 Personal Finance PowerPoint Presentation, Social Security, How Much Will You Get? Prepare to get financially fit by practicing personal finance. In prior presentations, we've been focusing in on retirement planning. In prior sections, we've talked about investment goals, strategies, tools, and general. Now we're honing them down on the specific goal of retirement planning. First, recapping, listing out the common sources of income people might have access to in retirement, which include the employer pension plan, which we talked about in prior presentations. We can also include like a 401K plan in that category. Public pension plans, we can include like a 403B in this category as well. Note that the public pension plans, we can also think of as being similar to the employer pension plans, but for workers that work in the public sector, like for the government as opposed to the private sector. I'm also going to be grouping in this public sector the benefit types of income that we might have for government benefits, such as social security. You might also group in here like Medicare and Medicaid, although they're more specific. Social security being the big one, we're going to talk about here. When we're thinking about long-term planning, I always want to note with these kind of programs that we would like to not be dependent upon the government programs. And if we get them great, but the laws could always change, especially if we're further out to when we're actually going to be receiving the benefits. So we'll talk more about that shortly, but keep that in mind. We got the personal retirement plans. These could be things like an IRA, for example, or us saving outside of the government plans that we're going to have control over there. And we might have annuities, which is a specific investment tool that we might use for our retirement time. So we're going to be focusing here in on most of this information coming from investopedia. How much social security will you get? So if we're going to be looking at the social security, the question is, how much are we going to get from it? This is from the investopedia team updated April 26, 2022. When thinking about social security, we're usually focused on one of two sides, either us putting the money into the social security in the form of payroll taxes, generally, or getting the benefits back generally in the retirement years. We're focusing in on the benefits, getting the money back in the retirement years here, although there's going to be some interplay between them because the amount of money we get back will be dependent in part on how much we paid into the system, kind of like a 401k plan, although it's not exactly the same, which we might talk about a bit more in detail shortly. Also, remember, you want to keep in mind whether we're thinking about the social security as a welfare program, a safety net program, a program for people that need the money, or is it kind of like a public retirement program, which everyone has access to. When they first put the social security law in place, which I believe was in like the 1930s, it was more of a welfare type of program for people that lived past their life expectancy, for example, to benefit those people. At this point, we're thinking of it more and more generally as just a program that everybody's going to have access to, kind of like a government benefit program for everybody, and therefore you would think that we should be able to depend on it a little bit more in terms of retirement. However, if you're further away from the retirement years, then I would try to not depend on it as much in your retirement planning. If you get it great, if you don't, then hopefully you have enough money anyways going forward. Part of the reason I say that is because there's issues with basically the funding of the retirement programs. Obviously, these are huge programs and we don't have any control over directly, at least, what happens with the law. So if you're close to retirement, then it's not likely that the law is going to basically yank out social security. But if you're further away from the retirement age, you can imagine them just keeping on increasing the retirement age and so that you're going to reduce the kind of benefits. So you might not be able to depend on it as much if you're further out. Okay, keeping that in mind, how much social security will you get? If you are a typical U.S. worker nearing retirement, you have been shoveling money into the social security system through payroll or self-employment taxes for decades. So it's a fairly large tax and that's why more and more we're thinking of it not as like a safety net program, but more of everybody should get access to it now because it's a significant amount of money you're putting in to the social security. So it's possible that over time, you and your employer together have paid more than $200,000 into the system on your behalf. So if you also figure in the time value of money on these contributions, your total contribution to the system could be twice as much. So now the time is approaching to turn the tables and determine what the Social Security Administration, the SSA, owes you. So now we're in retirement. We've been paying all this money and how much are we going to get back at that point? This is going to be a critical kind of planning question for many people. How to estimate your social security income? Two facts are known. Social security benefits are not guaranteed and some changes will be necessary to keep the system solvent in the future as millions of baby boomers retire and begin to receive their social security benefits. Now, we've been hearing about this for years. If you haven't heard about this, that the Social Security is a huge program, a large amount of spending, and there's going to be at some point in time you would think something hitting the fan that doesn't smell good and they might have to do something like increase the retirement age or something like that. And that's in part because the program is not designed that you're putting money into the program. They're investing it and then giving the money back to you. The money that's going into the program is paying for the current people that are getting the Social Security. So when you have fluctuations in the population, then you can have these situations where you have less workers paying for a large bulk of people that are in retirement, which causes problems on the debt side of things. So, though these facts create uncertainty, it's also true the qualify for your retirement depends on your planning and you must start planning somewhere. A good starting point is to figure out the dollar amount of retirement benefits to which all of your years of Social Security contributions entitle you under current law. There are four ways to do this. Number one, visit a local Social Security office to get a record of your taxed Social Security earnings and an estimate of retirement benefits, though it won't take into account future earnings or other changes that could impact your monthly payouts. So you can get the information in terms of how much of my wages. So remember, when you earn money and you pay into the system, they're going to take a piece of it, a percent. It's more of a flat tax, 6.2%. I believe if you're self-employed, then they double whatever gets a little bit more complicated. But you can get the amount of income that we're subject to the tax because the Social Security administration should have that. Number two, visit the Social Security website and use one of its online benefit calculators to determine your retirement estimate based on your earnings records. So once you have your earnings records in hand, that's going to be one of the major factors involved in determining the benefits that you would get. You can take those records and then use the online calculator on the website to help you to calculate your benefits. Number three, wait until you decide to start receiving benefits and let the SSA calculate the amount for you. However, this doesn't help you plan and though the SSA can usually be counted on to determine benefits accurately, mistakes are sometimes made. So you may want to double check on their calculations if you're waiting for them to do the calculations. And of course, for planning, you need to do the calculations yourself if you're trying to see what's going to happen going forward. Number four, calculate your own benefits using the step-by-step process described in this article. So here we go. When you understand a few basic concepts, it's not that difficult. One advantage of calculating your own benefits is that you can make decisions and consider tradeoffs such as whether you can afford to retire earlier or how much you can increase your benefits by continuing to work. So this becomes more and more of an issue as we get close to retirement question being if I worked more, would that increase the amount of my social security benefits? How can I maximize the amount that I can get and retirement from the social security benefits and so on? Step one, calculate your AIME. One important idea behind social security is that workers can keep earning benefits for every dollar they pay into the retirement system for as long as they keep working. A non-working spouse qualifies for half of the working spouse's benefits so each extra dollar a worker earns can actually be worth 1.5 times the benefit. This idea is embedded in the first step, the calculation of your average index to monthly earnings, the AIME. It begins with a column on your social security statement that shows your taxed social security earnings year by year. So you're going to get your statement and it's going to show you the amount that you were taxed on for social security on a year by year basis. Next, you multiply each year's earnings by a figure based on that year's national average wage index. You got to go to the index, the NAWI. This effectively adjusts past year's contributions for wage inflation. So in other words, when you're looking at your lifespan, you can't say that all the income was the same because clearly there was purchasing power changes. You got to take into consideration inflation when you're trying to figure out how much you should be, you know, receiving time value of money considerations. So making them more comparable to recent years. The Social Security Administration publishes a new table of wage indexing factors each year based on the current NAWI. The table that matters for your benefits calculation is the one published the year you turn 60. Any wages you earn after age 60 can increase your benefits but they are assigned a NAWI table factor of one which means they are not adjusted for future wage inflation. The table below helps to explain the AIME calculation for a worker born in 1956 who plans to retire in 2022 at age 66 and two months their full retirement age. So now you got the full retirement age. That's the thing that might keep on increasing as time goes as they try to realize that they can't afford. We can't afford the benefit program. It assumes the employee has worked from 1982 through 2021. So we got the earnings before and after indexing. So we got the year, the normal earnings from 2009 to 2021 and then we've got the indexing factor. So it's factoring then up. So you can see this is taken into consideration inflation to get the indexed earnings. So the idea being now that we've got the earnings more on a current dollar amount basis. And of course the indexing you can see it's greater than one and then it gets down to one in 2016 here. So the older wages then had, you know, there was more purchasing power so that means in today's dollars it was the 106,800 is 127, 604 would be the general idea. So it can be something more comparable to the 2021 earnings. So the second column shows the workers annual earnings that are subject to social security payroll tax. The third column shows the wage index factor as published in 2021 column four shows annual index earnings the second column times the third column. So notice that the index factor becomes one in 2016 the year in which the worker turns 60 and it remains one without changing for any future years of taxable earnings. So that's what they said when it gets to 60 it stays at the one. So if you plan to continue working after age 60 project the taxable earnings in the second column and use one in the third for all future years. The table above shows only a segment of the workers earnings from 2009 to 2021 out of a work history that spanned 40 years. Now you would expect that the last few years would be your highest earning years unless kind of you tapered off your earning and usually you're trying to pick kind of the highest years are going to be part of the calculation as we'll typically see going forward here. So the social security website has a full table the SSA performs a similar calculation for all past years in which any contributions were paid then the wage of all index earnings from the 35 highest income years. So we've got notice what they have 35 highest income year. So it's a pretty large number of years. Right if you work the 35 years of the you know I think I believe at one point it was less they were choosing like the highest 10 years or something like that but the high 35 highest income years from the fourth column above is factored into the calculation. So to do this add up the highest 35 years and divide by 35 or to get monthly amounts take the sum and divide by 420 35 years times 12 to arrive at your AIME and this case the previous 35 top earnings years add up to so we're going to take the 35 years. This could be used in Excel. You might want to punch this in Excel if you have that and that's going to add up to 4,259,563. So the AIME is calculated to be 10,141. Step two bend your benefits. Next step is to convert your AIME into a primary insurance amount the PIA by running it through a calculation called Bend Points. So quote social security is designed as a progressive social insurance system. So that means it's going to be benefiting people more on the lower income side of things. So remember this is kind of the idea of is it a benefit program or a welfare is it for everybody or is it a welfare program? Is it like a like a retirement program? It's kind of more like a retirement program but it's still bent towards the people that are on the lower earnings side of things. So it's kind of both at this point in time. So which means it replaces a greater portion of average monthly pay for low income workers than it does for high income workers. So the Bend Points implement this skew relative to each workers AIME. So there are two so that means that as your income goes up as you have higher earnings that means of course you paid a lot more into the system but you're going to get lesser of a benefit as your income went up even though you've paid the same rate into the system of the 6.2% generally. In any case, there are two Bend Points and both are adjusted for inflation each year. The relevant Bend Points for each worker are those published in the year the worker first became eligible for benefits age 62. The Bend Points are published each year by the Social Security Administration and calculating the PIA the SSA has established fixed percentages as multipliers 90%, 32% and 15% which are applied to the individuals AIME. So primary insurance amount calculation for 2022 the SSA established the first Bend Point at $1,024 and the second Bend Point at $6,172 using the AIME from the earlier example of $10,141 and the Bend Points we can calculate the primary insurance amount the PIA below are the steps to calculate the PIA multiply the first $1,024 of the person's AIME by 90% so now we've got this kind of this is reminiscent of our progressive tax system right where we got these percents we're going to have to apply to the different levels so we got the $1,024 times the 90% $921.60 and subtract the first and second Bend Points and multiply the difference by 32%. So now we're going from the second level up now so we got the $6,172 minus the $1,024 to get to that second level which is at the $5,148 which is still below our total of $10,141 and we're going to take that and multiply it times .32 to get the $164,735 and then subtract the second Bend Point amount from the total AIME so all the rest is in the last Bend Point so now you're going to take the total that we had which was the $10,141 minus that last tier which was at the $6,172 that gives you the $3,969 multiply it times the 15% which is that last level of the kind of progressive structure here and that gives us the $5,9535. Please note that the calculation results are required to be rounded down to the next lower multiple of $0.10. The PIA is the sum of the three calculation results so now you've got these results the $921.60 the $1,647.35 and the $5,9535 which gives you the $3,164.30 so the multiples 90%, 32%, 15% are set by law and do not change annually. The Bend Points are inflation indexed but only through age 62. PIA is effectively locked in at age 62. Number three, adjustments to PIA. In our example above the workers benefits were based on 2022 figures but usually the SSA adjust the level of benefits based on the pace of raising prices in the economy called inflation. So the adjustment is called a cost of living adjustment which is a COLA that you can say for short for example social security and supplemental security income SSI beneficiaries will receive a 5.9% COLA in 2022 while the COLA was 1.3 for 2021.6% for 2019 and it's a lot larger now because we're experiencing inflation prices are going up and therefore they have to apply a larger adjustment. PIA determines the monthly social security benefits that will be received in the first year of benefits by a worker who starts benefits at their full retirement age FRA which is 66 for individuals born between 1943 and 1954 increases by two months each year for those born after 1954 and reaches 67 for those born in 1960 and thereafter. A spouse who qualifies for benefits on a worker's record will receive half of the workers PIA assuming they start benefits after FRA. So benefit reduction if taken before full retirement age. So now you're gonna say, well, what if I go with the early benefits. When calculate benefits for early retirement there are one or two calculations depending on how early benefits are taken assuming a normal retirement age of 67 the age of 62 is the earliest year a person can receive benefits or 60 months early. So now we're gonna say now we're gonna knock it to full retirement we'll try to take it early and so that's gonna be a different calculation the benefit is reduced by five nines five over nine of 1% five nines of 1% for each month before the normal retirement age 67 up to 36 months. So if the number of months exceeds 36 then the benefit is further reduced to five twelfths of 1% of 1% per month. So for example, let's say the person wants to retire at age 62 leading to a six month reduction from the normal retirement age of 67. So that we're gonna retire in 67 they want to retire as they want as soon as possible 62 the first 36 months would be calculated as 36 months times five nines of 1% plus 24 months times five twelfths of 1% so the first 36 months five over nine is 0.555 times 1% which is gonna be 0.00555 times 36 months that gives you the point one nine nine or about 20% and then remaining 24 months five divided by 12 gives you the point 4166 times 1% it gives you the point 0041666 times 24 months gives you the point oh nine nine nine or about moving the decimal over a rounding about 10%. So in other words benefits would be reduced by 30% which would be the 20% plus the 10% if taken at age 62. Four ways benefit can be increased or decreased there are four ways the starting benefit can be permanently increased or reduced from the PIA calculated at age 62 starting benefits early benefits may begin as soon as age 62 but they are permanently reduced for every month between the onset of benefits and FRA. So there's obviously a cost to getting the benefits early we might dive into the decision making process in a future presentation on that question a bit more later but you can see the calculation here which can help you with that decision process. So dealing benefits beyond full retirement age delayed retirement credits can permanently increase benefits and they are awarded for every month between FRA and later onset of benefit starting early and continuing to work. So what if you start the benefits early but you keep working so if you start benefits before your FRA full retirement age and keep working that means you're earning wages and now you're gaining benefits as well the SSA may deduct part of your benefits that exceeds a threshold. However, any such deductions are not permanent when you reach your FRA full retirement age the SSA Social Security Administration recalculates your benefits and credits back any any deductions continuing to work period. So even if you don't start benefits early you can increase your benefits by continuing to work up to any age. So any year in which your indexed earnings are higher than one of your 35 previous highest years will boost your benefits. So if you're getting close to retirement you might want to look at your social security wages that you've earned and try to index them and say okay what's my highest third do I have a high 35 years of benefits and then the question would be well if I work another year am I earning enough that it would actually increase I would have one of my 35 top years it would top one of my 35 top years and therefore possibly increase my benefits and that would be the question. However, after age 60 you will not you will not receive wage indexing and after age 62 you will not receive bend point inflation indexing. So all four points are related to your starting social security benefits. Keep in mind that when your benefits start the COLA that's the inflation kind of factor will increase them annually. So once you start getting benefits then they should be increased in accordance with the inflation index to keep up with the purchasing power of the dollar. So if you start benefits at age 66 your PIA determined at age 62 automatically increases with the applicable COLA's from years in which you turn 63 through 66. How to calculate social security benefits in Excel if you are in your late 50s and approaching retirement you can create a useful model of your future benefits. It works best to do this in a Microsoft Excel spreadsheet as follows. So be good to do these calculations using Excel clearly. Using a recent social security statement list a spreadsheet column A your social security earnings. So you can get your benefits from the Social Security Administration your earnings that were subject to taxes list them out in a column in Excel list them column B the most recently published in a WI adjustment factors year by year. So then you can have these adjustment factors that you're going to multiply them by so that you can try to even out those earnings to you know present dollar multiply columns one or A by B so you can multiply them out to get the to get the totals identify in column D the 35 highest values in column C so then you can kind of sort the columns by your highest values and find your 35 highest values which which are going to be used to calculate your your your social security add these together and divide the sum by 420 so seeing as there are 420 months in 35 years this will approximate your your A I M E so use the most recently published to bend points to convert your A I M E into a P I A so then you got used to bend points you also can fill in hypothetical values for estimated taxable social security earnings in future years so once you have that done if you're further out from retirement then you can say well what if I worked a few more years and you can run projections in your excel sheet maybe we'll try to put a mock schedule together here in any case until you plan to stop working to be conservative I use a in a WI adjustment factor of one in column B meaning let's not adjust it higher for inflation we'll just keep it at one which will be the low ball calculation on the conservative side of things and a financial advisor who fully understands this process can help verify your calculations advise you on which to start social security benefits and estimate the future benefits you can expect to receive what's the bottom line understanding this benefits calculation process may allow you to have increased confidence that your benefits are fairly secure regardless of any future actions taken by congress to deal with social security shortfalls so clearly again the loss could change going forward because some you know it's it's a lot of money the ssa has invested vast sources in the record system and software required to perform these calculations for millions of americans as you can see minimum benefits become locked in based on calculations made between the ages of sixty and sixty two when you move into that age range you may be less vulnerable to any changes made to the system in the future meaning if you're closer to retirement it's less likely they're going to pull the rug out from under you if you're further away from retirement it's more likely that the rug will be worn uh... quite thin but but but but but but but you get there but in case that there it is