the highest possible benefit
– Claiming strategies depend on:
•
•
•
•
Relative ages of spouses
Each spouse’s work record
Other income
Life expectancy (but this is less important than for single persons)
Source: SSA.GOV
For financial professional use only
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Married Clients
Two common filing strategies for married couples
– restricted application
– file and suspend
Restricted Application:
– Typically both spouses have a benefit in their own right. One
spouse takes his or her benefit and the other takes a spousal
benefit. At some point the spouse taking the spousal benefit
takes his or her benefit at a higher level, either because they have
reached FRA or to take advantage of delayed retirement credits
– Bipartisan Budget Act of 2015 – “deemed filing” rule applies at
all ages, not just prior to FRA
• Persons age 62 before 1/1/2016 can still use technique
Source: SSA.GOV
For financial professional use only
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Married clients
File and Suspend:
– The worker spouse has to have filed for benefits before the other
spouse can file for a spousal benefit. This does not necessarily
mean that the worker spouse has to start receiving benefits as he
or she can suspend the benefit to take advantage of the delayed
retirement credits
– Bipartisan Budget Act of 2015 changes rule so that suspension
of benefits applies to all benefits associated with worker’s
benefit being suspended (includes spousal and family benefits)
– Technique is available to anyone (over FRA) who files and
suspends on or before April 30, 2016.
– Current recipients of benefits under file and suspend will
continue to receive benefits
Source: SSA.GOV
For financial professional use only
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Loss of Benefits
• Earned income could cause reduction in
benefits
• Under year of full retirement age
– 2016 exemption is $15,720
– Loss of benefits is $1 for every $2 earned above
exemption
• Calculation is different for earned income in
year of full retirement age up to month of full
retirement age
Source: SSA.GOV
For financial professional use only
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Taxation of Social Security
• Up to 85% of benefits includable in taxable
income
• Tax rate depends on amount of other income
and deductions
• Columbus Life Tax App has a simple
calculator
• Consult your tax advisor
2015
Source: SSA.GOV
For financial professional use only
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Summary
• It is easy to make this much more complicated than necessary
• For any clients, need for income will dictate claiming age
• For single clients, life expectancy (consideration of crossover
point) may influence claiming decision
• For married couples, maximizing benefit for one of the couple
is primary objective as this will also be the amount of the
survivor benefit
• Both the File and Suspend and the Restricted Application
strategies will continue to be available – but only for a limited
time
For financial professional use only
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Next SmartTalk
Contact the Advanced Markets group
Email [email protected]
Phone 800-677-9696 option 3
For financial professional use only
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