Berks Barrister Fall 2018 - 10
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Out-Of-The-Box Thinking for
S oci a l S e cu r i ty
By Paul Marrella, J.D., CFP®, CLTC, RICP®
etting a handle on retirement income planning is a
challenge for everyone, especially attorneys. Attorneys
tend to be busy solving clients' problems, meaning their
planning gets placed on the back burner. Since very few attorneys
have defined benefit pension plans (although their spouses may),
you will need a basic understanding of the tools available to fund
This article will provide an overview of the Social Security
("SS") rules and how they may apply to you (or one of your
clients). Since SS benefits will probably not be enough to fund
your retirement, a brief discussion of retirement income is also
included. The article ends with some thoughts on withdrawing
assets from retirement plans.
As you read, consider what you can do better for yourself.
Planning should start long before retirement; in fact, the best
time to start is with your first paycheck. If that did not happen,
hopefully, you will have more motivation after reading further.
The more knowledge you attain, the better questions you will
ask yourself and your professional advisors.
SS is a retirement program designed to provide "security" to
maintain a minimal standard of living. It was not designed to
be your sole source of retirement income, yet it plays a large role
nationally. According to the Social Security Administration's Fast
Facts & Figures About Social Security 2017, 33% of Americans'
retirement income comes from SS. 34% comes from earnings,
while only 9% comes from "asset income." Government pensions
comprise 8%, private pensions 12%, and 4% is "other."
Based on the figures above, Social Security's importance is real.
Remember, it is an inflation-adjusted annuity that pays you for
life. Planning how to best utilize it, however, is quite complicated.
Understanding the rules (and asking the right questions) may
benefit you and your family's long-term planning.
"When Should I Take It?"
Probably the most asked question is when to collect your SS
benefits. Most people prefer to collect at the earliest point, age 62,
which may not be the best option. If you are married, SS planning
should be coordinated with your spouse to help maximize your
lifetime benefits, especially if you plan to live a long time. If you
are widowed or divorced, special rules may also apply.
To simplify this discussion, we will consider three ages: 62, 66,
& 70 (Note: these ages will increase in the future). Age 66 is what
SS calls Full Retirement Age ("FRA"). FRA is the baseline age
used to calculate how benefits are calculated. If you take SS before
that time (called drawing "early"), you receive a lifetime reduction
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in your benefits. If you take Social Security later than FRA (called
"deferred"), your payments will permanently increase.
The general rule is the longer you live, the better it is to defer
your SS benefits. Similarly, if you plan to pass earlier, you should
collect at age 62. The problem for the aspiring retiree is that you
have no idea how long you will live. Some commentators suggest
you look at factors such as heredity, which may not be accurate.
What may be more helpful is to consider the factors affecting
retirement income planning. The most impactful is probably
longevity. For most of our clients, financial concerns do not arise if
husband and wife only live to age 72 - they typically have enough
money. A much greater challenge is affording to live to age 95 or
100. Keep this in mind as you read on.
Next, we will look at the mathematics of SS, then ways to
consider how they fit into your situation.
How is SS Calculated?
Early Retirement Reduction: The benefit reduction
calculations are updated each month, rather than by quarter or
year. For each month prior to FRA (Full Retirement Age), your
benefits are reduced by:
-- The First 36 Months: 5/9% per month, up to 36 months;
-- Months 37 and Beyond: 5/12% for months 37 and beyond.
Suppose your SS Benefit at FRA is $2,000 per month. If you
decide to take SS at 62, your reduced benefit is $1,500 per month
($2,000 less 25%). The percentage benefit reduction is:
1st 36 Months - 5/9% x 36 = 20%
Next 12 Months - 5/12% x 12 = 5%
20% + 5% = 25% Reduction
If you collect SS at 63, your reduction would be 20%
(5/9% x 36 equal 20%).
At FRA 66, you will receive 100% of your benefit,
so you would collect the full $2,000.
Deferred Retirement Credits: For each month you defer benefits
you receive an additional, permanent 2/3% per month (8% per
year) benefit. This would total $2,640 per month.
Fig. 1 - Changes in SS Benefits Based on Starting Age
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