Retirement Planning and Employee Benefits for Financial PlannersBenefits AvailableSocial SecuritySlide 4Slide 5Slide 6Social Security Taxes and ContributionsQualifying for Social Security BenefitsSlide 9Social Security BeneficiariesSocial Security Retirement BenefitsCalculating the Retirement Benefit (1 of 3)Calculating the Retirement Benefit (2 of 3)Calculating the Retirement Benefit (3 of 3)Slide 15Early RetirementDelayed RetirementRetirement Earnings Limitations Test (1 of 2)Retirement Earnings Limitations Test (2 of 2)Taxation of Social Security Benefits (1 of 3)Taxation of Social Security Benefits (2 of 3)Taxation of Social Security Benefits (3 of 3)Disability BenefitsFamily BenefitsSurvivors BenefitsDeath BenefitMaximum Family BenefitMedicare BenefitsMedicareHospital Insurance – Medicare Part AMedical Insurance – Medicare Part BPrescription Drug – Medicare Part DSupplemental Security IncomeEffect of Marriage or Divorce on Benefits1Retirement Planning and Employee Benefits for Financial PlannersChapter 11: Social Security2Benefits AvailableRetirement BenefitsDisability BenefitsFamily BenefitsSurvivors’ BenefitsMedicareSupplemental Social Security3Social SecurityInadequate funding of Social SecurityRatio of workers to beneficiaries1950 16:1; 1960: 5.1 to 1; 2004:3.3 to 1, 2025:2.3 to 1Currently 55 million getting $1,077 average monthly checkRetirement life expectancy1935: 65 to receive benefits; life expectancy 62 years2008: benefits as early as 62, life expectancy 80+Number of workersWhere’s the money?Used to pay current benefitsExcess invested in $1.5 trillion in Treasury bonds Surplus projected until 20174Social Security5Social SecurityInadequate funding of Social Security2010 report of trusteesSocial Security will exhaust funds in 2037Will only be able to pay 75% of benefitsSolutionsIncrease taxes by 2.15%Tax all wagesImmediately reduce benefits 14%Make $5.3 trillion contribution to trust fundKeep COLA at inflation – 1% (eliminates 75% of shortfall)Raise retirement age to 70 (eliminates 33% of shortfall)6Social SecurityInadequate funding of Medicare2010 report of trusteesMedicare will exhaust funds in 2029SolutionsIncrease taxes by 1%Immediately reduce benefits 17%7Social Security Taxes and ContributionsFederal Insurance Contributions Act (FICA)Collected through payroll taxesTotal taxes of 7.65%6.2% up to $117,000 of compensation (OASDI)4.2% in 2012 6.2% in 20141.45% of total compensation (HI)An additional .9% HI for compensation above $250,000 MFJ beginning in 2013Unearned income above $250,000 MFJ is subject to a 3.8% HI tax beginning in 2013OASI Trust Fund 5.30% up to $117,000 (2014)DI Trust 0.9% up to $117,000 (2014)HI Trust 1.45% (all compensation)SMI Trust Funded by general tax revenue8Qualifying for Social Security BenefitsFully Insured40 quarters of coverageA quarter of coverage = $1,200 for 2014 of earningsMaximum accrual of 4 quarters per yearCurrently Insured6 quarters of coverage out of the previous 13 quarters9Qualifying for Social Security BenefitsNot covered by Social SecurityFamily employeesChild under 18Not in trade or businessRailroad employeesMinisters10Social Security BeneficiariesParticipant WorkerParticipant’s SpouseParticipant’s ChildrenDependent ParentsWorkers Divorced Spouse (10+ Year Married)11Social Security Retirement BenefitsRetirement benefit payable at retirementFully Insured RetireesNormal Retirement Age is increasingCurrently 66 years. Will increase to age 67 in 2027Increased benefit for delayed retirementRetirement BEYOND normal retirement ageDecreased benefit for early retirementRetirement BEFORE normal retirement ageMonthly benefits increase each year based on COLA12Calculating the Retirement Benefit (1 of 3)Calculate the worker’s Average Indexed Monthly Earnings (AIME)Convert earnings after age 21 to current dollars using an indexing factor. Earlier earnings, higher factor Sum the highest 35 yearsDivide sum by 420 months13Calculating the Retirement Benefit (2 of 3)Calculate the worker’s Primary Insurance Amount (PIA)Sum of three separate percentages of the AIME90% of the first $816 (2014)32% of the AIME over $816 and less than $4,917 (2014)15% of the AIME that exceeds $4,917 (2014)Consequently, workers with lower income will receive a much higher percentage of their wages in social security benefitsLow income workers: social security 60% of retirement income14Calculating the Retirement Benefit (3 of 3)Worker would receive PIA.Maximum PIA = $2,642 (2014) Full Retirement AgeA beneficiary of the worker may receive a percentage of the PIA:Spouse w/child under 16: 50%Spouse, age 65: 50%Spouse can receive benefits based on her PIA if it is greaterSpouse, under age 60: noneChild under 18, 50%15Calculating the Retirement Benefit (3 of 3)Deceased workerA beneficiary of the worker may receive a percentage of the PIA:Spouse w/child under 16: 75%In general, must be married nine months at time of death but exceptions to rule existSpouse, age 65: 100%Spouse can receive benefits based on her PIA if it is greaterSpouse, over age 60,: 71.5%Child under 18, 75%16Early RetirementMay begin at age 62.Permanently reduced benefit:Currently receive 75% of normal retirement benefitsBut nearly 50% elect to retire at age 62Almost 70% elect to receive benefits before normal retirement age By 2027, receive only 70% of normal retirement benefitsJournal of Financial Planning, Jan. 2004Breakeven generally occurs at age 73-7470 – 80% likelihood of someone age 62 living to age 7417Delayed RetirementBegin taking retirement distributions after normal retirement age.Permanent increased benefit.Increases the benefit by 8% for each year of delayed retirement from normal retirement (age 65, 10 months) until age 70.Consequently, benefits increased by 32% if wait until age 70 to begin collecting benefitsConsequently, often recommended strategies:Higher income spouse delay until age 70Increase his suspended benefits, but spouse can draw 100% normal retirement benefitsLower income spouse take at age 62Switch to spousal benefits at death of spouseFile and suspend: high and low earnings spousesHigher