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Investing Advice Inspired by Jack Bogle
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Barry Barnitz
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Joined: 19 Feb 2007
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Location: Virginia Beach
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Cb
Joined: 21 Feb 2007
Posts: 209
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 Posted: Tue Sep 18, 2007 11:20 pm Post subject: |
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I thought John Greaney's analysis of starting SS at 62, then repaying & restarting at 70 was interesting:
http://www.retireearlyhomepage....nuity.html
"A little-known Social Security provision effectively allows you to "purchase" a life annuity from the Social Security administration at a substantial discount to what a commercial insurer would charge for the same monthly benefit. Delaying taking Social Security benefits until age 70 gives a retiree a monthly check as much as 77% larger than a retiree who started taking benefits at age 62. But you don't have to delay taking benefits until age 70 to take advantage of this. The Social Security Administration allows you to "withdraw your application" for benefits, reapply at a later date, and get the same larger monthly check as someone who delayed taking Social Security until that age. Of course, you'll have to pay back all the Social Security benefits you've received to date, but you won't have to pay back interest on the money and you'll be eligible for either a tax deduction or tax credit on the income taxes you paid on the Social Security benefits collected to date. If you save and invest the Social Security benefits you collect from age 62 to age 69 and then reapply at age 70 for the larger monthly benefit, you'll likely have tens of thousands of dollars in after-tax earnings beyond the amount that you repay to the Social Security Administration." |
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Barry Barnitz
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Joined: 19 Feb 2007
Posts: 1445
Location: Virginia Beach
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| Posted: Tue Sep 18, 2007 11:53 pm Post subject: Planning Social Security Benefits |
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Planning Social Security Benefits
Bud Hebeler's site analyzenow contains excellent resources on planning social security benefits. The Articles section contains a segment on Social Security where the timing of taking Social Security benefits is considered. The Free Programs section provides Social Security Spreadsheets.
The following papers examine the planning of social security retirement benefits:
1. Estimating the Value of Social Security Retirement Benefits by William W. Jennings and William Reichenstein, August 20, 2001
| Quote: | There are three objectives of this paper. First, we explain the current structure of Social Security retirement benefits. Professionals who advise individual investors should
have knowledge of the benefits structure. With this knowledge, they can add value to clients by helping them decide when to begin receiving benefits. Second, we provide models to estimate the present value of expected Social Security retirement benefits. These models rely on the similarities between inflation- linked Treasury bonds and Social Security. Third, we
demonstrate that including the value of Social Security benefits can substantially change the calculation of the current asset mix. |
2. Rethinking Social Security Claiming in a 401(k) World by James I. Mahaney and Peter C. Carlson, PRC WP 2007-18 Pension Research Council Working Paper (August 2007)
| Quote: | | This chapter argues that previous research on Social Security take-up alternatives has failed to recognize critical factors that greatly impact the discussion on when it is most beneficial to start Social Security retirement benefits. We show that the effect of taxes can have a dramatic effect on the financial security of retirees, yet the taxation caused by IRA withdrawals and the interaction with Social Security has been largely misunderstood. In addition, changes made under the Senior Citizens’ Freedom to Work Act of 2000 make delaying Social Security for married couples much more favorable. We also show how the traditional approach of starting Social Security benefits early and deriving income from stock and bond mutual funds is expected to under-perform a strategy that takes income from personal retirement assets first and is followed by increased benefits from Social Security. |
How flattering to have our paper posted as one to read. We do really think that few people really understand the advantages to making optimal Social Security decisions. I encourage everyone who wants to retire early to read the section on taxes. Most people can dramatically reduce taxes by creating larger SS income streams. - Jim Mahaney
3. The Effect of Retirement Under Social Security at Age 62 by Robert Muksian, Ph.D. Journal fo Financial Planning, (January 2004)
| Quote: | Executive Summary
* The reduction in Social Security benefits due to early retirement at age 62 is greater than often realized.
* When calculating how much benefits will be reduced by retiring as early as age 62, observers often underestimate the reduction because they fail to account for the annual cost-of-living adjustments and make other incorrect assumptions relative to the reduction.
* The article explains how Social Security calculates a worker’s “average indexed monthly wage” and how the primary insurance amount is in turn calculated from that, using “bend points.”
* An accurate calculation of early retirement benefits is also key to spousal benefits, because a reduction of benefits for the primary worker may affect the amount of benefits the spouse receives both during the marriage and after the worker’s death.
* One of the subjective arguments for collecting Social Security benefits early is that if death occurs before normal retirement age, no retirement benefits are collected. But a 62-year-old male has more than a 93 percent chance of living to normal retirement age, and a couple has more than a 99 percent chance that one of them will reach normal retirement age.
* A spreadsheet calculates the break-even point for the age at which total benefits from an early retirement and normal retirement age are equal.
* Unless early retirement is “mandated” due to health reasons, it appears one should wait until normal retirement age or later to begin collecting Social Security. |
4. Calculating Break-Even Ages for Delaying Social Security Beyond Normal Retirement Age by Robert Muksian, Ph.D. Journal fo Financial Planning, (March 2006)
| Quote: | Executive Summary
* Planners must frequently advise clients on the future economic effects of the timing of collecting Social Security benefits. In addition to such factors as the client’s health and financial status, the timing decision frequently depends on determining the break-even age, which is defined as that age when total revenues from Social Security will be equal regardless of the elective start of those benefits.
* This paper provides a freely available spreadsheet for planners for specifically determining the break-even ages between taking benefits at the normal retirement age and age 70, when taking benefits becomes mandatory and there is no economic benefit from further delay.
* The paper looks at three options for a worker who decides to continue working past normal retirement age, or has other adequate sources for retirement income, but takes the benefit at the normal retirement age: (1) always spend the after-tax amount, (2) always invest the after-tax amount, or (3) invest the after-tax benefits until age 70 and then make monthly withdrawals from the accumulated fund.
* Under the first option, most workers with normal life expectancy would be better off financially to delay taking the benefits. The second option of investing the money is investigated under different after-tax-return scenarios. Generally, it pays to begin taking benefits at normal retirement age. Under the third option, building an accumulating fund until age 70, then to be depleted monthly, will produce a shortfall if the worker lives beyond the break-even age. |
5. When Should Women Claim Social Security Benefits? by Alicia H. Munnell and Mauricio Soto, Journal of Financial Planning (June 2007)
| Quote: | Executive Summary
* This paper summarizes the incentives facing older women when deciding when to claim their Social Security benefits. Nearly 60 percent of women opt for actuarially reduced benefits at age 62—a greater percentage than men. Yet women are expected to live longer than men. Longer life expectancy would generally suggest delaying Social Security benefits. But the analysis shows that single women and married women face very different choices.
* Married women are entitled to three types of benefits: (1) benefits based on their own earning records, (2) spouse's benefits based on their husband's earning records, or (3) survivor's benefit equal to 100 percent of their husband's benefits. These benefits are reduced if claimed earlier than the full retirement age.
* From the authors' study, two key points emerge. First, in the case of survivors' benefits, the husband usually can maximize the benefits of the couple or his surviving wife by delaying his claim.
* Second, the wife is usually better off claiming her own Social Security benefits as early as possible, though this can change depending what percentage her own benefits are of her husband's benefits.
* For most married women, the Social Security benefit structure actually encourages them to grab their benefits as soon as possible. While this may maximize the wife's Social Security "wealth," it also encourages them to withdraw from the labor force, creating a loss of earnings and 401(k) savings, and extending the period over which they need to support themselves in retirement |
6 .Estimating the Social Security Windfall Elimination Provision's Impact on Clients by Richard Mason, Ph.D., J.D.; John R. Mills, Ph.D., CPA; and Brian Ferrell, CPA, Journal of Financial Planning, (December 2005)
| Quote: | Executive Summary
* Social Security's windfall elimination provision (WEP) reduces Social Security retirement benefits for those workers, typically employed in the public sector, covered by a non-Social Security retirement plan and who became first eligible for that non-Social Security plan after 1985.
* It is estimated that up to 9 percent of future retirees may be affected by the provision. As a rule of thumb, essentially all workers who have paid into the Social Security system for less than 30 working years at "substantial earnings" and have worked in the public sector in non-Social Security positions are likely to have their Social Security retirement benefits reduced by the WEP.
* Current annual Social Security benefit statements overstate the worker's estimated benefits by not reflecting any potential WEP reduction. Accordingly, financial planners should be aware of the potential reduction and how it works to reduce the monthly benefits that clients may receive.
* It is particularly important to factor in the WEP for those clients who have 20 or fewer years of substantial earnings, as the WEP reduction for these individuals is far more pronounced.
* This article describes the WEP and its workings through a detailed example. It shows how to estimate Social Security retirement benefits, upon which any potential WEP impact must be based, with a quick yet accurate back-of-the-envelope calculation.
* The article also discusses the fact that workers who leave the private sector for a non-Social Security covered position may well lose their Social Security disability coverage that requires current Social Security work credits to remain in force. |
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blb
December Birthday Celebration: Ludwig van Beethoven |
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sscritic
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