Knowledge Base: Social Security

Explore Social Security Benefits in RightCapital

This article is designed to give advisors an overview of Social Security income and how certain calculations are generated within RightCapital. For additional information on entering Social Security income or using the Social Security Optimization tool please review the linked help center articles.

Social Security Overview

RightCapital allows advisors to estimate or supply the Social Security benefit amount within the Profile / Income area of each financial plan. Social Security Benefits can be tracked in the Retirement / Cash Flows / Income Inflows / Social Security column.

Social Security benefits are intended to replace a percentage of a worker’s pre-retirement income based on their lifetime earnings. The portion of pre-retirement wages that Social Security replaces is based on your highest 35 years of earnings and varies depending on how much you earn and when you choose to start benefits. The amount issued as monthly income replacement at full retirement age is referred to as the primary insurance amount (PIA). The PIA value is issued to every eligible client by the Social Security Administration (SSA).

Eligibility for Social Security

Within RightCapital, Social Security income is generated by entering historical covered earnings, entering a full retirement age PIA value or through a simplified estimate based on the client's salary card. Users can also enter benefits currently received by the client in the Profile / Income / Social Security Income Card by clicking the "already receiving" checkbox.

Clients must qualify for Social Security benefits clients by earning at least 40 Social Security credits. Clients earn up to four Social Security credits per year when they work and pay Social Security taxes.

Credits are based on their total wages and self-employment income for the year. The amount of earnings it takes to earn a credit may change each year. In 2021, clients earn one Social Security or Medicare credit for every $1,470 in covered earnings each year. You must earn $5,880 to get the maximum four credits for the year.

Primary Insurance Amount (PIA)

RightCapital allows advisors to estimate or supply the Social Security PIA value within the Profile / Income area of each financial plan. In the estimated benefit amount dropdown menu, users can input the full retirement age benefit PIA value. This will be increased or reduced based on the filing age.

The PIA value is the monthly Social Security benefit a client will receive if they file for income at their full retirement age. At full retirement age the benefit is neither reduced by an early withdrawal penalty nor is it increased with a delay credit. The Social Security Administration will calculate and supply this amount for eligible client.

How PIA is Calculated

When users are estimating a Social Security benefit in RighCapital, the client's birthday, earnings and family profile will be used will be used to estimate a PIA value for the plan. This PIA value is then adjusted for filing age and other adjustments.

The Social Security PIA value is based on each eligible client's averaged monthly earnings adjusted for wage growth. The average indexed monthly earnings (AIME) are separated into three amounts or "bend points". These amounts change based on when a client reaches age 62. Each amount is multiplied by a specific factor and the sum of all three amounts will equal the client's PIA value which can be increased or decreased depending on other variables. Here are links that illustrate PIA bend points and maximum benefit formulas.

Bend points for a client who turns 62 in 2021:

  1. the first bend point of the AIME is $996, therefore all earning up to this amount are multiplied by 90%.
  2. The second bend point represents AIME between $996 and $6,002 which are multiplied by 32%.
  3. While any remaining AIME above $6,002 is multiplied by 15%.

The total of all three amounts equal the PIA value.

PIA Recomputation

RightCapital will only factor in recomputation when the client's estimate benefit is calculated using a "simple estimate" or a "historical covered earnings" approach. If a client is entering their assigned PIA value into the Profile > Income area RightCapital will not automatically factor in recomputation.

If a client receives large amounts of income into their 60's the issued PIA value can be increased due to recomputation. For example, if a client decides to work till age 70, not only can he get delay credit on his retirement benefit. But his PIA can increase because his earning between age 60 to 70 is high enough to impact the highest 35 years of earnings used when calculating PIA.

Retirement Benefit

RighCapital will allow clients to file for social security retirement benefits as early as 62 and as late as age 70. The income associated with the retirement benefit will flow from the Profile / Income / Social Security Income Card. The retirement benefit and any adjustments can be seen in the Retirement / Cash Flows / Income inflows / Social Security column.

The filing age affects how much clients will receive in Social Security income. Clients who delay filing past their full retirement benefit will receive a delay credit while those who file earlier will have their benefit reduced. In RightCapital the client's birthday, listed in the family tab is used to determine their full retirement age.

Full Retirement Age

Full retirement age is the age when clients will be able to collect their full retirement benefit amount. The full retirement age is 66 if clients were born from 1943 to 1954. The full retirement age increases gradually if they were born from 1955 to 1960, until it reaches 67. For anyone born 1960 or later, full retirement benefits are payable at age 67. You can find a client's full retirement age by birth year in the full retirement age chart.

Early Retirement Age

Clients can collect Social Security benefits as early as age 62. However, their benefit is reduced if they start collecting benefits before full retirement age. Advisors can use the following link to determine how claiming retirement benefits early will affect the benefit amount. The early withdrawal penalty when filing for Social Security benefits before full retirement age ranges from 5% to 6.7% per year depending on the client’s birthday.

Delayed Retirement Age

When clients delay filing for Social Security beyond their full retirement age, the benefit amount will continue to increase until age 70. Advisors can use the following link to determine how delaying Social Security will affect the benefit amount. The delay credits applied to Social Security benefits range from 7.5% to 8% each year depending on the client’s birthday.

Spousal Benefit

RightCapital will automatically generate a spousal benefit within financial plans when clients are eligible. Financial plans will include the greater of a client's retirement benefit or the spousal benefit in order to produce the best outcomes. When applicable, the spousal benefit can be viewed in the Retirement / Cash Flows / Income inflows / Social Security column. If advisors would like to stop RightCapital from automatically including a spousal benefit, the Social Security income card can be set to "No Social Security".

Starting at age 62 spousal benefits are available to clients even if they never worked towards Social Security credits. If a client's spouse qualifies for Social Security the spousal benefit can provide 50% of the spouse's primary insurance amount value. The current plan's strategy will automatically include spousal benefits when appropriate.

Spousal benefits are subject to an early withdrawal penalty (5% to 8% per year) but delay credits after full retirement age. Spousal benefits can be viewed in the Retirement > Cash Flows > Income Inflows > Social Security income area. Click the underlined column headers to reveal additional information including any spousal benefits.

Survivor Benefit

RightCapital will automatically generate a survivor benefit within financial plans when clients are eligible. When the "already receiving" checkbox is selected in the Social Security income card RightCapital will use the listed filing age to determine the appropriate survivor benefits in the plan. To view survivor benefits in the future cash flows users can visit the Retirement / Cash Flows / Income inflows / Social Security column.

If a client passed away, the surviving spouse is eligible to receive a survivor benefit. The maximum monthly survivor benefit is 82.5% of the deceased spouse's benefit amount. The spouse can then take the max of her retirement benefit or the deceased client's retirement benefit.

An early withdrawal penalty of 4% to 6% per year is applied if the benefit is taken before the surviving spouse's full retirement age. No delay credits are available on survivor benefits. Financial plans in RightCapital will default to a strategy that includes survival benefits when appropriate. When a client is "already receiving" Social Security the start age listed will be used to calculate survivor benefits.

Child Benefit

In RightCapital, child benefits are automatically applied when clients file for Social Security with a minor child included in the Profile > Family area. The child benefit stops once child reaches age 18.

When a client files for Social Security benefits while listing a minor child as a dependent, there is an opportunity to receive additional benefits. The child can be biological, adopted or a stepchild in the household.

The following calculation is used to determine the child benefit amount used in a financial plan. The child benefit amount can be seen in the Retirement > Cash Flow Projections > Summary Tab > Income Inflows Column > Social Security Income > listed under Child benefit.

Condition to receive Child BenefitChild Benefit Amount
Client receives Retirement Benefit, and has a child under age 1850% of Client PIA
Client receives Survivor Benefit, and has a child under age 1875% of deceased spouse's PIA

Annual Earnings Test

RightCapital will also perform an annual earnings test if a client is working while taking their Social Security benefit. If benefits are withheld due to the earnings test, they are paid back once the client hits FRA. Advisors will see that amount added under the earnings test column within the Cash Flows > Summary Tab > Income Inflows > Social Security column. The annual earning test reduction stops after Full Retirement Age (FRA). The annual earning test reduction in RightCapital applies to all social security benefits including retirement, spousal and survival benefit.

When applying the annual earnings test, Social Security benefits are reduced $1 for every $2 of earnings in excess of the lower exempt amount ($1,896). For clients earning in excess of the higher amount ($50,520) $1 in benefits is reduced for every $3 of earnings. Earning thresholds are increased with inflation every year.

Example

  • Client retires at age 62.
  • The client starts social security retirement benefit at age 62, with benefit equal to $1,000 a month.
  • The client works a part-time job at age 63, earning $24,000 a year.
  • The client's social security benefit might be reduced by $290 a month, to $610 per month.
  • Once client reaches 65, his/her Full Retirement age, the social security benefit goes back to $1,000 a month.

Government Pension Offset (GPO)

RightCapital allows users to apply a government pension offset for clients with government pensions who didn’t pay Social Security taxes. If clients are subject to a Government Pension Offset (GPO) that reduces Social Security spousal benefits, check the Non-covered box in the pension income card to have that pension amount offset the spousal benefit. The GPO reduces spousal benefits by 66% of the monthly non-covered pension amount.

How to Apply GPO to Pension Income

In the Profile > Income area (or step 2 when creating a client) Add a pension income card, fill out the necessary data fields and check the "Non-Covered" box on the bottom left. Once checked the pension amount will offset any Social Security spousal benefits that the client would otherwise receive.

Windfall Elimination Provision (WEP)

RightCapital will apply the WEP reduction to Social Security benefits when there is a non-covered pension income card entered. This calculation will not impact Social Security income that is already being received nor will it affect Social Security estimates based on the "full retirement benefit amount". The WEP reduction will impact estimated SS benefits using the "simple estimate" or from "historical covered earnings". WEP can affect monthly SS benefits, spousal benefits, child benefits, family maximum benefits and annual earnings test calculations within a financial plan. Survivor benefits will not be impacted by the Windfall Elimination Provision. RightCapital will also apply the WEP guarantee that restricts SS benefit reduction to half of the client's pension income.

When a client is eligible to collect non-covered pension income and Social Security income, their Social Security benefit amount may be reduced. This reduction is referred to as the Windfall Elimination Provision. WEP applies to clients who have both, worked jobs where they did not pay into Social Security since they receive a pension, as well as worked jobs where they did pay into Social Security and are eligible for SS benefits.

The WEP can reduce the percentage of pre-retirement earnings that are replaced by Social Security benefits up to the first income tier or bend point. This has the potential to lower the client's income replacement from 90% to 40% within the first bend point. For additional information on the Windfall Elimination Provision please refer to the SSA Website.

How to Apply WEP to a Financial Plan

1
In the Profile > Income area (or step two when creating a client) Add a pension income card and check the "Non-Covered" box on the bottom left. Once checked the pension amount will offset any Social Security spousal benefits that the client would otherwise receive while enabling WEP reduction.

2
In the Profile > Income > Social Security card, RightCapital users have three different options to choose from when calculating future Social Security benefits. WEP calculations will be uniquely impacted by each choice.

  • Use simple estimate – The social security benefit is estimated using the income and projected annual increase entered in any Salary or Self-employment income cards. WEP will affect this calculation as long as "exclude from SS tax" is not checked in the income card.
  • Based on full retirement benefit – Enter the client's projected Primary Insurance Amount (PIA) at full retirement age that can be found on their Social Security statement. WEP will NOT affect this calculation in RightCapital, as we assume WEP has already been applied to the PIA value supplied by the Social Security Administration.
  • Based on historical covered earnings – Enter an annual covered amount for each year and RightCapital will use those earnings to calculate the Social Security benefit. The future income based on the Salary / Self-employment income will be included. WEP will affect this calculation based on the number of covered earnings that meet the substantial earnings criteria for each year ($26,650 for 2021).
3
The WEP reduced Social Security benefit can be tracked into the Retirement > Cash Flow Projections > Summary Tab > Income Inflows Column > Social Security Income

Family Max Benefit

In RightCapital, there is a maximum Social Security benefit each family can receive. When adding up retirement benefit, spousal benefit, child benefit & survivor benefit, RightCapital will follow the rules to cap the benefit at the family maximum amount. Retirement benefits will not be reduced by family max benefit, instead other benefit amounts will be reduced pro-rata. For information on how the family max benefit is calculated view this link.

The formula used to compute the family maximum is similar to that used to compute the Primary Insurance Amount (PIA). The formula sums four separate percentages of portions of the worker's PIA. For 2021 these portions are the first $1,272, the amount between $1,272 and $1,837, the amount between $1,837 and $2,395, and the amount over $2,395. These dollar amounts are the "bend points" of the family-maximum formula. Thus, the family-maximum bend points for 2021 are $1,272, $1,837, and $2,395. See table showing bend points for years beginning with 1979 (table also shows PIA formula bend points).

For the family of a worker who becomes age 62 or dies in 2021 before attaining age 62, the total amount of benefits payable will be computed so that it does not exceed:

(a) 150 percent of the first $1,272 of the worker's PIA, plus

(b) 272 percent of the worker's PIA over $1,272 through $1,837, plus

(c) 134 percent of the worker's PIA over $1,837 through $2,395, plus

(d) 175 percent of the worker's PIA over $2,395.

Restricted Application

RightCapital will include restricted application as on of the 700 different filing strategies analyzed to optimize Social Security for each client. If a client meets the requirements for restricted application and it produces the most Social Security income for the household, the details will be listed in the Retirement / Social Security / Action Items area. The strategy can be implemented in a proposed plan by choosing the Optimal Strategy in the Retirement / Analysis / Actions Items / Social Security Strategy dropdown menu.

If a client's spouse was born before January 2, 1954 and has already reached full retirement age, they can choose to receive only the spouse's benefit and delay receiving their own retirement benefit until a later date. This strategy is included in the optimal Social Security analysis in RightCapital.

If the spouse’s birthday is January 2, 1954 or later, the option to take only one benefit at full retirement age no longer exists. If the spouse files for one benefit, they will be effectively filing for all retirement or spousal benefits.

Tax on Social Security Income

Federal Tax

When a client's combined Income is higher than the threshold listed below, the social security benefit is taxable in RightCapital. Combined income is defined as the client's AGI plus non-taxable interest plus 50% of Social Security benefit.

Taxable Social Security for Single filer

Client's Combined IncomeSingle filer
Combined income < $25,000Social Security benefit not taxable
$25,000 < Combined income < $34,00050% of Social Security is taxable
Combined Income > $34,00085% of Social Security is taxable

Taxable Social Security for Married Filing Joint

Client's Combined IncomeMarried filing Jointly filer
Combined income < $32,000Social Security benefit not taxable
$32,000 < Combined income < $44,00050% of Social Security is taxable
Combined Income > $44,00085% of Social Security is taxable

Taxable Social Security Worksheet

The tax calculation details in RightCapital can be seen on the Taxable Social Security worksheet in the Tax > Tax Estimate > Details > Taxable Social Security area found in the "1040" dropdown menu. Total Social Security benefits are shown in box 5a on the 1040 while the Taxable Social Security amount is shown in box 5b.


State tax

Only certain states will tax a client's Social Security income. RightCapital will use the client's resident state, entered in the Profile > Family > Client Card, to determine if their Social Security benefit is taxable at the state level. Below is a list of states that will tax Social Security benefits.

StateTaxable Social Security Benefit
ColoradoYes
ConnecticutYes
GeorgiaYes
KansasYes
MinnesotaYes
MissouriYes
MontanaYes
NebraskaYes
New MexicoYes
North DakotaYes
Rhode IslandYes
UtahYes
VermontYes
West VirginiaYes