by Carolyn Rothwell on April 10, 2012

Flexible Treatment of Pension and S.S. benefits in Silver Financial Planner


The Pension and Social Security data entry window of Silver Financial Planner includes a check box for “Do not capitalize pre-retirement pension and Social Security benefits.” This option provides flexibility on how pre-retirement pension and Social Security benefits are treated by the program.

This option can make a big impact on a client’s retirement projection if the client receives pension or Social Security benefits before retirement.

With this box unchecked, Silver will automatically reinvest any pension or Social Security benefit received prior to retirement into the client’s taxable savings investments.  Checking this box changes this behavior to assume any pension or Social Security received prior to retirement is not available to be saved and reinvested into the investment accounts.

Let’s look at an example.  Client Earl Pension is 45 years old.  He has completed military service and is currently receiving a military pension of $17,500.  His pension is expected to increase about 2% a year and continues until his life expectancy.  Earl is employed, earning wages of $40,000 and plans to retire from the workforce when he reaches age 60. 

When we enter this information in Silver, we would set his current age as 45 and retirement age as 60 on the Names/Ages input.  To enter his current wages and pension benefits, we go to the Pension/S.S. input area.  Here we can enter his annual pension benefit of $17,500 starting at his current age of 45.  Then we enter his earned income of $40,000 a year. 

SilverDoNotCapitalizeInput

If we leave the “Do not capitalize pre-retirement pension and Social Security benefits” box unchecked, the $17,500 pension benefit will be automatically saved and reinvested into the taxable savings and investment accounts.  This is appropriate if the client is not using the pension to cover is living expenses, and is indeed able to save the full amount of his pension.  In this case, the $17,500 pension is fully saved and added to assets for the next 15 years until retirement age of 60.

SilverDoNotCapitalizeOutput1

On the Retirement Capital Analysis, we can see the total Retirement Capital amount is growing by the surplus amount, which includes the military pension, scheduled additions to assets, and growth on the investments.  For this example, the clients are projected to have over 2M at last life expectancy. 

If we instead check the “Do not capitalize pre-retirement pension and Social Security benefits” box unchecked, the $17,500 pension benefit will not be automatically saved and reinvested into the taxable savings and investment accounts.  This is appropriate if the client is using the pension to help cover his living expenses.  Only savings to assets would be anything entered in the Asset input as an annual addition to an asset. 

SilverDoNotCapitalizeOutput2

On the Retirement Capital Analysis, we can see the total Retirement Capital amount is growing by the scheduled additions to assets and growth on the investments.  Pensions do not display on the Retirement Capital Analysis until retirement age, which prevents them from causing a surplus that is reinvested.  For this example, the clients are projected to have just over a 1/4M at last life expectancy. 

In both cases, the Cash Flow report will display the pension benefit prior to retirement.  This is a good report to help review if the client is indeed able to save the pension or if the client actually needs to use the pension to help cover living expenses.  If the cash flow shows a surplus of more than the clients pension, that would be a good indicator that the client would be able to save the pension benefit, and therefore you could leave the “Do not capitalize…” box unchecked.  However, if the surplus is less than the pension benefit, you will want to check the “Do not capitalize…” box.  You can also reflect that some, but not the entire pension is being saved by checking the “Do not capitalize” box and increasing the scheduled additions in the asset input.

 

Not currently using Silver Financial Planner?  Silver Financial Planner is a friendly planning solution designed to deliver efficient planning for busy planners.  Silver’s intuitive navigation and clear, concise reports allows you to spend less time creating plans and more time where it matters most, with your clients.  Get started today with a 30 day free trial. 

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Silver is also available online!  All the features of Silver Financial Planner plus: 
Client access portal,  sata backup & security, user role managemeng allowing for custom security settings, tablet friendly, and the ability to access your program anywhere you have an Internet connection. 

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Carolyn Rothwell

Carolyn enjoys spending her time building Money Tree Software's brand and products. Her experience creating and delivering financial plans for a full-service financial planning firm and supporting advisors working to provide the best planning to their clients as a Money Tree support member has provided an excellent understanding of the importance of financial planning.