Retirement Planning and Employee Benefits for Financial Planners
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Transcript of Retirement Planning and Employee Benefits for Financial Planners
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Retirement Planning and Employee Benefits for Financial Planners
Chapter 11: Social Security
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Benefits Available Retirement Benefits Disability Benefits Family Benefits Survivors’ Benefits Medicare Supplemental Social Security
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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
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Social Security
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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)
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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 $110,100 of compensation (OASDI) 4.2% in 2012
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
OASI Trust Fund 5.30% up to $110,100 (2012)DI Trust 0.9% up to $110,100 (2012)HI Trust 1.45% (all compensation)SMI Trust Funded by general tax revenue
8 Qualifying for Social Security Benefits
Fully Insured 40 quarters of coverage
A quarter of coverage = $1,120 for 2012 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
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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
12Calculating 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
13Calculating 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 $767 (2012) 32% of the AIME over $767 and less than $4,624
(2012) 15% of the AIME that exceeds $4,624 (2012)
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
14Calculating the Retirement Benefit (3 of 3)
Worker would receive PIA. Maximum PIA = $2,461 (2012) 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%
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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
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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 strategy
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
18Retirement 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
19Retirement Earnings Limitations Test (2 of 2)
Before normal retirement age and collecting Social Security: $1 reduction for every $2 of earnings above
$14,640 for 2012 if don’t reach full retirement age in 2012
$1 reduction for every $2 of earnings above $38,880 for 2012 if do reach full retirement age in 2012
Don’t take Social Security early if plan to continue to work
After attaining normal retirement age, $0 reduction.
20Taxation 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
MFJ Single1st Hurdle $32,000 $25,0002nd Hurdle $44,000 $34,000
21Taxation 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]
22Taxation 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
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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.
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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
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Under 18 Under age 19 and in high school Age 18 or older and disabled before age 22
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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
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Death Benefit One-time $255 death benefit
payment Paid to deceased worker’s surviving
spouse, or minor child (if no spouse).
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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.
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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
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Medicare
30 Hospital Insurance – Medicare Part A Covers
Hospital Coverage, and Skilled Nursing Care
Deductible for inpatient hospital care: $1,156 deductible per illness for 2012
for the first 60 days $289 for 2012 per day for days 61-90, and $578 for 2012 per day for days in excess of 90.
Skilled nursing care deductible $145 for 2012 per day for 21st day to 100th day.
Coinsurance based on benefit period
31Medical Insurance – Medicare Part B Individuals pay monthly premium.
Increases based on AGI $100/mo if AGI < $170,000; $320/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
$140 annual deductible in 2012.
32Prescription 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.
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Supplemental Security Income Monthly payments to individuals with
low income and few assets: 65 and older Disabled Blind
Single: $698 per month for 2012. Married: $1,048 per month for 2012.
34Effect 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