Social Security claiming decisions have benefitted greatly from such programs.
The latest innovation from Impact Technologies Group, creator of Social Security Pro, is called Cash Flow Decisions. It considers not just which claiming strategies will maximize Social Security benefits over a client's lifetime, but takes into account how clients' other income and assets could affect how much of their Social Security benefits are taxed.
The higher the tax bill, the less cash is available to spend in retirement.
Think of this latest iteration as the next step beyond Social Security maximization. The focus now shifts to how to optimize a client's total retirement income in a way that will allow them to keep more after-tax money in their pockets.
Depending on a client's income, up to 85% of Social Security benefits may be taxed at ordinary income tax rates. But the percentage of benefits taxed is seldom a fixed amount as a result of annual changes in capital gains, required minimum distributions from qualified retirement plans starting at age 701/2, and fluctuations in income and the value of other assets from year to year. Therefore, the percentage of Social Security benefits subject to income taxes needs to be calculated annually.
“We spent the last year engineering a way to produce Social Security filing recommendations that consider clients' income and other assets and how everything fits together to produce their retirement income,” said Shelley Walsh, director of corporate sales for Impact Technologies in Charlotte, N.C. “When we were finished, we were shocked to see how the percent of Social Security benefits subject to tax fluctuates over the years.”
CASE STUDY
To demonstrate, Ms. Walsh showed me a case study of Joe, 62, with a Social Security benefit of $2,045 per month at his full retirement age of 66, and his wife Joan, 61, with a full retirement age benefit of $2,084 per month.
The couple decides to retire the same year, when Joe is 66 and Joan is 65. Using a typical Social Security maximization software program such as Social Security Pro, the best way to maximize their benefit in this scenario is to have Joan claim her slightly reduced Social Security benefit at 65. At that point, Joe, who has reached his magic age of 66, could file a restricted claim for spousal benefits and collect half of Joan's full retirement age amount — $1,042 per month for four years — and then switch to his own maximum benefit of $2,699 per month ($2,045 x 1.32%) at age 70.
Assuming they both live to their average life expectancy of 85 for Joe and 87 for Joan, the future value of their combined Social Security benefits would total $2,704,239, assuming a 5.5% discount rate and 2.2% annual cost-of-living adjustments to Social Security benefits.
But according to Cash Flow Decisions, a different Social Security claiming strategy would create more spendable after-tax income despite producing slightly lower lifetime benefits.
The second strategy suggests that Joe file and suspend his Social Security benefits at his full retirement age of 66 and begin collecting his benefits at age 69. Meanwhile Joan would file a restricted claim for spousal benefits when she turned 66, collecting half of Joe's full retirement age benefit amount —$1,023 per month. She would switch to her own maximum benefit of $2,751 per month at age 70.
REDUCING TAXES
The second strategy would produce lifetime benefits of $2,679,489 in future value — nearly $25,000 less in lifetime benefits than the first scenario — but would increase cash flow by reducing taxation of the Social Security benefits in some years to as little as a 37% effective tax rate.
The Cash Flow Decisions software automatically calculates a cash-flow analysis for every available Social Security filing method for every combination of filing ages. It ensures required minimum distributions are made and added to taxable income. The program then selects the Social Security strategy that results in the lowest shortfall or largest surplus.
Under the two sample scenarios, the first Social Security maximization strategy would meet the client's income needs and result in a $99,731 surplus upon the death of the second spouse. The second strategy, which focuses on optimizing cash flow, would result in a $177,114 surplus over the same period.
“Our pitch is why not take a look at the full picture before determining when to file for Social Security,” said Joe Walsh (no relation to Ms. Walsh), who is in charge of software support and training at Impact Technologies. “Assets and income weigh heavily on that decision.”
Impact Technologies introduced Cash Flow Decisions two months ago and already is working on improvements for the next edition based on feedback from financial advisers who currently use the product. The next version will include the ability to link to policy illustrations for annuities to help clients fill an income gap if they want to delay collecting Social Security until age 70 or for life insurance to provide for a surviving spouse.
The Cash Flow Decisions program costs $549 per year, nearly double the price of the stand-alone Social Security Pro claiming tool ($295) that is included in the package. All tools are iPad compatible and client friendly.
(Questions about Social Security? Find the answers in my ebook at InvestmentNews.com/mbfebook.)
