Social Security Five things you need to know

Social Security: Five things you need to know Not FDIC insured May lose value No bank guarantee Optimizing Social Security benefits.

Social Security: Five things you need to know Topics for today • Quick facts on Social Security • Key risks in retirement • Understanding Social Security – Fundamentals – Five things you need to know PPT 200 319770 12/19 2

Social Security: Five things you need to know Quick facts • Over 60 million Americans receive Social Security benefits totaling almost $1 trillion in benefits annually • The average monthly retirement benefit is $1, 503 • For 61% of elderly beneficiaries, Social Security provides the majority of their cash income • Social Security trust fund is projected to be exhausted in 2035, at which time benefits would be reduced by roughly 25% Sources: Social Security factsheet, 2020; Social Security Trustees Report, 2019. PPT 200 319770 12/19 3

Social Security: Five things you need to know Social Security can help address these key risks in retirement Longevity Inflation Markets Lifetime income for worker and spouse Regular cost-of-living adjustments Benefits not affected by markets Taxes Income Preferential tax treatment vs. other income sources such as IRA income Guaranteed income stream PPT 200 319770 12/19 4

Social Security: Five things you need to know The fundamentals of Social Security Eligibility At least 40 quarters of work* Individual contributions Social Security payroll tax of 6. 2% on first $137, 700 of earnings Benefits Calculated based on average monthly earnings indexed for inflation — top 35 earning years taken into consideration Spousal benefits Spousal benefit (50% of covered spouse benefit) and survivor benefit (100% of covered spouse’s benefit) * For 2020, earnings of $1, 410 constitute one quarter of coverage. No matter how high your earnings may be, you can not earn more than 4 quarters of coverage in one year. PPT 200 319770 12/19 5

Social Security: Five things you need to know What’s your full retirement age (FRA)? Year of birth Full retirement age 1943– 1954 66 1955 66 and 2 months 1956 66 and 4 months 1957 66 and 6 months 1958 66 and 8 months 1959 66 and 10 months 1960 and later 67 Source: Social Security Administration. PPT 200 319770 12/19 6

Social Security: Five things you need to know When you claim affects your benefits EARLY RETIREMENT FULL RETIREMENT DELAYED RETIREMENT • Age 62 for worker and spousal (60 for survivors) • Benefits reduced for claiming early (by 25% if claiming at age 62 if FRA is age 66) • Subject to earnings limitation — $1 of benefits withheld for every $2 above earnings limit of $18, 240* • Earnings limitation applies to own, spousal, and survivor benefits • Earnings limitation no longer applies† • If you claimed early, you can voluntarily suspend at FRA to recoup benefits • Example: If you claimed at 62, voluntarily suspended at FRA (age 66), and began benefits again at age 70, you would receive 99% of what you would have received if you claimed at FRA originally • 8% “raise” for each year you delay benefits — only applies to your worker benefits, not spousal or survivor benefits • No benefit for waiting past age 70 * During year reaching full retirement, the earnings limit is $48, 600. One dollar in benefits will be withheld for every $3 in earnings (i. e. , wages) above the limit. Wages from a spouse are not considered. † After you reach full retirement age, the SSA will recalculate benefit amount to give credit for any months in which benefits were withheld because of the earnings limitation. PPT 200 319770 12/19 7

Social Security: Five things you need to know Calculating spousal benefits • Spouses are eligible to receive the higher of own benefit based on earnings record or 50% of primary insurance amount (PIA) of working spouse (PIA is the benefit amount received at FRA) • Worker must file for benefits before spousal benefit is available • Must be married for at least one year to receive spousal benefits • Spousal benefit based on when the spouse claims Social Security, not the worker PPT 200 319770 12/19 Example: Husband’s benefit at FRA is $2, 400 Husband files early at age 62 so benefit is reduced by 25% to $1, 800 Wife files for spousal benefit at her FRA based on husband’s earning record — spousal benefit will be 50% of his PIA (50% of $2, 400 = $1, 200), not 50% of what the husband receives 8

Five things you need to know about Social Security PPT 200 319770 12/19

Social Security: Five things you need to know 1. It might pay to delay Roughly 65% elect before reaching full retirement age, including 40% who claim at age 62* • The reality — many retirees claim benefits too early – – – 35% People often underestimate life expectancy Benefit level is significantly lower Earnings test may apply if still working† May be more likely to have benefits taxed In most cases, you can’t change your mind after benefits begin • You receive an 8% “raise” for every year you delay taking benefits *Source: Social Security Administration, 2018. † For 2020, if you are under the full retirement age, $1 in benefits is withheld for every $2 of earnings in excess of $18, 240. PPT 200 319770 12/19 10

Social Security: Five things you need to know When do retirees claim Social Security? 41% 22% 62 8% 8% 63 64 12% 65 66 5% 4% 67– 69 70 Age Social Security Administration, 2018. Excludes those claiming disability. PPT 200 319770 12/19 11

Social Security: Five things you need to know Monthly benefits increase as you delay Social Security $2, 660 $1, 983 $1, 394 Age 62 Age 66 Age 70 Source: Social Security Quick Calculator benefit estimate based on an individual age 62 with $75, 000 in current earnings. Does not include increases in benefit levels due to regular cost of living adjustments. PPT 200 319770 12/19 12

Social Security: Five things you need to know 2. Plan for your surviving spouse • Historically, higher-earning spouses have taken Social Security early, exposing the surviving spouse to longevity risk • Think in terms of joint life expectancy – If possible, maximize highest earner’s benefit to provide higher lifetime benefit for surviving spouse PPT 200 319770 12/19 13

Social Security: Five things you need to know Important changes to Social Security The Bipartisan Budget Act of 2015 phased out two claiming strategies for married couples File and suspend Must have reached full retirement age (66) by April 30, 2016, and filed and suspended Restricted application Those who reach age 62 in 2015 can still restrict application to spousal benefits only once reaching full retirement age (66) PPT 200 319770 12/19 14

Social Security: Five things you need to know Understanding the “restricted application” strategy Who should consider? Working couples with similar incomes How does it work? Older spouse waits until full retirement age and restricts claim to spousal benefit only, then at age 70 claims higher benefit based on own earnings record. Other spouse must file for own retirement benefit to trigger the spousal benefit. What’s the benefit? Higher earner receives spousal benefit while allowing own benefit to reach maximum amount. Highest survivor benefit is preserved. PPT 200 319770 12/19 15

Social Security: Five things you need to know 3. Special rules for divorced and widowed individuals • Divorced? You can receive benefits on ex-spouse’s earning record if: – You are unmarried and age 62 or older – Your marriage lasted 10 years or more (and divorced for 2 years) – Your ex-spouse is eligible for Social Security benefits (even if exspouse hasn’t filed for benefits yet) • Widows may receive benefits as early as age 60 – The benefit amount is 71. 5% of full benefit amount if taken at age 60 and is based on deceased spouse’s earnings – Can choose to receive survivor benefits while letting your own benefit accrue delayed retirement credits up to age 70 * An exception may apply to the 9 -month rule if the deceased spouse died accidentally or while on active duty in the military. For a full list of exceptions consult Federal – Must be married for at least 9 months to qualify for benefits* Regulations § 404. 335. PPT 200 319770 12/19 16

Social Security: Five things you need to know More detail on survivors Relationship to you Your widow(er), who has reached FRA Survivor benefit (percentage of your expected full retirement benefit) 100% Your widow(er), who is at least 60 years old, but hasn’t yet reached FRA 71. 5%– 99% Your widow(er), who is caring for your child under 16 or disabled 75% Your qualifying child* 75% * Qualifying child is one younger than age 18 or between age 18 and 19, but in elementary or secondary school as full-time students. Generally, a family maximum is calculated from a formula that is between 150% and 188% of the worker’s basic Social Security benefit or primary insurance amount. PPT 200 319770 12/19 17

Social Security: Five things you need to know 4. There’s a good chance benefits will be taxed Income level* Taxation Between $25, 000 and $34, 000 ($32, 000 and $44, 000 for couples) Up to 50% of benefits reported as taxable income Over $34, 000 ($44, 000 for couples) Up to 85% of benefits reported as taxable income 50% 85% * IRS Notice 703. Income calculation for taxation of Social Security benefits equals your adjusted gross income (AGI), one half of Social Security benefits, and tax-exempt municipal bond interest. Income from Roth accounts does not negatively impact taxation of Social Security benefits. PPT 200 319770 12/19 18

Social Security: Five things you need to know 5. Pension income may reduce benefits Who’s affected? Windfall Elimination Provision (WEP) Government Pension Offset (GPO) Workers eligible for Social Security who are also receiving a pension from a job where Social Security benefits were not withheld Workers applying for spousal or survivor benefits who are receiving a pension from a job where Social Security benefits were not withheld What is Based on a calculation from the Social Security reduction? Administration, Social Security benefits can be reduced but not totally eliminated. PPT 200 319770 12/19 Benefits are reduced by two thirds of the amount of the pension income. Social Security benefits may be totally eliminated. 19

Social Security: Five things you need to know Examples of how the WEP and GPO can reduce benefits Windfall Elimination Provision (WEP) Assumptions: • Andy’s monthly Social Security benefit = $1, 500 • Andy’s monthly pension = $1, 000 As a result of the WEP, Andy’s monthly Social Security benefit is reduced by $434 a month for a net benefit of $1, 066 a month* Government Pension Offset (GPO) Assumptions: • John’s monthly Social Security benefit = $2, 000 • Martha’s spousal benefit = $1, 000 • Martha’s monthly pension = $900 GPO calculation: Spousal benefit ($1, 000) minus two thirds of her pension benefit ($600) As a result of the GPO, Martha’s spousal benefit is $400/month * Based on a hypothetical example utilizing the WEP calculator on SSA. gov where benefit recipient worked for 15 years in Social Security–covered employment. PPT 200 319770 12/19 20

Social Security: Five things you need to know Closing thoughts ✓ Social Security is a critical component of an effective retirement income plan ✓ Understanding and making the right ✓ PPT 200 319770 12/19 decisions around taking Social Security can be a big driver of success in retirement Work with your financial advisor to assess your personal situation 21

Social Security: Five things you need to know For informational purposes. Not an investment recommendation. This information is not meant as tax or legal advice. Please consult your legal or tax advisor before making any decisions. Putnam Retail Management putnam. com PPT 200 319770 12/19 22