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The Inequity of Spousal Social Security Benefits

Cover of "Sid and Nancy: The Criterion Co...

Cover of Sid and Nancy: The Criterion Collection

We’ve covered a lot of ground talking about Spousal Benefits and strategies for filing, and other facts to know about Spousal Benefits.  But did you realize that there is a flaw in the process that shortchanges some couples when it comes to Spousal Benefits?

Here’s a pair of example couples to illustrate the inequity:

The first couple: Jane has worked her entire life and has earned a Social Security benefit of $2,600 per month when she retires.  Her husband Sam has been a struggling artist his whole life, as well as a stay-at-home Dad to their three kids when they were young.  As a result, Sam has never generated enough income on his own to receive the requisite 40 quarter-credits to have a Social Security benefit of his own.

The second couple: Sid and Nancy have both worked and had earnings within the Social Security system over their lifetimes.  Sid had a higher level of earnings, generating a Social Security retirement benefit of $2,600 when he’s ready to retire.  Nancy operated a home-based business part-time while the kids were young, and worked outside the home for several years after they were all finished with high school.  As a result, Nancy has a retirement benefit of $1,000 built up for when she’s ready to retire.

The result is this: Both couples, if they file at Full Retirement Age (FRA), will be eligible for the exact same benefit amounts. For the sake of my illustration and to keep things simple, all four individuals reach FRA at the same time.

Jane files for her own retirement benefit of $2,600.  Sam, without an earnings record, can now file for the Spousal Benefit in the amount of $1,300.  Altogether they will receive $3,900 per month.

Sid also files for his own retirement benefit of $2,600.  Nancy then files for her own benefit of $1,000, and since she’s eligible to file for the Spousal Benefit, she will receive a Spousal Benefit offset amount of $300 – bringing her total benefit to $1,300.  Altogether they will receive $3,900 per month.

Exactly the same benefit amount.  Nancy receives nothing extra from Social Security for her earnings record.

One Difference

There is one difference in the options available to these two couples.  Having read my columns on the subject, Sid and Nancy decide that Nancy should file a restricted application for Spousal Benefits only, which would result in the same $1,300 per month benefit.  Nancy can then later, at age 70, file for her own benefit which has been increased due to Delayed Retirement Credits.  This amounts to a 32% increase, which would bring her total benefit to $1,320 per month at that time.

So for her work record, Nancy can increase her overall benefit by $240 per year.  Doesn’t seem fair, does it?  Don’t get me wrong, I don’t think a stay-at-home parent should be penalized and receive nothing for his or her time in that critical occupation, nor do I think that spouses with low or no income should suffer either.  But it does seem that there should be *some* additional benefit for the lower-earning spouse who has generated a benefit on his or her own record.

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Survivor Benefits Do Not Affect Your Own Benefits (and vice versa)

I'm a Survivor

I’m a Survivor (Photo credit: FotoRita [Allstar maniac])

I’ve had a few questions about this topic over the past several weeks, so I thought I’d run through a few examples and explain it.

When you have access to a Social Security Survivor Benefit and a Social Security retirement benefit, you can maximize your lifetime benefits by coordinating the two and planning out your strategy for taking each benefit.

As we’ve covered in other articles, it often is best to delay receiving your own benefit as long as possible.  This is because you will receive Delayed Retirement Credits (DRCs) for every month after you’ve reached your Full Retirement Age (FRA, which is age 66 if you were born between 1943 and 1954, and increasing gradually up to age 67 if you were born in 1955 or later).  This DRC amounts to 8% per year, or 2/3% per month.

In addition, it can be beneficial to delay receiving a Survivor benefit past the earliest age it is available (age 60, or age 50 if permanently disabled) as this benefit can be reduced to as little as 71.5% of it’s potential amount if started early.

Plus - this is the really important point to note - neither benefit has an impact on the other.  I’ll illustrate this below in a couple of examples.

Survivor Benefit is Less Than Own Benefit

John, age 60, just lost his wife Priscilla at her age 66.  Priscilla had just started receiving her Social Security benefit in the amount of $1,000 per month.  John has a PIA of $2,000 per month available to him – meaning he will receive $2,000 at his FRA, age 66.  He could also begin receiving his own benefit at age 62, in the amount of $1,500 due to the early start reduction.

Since John is age 60, he is also eligible to receive a Survivor Benefit based upon Priscilla’s record.  John could receive $715 per month in Survivor benefits beginning right now, and continue to receive this amount until he decides to draw benefits based on his own record.  So this means John could receive this amount for 6 years, and then file for his own benefit at the $2,000 per month level.  He could also receive the Survivor Benefit for up to 10 years, and then file for his own benefit at the DRC-enhanced amount of $2,640.

It’s important to note that John isn’t required to begin receiving the Survivor Benefit at age 60, he could delay to age 62 (for example) and then the benefit would be approximately $810 per month.  If he waits until he is age 66, the Survivor Benefit would be $1,000.

Survivor Benefit is Greater Than Own Benefit

Lucy, age 58, just lost her husband David, who was 65.  David had not begun to receive his Social Security benefits as of his date of death.  Had he lived to age 66 (his FRA) he would have been eligible for a benefit of $1,800 per month.  Lucy is due to receive a benefit of $1,500 per month at her age 66.

When Lucy reaches age 60 she has a choice: if she files for the Survivor Benefit, it will be reduced to $1,287 per month.  She could receive this amount until she decides to file for her own benefit ($1,500) at a later date.  On the other hand, if she waits until she is age 62, she could receive her own benefit in the amount of approximately $1,113, due to the reduction factors.  She could receive that amount until she reaches age 66, at which point she could begin receiving the Survivor Benefit at the maximum rate, or $1,800.

Going back to the first hand, Lucy could file for the Survivor Benefit right away at age 60, receiving $1,287 per month, and then wait to age 70 to file for her own benefit.  This would give her the maximum benefit based on her own record, of $1,960, greater than the maximized benefit from David’s record.  If she has the resources, she could wait until age 66 and file for the Survivor Benefit at the $1,800 rate and then at age 70 file for her own benefit at $1,960.

Because taking one type of benefit or the other has no impact on the other benefit, she can choose which strategy works best for her own situation.

Hope this helps to clear up some of the confusion around these benefits.

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Illinois Pension Reform

Seal of Illinois. Center image extracted from ...

Seal of Illinois. Center image extracted from Illinois flag. (Photo credit: Wikipedia)

In recent news the state of Illinois introduced their Pension Reform Bill and as of this writing Illinois Governor Pat Quinn has yet to sign the bill which he said he would. After reading through the bill as well as some other readers’ interpretations of the bill it’s my opinion that it could be much, much worse. Let me put it this way; if I’m a current or retired state worker, I’m not upset. I may be a little inconvenienced, but certainly not angry.

Dave Grant, CFP® and founder of Finance for Teachers wrote a very succinct and informational summary of the bill some of which I’ll highlight in this post.

Some of the more notable changes include the removal of the 3% compound COLA increase and is now being replaced and calculated by years of service and current inflation rates.

Other changes include any new employees hired after the passage of the bill will not be able to take any unused sick or vacation days and have them put toward service credit for their pension. Current employees can still take advantage of this provision and use up to 2 years of unused sick or vacation days.

Employees currently contributing 9.4% of their salary will see a decrease of 1% and will now contribute 8.4% of their salary. This is because the state has put in requirements that starting in 2019, $364 million will be paid to the state Pension Stabilization Fund and from 2020 onward a $1 billion annual payment will be made to the fund. According to the bill this would have the pension 100% funded by 2044.

Side note: We recommend state employees take that 1% reduction and save it in their deferred comp plan (457) or into an IRA.

There is an addition of defined contribution plan (401k type plan) that up to 5% of employees can participate in. This is first come, first served but may be an option for employees that don’t trust the state and want the investment responsibility themselves. It remains unclear whom the plan providers will be and available fund options (we hope index funds).

The retirement age has also increased to anyone under age 45. Currently full retirement age for Tier I employees is age 60, however, depending on an employee’s current age their full retirement age will be increased with the increase dependent on their current age as of June 1st, 2014. Tier II employees have a full retirement age of 67.

In addition, the highest salary that will be calculated for pension purposes is capped at $106,800 – lower than the current Social Security cap of $113,700.

Overall, the changes aren’t necessarily bad, but they are necessary. There remains some uncertainty going forward as to whether or not the bill will remain in force or if it will be challenged in court to determine its compliance with Illinois’ Constitution.

We encourage any state employee or retiree that has questions regarding the effects of the new bill on their retirement planning to talk to us. We can be reached at 217-488-6473 or online at www.blankenshipfinancial.com.

 

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How Adding to Your Earnings Can Increase Your Social Security Benefits

Given the way that Social Security benefits are calculated, it should come as no surprise that increasing your income over time will make a difference in your eventual Social Security retirement benefits.  But how much of a difference does it make when your income is increased?

Of course, this is going to depend upon what your current income is, and how many years you have left before you’ll begin receiving benefits.  Keep in mind how your benefits are calculated – see this article for information about Computing Your Social Security Monthly Benefit – it’s based on your average monthly income over your lifetime.  Increasing that average will increase your PIA, which will in turn increase your benefit.

It’s definitely not a simple calculation to figure out what difference each increased dollar of income will have on your benefit.  Let’s walk through a few examples to see how it plays out.

Example 1

Jane, age 32, has been earning an inflation-adjusted $2,000 per month during her working career, beginning at age 22.  If her income only keeps up with inflation between now and age 62, her average indexed monthly earnings (based on today’s dollars) would equal $2,000.  Running the numbers to determine her PIA, we use these equations (2013 figures):

90% of the first $791 = $711.90
32% of the next $1,209 = $386.88

Jane’s PIA is the sum of these two numbers, $1,098.78.  This is the amount that Jane would receive at Full Retirement Age (of course, adjusted by inflation at that time). 

So what would happen if Jane can increase her average income by $100 per month, from now until she’s ready to retire?  Since she’s 32 now, she’s had 10 years at the average adjusted rate of $2,000 per month, so this means her income for the coming 30 years will need to be approximately $2,117.  Running the numbers on her new average monthly income of $2,100:

90% of the first $791 = $711.90
32% of the next $1,309 = $418.88

That brings Jane’s PIA to a total of $1,130.78, a monthly increase of $32 dollars.

What if the individual has a much lower current average income?  Intuitively you’d have to figure that the increase of $100 would have a higher percentage of impact on benefits, right?  It depends on where you are on the scale of bend points.  Let’s look at two individuals, Ed and Seth.

Example 2

Ed, age 37, has an average income of $1,000 per month over his lifetime. Seth is 42, and has a lower average income – only $500 per month.  Ed and Seth are thinking about starting a very small side-business which will bring in $100 a month each.  Neither fellow earns any more in his regular job (other than COLA increases) throughout the rest of his life.

As a result, without the side-business, Ed’s PIA at age 62 would be $778.78.  If he adds the side-business income, his average over his lifetime would increase, and so would his PIA – to $801.64, for an increase of $22.86 per month.  Seth, on the other hand, would have a PIA of $450 without the side-business.  Adding the additional $100 per month with the side-business would bring his PIA to $501.42 – an increase of $51! 

Seth’s PIA increased by a larger amount for two reasons: first of all, the $100 represents a larger percentage increase versus Ed’s increase.  Secondly, since Seth’s average income is below the first bend point ($791) both before and after the increase, a much larger share of his increased average income applies to his PIA.  In this case, the $100 increase made a difference for each, just by appreciably different amounts.

What about higher incomes?

Example 3

Anna, age 42, has averaged $6,000 per month over her lifetime.  If she continues at that rate for the coming 20 years, her PIA would equate to $2,422.46.  If Anna receives an increase in her salary of $100 per month for the coming 20 years, her PIA would increase to $2,431.03.  This increase of $8.57 per month is due to the fact that Anna’s average income is above the second bend point, so each dollar of average income increase only has a 15% impact on her PIA.

These examples illustrate how the Social Security benefit calculation benefits lower income folks at a higher rate (proportionally) than folks at higher incomes.  One particular career where this can really make a huge difference is in the service industry – particularly waiters and waitresses.  Since cash tips are voluntarily reported, waiters and waitresses typically under-report these, to their own detriment, regarding Social Security benefits.  Since quite often waiters and waitresses are on the lower end of the wage spectrum, taking credit for the dollars earned in cash tips can have a lasting improvement in future Social Security benefits!

Be Careful When Using Your Social Security Statement for Planning

The Statement

The Statement (Photo credit: Wikipedia)

Recently I received an interesting email from a reader (thanks, JRT!) that illustrates one of the problems with interpreting your statement from Social Security on a regular basis.  Part of the email follows:

I am just reaching 66 and have been self employed for many years.  I have worked continuously for 30+ years reaching $100,000 or so per year  but have been slipping into retirement and last years income dropped to $70000. SS has already reduced my monthly payment estimate.  It appears that if I postpone beginning taking my SS retirement I will lose in the long term because each year I have reduced income before retiring my SS distribution will be less. For instance if I defer to 70 and have 4 years with zero income won’t I be hurting myself???

In the situation described above, what the reader is describing is the amounts he is seeing on statements from Social Security.  When he was (for example) 64 years old, he saw a projected benefit at age 70 approaching the maximum benefit.  Then when he got his new projection a year later, after he had reduced his income for the most recently-reported year, the amount was less.  It appears that he’s losing benefits by delaying – right?

Not really.

The problem is with the way that the SS calculates your projected benefit.  They always assume two things that will tend to cause problems:

  1. Your most recently-reported wages will continue at that same rate until you retire.
  2. You will continue working until you file for SS benefits.

Jeff’s Statement at Age 64

So let’s work this out in an example.  FYI, I’ve done all of this work using the Social Security “Any PIA” online calculator.  The reader (let’s call him Jeff) was born in 1949, so in 2013 he is 64 years of age.  He has earned the Social Security maximum earnings from 1978 to the present.  When he receives his estimate for benefits at age 70, the projected amount of his benefit is $3,452.  (Note: When I plugged in the numbers for 2013 and 2014-beyond, I used the current max amount of earnings, $113,700, to reflect what SS does for the statement.)

If I go back and change the retirement age to 66, the benefit calculates to $2,579.  It’s safe to assume that if the situation was exactly as I described, Jeff would have received a statement showing him that information when he was 64 years of age.

Jeff’s Statement at Age 65

To estimate what would happen to Jeff’s estimated benefits the next year when he gets his statement, I changed his birthdate to 1948, and – since he indicated he is now earning less, I showed that instead of the maximum amount for 2012, 2013, and 2014-beyond, he actually projects to earn $70,000.  Now, his projected benefit at age 70 is $3,394 – since the future projected income is less than was projected a year earlier.  The projected age 66 benefit is now $2,571, also less than before, but by a smaller margin since fewer years are impacted.

Jeff hasn’t “lost” benefits – because the projected amount was only that, a projection.  Since the reality is that he received less in earnings than was originally projected, his accurately-projected benefit is now less.  In other words, the only way Jeff could have achieved the projected benefit is if he continued to work at the same income level ($113,700) as was projected for him.

Jeff’s Statement at Age 66

Taking Jeff’s last statement into account now – what happens if he stops working at age 66 and has four zero years?  To display this, I again dropped his birthdate back by a year, so that it indicates he is age 66 this year.  The past three years (including 2013) he has received earnings of $70,000 – but for future years, he will receive zero income.  Now the calculator shows a projected age 70 benefit of $3,306, which is likely to be very accurate – the only difference would be the annual COLAs that are applied (if any) between now and when Jeff reaches age 70.

Conclusion

So – as you can see, it can be dangerous to assume that the projected benefits on your Social Security statement are completely accurate for your situation, unless you actually will earn the same income between now and the date you begin receiving benefits.  In the case of Jeff, since his income is reducing and potentially going to zero for his last four years before age 70, the projected benefit from a couple of years prior was overstated.  The overstatement in this case was roughly $150 per month.

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How to Reduce or Eliminate Windfall Elimination Provision Impact to Your Social Security Benefit

Basic WEP encryption mechanism

In prior articles we have discussed the Windfall Elimination Provision (WEP) which has the effect of reducing a portion of your Social Security retirement benefit if you’ve worked in a job that was not covered by Social Security which also provides a pension.  This article deals with two ways that you can remove the impact of the WEP from your benefit – neither of which is simple, and neither of which can be done after you’ve retired.

The two methods are:

  1. Add years of “substantial earnings” to your record
  2. Take a lump sum distribution from your pension before you are eligible to receive the pension.

Adding Substantial Earnings Years

If you have the opportunity to work in a job that is covered by Social Security withholding and you have “substantial earnings” from that job, each year that you work in this SS-covered job adds to your ability to begin eliminating the WEP impact.

This is not an insignificant undertaking.  Substantial earnings for 2013 is defined as $21,075 or more in earnings covered by Social Security, and this figure is adjusted annually by the Cost-of-Living increases.  Plus, it doesn’t make a difference on your WEP impact until you’ve added 21 or more years of substantial covered earnings to your record.

The good news is that if you have 30 or more years of substantial earnings in a Social Security-covered job, you’ll eliminate the WEP impact altogether.

Taking a Lump Sum Distribution of Your Pension

If you don’t have enough years with substantial earnings, there is another way that you can eliminate the impact of WEP, which again isn’t an insignificant thing to do.  If you have the ability to take a lump-sum distribution of your non-covered pension before you are eligible to receive the pension, you can eliminate WEP impact altogether.  By doing this you’ll forfeit any future pension that you might have received from the non-covered employer.

The timing on this has to be right – if you are eligible for the pension when you take the lump sum distribution, you’ll still have WEP impact.

For example, John is a teacher in a state in which teachers are not covered by Social Security and he works there long enough to build up a pension.  He decides to leave that state and go to another state where teachers are covered by Social Security.  He’s young enough that he is not yet eligible for the pension in the first state.  If he withdraws the entire pension from the first state and thereby forfeits all future claim to that pension, he will no longer have future WEP impact on his Social Security.  That is, unless he goes back to another non-Social-Security-covered job at a later point in his life.

Important points

It’s important to note that WEP impact only occurs if the pension is considered to be the primary retirement plan.  This is regardless of whether the pension is funded by the employee only, by a combination of employer and employee contributions, or solely by the employer.

If the plan is considered to be a supplemental plan (for example, as a 403(b) plan might be to a regular pension plan), then if the source of funds is solely from the employee, this plan will not produce a WEP impact.  In a case like this, the primary plan would likely produce the WEP impact anyhow, unless one of the options listed above is used to eliminate the impact.

In addition, payments from optional savings plans, such as the TSP (Thrift Savings Plan) for CSRS employees, are not considered as WEP-impacting pension payments.

If there are multiple sources of pension from the non-covered employer, only the applicable pension for WEP impact is considered when calculating the maximum WEP impact. This is because WEP impact can’t be more than 1/2 of the applicable pension amount.

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Factors to take into account when planning Social Security filing

Dice five

As with the overall process of planning for retirement income, there are certain important factors external to Social Security benefits that you need to take into account while planning when to file for benefits.  In the list below I will detail some of these factors and why they are important to the process.

Important Factors When Planning Social Security Filing

Pension income.  Pension income must be considered with special care when planning your Social Security filing strategy.  Often, pensions will increase in value up to a certain age of commencement and then there are no increases after that age.  Coordinating your pension with your Social Security benefits can enhance your overall income stream – since a pension is generally a guaranteed source of income for yourself and possibly your spouse.

In addition, since many pensions are not indexed for inflation, meaning that there are no Cost-of-Living-Adjustments (COLAs), it probably makes a great deal of sense to maximize the amount that you can receive from this source.  Depending upon your needs, starting Social Security benefits earlier could provide you with the income you need in order to maximize your pension.

Personal Assets.  Funds that you have saved over the years can help you to bridge the gap between your current age (if you’re stopping work) and the age that maximizes your Social Security benefits (and pension benefits, as noted above).  While it may be difficult to stomach, it may work in your favor to start taking some funds from your retirement plans (IRAs, 401(k)s, and the like) or taxable investment or savings accounts.

This is the reason that you’ve set aside this money over the years – taking distributions from these accounts so that you can delay other benefits may make all the difference.  The point is that delaying to increase the amount(s) of your guaranteed income streams is likely very much worth the amount you are taking from the accounts in the long run.

Earnings from working.  As you likely have realized, working part time in your retirement could be a good way to maximize your income.  As with all income-producing efforts, work, even part-time, can be a very valuable asset.  For other types of assets to produce income, there must be a store of value existing in order for the income to flow.  In Social Security benefits the store of value is your earnings history; the same goes for pension benefits.  With retirement accounts, the amount of savings you’ve built up is the store of value.

Working, at any age, utilizes the store of value of your own experience, skills, and knowledge.  Continuing to work produces income from that store of value, income that otherwise would go unrealized.

General health.  If your health is declining and the expectation is that your life-span will be somewhat less than the average, this can influence your need to start Social Security benefits earlier rather than later.  However, as we’ve discussed in the past, it is not only your own health (e.g., longevity) that is important to consider.  The health of your dependent beneficiaries is just as important, if not more so, especially if your Social Security benefit is large enough for others to depend upon it after you’ve passed.

Income requirements.  The amount of income that you need to get by and pay your ordinary expenses can also influence your time to file for Social Security benefits.  If you just can’t make ends meet using all of your other sources of income, it might be necessary to file for your Social Security benefit before it is maximized.

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The Value of Your Social Security Benefits

Improve the present hour

As you consider your Social Security benefits and when you might begin to draw them, keep in mind that the benefits you’re receiving are actually akin to an annuity – a stream of income that you will receive from the time you start the benefits throughout your life.  As with an annuity, if you live longer than average, you will receive much more than the original value (premium) of the annuity.  If you have a way to increase the amount of the stream of income, by delaying start of the benefits, the overall amount that you eventually receive will increase as well (assuming you live longer than average).

Let’s say that your Social Security benefit would be $1,500 at Full Retirement Age.  If you started your benefit early at age 62, your benefit would be reduced to 75% of that amount, or $1,125; if you delayed your benefit to age 70, the benefit amount would be increased by 32% to $1,980.

If you started receiving benefits at age 62 and you lived to age 75, the total benefit that you receive over your lifetime would be $189,000 – not including Cost of Living Adjustments.  In a similar manner, calculating the total lifetime benefit if you started receiving benefits at Full Retirement Age (FRA, age 66 for folks reaching that age these days) comes out to $180,000 if you live to age 75.  Waiting to age 70 to start benefits results in a lifetime benefit (to age 75) of only $142,560.

So if you only live to age 75, it makes the most sense to start your benefits as early as possible.  But read on…

What’s interesting about this sort of calculation is that if you live beyond age 75, say to age 80, now your lifetime benefits are starting to be greater by delaying a bit.  If you start at age 62, the total lifetime benefit would be $256,500 through age 80; starting at 66 results in $270,000 over your lifetime.  Delaying to age 70 still results in a lower lifetime benefit at this age – only $261,360.

So if you happen to live even longer, let’s say to age 90 – now the later you’ve delayed results in the greatest overall lifetime benefit.  Starting at age 62 results with a total lifetime benefit of $391,500; 66 amounts to $450,000, and beginning at age 70 yields $498,960.

What about the value of that income stream in today’s dollars?

There’s another calculation that we financial guys do when evaluating things like annuities – it’s known as a Net Present Value (NPV) calculation.  Essentially what we do is to take the value of the cash flows and use a set rate of return to determine what amount of money we’d need in order to produce those cash flows at those times in the future.

So, for our example above, using a rate of return of 5%, we come up with the following net present values of the cash flows:

Age to start NPV to age 75 NPV to age 80 NPV to age 90
62 $133,632 $163,152 $204,404
66 $138,991 $186,834 $253,691
70 $120,598 $198,360 $304,631

As you can see, the NPV increases for your delayed receipt of benefits starting with a lifespan of age 80, and becomes more pronounced if you live even longer.  As we saw with the total lifetime benefit, there’s a higher value to the cash flow if you start early only if your lifetime is relatively short – in this case, to age 75.

Conclusion

This is the reason that we financial-types often recommend delaying receipt of Social Security benefits.  As the figures above attest, there can be a substantial lifetime benefit increase if you life beyond age 80 – in our example it comes to over $100,000 by changing your start date from age 62 to age 70 and you live to age 90.  Of course, if you don’t happen to live beyond age 80 (and who knows how long you’ll live?) starting earlier will likely result in the greater benefit for you in your lifetime.

Given that folks are living longer and longer these days, you should really consider delaying Social Security benefits as your strategy.  Keep in mind that we’re only talking about a single person’s benefits – for a couple, the calculations become infinitely more complex, as we have to account for two lifetimes, two potential benefits, and spousal and survivor calculations.  We’ll get to that next time…

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Average Indexed Monthly Earnings Years

Panneau Aime la Plagne

We’ve discussed the AIME (Average Indexed Monthly Earnings) calculation before, and it’s not like anything has changed about those calculations.  It turns out that the calculation process can be a bit confusing (shocked? I think not).

The AIME is calculated using what’s known as the “base years”, which are those years between your age of 22 and 62 that occurred after 1950 (I realize most folks needing to know about this didn’t need that 1950 reference, but it’s part of the rules, so I included it).  Of those 40 years, only the 35 years with the highest earnings are used to calculate the AIME.  The earnings for each year is indexed (see the original article for details) and then the earnings are averaged.

One of the questions that comes up is how years after age 62 are handled in this process.  If earnings in subsequent years are greater (after indexing) than earnings in the earlier “top 35” that was used for the calculation, your AIME can be recalculated, which might make a change to your PIA.  So working past your age 62 can have a positive impact on the benefit that you (and possibly your family) can receive.

See the earlier article about the Primary Insurance Amount (PIA) calculation for how the AIME is used to generate the PIA.  Bear in mind that additional earnings may not have a dramatic impact on your PIA.  This is because (using 2012 figures) any amount of your AIME between $767 and $4,624 are included at the rate of 32%, and AIME amounts above $4,624 are included at only 15%.  Therefore, increases to your AIME above those amounts have only a minimal impact on your PIA.

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“Swim With Jim” Radio Interview by Jim Ludwick

I recently had the honor of being interviewed on the radio by Mr. Jim Ludwick, a colleague that I admire and look up to a great deal.  Jim is a CERTIFIED FINANCIAL PLANNERTM professional, and his practice is based in Odenton, Maryland with additional offices in Washington, DC, Santa Barbara, California, San Mateo, California, and New York City.  Jim also is a fellow member of the Garrett Planning Network.

In the interview we talk very briefly about some of the important factors of Social Security that baby boomers need to address as they plan for Social Security benefits.

You can follow Jim’s radio program on BlogTalkRadio; his channel is Swim With Jim.

 

Listen to internet radio with Swim with Jim on Blog Talk Radio

To hear the interview, click the “Play” button above.

In the interview I mention that it can be helpful to have an advisor work with you to understand your Social Security benefits.  Members of the Garrett Planning Network are uniquely positioned to help in such matters, as we operate on an hourly basis providing financial advice, unlike most of our financial industry brethren (and sistren).  Seek out your nearest Garrett Planning Network member if you need help!

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