Understanding Retirement Income Sources and Social Security Benefits

Your Retirement Income Where will your money come from after you retire, and will you have enough to live the way you want to? Pensions & retirement plans Social Security Income from assets Income from earnings other

How much money does it take to retire? Many financial advisors recommend saving to replace 80% of your pre-retirement annual income to maintain your standard of living. Average income replacement need 80% 80%

Because Social Security alone isnt enough Social Security only covers so much. It can help with your everyday living costs, but it likely won t get you to the retirement you have in mind. 30% to 50% 80% What Social Security is designed to replace Average income replacement need

Social Security: What Is It? Social Security is a social welfare and insurance program created and managed by the U.S. Government. Pays benefits to retirees, the disabled, and survivors of deceased workers. A system funded through payroll tax, that is eventually paid out once you reach retirement age.

How Does It Work? A payroll tax is levied against your earnings. You become eligible to receive benefits after working 40 quarters earning at least $1,640 per quarter for 2023. Your Social Security payout is based on the 35 years you earn the highest income. Source: https://www.ssa.gov/OACT/COLA/QC.html

Monthly Social Security benefits examples Average $105,000 $142,800+ $65,000 $85,000 $25,000 $45,000 annual salary SAMPLE MONTHLY BENEFIT AT FULL RETIREMENT AGE $3042 $3429 $2,245 $2682 $1269 $1740 Like most people, you re probably thinking I m going to need more than that FOR ILLUSTRATIVE PURPOSES ONLY. Not intended to be investment fiduciary, financial, legal or tax advice. Source: 2023 Guide to Social Security Assumptions: This table assumes the projections are based on a person at age 50 in 2024, worked steadily since age 22, and received average pay raises. Wages and salaries will remain constant until retirement.

Collecting Benefits While still Working If you collect before your full retirement age, you can earn up to $22,320 in 2024 without any impact on your benefit. If you are under full retirement age for the entire year, SSA deducts $1 from your benefit payments for every $2 you earn above the annual limit. For 2024, that limit is $22,320. In the year you reach full retirement age, we deduct $1 in benefits for every $3 you earn above a different limit. In 2024, this limit on your earnings is $59,520. We only count your earnings up to the month before you reach your full retirement age, not your earnings for the entire year. For illustrative purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Source: https://www.ssa.gov/planners/retire/whileworking.html

Reduced Benefits ( Cont) When you reach full retirement age + Beginning with the month you reach full retirement age, your earnings no longer reduce your benefits, no matter how much you earn. + The IRS will recalculate your benefit amount to give you credit for the months they reduced or withheld benefits due to your excess earnings. + Social Security will only count your earnings up to the month before you reach your full retirement age, not your earnings for the entire year.

Social Security Taxation 1 2 Filing as an individual: Between $25,000 and $34,000 you may have to pay tax on up to 50% of your benefit. More than $34,000 and up to 85% of your benefit is taxable. Filing a joint return: Between $32,000 and $44,000 you may have to pay taxes on up to 50% of your benefit. $44,000 and above, up to 85% of your benefits are taxable. For illustrative purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Source: https://www.ssa.gov/planners/taxes.html

What if I take Benefits Early? If you choose to take your own (not your spouse's) Social Security benefit before your full retirement age (FRA), be aware that the benefit is permanently reduced by five-ninths of 1% for each month. If you start >36 months before your FRA, the worker benefit is further reduced by five-twelfths of 1% per month for the rest of retirement. Ex: Assume you stop working at age 62. If your FRA is 67 and you elect to start benefits at age 62, the reduced benefit calculation is based on 60 months. So, the reduction for the first 36 months is 20% (five-ninths of 1% times 36) and then another 10% (five-twelfths of 1% times 24) for the remaining 24 months. Overall, your benefits would be permanently reduced by 30%. Source: SSA.gov 1. Represents Full Retirement Age (FRA) based on DOB January 2, 1960 2. PIA = The Primary Insurance amount is the basis for benefits that are paid to an individual

What if I delay taking my benefits? If you retire sometime between your full retirement age and age 70, you typically earn a "delayed retirement" credit (DRC) for your own benefits (but not spousal benefits). Ex: say you were born in 1960, and your FRA is 67. If you start your benefits at age 69, you would receive a credit of 8% per year multiplied by two (the number of years you waited). This means your benefit would be 16% higher than the amount you would have received at age 67. (This doesn't include any potential additional cost of living adjustments for inflation from age 67 to 69.) Source: SSA.gov 1. Represents Full Retirement Age (FRA) based on DOB January 2, 1960 2. PIA = The Primary Insurance amount is the basis for benefits that are paid to an individual

When to Take Social Security? Average annual salary $45,000 (Not including your spouse's or ex-spouse's benefits. Your benefit could be higher if you are eligible for a spousal benefit, which is 50% of your spouse s benefit.) For illustrative purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. DOB in example is 1/1/1961 Source: https://www.aarp.org/work/social-security/social-security-benefits-calculator.html

When to Take Social Security? Average annual salary $80,000 (Not including your spouse's or ex-spouse's benefits. Your benefit could be higher if you are eligible for a spousal benefit, which is 50% of your spouse s benefit.) For illustrative purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. DOB in example is 1/1/1961 Source: https://www.aarp.org/work/social-security/social-security-benefits-calculator.html

How should I decide when to take benefits? Consider the Following Factors As You Decide When to Take Social Security. Your Cash Needs If you're contemplating early retirement and you have sufficient resources (an investment portfolio, a traditional pension, and other sources of income), you can be flexible about when to take Social Security benefits. If you'll need your Social Security benefits to make ends meet, you may have fewer options. If possible, you may want to consider postponing retirement or working part-time until you reach your full retirement age or even longer so that you can maximize your benefits. Your Life Expectancy If you think you'll beat the average life expectancy, then waiting for a larger monthly check might be a good deal. On the other hand, if you're in poor health or have reason to believe you won't beat the average life expectancy, you might decide to take what you can while you can.

How should I decide when to take benefits? (Continued) Your marital status If you're married, start by taking your spouse's age, health, and benefits into account, particularly if they are the higher-earning spouse. Ex: At full retirement age, you can take either 100% of your own retirement benefits or 50% of your spouse's, whichever is higher. If you are divorced and you were married for 10 years or more, you can receive benefits based on your ex-spouse's Social Security record (up to 50% of their full retirement benefits). Take note that if your ex-spouse uses your record, this won't impact your or your current spouse's benefits. If you're widowed, you can receive either your own retirement benefits or up to 100% of your spouse's benefits, whichever is higher. It's important to make the most effective use of the combination of a worker, spousal, and survivor benefit, working with a financial planner if possible.

How should I decide when to take benefits? (Continued) (Continued) Your employment status + Earning a wage (or even self-employment income) can reduce your benefit temporarily if you take Social Security early. If you're still working and you haven't reached your full retirement age, $1 in benefits will be deducted for every $2 you earn above the annual limit ($22,320 in 2024). + In the year you reach your full retirement age, the reduction falls to $1 in benefits for every $3 you earn above a higher limit ($59,520 in 2024). However, starting the month you hit your full retirement age, your benefits are no longer reduced no matter how much you earn. + Again, any reduction in benefits due to the earnings test is only temporary. You receive the money back in the form of a recalculated higher benefit beginning at full retirement age, so don't use the reduction as the sole reason to cut back on working or worry about earning too much.

Consider taking benefits earlier if . . . + You are no longer working and can't make ends meet without your benefits. + You are in poor health and don't expect the surviving member of the household to make it to average life expectancy. + You are the lower-earning spouse, and your higher- earning spouse can wait to file for a higher benefit. TO WAIT OR NOT TO WAIT? Consider waiting to take benefits if . . . + You are still working and make enough to impact the taxability of your benefits. (At least wait until your normal retirement age so benefits aren't further reduced due to earnings.) + Either you or your spouse are in good health and expect to exceed average life expectancy. + You are the higher-earning spouse and want to be sure your surviving spouse receives the highest possible benefit. + Large Age Gap between Spouses

Social Security Strategies No. 1: Maximize lifetime benefits + How it works: The basic principle is that the longer you defer your benefits, the larger the monthly benefits grow. Each year you delay Social Security from age 62 to 70 could increase your benefit by up to 8%. + Who it may benefit: This strategy works best for couples with normal to high life expectancies with similar earnings, who are planning to work until age 70 or have sufficient savings to provide any needed income during the deferral period. + Example: Willard's life expectancy is 88, and his income is $75,000. Helena's life expectancy is 90, and her income is $70,000. They enjoy working. + Suppose Willard and Helena both claim at age 62. As a couple, they would receive a lifetime benefit of $1,100,000. But if they live to be ages 88 and 90, respectively, deferring to age 70 would mean about $250,000 in additional benefits. For illustrative purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Source: https://www.fidelity.com/viewpoints/retirement/social-security-tips-for-couples

Social Security Strategies No. 2: Claim early due to health concerns + How it works: Benefits are available at age 62, and full retirement age (FRA) is based on your birth year. + Who it may benefit: Couples planning on a shorter retirement period may consider claiming earlier. Generally, one member of a couple would need to live into their late 80s for the increased benefits from deferral to offset the benefits sacrificed from age 62 to 70. While a couple at age 65 can expect one spouse to live to be 85, on average, couples who cannot afford to wait or who have reasons to plan for a shorter retirement, may want to claim early. + Example: Carter is age 64 and expects to live to 78. He earns $70,000 per year. Caroline is 62 and expects to live until age 76. She earns $80,000 a year. + By claiming at their current age, Carter and Caroline are able to maximize their lifetime benefits. Compared with deferring until age 70, taking benefits at their current age, respectively, would yield an additional $113,000 in benefits an increase of nearly 22%. For illustrative purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Source: https://www.fidelity.com/viewpoints/retirement/social-security-tips-for-couples

Social Security Strategies No. 3: Maximize the survivor benefit + How it works: When you die, your spouse is eligible to receive your monthly Social Security payment as a survivor benefit, if it's higher than their own monthly amount. But if you start taking Social Security before your full retirement age (FRA), you are permanently limiting your partner's survivor benefits. Many people overlook this when they decide to start collecting Social Security at age 62. If you delay your claim until your full retirement age which ranges from 66 to 67, depending on when you were born or even longer, until you are age 70, your monthly benefit will grow and, in turn, so will your surviving spouse's benefit after your death. + Who it may benefit: This strategy is most useful if your monthly Social Security benefit is higher than your spouse's, and if your spouse is in good health and expects to outlive you. For illustrative purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Source: https://www.fidelity.com/viewpoints/retirement/social-security-tips-for-couples

Social Security Strategies No. 3: Maximize the survivor benefit (CONT) + Example: Consider a hypothetical couple who are both about to turn age 62. Aaron is eligible to receive $2,000 a month from Social Security when he reaches his FRA of 66 years and 6 months. He believes he has average longevity for a man his age, which means he could live to age 85. His wife, Elaine, will get $1,000 at her FRA of 66 years and 6 months and, based on her health and family history, anticipates living to an above-average age of 94. The couple was planning to claim at 62, when he would get $1,450 a month, and she would get $725 from Social Security. Because they re claiming early, their monthly benefits are 27.5% lower than they would be at their FRA. Aaron also realizes taking payments at age 62 would reduce his wife's benefits during the 9 years they expect her to outlive him. + If Aaron waits until he's 66 years and 6 months to collect benefits, he'll get $2,000 a month. If he delays his claim until age 70, his benefit and his wife's survivor benefit will increase another 28%, to $2,560 a month. (Note: Social Security payout figures are in today s dollars and before tax; the actual benefit would be adjusted for inflation and possibly subject to income tax.) + Waiting until age 70 will not only boost his own future cumulative benefits, it will also have a significant effect on his wife's benefits. In this hypothetical example, her lifetime Social Security benefits would rise by about $69,000, or 16%. For illustrative purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Source: https://www.fidelity.com/viewpoints/retirement/social-security-tips-for-couples

Social Security Strategies FOR THOSE 70 and OLDER File a Restricted Application + If you were born before January 1, 1954 and are currently married, or divorced and eligible for a benefit on an ex-spouse s record at full retirement age you may use a restricted application to claim a spousal benefit while letting your own benefit continue to grow. You could then switch to your own higher benefit at age 70. Key Points + A spouse must be at full retirement age and be born before the date 1/1/1954 to file a restricted application and must not have begun already receiving their benefits. + A widow/widower, or survivor of a deceased ex-spouse, may file a restricted application regardless of age and when they were born. + A claimant caring for a child under 16 or disabled adult child who is entitled to child s benefits may have the option to file a restricted benefit as well. + Consult an attorney to review if these options apply to you. For illustrative purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Source: https://www.thebalance.com/social-security-rules-for-restricted-applications-2388915

Will it Be Around for Me? Due to changes to Social Security enacted in 1983, benefits are now expected to be payable in full on a timely basis until 2041 +/-. At that time, trust reserves will be exhausted. Once reserves are used up, continuing taxes are expected to be enough to pay 76% of benefits. To be fully funded at that time, there will need to be an immediate reduction of benefits by 13%, raise the combined payroll tax from 12.4% to 14.4%, or a combination of the two. At that time, the shortfall is expected to remain stable due to a drop of birth rates from three to two children per woman. This is according to the Chief Actuary of the Social Security Administration. Source: https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html

Conclusion + Take time to understand your cash flow to see when taking Social Security makes the most sense for your income goals. + Contact MCF to review your path to retirement to ensure you are utilizing all available resources. + Maximize your benefit to best suit your particular needs. Know when the best time to start your Social Security.

Questions? Hunter Nighbert Financial Advisor hnighbert@mcfadvisors.com 859-967-0990 https://calendly.com/hnighbert https://calendly.com/hnighbert www.mcfadvisors.com/pre-retiree-academy www.mcfadvisors.com/pre-retiree-academy

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