Decoding Social Security for Retirement Planning
Smarter
Social Security
Daniel G. Mazzola, CFA, CPA
American Portfolios Financial Services, Inc.
dgmazzola@americanportfolios.com
danmazzola.com
Massapequa, NY 516 783 9540
What Bucket to Draw From?
•
John and Jane are in their mid-60s,
newly retired and need cash to
replace wage income. What bucket
should they draw?
•
Individual Retirement Account
•
Brokerage Account
•
Social Security
Origins
•
Otto von Bismarck developed a system of
social security for the industrial workers
of Germany during the late 19
th
century
•
In the U.S. the Social Security Act was
signed into law in 1935, creating a
program designed to pay individuals
workers age 65 or older a
continuing
stream of income
.
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Ida J. Fuller
Recognized as first person
to collect a monthly social
security benefit check. She
was born in 1874 and
started paying payroll taxes
in 1937. Contributed
$24.75 during the three
years she was enrolled.
Retired in 1940 and
collected $22,888 until she
died in 1975.
Daniel G. Mazzola, CFA, CPA
Importance of Social Security
•
In 1935 the poverty rate for
seniors exceeded 50%. Today it is
less than 10%.
•
SS represents (at least) half of the
income for 53% married and 74%
unmarried individuals 65
and older
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Pay-As-You-Go System
Money Comes In – Money Goes Out
•
Your payroll tax dollars used to
pay benefits for current retirees
•
Benefits of today’s workers will
be funded by the workers of
tomorrow.
Daniel G. Mazzola, CFA, CPA
Changing Demographics
•
In 1935 the worker/beneficiary
ratio was 160:1. Today it is about
2.8 workers for each beneficiary –
by 2033, there are projected to
be only 2.1 workers for each
beneficiary
Daniel G. Mazzola, CFA, CPA
Social Security Trust Fund
Tax revenue that supports SS has not fully covered benefits since 2010
Closing the Gap
•
Raise Full Retirement Age
•
Raise Taxable Wage Base
($137,700 in 2020)
•
Raise Payroll Tax Rate
currently 6.2% on both employer and employee
Age to Receive Full Benefits (FRA)
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Claiming Early vs. Later
Is There an Actuary in the House?
•
From an actuarial perspective, it does not
matter when you begin collecting if you
live to your average life expectancy.
•
Formula has been designed so that
person living to this age receives the
same total amount regardless of when
they start
danmazzola.com
Social Security is a Form of
Longevity Insurance
•
Longevity is the biggest driver of health care costs
•
By waiting to claim Social Security you buy more
longevity insurance
: protection against financial
challenges of living longer than anticipated.
•
Delaying provides greater income at
an advanced age when health care
expenses will increase rapidly
Daniel G. Mazzola, CFA, CPA
Costs of Healthcare in
Retirement
•
65 year-old couple enrolled in
Medicare will pay at least $10,300
this year in premiums and out-of-
pocket costs
•
In 20 years those costs are projected
to be $33,000 annually
According to HealthView Services NY Times 11/3/19
Loss of Benefits Due to “Excess”
Earned Income
•
At FRA no benefits
are lost due to
employment wages
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Excess Earned Income
•
A person
under
FRA and
collecting can lose some or all
Social Security benefits by
working. This includes spousal
and survivor benefits.
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Earned Income Thresholds
•
For wages earned before the
year the beneficiary reaches
FRA – $1 of social security
benefits is lost for every $2
over $18,240
$18,240 in 2020
62 year old with $40,000 in wages
Earned Income Thresholds
•
For wages earned during the
year the beneficiary reaches
FRA – $1 of social security
benefits is lost for every $3
over $48,600
$48,600 in 2020
Special Earnings Test for
First Year Retirees
Annual earnings limit can
be replaced with “monthly
earnings limit” for first
year retirees collecting
before FRA. Ex: Joe earns
$45,000 for the first 10
months of 2015. He turns
62 on October 30
th
. He
then takes a part time job
paying $600 per month.
Even though his earnings
for the year exceed the
limit of $18,240, he will
receive his full benefit for
November and December.
Calculation of Benefits
•
A retirement benefit is based on
a worker’s highest 35 years of
earnings, inflated for economy
wide wage growth
•
Formula:
90% of first $885 of earnings
32% between $885 and $5336
15% above $5336
$4000 monthly wages = $1793 benefit
Daniel G. Mazzola, CFA, CPA
Reason to Keep Working
•
Each additional year an individual works adds
another year of earnings to his record. Person
may be able to replace a year of low earnings
with another of higher wages.
•
SSA automatically recalculates your benefits
each year and will adjust upward if required.
Morgan Freeman
Morgan Freeman did not
receive his first movie credit
until age 43. At age 50, he
appeared in “Street Smart”,
what he considers to be his
breakthrough role. In 2004,
at age 67, he was credited
with 3 movie roles, including
“Million Dollar Baby”. In
2005, he was credited with 5
roles, in 2006 6 roles, and in
2007 he was credited with 4
roles, including “The Bucket
List”.
www.danmazzola.com
Reasons to Delay
•
People tend to underestimate their life
expectancy
. 65 year old has a 1-in-3
chance of living to age 90. As adults live
longer, they are more likely to live with
multiple chronic conditions and
functional limitations, resulting in higher
spending on health care needs
Reasons to Delay
•
Survivor benefits reflect
delayed credits.
•
Strategy to enhance spousal
benefits only functions when
spouse is at FRA
Common Questions
How can I obtain the amount of my
Social Security benefit?
•
You will receive a statement in the mail
indicating your benefits
if
you are 60 or older,
are not receiving benefits and have not
registered for an online account.
•
To register for an online
account, go to
socialsecurity.gov/myaccount
.
Can I collect & change my mind?
•
You can file a “Request for Withdrawal of
Application” form with the SSA.
•
If request is granted, you need to re-pay SSA
all of the money you and family members have
collected base on your work history.
•
You are allowed one “withdrawal” per lifetime,
and it must be done within 12 months of the
initial collection.
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Is Social Security Taxable?
Combined Income: AGI + municipal bond interest + 50% of SS
Excluded from NYS & NJ taxable income
What is My Break-Even Age?
•
Age at which cumulative
higher monthly benefits
beginning later would equal
the aggregate lower benefits
from an earlier claiming date
Breakeven Analysis:
$750
per month at 62
vs.
$1000
per month at 66
Break-Even Analysis
•
Comparing 62 vs. 70 it is 80.5
Comparing 66 vs. 70 it is 82.5
•
Described as an “unsound
way” to decide when to start
collecting benefits
Pitfalls of Break-Even Age Analysis :
•
Influences people to claim earlier than they
might otherwise
More concerned about the potential loss of money by dying early
than the risk of outliving retirement savings
•
Minimizes the significance of the risk-free rate
of return and survivor benefit to spouse
•
Ignores the importance of delaying as a form
of longevity
insurance
.
Insurance is a “What If?” product and not a break-even product
How Does the Age at Which I Claim
Social Security Affect Medicare?
•
If you are already receiving SS
when you turn 65, you are
automatically enrolled.
•
If you are not, you should sign up
to avoid late enrollment penalties
and gaps in coverage
Considerations:
•
Part A is free. Part B is not.
•
You should enroll for Part B at
65 unless you or spouse are
actively
employed for a
company with more than 20
employees.
Enrolling in A precludes you from contributing to an HSA
Common Misconceptions
About Medicare
Medicare is Free
Part A: In-Patient Hospital Care
Part B: Physician Services
•
Monthly Premiums start at
$135. Can go as high as $428
•
Typically only pays 80% of the
cost of Medicare approved-
services
Medicare Supplement: MediGap
•
MediGap Plan F:
most comprehensive
Lowest Monthly Premium
for Long Island residents is
$279
Part D: Prescription Drugs
•
Deductible may be up to $400
•
Monthly premiums range from
$34 to $76
•
Donut Hole: enrollee pays for
drugs in between $3700 and
$4950 thresholds
Medicare Covers
Everything
Exclusions:
•
Nursing home care
•
Care received overseas
•
Hearing Aids
•
Dental Care
•
OTC medicines
•
Limited coverage of diagnostic testing
•
Medicare’s
Top Ten
Medicare Is Not Free
•
Retirees spend an average of
$260,000 per couple on
health care from age 65
onward
•
1/3 on Medicare premiums,
2/3 on copays, deductibles
and drug costs
Medicare is Not Free
**
Part B & D premiums increase significantly for taxpayers above $85/170 K threshold
*Assumes beneficiary or spouse has 10 years of earnings record
Medicare Does Not Cover
Everything
•
Exclusions:
Nursing Home Care
Custodial Care in own home
Medical services abroad
Routine vision, dental, hearing
and foot care
Over-the-counter medicines
•
Diagnostic testing is limited
Medicare Has Defined Enrollment
Periods
•
Initial Enrollment
– 7 months surrounding
beneficiary’s 65
th
birthday
•
Special Enrollment
– allowed at any time but
only under defined circumstances.
Most common is when beneficiary separates from service from company for which
he had health insurance
•
General Enrollment
– used if beneficiary
misses IEP or SEP deadline.
Lasts from 1/1 thru 3/31 with coverage beginning 7/1
.
Enrollment Periods
•
Open Enrollment
– allows beneficiary to
switch MA plans, convert from MA to
Medicare or vice versa, or add/switch Part D.
Lasts from 10/15 through 12/7
.
•
Disenrollment
– beneficiary leaves MA to
return to Traditional Medicare
Lasts from 1/1 through 2/14
.
Medicare Does Not Cap Out-of-Pocket
Expenses
•
Hospital Visit
– After 90 days in any one benefit +
60 day lifetime reserve, beneficiary must pay full
costs
•
Skilled Nursing Facility
– After 100 days in any one
benefit period, beneficiary must pay full costs
•
Part B
– no limit on beneficiary’s exposure to 20%
co-pays
•
Part D
– Beneficiary still responsible for 5%
or less
after $3725 deductible is met
Blood cancer Drug Revlimid cost $11,538 per year after Medicare
Medicare Has Late Enrollment
Penalties
•
Part A penalty
: Premium increases by 10% for
each month beneficiary enrolls late. Penalty lasts
for twice the number of full years.
•
Part B penalty:
Premium increases by 10% for
each month beneficiary enrolls late. Penalty
applies for life.
20% penalty for being late 2 years
•
Part D penalty
: If beneficiary lacks coverage for
63 days or more, premium increases 1% per
month of $35.63
(national base premium)
for each month
beneficiary enrolls late. Penalty applies for life.
2 years late - $8.55 per month
Medicare Can Be Traded
•
Medicare Advantage
purchased through
private insurers is an alternative to Traditional
Medicare
administered by the fed government
•
MA covers dental, vision, hearing
•
Ma charges lower co-pays and caps out-of-
pocket expenses
•
Typical Plan costs $37 more than beneficiary’s
Part B premium
Medicare Advantage
•
With Medicare, beneficiary can use
any doctor or hospital that accepts
Medicare patients.
•
With MA, BENEFICIARY IS
RESTRICTED TO PLAN’S LIMITED
NETWORK OF DOCTORS AND
HOSPITALS.
Size and composition of networks varies greatly
Medicare Can Be Supplemented
•
MediGap
private insurance separately to
cover Medicare co-pays and deductibles
•
Beneficiary must be enrolled in Parts A & B
•
Can not be combined with a MA Plan
•
Most comprehensive MediGap Plan (F) has
average cost of $191 for a 65 year old
Medicare Can Be Declined
•
Beneficiary can decline Part B if covered under
a group insurance plan from an employer for
whom he and/or spouse is actively working
•
Beneficiary can decline Part D if he has other
creditable
coverage from current or former
employer.
Beneficiary has 63 days to enroll when creditable coverage is
lost.
Declining Coverage
•
Determining whether Medicare is primary or
secondary is critical. Coverage from an
employer with more than 20 employees is
primary.
•
If beneficiary does not have Medicare when it
is primary, secondary payer may refuse to
cover costs
•
Beneficiary can be forced to reimburse health
insurer for costs it paid unnecessarily
Medicare Can Be Denied
•
MediGap insurers can reject you, charge more
because of health status or impose a waiting
period if more than 6 months have passed
since you originally enrolled in Part B and have
not secured MediGap
•
MediGap insurers can reject you etc. if you
have enrolled in Medicare Advantage, 12
months have passed and you want to return
to Traditional Medicare
Medicare Coverage Can Be Changed
•
Part D formularies can change during the year.
Cost difference for on-formulary medication vs. off formulary
is substantial
.
•
Part D co-pays for each drug can change
•
Pharmacy networks can change
•
Part D premiums can change
•
Existing drugs move from branded to generic
status
Family Benefits
•
When an individual becomes
eligible to collect Social
Security, his spouse, parents
and children who
would not
otherwise qualify
may also
claim a benefit
Daniel G. Mazzola, CFA, CPA
Family Benefits
•
Family benefits are added
to the worker’s
•
Family benefits are capped
at 150% to 180% of the
worker’s
Spousal Benefits
•
Spouse of an eligible worker
can collect SS benefits
regardless of whether or not
s/he has own earnings record
•
Spousal benefit is 50% of
worker’s PIA at FRA
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Example: Spousal Benefit
PIA – Primary Insurance Amount i.e. Monthly Payout
Spousal Benefits: Eligibility
•
To qualify, spouse must be 62
and have been married to the
worker for at least one year
or
•
be caring for child of the
worker under the age of 16
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Child’s Benefit
•
Child under the age of 18 or
disabled at any age
(if disability has
manifested itself before age 22)
is eligible for
Social Security if the parent is
claiming
Billy Joel, Alexis Roderick Joel and
Della Rose Joel
Della Rose DOB 08/12/15 2
nd
child Remy Anne DOB 10/22/17
Spousal Benefits
•
Person can not collect spousal
benefit until that person’s spouse has
applied for Social Security
•
The spouse can claim the
higher
of a
social security benefit based on their
own earnings record or a spousal
benefit
Spousal Benefits continued
…
•
Spousal benefit is reduced by a
similar percentage in the event
spouse wants to collect early
•
Married couples limited to one
spousal benefit
Daniel G. Mazzola, CFA, CPA
Common Questions
How is My Benefit Affected If my
Spouse Collects Early?
•
When your spouse
collects benefits has no
effect on your spousal
benefits
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Do Spousal Benefits Continue to
Increase Beyond FRA?
•
Spousal benefits are
not adjusted for
delayed credits
Can I Collect Spousal Benefits
Whenever I Want them?
•
Your spouse must has filed
for benefits for you to
collect
Right to file/suspend expired as of 04/30/015
Can I Collect Spousal and Switch to
My Own?
•
As long as you are at least
Born Before 12/31/1953
FRA
Spouse Has Filed
You can choose Spousal Benefits only
•
This allows your own benefits to earn
delayed credits. You would then convert
at a later date
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Can I Be Denied Spousal Benefits?
•
Under federal law, spousal (and
survivor) benefits claimed by
government pensioners who have
not contributed into social security
program will be reduced or
eliminated altogether
Government Pension Offset
The amount of your
spousal or survivors
benefit will be reduced
by 2/3 of the amount of
your government
pension. Example: Tom
has a monthly spousal
benefit of $500 and
monthly civil service
pension of $600. He will
receive only $100 of his
$500 spousal benefit.
Has Anyone Received this Letter?
•
Dear Mr./Mrs.
Are you currently or have you
ever been married? If so, we
invite you to contact a Social
Security Administration office to
learn about strategies developed
to optimize the spousal and
survivor benefits for which you
may be eligible.
•
Respectfully Yours,
Social Security
Administration
Daniel G. Mazzola, CFA, CPA
Social Security Employees Provide
Information Not Advice
•
180,000 people a day visit SS offices and the
agency handles 450,000 daily phone calls
•
SS reps are “not at liberty to substitute their
own judgment or opinion for rulings,
regulations, or the law”
•
SS reps do not know about your household
budget, your health, your retirement savings,
your life insurance, your plans for life after
retirement
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Onus is on the Individual
•
Your responsibility to know
about the disadvantages of
taking benefits early and
various claiming strategies
Restricted Claim
•
Person Claims Spousal
Benefit Rather Than
His Own When Filing
Daniel G. Mazzola, CFA, CPA
Restricted Claim
•
Born Before 12/31/1953
•
Must Be at FRA when Filing Restricted
•
Spouse Must have Filed for Benefits
Daniel G. Mazzola, CFA, CPA
Restricted Claim In Action
•
Two Couples With
Similar Work Histories,
Same Benefits But
Different Ages
Restricted Claim: Not Available
From Spouse With Lower Benefit’s
Perspective
•
At Whatever Age Steve
Claims He Will Receive The
Higher Of The Spousal Or
His Own
Steve’s Benefits
Daniel G. Mazzola, CFA, CPA
IMPLEMENTATION
OF
RESTRICTED CLAIMING
STRATEGY
Restricted Claim: Available
Implementing Restricted Claim
Daniel G. Mazzola, CFA, CPA
One Spouse on Disability
Restricted Claim Available
Younger Spouse Wants to Collect
Early
Restricted Claim Available
for John
Daniel G. Mazzola, CFA, CPA
Rule of Thumb
•
Spouse with higher earnings record
should delay taking benefit early,
especially if it is a male.
•
The female spouse will likely outlive
the male spouse and will be able to
claim a higher
survivor
benefit
.
Daniel G. Mazzola, CFA, CPA
Common Scenario
•
Younger Spouse Wants to
Claim Own Early While
Older Spouse Delays. What
Is the Effect On The
younger spouse’s
Spousal Benefit?
Had Jane Waited
Consequences:
•
Jane files for her own
reduced benefit
•
Whenever John claims Jane will
receive
reduced
spousal because
she collected her own early
$750 + [1500-1000]
Daniel G. Mazzola, CFA, CPA
John Claims at 69
At age 65 $500 is reduced to $465 at age 64 $500 is reduced to $430
Divorced Spouse’s Benefit
•
Entitled if:
unmarried and age 62
ex-spouse is entitled to benefits
married for 10 years to ex-spouse
divorced for 2 years to ex-spouse
Daniel G. Mazzola, CFA, CPA
Divorced Spouse’s Benefit
•
Amount of divorced spouse’s benefit
is same as ordinary spouse benefit
(50%)
•
Benefit not subject to family
maximum
•
Contact with ex-spouse is not
required
Divorced Spouse’s Benefit
•
Marriage License
•
Divorce Decree
•
Social Security# of
Ex-spouse
Divorced Spouse’s Benefit
•
Divorced Spouse is able to receive benefits
regardless of whether the ex-spouse has filed
for benefits and/or remarried.
•
Divorced spouses can claim spousal benefits
on each other
(unlike married couple)
•
Individual married multiple times will collect
on only one record, but receive the highest
amount derived from any of the former
spouses
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Johnny Carson
Johnny Carson was married 4
times: first to Joan Wolcott for
14 years, then to Joanne
Copeland for 9 years, then to
Joanna Holland for 13 years,
then to Alexis Maas for 18
years, until his death in 2005.
As many spouses that can
satisfy the conditions can
collect benefits on one
spouse. All but Joanne
Copeland are entitled to a
spousal benefit based on his
earnings record.
Daniel G. Mazzola, CFA, CPA
Survivor Benefits
•
When a covered worker dies,
members of his family may be
entitled to benefits on the deceased
•
An applicant for survivor benefits
eligible to receive his own will
receive the higher,
not a
combination
, of the two benefits
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Survivor Benefits: Widow(er)
•
A widow is entitled to survivor benefits on a
deceased spouse’s earnings if
:
- Age 60 or older
- At least age 50 and disabled
- Surviving spouse married to
deceased for at least 9 months and
currently unmarried
(remarriage allowed
after 60)
Daniel G. Mazzola, CFA, CPA
Survivor’s Benefit
•
Survivor’s benefit is
100%
of
what deceased spouse
received or was entitled to
receive at time of death
Survivor Benefits: Widow(er)
•
Widow(er) who begins taking
benefits before FRA will see a
28.5% reduction at aged 60
4% thereafter
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For Couple Already Receiving
Benefits, Upon the Death of
One the Survivor is Entitled to
Receive the Larger of the Two
Spouse Claiming Her Own
Before FRA May Delay
Converting to Survivor Until It Is
At Maximum
Widow Not Collecting:
Survivor Benefit Higher
Strategy:
•
DELAY the Greater of the Two
•
At age 62 Jane files a
restricted
application to
claim her own reduced benefit of $900
•
At age 66 she can amend her claim to begin
receiving 100% of her survivor benefit of
$2000
•
Excess earnings test will apply
www.danmazzola.com
Delay the Greater of the Two
Widow Not Collecting
Own Benefit Higher
Strategy:
•
DELAY the Greater of the Two
•
At age 60 she can file a
restricted
application
and receive a survivor benefit of $1287
•
At age 66 she can amend claim to receive her
own benefit of $2000 or wait until aged 70
and receive $2640
•
Excess earnings test will apply
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Delay the Greater Of The Two
Other Survivor Benefits
•
Child under age 18 or disabled is
entitled to 75% of deceased parent’s
PIA
•
Parent at any age caring for child
under age 16 or disabled is entitled
to 75% of deceased worker’s PIA
Daniel G. Mazzola, CFA,CPA
Other Survivor Benefits
•
Dependent parent aged 62 or
older of deceased worker
-
One surviving parent – 82.5% of PIA
- Two surviving parents –75% of PIA for each
What Bucket to Draw From?
•
John and Jane are in their mid-60s,
newly retired and need cash to
replace wage income. What bucket
should they draw?
•
Individual Retirement Account
•
Brokerage Account
•
Social Securi
ty
Jones: Large IRA Means Large RMD
•
Increases AGI:
-
Push taxpayer into higher bracket
-Increase Medicare premiums
-Increase SS benefits subject to taxation
-Reduces deductibility of medical
expenses
-3.8% Surcharge on net investment
income
$250 K MFJ $200 K single
Roth IRA Conversion
•
Account owner assumes a
current tax obligation for the
control to decide for what
amount and when to make
withdrawals from retirement
accounts
Long Term Cap Gains Rate - MFJ
LT cap gains are separated from ordinary income and taxed separately
MFJ: AGI
of
$24,800 and
LT Cap Gains
of
$80,000 = $0 Taxes
Integration of
Social Security
with other assets
combined with
strategies such as
Roth conversions
can generate a tax
efficient stream of
income that will
span your lifetime
Daniel G. Mazzola, CFA, CPA
American Portfolios Financial Services, Inc.
dgmazzola@americanportfolios.com
danmazzola.com
Massapequa, NY 516 783 9540
References:
•
2019 Social Security & Medicare Facts
published
by the National Underwriter Company of
Erlanger, Kentucky
•
2019 Guide to Social Security and Medicare
published by Mercer Human Resource
Consulting, Inc. of Louisville, Kentucky
•
Social Security and Medicare: A Survey of Benefits
published by Professional Education Services, LP
of Granite Bay, California
•
www.ssa.gov
Official Website of the U.S. Social
Security Administration
www.danmazzola.com
Discover the origins, importance, and future challenges of Social Security, along with strategies for maximizing benefits during retirement. Explore key aspects such as the Pay-As-You-Go system, changing demographics, and the Social Security Trust Fund. Gain insights on drawing from different financial buckets and learn from historical figures like Ida J. Fuller. Dive into the fundamentals of Social Security and its impact on retirement income security.
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Presentation Transcript
Smarter Social Security
Daniel G. Mazzola, CFA, CPA American Portfolios Financial Services, Inc. dgmazzola@americanportfolios.com danmazzola.com Massapequa, NY 516 783 9540
What Bucket to Draw From? John and Jane are in their mid-60s, newly retired and need cash to replace wage income. What bucket should they draw? Individual Retirement Account Brokerage Account Social Security
Origins Otto von Bismarck developed a system of social security for the industrial workers of Germany during the late 19thcentury In the U.S. the Social Security Act was signed into law in 1935, creating a program designed to pay individuals workers age 65 or older a continuing stream of income. www.danmazzola.com
Ida J. Fuller Recognized as first person to collect a monthly social security benefit check. She was born in 1874 and started paying payroll taxes in 1937. Contributed $24.75 during the three years she was enrolled. Retired in 1940 and collected $22,888 until she died in 1975. Daniel G. Mazzola, CFA, CPA
Importance of Social Security In 1935 the poverty rate for seniors exceeded 50%. Today it is less than 10%. SS represents (at least) half of the income for 53% married and 74% unmarried individuals 65 and older www.danmazzola.com
Pay-As-You-Go System Money Comes In Money Goes Out Your payroll tax dollars used to pay benefits for current retirees Benefits of today s workers will be funded by the workers of tomorrow. Daniel G. Mazzola, CFA, CPA
Changing Demographics In 1935 the worker/beneficiary ratio was 160:1. Today it is about 2.8 workers for each beneficiary by 2033, there are projected to be only 2.1 workers for each beneficiary Daniel G. Mazzola, CFA, CPA
Social Security Trust Fund 2033 Trust Fund Reserves projected to be exhausted. Payroll taxes revenues will cover about 79% of currently legislated benefits Tax revenue that supports SS has not fully covered benefits since 2010
Closing the Gap Raise Full Retirement Age Raise Taxable Wage Base ($137,700 in 2020) Raise Payroll Tax Rate currently 6.2% on both employer and employee
Age to Receive Full Benefits (FRA) 1943-54 66 1955 66 + 2 months 1956 66 + 4 months 1957 66 + 6 months 1958 66 + 8 months 1959 66 + 10 months 1960 67 www.danmazzola.com
Claiming Early vs. Later Age 62 75% Age 63 80% Age 64 86 2/3% Age 65 93 1/3% Age 66 100% Age 67 108% Age 68 116% Age 69 124% Age 70 132% A person reaching FRA at age 67 may take reduced benefits at age 62. Reduction is 30% rather than 25%, 25% at 63, 20% at 64 etc.
Is There an Actuary in the House? From an actuarial perspective, it does not matter when you begin collecting if you live to your average life expectancy. Formula has been designed so that person living to this age receives the same total amount regardless of when they start danmazzola.com
Social Security is a Form of Longevity Insurance Longevity is the biggest driver of health care costs By waiting to claim Social Security you buy more longevity insurance: protection against financial challenges of living longer than anticipated. Delaying provides greater income at an advanced age when health care expenses will increase rapidly Daniel G. Mazzola, CFA, CPA
Costs of Healthcare in Retirement 65 year-old couple enrolled in Medicare will pay at least $10,300 this year in premiums and out-of- pocket costs In 20 years those costs are projected to be $33,000 annually According to HealthView Services NY Times 11/3/19
Loss of Benefits Due to Excess Earned Income At FRA no benefits are lost due to employment wages www.danmazzola.com
Excess Earned Income A person under FRA and collecting can lose some or all Social Security benefits by working. This includes spousal and survivor benefits. danmazzola.com
Earned Income Thresholds For wages earned before the year the beneficiary reaches FRA $1 of social security benefits is lost for every $2 over $18,240 $18,240 in 2020
62 year old with $40,000 in wages Wages $40,000 $18,240 $21,760 Divided by 2 $10,880 Threshold Difference Factor
Earned Income Thresholds For wages earned during the year the beneficiary reaches FRA $1 of social security benefits is lost for every $3 over $48,600 $48,600 in 2020
Special Earnings Test for First Year Retirees Annual Threshold Months Monthly Threshold $18,240 Annual earnings limit can be replaced with monthly earnings limit for first year retirees collecting before FRA. Ex: Joe earns $45,000 for the first 10 months of 2015. He turns 62 on October 30th. He then takes a part time job paying $600 per month. Even though his earnings for the year exceed the limit of $18,240, he will receive his full benefit for November and December. 12 $1520
Calculation of Benefits A retirement benefit is based on a worker s highest 35 years of earnings, inflated for economy wide wage growth Formula: 90% of first $885 of earnings 32% between $885 and $5336 15% above $5336 $4000 monthly wages = $1793 benefit Daniel G. Mazzola, CFA, CPA
Reason to Keep Working Each additional year an individual works adds another year of earnings to his record. Person may be able to replace a year of low earnings with another of higher wages. SSA automatically recalculates your benefits each year and will adjust upward if required.
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Reasons to Delay People tend to underestimate their life expectancy. 65 year old has a 1-in-3 chance of living to age 90. As adults live longer, they are more likely to live with multiple chronic conditions and functional limitations, resulting in higher spending on health care needs
Reasons to Delay Survivor benefits reflect delayed credits. Strategy to enhance spousal benefits only functions when spouse is at FRA
How can I obtain the amount of my Social Security benefit? You will receive a statement in the mail indicating your benefits if you are 60 or older, are not receiving benefits and have not registered for an online account. To register for an online account, go to socialsecurity.gov/myaccount.
Can I collect & change my mind? You can file a Request for Withdrawal of Application form with the SSA. If request is granted, you need to re-pay SSA all of the money you and family members have collected base on your work history. You are allowed one withdrawal per lifetime, and it must be done within 12 months of the initial collection. www.danmazzola.com
Is Social Security Taxable? 50% of Benefit Subject to Tax Liability Single $25,000 - $34,000 Over $34,000 MFJ $32,000 - $44,000 Over $44,000 85% of Benefit Subject to Tax Liability Excluded from NYS & NJ taxable income Combined Income: AGI + municipal bond interest + 50% of SS
What is My Break-Even Age? Age at which cumulative higher monthly benefits beginning later would equal the aggregate lower benefits from an earlier claiming date
Breakeven Analysis: $750 per month at 62 vs. $1000 per month at 66 Age 62-65 $36,000 66 $45,000 70 $81,000 74 $117,000 $108,000 78 $153,000 $156,000 Total Total $0 $12,000 $60,000
Break-Even Analysis Comparing 62 vs. 70 it is 80.5 Comparing 66 vs. 70 it is 82.5 Described as an unsound way to decide when to start collecting benefits
Pitfalls of Break-Even Age Analysis : Influences people to claim earlier than they might otherwise More concerned about the potential loss of money by dying early than the risk of outliving retirement savings Minimizes the significance of the risk-free rate of return and survivor benefit to spouse Ignores the importance of delaying as a form of longevity insurance. Insurance is a What If? product and not a break-even product
How Does the Age at Which I Claim Social Security Affect Medicare? If you are already receiving SS when you turn 65, you are automatically enrolled. If you are not, you should sign up to avoid late enrollment penalties and gaps in coverage
Considerations: Part A is free. Part B is not. You should enroll for Part B at 65 unless you or spouse are actively employed for a company with more than 20 employees. Enrolling in A precludes you from contributing to an HSA
Common Misconceptions About Medicare
Part A: In-Patient Hospital Care Per Benefit Period Days 1-60 Days 61-90 Days 91-150 All days after 150 Enrollee Pays $1316 deductible $329 per day $658 per day (60 days lifetime) All costs
Part B: Physician Services Monthly Premiums start at $135. Can go as high as $428 Typically only pays 80% of the cost of Medicare approved- services
Medicare Supplement: MediGap MediGap Plan F: most comprehensive Lowest Monthly Premium for Long Island residents is $279
Part D: Prescription Drugs Deductible may be up to $400 Monthly premiums range from $34 to $76 Donut Hole: enrollee pays for drugs in between $3700 and $4950 thresholds
Medicare Covers Everything
Exclusions: Nursing home care Care received overseas Hearing Aids Dental Care OTC medicines Limited coverage of diagnostic testing
Medicares Top Ten
Medicare Is Not Free Retirees spend an average of $260,000 per couple on health care from age 65 onward 1/3 on Medicare premiums, 2/3 on copays, deductibles and drug costs
Medicare is Not Free Coverage Monthly Premium Co-Pays/Deduct Yes Part AHospital No* Part BDoctors $109** Yes Part D Prescription Drugs $34** Yes *Assumes beneficiary or spouse has 10 years of earnings record **Part B & D premiums increase significantly for taxpayers above $85/170 K threshold
Medicare Does Not Cover Everything Exclusions: Nursing Home Care Custodial Care in own home Medical services abroad Routine vision, dental, hearing and foot care Over-the-counter medicines Diagnostic testing is limited
Medicare Has Defined Enrollment Periods Initial Enrollment 7 months surrounding beneficiary s 65th birthday Special Enrollment allowed at any time but only under defined circumstances. Most common is when beneficiary separates from service from company for which he had health insurance General Enrollment used if beneficiary misses IEP or SEP deadline. Lasts from 1/1 thru 3/31 with coverage beginning 7/1.
Enrollment Periods Open Enrollment allows beneficiary to switch MA plans, convert from MA to Medicare or vice versa, or add/switch Part D. Lasts from 10/15 through 12/7. Disenrollment beneficiary leaves MA to return to Traditional Medicare Lasts from 1/1 through 2/14.
