Last update on November 6, 2013
The Income Discovery tool allows you to seamlessly blend decisions regarding the timing and method of Social Security benefit claims into an income strategy.
Before proceeding, here is a brief explanation of the basic rules regarding Social Security claim age: the investor's date of birth determines their Full Retirement Age (FRA) and the corresponding benefit amount. Benefits claimed prior to the FRA are penalized and reduced. The reduction is dependent upon number of years prior to the FRA that the benefit is being taken and the benefit type - own earnings, spousal benefit or survivor benefit. Benefits based on own earnings can be deferred until 70 years of age, which increases the benefit amount. This increase is not offered with spousal benefits, however.
The Social Security tab, within the Income Strategies pane, is where you configure the claim strategy you wish to incorporate into your clients' retirement income plans. The screenshot below highlights where the Social Security tab is located within the tool:
The Social Security tab allows you to configure multiple claim strategies and then use any one of them while analyzing a custom plan or optimize across all the strategies using one click. We will now explain how to configure data within the tab, compare multiple claim strategies and determine an optimized claim strategy.
The tool allows you to create three independent SS claim strategies, which are listed in the leftmost column of the Social Security tab under Strategy Names. In an upcoming upgrade to the tool, one-click configuration will be available to create multiple rows under each strategy, but currently you must create each strategy by entering individual rows. It is not necessary to create all three strategies; you create only as much as you like. In case of clients who are over 70 years old and are receiving their benefits, only one strategy configuration would be relevant.
You may edit the strategy names by clicking on the or double clicking the specific name. The benefit data for each strategy is configured separately. Each row represents a family member and their claim method. You may add new rows by clicking on the .
-Beneficiary's Name: The family member whose Social Security benefits you are modeling.
-Benefit Type: This can be Own, Only Spousal, Own + Supplemental Spousal or Survivor. The tool differentiates between Only Spousal, the spousal benefit one can claim at or after one's FRA, while deferring one's Own earning based benefit until 70 years of age, and supplemental spousal, the benefit one collects as a spouse, over-and-above one's own earnings based benefit. The reason for differentiating them is that Social Security Administration (SSA) tracks each component separately and applies different reduction formulas to each component.
We further explain this with an example. Under Social Security rules, if a person is entitled to spousal benefits and unless she files a restricted application, she is given Own + Supplemental Spousal. For example, if wife's Primary Insurance Amount (PIA), her own benefit at FRA, was $1000 and her husband's PIA was $2500, then if she claims at her FRA and provided her husband was already claiming his own benefit at that time, she receives $1000 of her own benefit and $250 as supplemental spousal benefit. We commonly call $1250, half of her husband's PIA, as a spousal benefit, but in true technical nature of how Social Security benefit is calculated, it is a mix of own benefit and supplemental spousal benefit. Separation of these components is done, because different reduction formulas apply to each component, if the wife claims the benefit before her FRA.
If the wife had deferred her own earnings based benefit and filed a restricted application for Only Spousal benefit, she would receive the full $1250 as a spousal benefit. In this example, if she claimed her own earnings at 70 years of age and her own benefit has increased by 32% (assuming she was born in 1948) to $1320, then her supplemental spousal benefit is nil, because her own earnings based benefit are now higher than her base spousal benefit of $1250.
-Monthly Benefit, $: The SS benefit amount is always entered in today's dollars as the gross amount, NOT net of taxes or Medicare premiums (which are modeled as part of retirement income need). This contrasts with the SSA which pays out benefits net of the Medicare premium. The SSA communicates the benefits, including future year benefit estimates, in today's dollars. The SSA will automatically adjust the nominal dollar amount of the benefit by the cumulative cost-of-living-adjustment until the benefit year commences and the tool will also reflect this adjustment.
The entered benefit amount corresponds to a specific start age under a specific claim method. A different claim method or age would imply a different amount, so please enter the data carefully.
-Benefit Start Age: You may choose a specific age for your client to begin receiving benefits by double clicking on the row of data you wish to configure. A dropdown menu will appear ranging from 60 years of age (earliest claim age in some unique situations) to 100. You may also select if your client is already receiving their benefit and if you would like the benefit claim to begin upon the spouse passing.
-Benefit End Age: Configuring this data follows the same method as entering your client's benefit start age. You may set an age at which the claim will end or if it is a lifetime benefit, as well as if you would like the benefit to end upon the passing of the spouse.
Once all of the data is configured across each of the three strategies, you can then click between them to see the full claim strategy.
Determine an Optimal Income Strategy and Corresponding Claim Strategy
The tool allows you to determine which of the three Social Security claim strategies is optimal for your clients' retirement income plans, when paired with investment, annuities and bond ladder decisions. Simply click on the button to launch the optimization popup window. Then, choose the strategies that you wish the tool to consider when conducting the optimization analysis. See Optimization article for further details.
Taxation of Social Security Benefits
The taxable portion of Social Security benefits are determined based upon the guidance provided in IRS Publication 915.
Survivor Benefit Modeling
To model the case of when one spouse dies and the surviving spouse converts to a survivor benefit, configure the survivor benefit to begin upon another family member's passing. The specific steps for entering benefit beginning and ending ages are explained above.
When you try to analyze an income plan, the software checks that there are no overlapping periods of claim by the same member (a member can't claim the benefit under two different methods at the same time) and asks you to correct any overlaps.
Benefit of Deferring SS Claim Age
As described in the introduction above, retirees can benefit greatly from deferring their social security claim age. The Income Discovery tool provides options for how to compensate for the income gap resulting from the deferred social security benefit using products such as bond ladders or period certain annuities. Please view the corresponding Knowledge Base articles on these topics to learn more about those specific features the tool provides.