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Retirement Planning and Employee Benefits for Financial Planners

Explore the available social security benefits and retirement planning solutions, including disability benefits, survivors benefits, Medicare, and the inadequate funding of social security. Discover strategies to maximize retirement benefits and ensure financial security.

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Retirement Planning and Employee Benefits for Financial Planners

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  1. Retirement Planning and Employee Benefits for Financial Planners Chapter 11: Social Security

  2. Benefits Available • Retirement Benefits • Disability Benefits • Family Benefits • Survivors’ Benefits • Medicare • Supplemental Social Security

  3. Social 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 2017

  4. Social Security

  5. Social 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)

  6. Social Security • Inadequate funding of Medicare • 2010 report of trustees • Medicare will exhaust funds in 2029 • Solutions • Increase taxes by 1% • Immediately reduce benefits 17%

  7. Social 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 2013

  8. Qualifying 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 quarters

  9. Qualifying for Social Security Benefits • Not covered by Social Security • Family employees • Child under 18 • Not in trade or business • Railroad employees • Ministers

  10. Social Security Beneficiaries • Participant Worker • Participant’s Spouse • Participant’s Children • Dependent Parents • Workers Divorced Spouse (10+ Year Married)

  11. Social 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 COLA

  12. Calculating 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 months

  13. Calculating 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 income

  14. Calculating 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%

  15. Calculating 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%

  16. Early 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 74

  17. Delayed 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 income spouse files for benefits at normal retirement age but doesn’t collect benefits • Lower earnings spouse collects spousal benefits immediately

  18. Retirement Earnings Limitations Test (1 of 2) • Social Security Retirement benefits are reduced for early-retirees who have earnings from continued employment. • Earnings • Wages • Self-Employment Income • NOT Earnings • Pension Income • Investment Income • Capital Gains

  19. Retirement Earnings Limitations Test (2 of 2) • Before normal retirement age and collecting Social Security: • $1 reduction for every $2 of earnings above $15,480 for2014 if don’t reach full retirement age in 2014 • $1 reduction for every $2 of earnings above $41,400 for2014 if do reach full retirement age in 2014 • Don’t take Social Security early if plan to continue to work • After attaining normal retirement age, $0 reduction.

  20. Taxation of Social Security Benefits (1 of 3) • Retirees with substantial income in addition to Social Security benefits. • Up to 85% of the Social Security benefits may be taxable • Modified AGI (MAGI) • AGI + Nontaxable Interest + Foreign Earned Income

  21. Taxation of Social Security Benefits (2 of 3) • Second Hurdle > MAGI + ½ of Social Security Benefits > First Hurdle, the taxable amount of the Social Security Retirement benefits is the lesser of: • 50% of Social Security Benefits, or • 50% [MAGI + 0.50 (Social Security Benefits) less Hurdle 1 Value]

  22. Taxation of Social Security Benefits (3 of 3) • MAGI + ½ of Social Security Benefits > Second Hurdle, the taxable amount of the Social Security benefits is the lesser of: • 85% of Social Security Benefits, or • 85% [MAGI + 0.5(Social Security Benefits) less Hurdle 2], plus the lesser of: • $6,000 for MFJ, or $4,500 for all other taxpayers, or • The taxable amount calculated based on the 50% formula and only considering Hurdle 1

  23. Disability Benefits • Benefits payable to workers with: • Severe physical or mental impairments which prevents them from performing “substantial work.” • Cannot perform any gainful work. • Payable at any age. • Fully insured with 20 quarters of coverage in the last 40 quarters.

  24. Family Benefits • Benefit payable to family members of worker receiving retirement benefits or disability benefits. • Spouse • 62 and older • Caring for a child under age 16 • Caring for a child who was disabled before age 22 • Unmarried Child • Under 18 • Under age 19 and in high school • Age 18 or older and disabled before age 22

  25. Survivors Benefits • Benefits payable to family members of deceased individuals who were entitled to benefits. • Widow or Widower • 60 and older • Over 50 and disabled • Caring for a child under age 16 • Caring for a child who was disabled before age 22 • Unmarried Child • Under 18 • Under age 19 and in high school • Age 18 or older and disabled before age 22 • Dependent parents of the deceased worker

  26. Death Benefit • One-time $255 death benefit payment • Paid to deceased worker’s surviving spouse, or minor child (if no spouse).

  27. Maximum Family Benefit • Limit on the amount of monthly Social Security benefits paid to the family of a deceased worker. • Based on the deceased worker’s PIA.

  28. Medicare Benefits • Federal health plan for: • People 65 and older • Disabled individuals • Individuals with permanent kidney failure • Consists of: • Hospital Insurance - Medicare Part A • Medical Insurance - Medicare Part B • Prescription Drug – Medicare Part D

  29. Medicare

  30. Hospital Insurance – Medicare Part A • Covers • Hospital Coverage, and • Skilled Nursing Care • Deductible for inpatient hospital care: • $1,216 deductible per illness for 2014 • for the first 60 days • $304 for 2014 per day for days 61-90, and • $608 for 2014 per day for days in excess of 90. • Skilled nursing care deductible $152 for 2014 per day for 21st day to 100th day. • Coinsurance based on benefit period

  31. Medical Insurance – Medicare Part B • Individuals pay monthly premium. • Increases based on AGI • $105/mo if AGI < $170,000; $336/mo if AGI > $428,000 • Covers 80% of: • Doctor’s Services • Ambulance Transportation • Diagnostic Tests • Outpatient Therapy Services • Outpatient Hospital Services • Medical Equipment and Supplies • $147 annual deductible in 2014.

  32. Prescription Drug – Medicare Part D • Began January 1, 2006. • Insurance coverage for prescription drugs. • Participant must enroll and pay a monthly premium and a portion of each prescription.

  33. Supplemental Security Income • Monthly payments to individuals with low income and few assets: • 65 and older • Disabled • Blind • Single: $721 per month for 2014. • Married: $1,082 per month for 2014.

  34. Effect of Marriage or Divorce on Benefits • Worker receiving benefits based on his own earnings • Benefits continue regardless • Individual’s receiving benefits based on spouse’s earnings • Benefits cease at divorce, unless • Individual is 62 or older and was married longer than 10 years • Widows and Widower benefits • Benefits cease at remarriage unless 60 or older

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