New Article on When to Take Social Security

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Speedy
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New Article on When to Take Social Security

Post by Speedy »

I ran across an article I think may be of interest to others pondering this important matter. It is on forbes dot com. Becasue I'm not capable of using links, I'll describe the article for those that may be interested.

The article is mysteriously dated 11-12-07, authored by Janet Novack, titled "The 62/70 Solution". It refers to two papers, one co-authored by James Mahaney of Prudential Retirement, the other co-authored by Alicia H. Munnell, director of of the Center for Retirement Research at Boston College.

In summary, the article points out the advantage of one spouse taking SS early, the other later, and the dual nature of social security benefits. Net present value of varoius scenarios are presented.

Maybe someone that is capable would be interested in providing a link??

Bill :?
Last edited by Speedy on Wed Oct 31, 2007 2:14 pm, edited 1 time in total.
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Post by Jay »

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alec
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Post by alec »

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jjkthunder
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Yahoo link

Post by jjkthunder »

here is another link thru Yahoo

http://finance.yahoo.com/focus-retireme ... t-spending

I feel I'd be foolish to wait beyond 62 because my wife was a non-working spouse and stay at home mom. I started my S.S. in June 2007 at 62 and she'll be getting 47% of mine in December of 2007 when she turns 62.

GLI................Jack
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Speedy
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Post by Speedy »

Jay, Alec and Jack:

Thanks for providing the links. Extra thanks to Alec for linking the papers themselves.

Bill
JMahaney
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Papers

Post by JMahaney »

This is Jim Mahaney. I'm glad you have found the subject of interest. We felt that there was a lot of information about SS claiming which has been misunderstood or underappreciated. - Regards.
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Post by Sidney »

This is Jim Mahaney. I'm glad you have found the subject of interest. We felt that there was a lot of information about SS claiming which has been misunderstood or underappreciated. - Regards.
Thanks for checking in on the forum and bringing your thoughts on social security. Obviously, this is an important topic for many of us here.

Sid
I always wanted to be a procrastinator.
stipeman
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two high earners

Post by stipeman »

Jim,

Let's say there are two high earners both at the maximum benefit and both retire at 60. What is the best strategy:

1) wife at 62; husband at 70
2) husband at 62; wife at 70

This is not covered by the table in the forbes article. It seems to suggest (1) is correct but this is very conter-intuitive since the wife has a longer expected life span and the traditional advice is to delay if you have a longer life span. If the husband dies early, is it always better for the wife to pay back her collections or does it depend on her exact life expectancy?

Just want to make sure. Sorry if you cover this in your article.
sscritic
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Re: two high earners

Post by sscritic »

stipeman wrote:Jim,

Let's say there are two high earners both at the maximum benefit and both retire at 60. What is the best strategy:

1) wife at 62; husband at 70
2) husband at 62; wife at 70
I am not Jim, but try thinking about the situation as follows:

Since both have the same work record, there will be two benefits, high and low, that apply in both situations. If both live past age 70, when one of them dies, the survivor will get the high benefit, either as a worker or as a spouse. Thus there is no difference if both live to age 70.

So what if the person aiming for high (waiting until 70) dies before reaching 70? The higher benefit is then the benefit that the dearly departed would have received if he/she had started benefits on the day of death. This benefit, the reduced high benefit, is greater than low and less than high. The survivor will then have the reduced high benefit for life. Obviously, this is not as good as having the waiter make it to 70.

The goal of the game is to make sure that the person who doesn't start at age 62 lives until age 70. Thus, you should have the person who has the best chance of living to age 70 be the one to wait.

If you want to insure for the long term, this is the correct strategy. However, if you want to maximize net present value, the situation changes. If the early starter dies before age 70, the couple receives fewer years of the low benefit. Thus the total value received is increased if the early starter makes it to 70 (gaining eight years worth of low benefits). This argues for starting the healthiest person early.

I prefer the idea that waiting until age 70 is insurance against a long life. If that is your goal, have the unhealthy partner start at 62.
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Post by gkaplan »

What about singles? Is everyone in the world married?
Gordon
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Point

Post by JMahaney »

Our research was really focused on delaying the SS benefit for the higher earning spouse. It is critical to recognize that when the first spouse dies, the lower SS amount drops off - no matter whose it is. For example, if the husband is the higher earner, he should delay his benefit to age 70 and the spouse should start at 62. Yes, the wife has a longer life expectancy, but that is exactly why you delay the husband's SS. He takes that higher benefit at 70 and then when he dies, the surviving wife "steps up" to that benefit as long as she lives. That is also why it is best actuarially speaking, for her to start her benefits at 62. Statistically, she is unlikely to be utilizing "her" SS for a long time as she will "step up" to the higher SS benefit.

For single individuals, the benefits are also good to delay, but not quite as valuable due to the lack of "joint mortality" and the survivor benefit. But when you take IRA income first and delay SS, there usually is good tax benefits too.

Also, I am a believer in asset allocation in retirement that takes into account all lifetime income sources. Dr. Reichenstein of Baylor really pioneered this. He essentially says that SS and pension income should be treated as part of the fixed income portion of a retiree's portfolio. Building on this, with intermediate interest rates so low (4.3% 10 yr treasuries today), SS becomes that much more valuable. Creating higher amounts of SS income will improve how long portfolios can last. Of course, you give up the liquidity and bequest potential, but I would argue that you can become more aggresssive with your other assets (read higher allocation to equities and riskier assets) when the higher SS income is locked in.
kirk mccord
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Question for Mr. Mahaney

Post by kirk mccord »

Isn't there a penalty if the lower earning spouse begins his or her social security benefit at age 62? For example, wouldn't the lower earning spouse's spousal benefits be less than 50% once the higher earning spouse begins taking social security at age 70 and if the higher earning spouse dies first, wouldn't the surviving spouse get something less than 100% of the higher earning spouse's benefit?

Looks like the only way to avoid this "penalty" is for the lower earning spouse to wait until full retirement age to begin receiving benefits.

Would appreciate it if you could clarify this.

Thanks,
Kirk
sscritic
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Post by sscritic »

Kirk:

You are confusing two issues.

1a) Spousal benefits when the low earning spouse's full benefit is less than 50% of the high earning spouse's full benefit. In this case, when both are taking benefits, the low spouse's total benefit is permanently reduced for beginning benefits before full retirement age.

1b) Spousal benefits when the low earning spouse's full benefit is more than 50% of the high earning spouse's. In this case, there are no spousal benefits. Both workers take their own benefits.

2) When one spouse dies. The surviving spouse gets either their own benefit or the widow/widower benefit, which is equal to the benefit of the deceased if the survivor is of full retirement age. If the survivor is not yet of full retirement age, the benefit is reduced.
InvestingMom
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Questions

Post by InvestingMom »

Very interesting article.

I am confused though about the statement
Although early retirees can lose a portion of their benefits if they earn too much, once you reach 66 you don't incur any penalty for working.)
I am not retired yet and so I need to get up to speed on SS but I do know that my mom is over 66 and she is penalized from a tax standpoint for working too much. In other words the SS with her part time salary pushes her into a higher tax bracket. So considering that the lower earner may continue to work past 62, does taking early SS make sense if it pushes you into a higher tax bracket?

Incidentally, I find the bias in the article towards assuming that men make more a bit bothersome. Unless I am misunderstanding something, I believe that the point of the article is that the lower earner should consider taking SS at 62 to receive the maximum benefit (assuming you have no reason to believe one of you will live longer or shorter.) Yeah I understand that as a population men make more than women, but the article would be more clear if they stated it factually because I was not sure at first if the point was that because women live longer they should take the SS earlier...or because they were assumed to be the lower earner. Also, I am not so sure that for married people, men overwhelmingly make more than women, especially near retirement age.
stipeman
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Re: two high earners

Post by stipeman »

sscritic wrote:
stipeman wrote:Jim,

Let's say there are two high earners both at the maximum benefit and both retire at 60. What is the best strategy:

1) wife at 62; husband at 70
2) husband at 62; wife at 70
I am not Jim, but try thinking about the situation as follows:

Since both have the same work record, there will be two benefits, high and low, that apply in both situations. If both live past age 70, when one of them dies, the survivor will get the high benefit, either as a worker or as a spouse. Thus there is no difference if both live to age 70.

So what if the person aiming for high (waiting until 70) dies before reaching 70? The higher benefit is then the benefit that the dearly departed would have received if he/she had started benefits on the day of death. This benefit, the reduced high benefit, is greater than low and less than high. The survivor will then have the reduced high benefit for life. Obviously, this is not as good as having the waiter make it to 70.

The goal of the game is to make sure that the person who doesn't start at age 62 lives until age 70. Thus, you should have the person who has the best chance of living to age 70 be the one to wait.

If you want to insure for the long term, this is the correct strategy. However, if you want to maximize net present value, the situation changes. If the early starter dies before age 70, the couple receives fewer years of the low benefit. Thus the total value received is increased if the early starter makes it to 70 (gaining eight years worth of low benefits). This argues for starting the healthiest person early.

I prefer the idea that waiting until age 70 is insurance against a long life. If that is your goal, have the unhealthy partner start at 62.
I think a couple in this situation would always want to maximize expected net present value because they have the means to insure against a long life anyway. To actually do this calculation you need to integrate the probabilites over all possible futures. The answer to my original question is definitely not obvious.

To make things more complicated, the Forbes article states that if the "late starter" dies early, the "early starter" has the option of paying back all of his/her benefits received to date (without interest) and waiting until 70 to get the maximum benefit. In the meantime the spouse can still get the intermediate benefit from the deceased spouse (I think). The value of this option supports than (1) is the correct strategy.

I don't know what the correct strategy is or if it has even been analyzed in a published paper. Anyone?
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Re: Questions

Post by cherijoh »

InvestingMom wrote:Very interesting article.

I am confused though about the statement
Although early retirees can lose a portion of their benefits if they earn too much, once you reach 66 you don't incur any penalty for working.)
I am not retired yet and so I need to get up to speed on SS but I do know that my mom is over 66 and she is penalized from a tax standpoint for working too much. In other words the SS with her part time salary pushes her into a higher tax bracket. So considering that the lower earner may continue to work past 62, does taking early SS make sense if it pushes you into a higher tax bracket?
If you start SS at 62 and continue working, you have to give back part of the SS benefits if you earn more than a threshhold amount. This penalty goes away if you start your benefits at normal retirement age. That's in addition to being taxed on the SS benefits due to AGI being too high (which never goes away).

With respect to the higher tax brackets, whether you should postpone taking SS is going to depend on individual circumstances - for example if you need the SS to make ends meet vs. banking it or using it for your vacation fund...
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Re: Questions

Post by sscritic »

cherijoh wrote:
If you start SS at 62 and continue working, you have to give back part of the SS benefits if you earn more than a threshhold amount. This penalty goes away if you start your benefits at normal retirement age. .
Change the last sentence to "This penalty goes away once you reach normal retirement age."
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Re: two high earners

Post by sscritic »

stipeman wrote: To make things more complicated, the Forbes article states that if the "late starter" dies early, the "early starter" has the option of paying back all of his/her benefits received to date (without interest) and waiting until 70 to get the maximum benefit. In the meantime the spouse can still get the intermediate benefit from the deceased spouse (I think). The value of this option supports than (1) is the correct strategy.
I don't believe that you can take one benefit while postponing another. Otherwise, the "late starter" could take spousal benefits on the record of the early starter from age 62 to 70 before beginning the late (high) benefit. I can't find it in the POMS, but I am sure I have read this before (you can't take one without the other). I don't know if the same rule applies to widow/widower benefits and your own retirement benefit, but my guess is you can't take one without the other. If you do apply for both, only the higher one is payable.
kirk mccord
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sscritic

Post by kirk mccord »

Thanks for the reply. I do understand the difference between a spouse's own benefits and "spousal benefits". The point I was trying to make is if the lower earning spouse begins benefits at age 62 based on his or her own work record, it is my understanding that there is a reduction in what the lower earning spouse would later receive as spousal benefits (assuming the spousal benefits exceeds the spouse's benefits based on his or her own work record) when the higher earning spouse retires and also a reduction in what the lower earning spouse would receive when he or she succeeds to the benefit of the higher earning spouse when the higher earning spouse dies.

In other words, if the lower earning spouse takes benefits at 62 instead of 66, there is a reduction in the potentially higher benefit that he or she would later receive either as spousal benefits (when the higher earning spouse retires) or as the successor to the higher earning spouse's benefit (when the higher earning spouse dies).

Therefore, in situations where there is a relatively large disparity in earnings between the spouses and the age difference is not that great, it looks to me like it would be better for the lower earning spouse to wait until full retirement age to begin benefits so as not to reduce the potentially higher benefits that would come later. For example, if the spouses are the same age, it seems like the lower earning spouse should wait until full retirement age (66) to take benefits on his or her own record and the higher earning spouse should wait until 70. So this would be a 66/70 strategy instead of a 62/70 strategy. It would potentially lock in a higher benefit for the lower earning spouse in later years.

Comments?

Kirk
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Re: sscritic

Post by sscritic »

kirk mccord wrote:Thanks for the reply. I do understand the difference between a spouse's own benefits and "spousal benefits". The point I was trying to make is if the lower earning spouse begins benefits at age 62 based on his or her own work record, it is my understanding that there is a reduction in what the lower earning spouse would later receive as spousal benefits (assuming the spousal benefits exceeds the spouse's benefits based on his or her own work record) when the higher earning spouse retires and also a reduction in what the lower earning spouse would receive when he or she succeeds to the benefit of the higher earning spouse when the higher earning spouse dies.

In other words, if the lower earning spouse takes benefits at 62 instead of 66, there is a reduction in the potentially higher benefit that he or she would later receive either as spousal benefits (when the higher earning spouse retires) or as the successor to the higher earning spouse's benefit (when the higher earning spouse dies).

Kirk
I have been wrong before, but I believe that "spouse" is not the same as "widow." You are correct that a wife's spousal benefits are reduced if the wife began her own retirement benefits before age 66.
However, a widow's benefit is NOT reduced because of an earlier claim of retirement benefits. Widow's benefits are reduced if taken before age 66.

Here is an example. Wife age 62, husband age 63.

1) At age 62, wife takes own retirement benefits.
2) At age 64, husband takes own retirement benefits and wife begins spousal benefits at age 63.
3) At age 65, husband dies, and wife takes widow's benefits at age 64.

1) Wife's benefits are reduced by 25% by being four years before full retirement age.
2) Assuming wife's PIA is less than 50% of husband's PIA, he gets a benefit of 86.67% of his full benefit and she continues to get her reduced benefit. In addition, she gets a reduced portion of the difference between her PIA and his PIA because she is starting spousal benefits three years early (based on her age, not his).

Note that her own benefit does not stop; the spousal benefit is an add-on. Calling this a reduced spousal benefit is incorrect. If the spousal benefit begins at age 66, it (the add-on) is not reduced. However, the spouse's own original benefit continues at a reduced level. The total benefit is reduced, but the true spousal portion of the benefit is not (unless taken early).

3) She gets reduced widow's benefits based on her age (64, two years early).

POMS says
The WIB OB is equal to 100 percent of the largest of the following PIAs:
Death PIA
Deemed Life PIA (Including DRCs - RS 00615.702 and any RR recomputation.
Widow(er)'s Indexing Original Benefit (RS 00615.302).
In English, this means that the widow's benefit is based on the larger of the husband's PIA on date of death, the husband's PIA increased for delayed retirement (over 66) whether begun or not, and a special computation used when the worker died before age 62.

The reduction in widow's benefit only considers the age of the widow when benefits begin. It is not reduced for the widow taking her own retirement benefits early. The widow's benefit and the retirement benefit are computed separately. The larger benefit is paid. There is no add-on in this case.
grok87
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Another paper

Post by grok87 »

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Adrian Nenu
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Take SS when you need it

Post by Adrian Nenu »

Take SS when you need it.

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BlueEars
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Post by BlueEars »

Still not sure how our situation works out. In our case we are both about the same age. She is lower earner and 50% of my benefit at 66 would be higher then her benefit so the spousal benefit seems to be best for her.

Suppose she takes SS at 62 and I wait until 66. Of course, I get the full benefit if I wait until 66. At her reaching 62 (if I do a "file and suspend") does she get 50% of my age 62 benefit? Then when I take SS at 66 she does not get any step up for my having waited until 66?
sscritic
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Post by sscritic »

Les:

The "spouse gets 50%" is a myth. It applies only if the wife and husband both begin benefits at FRA (assume age 66).

If your wife begins her own retirement benefits at age 62 (only possible if born on the first or second of the month), she gets 75% of her PIA (full benefit at age 66). She can only get spousal benefits if you start taking benefits. Her spousal benefit at age 62 will be reduced by 30%; she will get 70% of 50% of your PIA (full benefit at age 66). Her spousal benefit is not affected by whether you take your benefit early or late; it is based solely on her age and your PIA, not your reduced benefit or your benefit increased by delaying past 66.

So how do you combine the two benefits and the two reductions? Assume her PIA is $800 and yours is $2000. Her own retirement benefit at 62 is $600 (if that is all she takes). Her spousal benefit at 62 is $700 (if that is all she takes). If she takes both, you first figure the difference between her own full $800 and her full spousal $1000 (half of your PIA). The difference is $200. When she takes both her own retirement benefit and the spousal benefit, she gets her own reduced benefit plus the a reduced portion of the $200 "excess spousal benefit." If she starts at age 66, her benefits will total $1000. By taking both at 62, she gets both parts reduced by their separate factors. For her own retirement, she gets $600 (75% of $800). For her spousal portion, she will get 70% of the $200 excess or $140. Her total benefit will be $740.

If she starts her own benefit at 62, she will get $600. If she waits until 66 to start spousal benefits, she will get 100% of the excess spousal benefit plus her still reduced $600. The total will be $800.
historydavid
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soc security

Post by historydavid »

Since I am 35 and my wife is 24 I plan to take the entire 12 dollars :roll: per year as early as possible. where else but social security can you put in $2000 per year and get back half of that in 30 years?

For younger people I would say take all that you can as soon as you can as I don't forsee it being around very long (2040?). I don't mean to be pessimistic but it seems that is where It is headed.

"A bird in the hand is worth more than two in a bush"
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Sidney
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Post by Sidney »

For younger people I would say take all that you can as soon as you can as I don't forsee it being around very long (2040?). I don't mean to be pessimistic but it seems that is where It is headed.
When I was first starting out in the late 70s this same fear came up several times over the next several years. While there are certainly no guarantees, I have a hard time imagining the political consequences of a total collapse of SS.

However, my own saving and investment planning during that period did not explicitly take into account any expectations of SS. As a result, I will be able to retire early (55) next year. SS + a DB pension that starts at age 65 will simply be an extra component of the cash flow at that time. Of course, by then oil will be $800 a barrel and the Euro will be worth $10 so all I will be able to do is sit on the back porch and whittle. :D
I always wanted to be a procrastinator.
JMahaney
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Working

Post by JMahaney »

If you start SS at 62 and continue working, you have to give back part of the SS benefits if you earn more than a threshhold amount.
Be careful on this as there is a lot of misinformation on this one too. You only temporarily "lose" SS if you earnings put you over the earnings limit. You can get those benefits back at your Full Retirement Age.

For example, if your Full Retirement Age is 66 and you start benefits at 62, you initially lock in a lifetime 48 month reduction. But let's say you earn enough part time over the next four years so that you have 12 months of your SS benefits "taken back" by the SSA. At your Full Retirement Age, you would get credit for the months they took back and your lifetime SS reduction would be calculated based on a 36 month reduction and not a 48 month reduction.
JMahaney
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Controlling benefits

Post by JMahaney »

I don't believe that you can take one benefit while postponing another.
One of the points of our research was to point out that there is some control over when someone can start benefits. Let's assume the wife is the lower earner and is eligible for a spousal benefit as her own worker SS benefit is less than one half of her husbands.

If the spouse files for her worker benefits prior to her Full Retirement Age (FRA) and she is entitled to a spousal benefit, than she cannot take one without the other. But importantly, she only is entitled to the spousal benefit IF the husband has filed for his benefits. Thus you can control when the wife becomes entitled to the spousal benefit.
M02424
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Minimizing Taxes

Post by M02424 »

Mahaney and Carlson paper discusses taking living expenses from traditional IRA and postponing SS as a way to reduce taxes.

Assumptions seem to be chosen to make the case but may not apply generally. For example MRDs may be so large that effect is offset.

Also they do not discuss option of doing Roth conversions before taking MRDs when there are taxable assets to use for living expenses and taxes.
This to minimize higher tax bracket effect with MRDs.

Also what to do when tax on cap gains is zero from 2008 to 2010. Is it better to take gains or to do Roth conversions?

Prudential paper at least mentions Roth conversions but seems to push their financial services.

Both papers make a point of high cost of self management of investments using load funds and financial advisor fees to reduce return. No mention of Diehard techniques of minimizing costs. So both seem to be sales pitches for investment advisors.
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dm200
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Perhaps I missed it

Post by dm200 »

in these discussions, but I do not think that a built in bias against males for retirement is adequately discussed.

It is an actuarial fact that females live longer, both in general and life expectancy at retirement age, whatever that age is. Females, therefore collect significantly more in SS retirement benefits than males, all other factors being equal.

Take twins John and Jane. Over the decades, they have identical income covered by Social Security. They both retire at, say, age 66 - the "full" retirement age for them. They receive an identical benefit. BUT - on average, Jane will receive significantly more over her expected life expectancy than John.

One measure of the premium Jane receives is to compare an immediate annuity of a lump sum (say 100,000) benefit for a 66 year old male and a 66 year old female. From Vanguard, someone born November 1, 1941, receiving a lifetime payment beginning January 1, 2008 - a male would receive 713.13 per month and a female would receive 656.06 per month. For an inflation adjusted payment for the same $100,000, the male would get $519.01 and the female would get $466.00.

There are, perhaps, other ways of measuring this sex affect, but it is real and, I believe, should receive more attention.

dan
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Re: Working

Post by sscritic »

JMahaney wrote:
If you start SS at 62 and continue working, you have to give back part of the SS benefits if you earn more than a threshhold amount.
Be careful on this as there is a lot of misinformation on this one too. You only temporarily "lose" SS if you earnings put you over the earnings limit. You can get those benefits back at your Full Retirement Age.

For example, if your Full Retirement Age is 66 and you start benefits at 62, you initially lock in a lifetime 48 month reduction. But let's say you earn enough part time over the next four years so that you have 12 months of your SS benefits "taken back" by the SSA. At your Full Retirement Age, you would get credit for the months they took back and your lifetime SS reduction would be calculated based on a 36 month reduction and not a 48 month reduction.
But this is still a permanent reduction. The benefits are not reduced permanently, but you are not paid back the money lost during the years 62-66. For example, suppose you take benefits at 62 but work enough during the next year so as not to get any benefits during that year. For the years 63 to 66, you get age 62 level benefits, then at age 66, you start age 63 level benefits. If you wait until age 63 to begin benefits, you get age 63 level benefits for the rest of your life. The gain from waiting is three years of the difference in benefit levels.

On the other hand, if you are going to be working the equivalent of three months each of the years from 62 to 66, you might as well start at 62 (assuming you don't want to wait until 66 or 70).

P.S. to the poster of the quote. You are supposed to estimate your yearly earnings before the year begins. SS will withhold your checks for the appropriate number of months at the beginning of the year. They don't wait for the end of the year and then ask you to send them a check. The procedure is more of a "withholding" than a "giving back."
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Re: Perhaps I missed it

Post by sscritic »

dm200 wrote:in these discussions, but I do not think that a built in bias against males for retirement is adequately discussed.

It is an actuarial fact that females live longer, both in general and life expectancy at retirement age, whatever that age is. Females, therefore collect significantly more in SS retirement benefits than males, all other factors being equal.

dan
Well, the original post was about an article on married couples, so under current rules, that means one of each.

Sex differences are not ignored in most articles. Single women are advised to wait until 66 or 70, while single men are advised to start between 62 and 66. Of course, gender has nothing to do with it; longevity is the real issue. A woman with breast cancer whose mother died at age 48 should probably start benefits at age 62. A man whose parents are both alive well into their 90s might want to wait until 66 or 70. Gender is just a proxy for longevity. Those who live the longest gain the most from waiting.
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Post by BlueEars »

Thanks sscritic very much for the detailed explanation. You don't have to answer this of course, but out of curiousity how do you know so much about this subject? I like to think I'm fairly well informed on financial matters but SS is a grey area for me.
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Re: Minimizing Taxes

Post by BlueEars »

M02424 wrote:Also what to do when tax on cap gains is zero from 2008 to 2010. Is it better to take gains or to do Roth conversions?
We are planning on taking the cap gains during this period. For our tax situation, I think Roth conversions are a great reason to put off taking SS until later but this is a special cap gains event -- not likely to repeat. One of the items that I track on a one page financial spreadsheet is total cap gains for each position held. For us these 3 years will probably allow us to take all the cap gains and legally avoid the taxes. Feels a bit like cheating but we have payed a lot of taxes and SS over the working years.
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mickeyd
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Post by mickeyd »

Let's assume the wife is the lower earner and is eligible for a spousal benefit as her own worker SS benefit is less than one half of her husbands.
In that case would the following be accurate?

Husband age 66; Wife age 62

Wife will draw Spousal benefit (50%)

Both file for SS on same day

Husband receives $1000; Wife gets $375 (500 x .75) each month~ (Total $1375)

Husband dies~Wife gets $1000/month.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle
kirk mccord
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mickeyd

Post by kirk mccord »

You gave an example that illustrates the question I asked in an earlier post. I believe all of the info in your example is correct, except maybe the last part. I am not sure that the wife would get the husband's full $1,000 benefit when he dies, if she starts SS at age 62. It may be something less than $1,000.

sscritic and/or Mr. Mahaney, can you clear this up?

Kirk[/quote]
sscritic
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Re: mickeyd

Post by sscritic »

kirk mccord wrote:You gave an example that illustrates the question I asked in an earlier post. I believe all of the info in your example is correct, except maybe the last part. I am not sure that the wife would get the husband's full $1,000 benefit when he dies, if she starts SS at age 62. It may be something less than $1,000.

sscritic and/or Mr. Mahaney, can you clear this up?

Kirk
I tried to answer this for you before Kirk, but perhaps the answer got lost in all the other considerations. If you look back to my reply to your earlier post, I wrote
the widow's benefit is based on the larger of the husband's PIA on date of death, the husband's PIA increased for delayed retirement (over 66) whether begun or not, and a special computation used when the worker died before age 62.

The reduction in widow's benefit only considers the age of the widow when benefits begin. It is not reduced for the widow taking her own retirement benefits early. The widow's benefit and the retirement benefit are computed separately. The larger benefit is paid.
Most of the rules for social security can either be found in the Social Security Handbook or the more detailed Program Operations Manual System(POMS) The information on simultaneous entitlement to retirement benefits and widow's benefits can be found on the page
RS 00615.150 Simultaneous RIB-WIB or RIB First (A/D or A then D)
If an individual is entitled to WIB and RIB simultaneously or RIB then WIB, determine each benefit independently
.

To read this, you need to learn the code. RIB - retirement insurance benefit, WIB - widow's insurance benefit, A - the number holder (worker whose record is the basis for benefits), and D - widow.

The computation of the widow's benefit is detailed here.

There are other pages that detail how simultaneous benefits are paid.
The following are the types of calculations that are possible:
Method A - Both benefits calculated independently; one benefit payable.
Method B - Both benefits calculated and reduced independently; small MBA paid plus excess of larger MBA.
NOTE: If larger MBA is a RIB or DIB just pay the RIB or DIB.
Method C - First benefit calculated independently; reduce excess of second benefit for age (if larger).
Method D - First benefit calculated independently; carry-over reduction applies to second benefit.
Note that method B applies here: calculate each benefit (RIB and WIB). You are actually paid the smaller of the two plus the excess of the larger over the smaller. Example: RIB = $400, WIB=$1000. You are paid $400 plus an extra $600. Most people call this getting the $1000 widow's benefit, but although the total is still $1000, you are actually getting some of each.

By the way, DIB is a disability insurance benefit. Rules for simultaneous benefits with disability are even more complicated!
sscritic
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Post by sscritic »

Kirk:

Maybe I missed part of your question. I was assuming the wife started her own benefit at age 62 but her husband did not die until she was 66. If her husband dies before age 66 and she starts widow's benefits, they will be reduced for the age she is when he dies. Again, it has nothing to do with whether she started her own retirement benefits early. It is only affected by her beginning widow's benefits before FRA.

If the husband dies before she turns 66, I am not sure if she can refuse the widow's benefits while continuing to collect her own retirement in order to get larger widow's benefits at age 66.
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Post by sscritic »

mickeyd wrote:
Let's assume the wife is the lower earner and is eligible for a spousal benefit as her own worker SS benefit is less than one half of her husbands.
In that case would the following be accurate?

Husband age 66; Wife age 62

Wife will draw Spousal benefit (50%)

Both file for SS on same day

Husband receives $1000; Wife gets $375 (500 x .75) each month~ (Total $1375)
The reduction for a spouse is different than for a worker. Assuming a FRA of 66, the worker gets 75% at age 62 but the spouse gets only 70% of her 50%. Husband $1000, wife $350.

If husband dies, wife gets $1000 if she is age 66 or over. If she is younger, there is a reduction. And yes, widow's reductions are different than worker's or spouse's.
kirk mccord
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Post by kirk mccord »

sscritic,

Thanks for your patience in answering my questions. I think I am beginning to "see the light" on this. I still think the question of when the lower earning spouse should begin benefits is subject to a lot of variables. The 62/70 strategy may not be best.

For example, if both spouses are the same age and both have "good genes", it may be better to pursue a 66/70 strategy instead of 62/70. As you said, it depends on whether the object is to maximize present value (62/70 strategy) or insure against a long life (66/70 strategy).

Also, your link to the Social Security handbook was quite helpful and answered a lot of my questions.

Kirk
JMahaney
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SS

Post by JMahaney »

I think I am beginning to "see the light" on this. I still think the question of when the lower earning spouse should begin benefits is subject to a lot of variables. The 62/70 strategy may not be best. "

I don't disagree at all. We did study the net present value of expected benefits - but those only use life expectancy. SS is an insurance vehicle that pays off in greater amounts the longer you live. Also think that SS is much more valuable in a world of low intermediate and long-term interest rates. So, there is a benefit if both spouses delay and both live longer than "average" retirements.

We also write about the tax benefits of delaying SS and these can be very large if both couples delay. Most researchers and articles assume that higher income retirees will face the taxation of 85% of their SS. And this is in addition to the taxes on their IRA income. But, if you look more closely at the formula, couples with large SS income (say after age 70) and lower IRA income can dramatically reduce thier taxes.

This is seen essentially by examining two parts of this equation. #1 SS counts at a 50% in the Combined Income formula (aka Provisional Income formula). And one of the three tests which then determines the taxation of SS says " 50% of the excess over the first threshold ($32,000) plus 35% over the second ($44,000). So you could have $64,000 of SS income (counting at a 50% rate) before ever hitting the "first threshold".

Factor in personal exemptions and standard deductions and you can see how taking larger SS amounts and lower IRA amounts (after age 70) can potentially lower one's taxes significantly.

As you can tell, this is not intuitive and not easy to follow.

I would argue that what matters most is after-tax income and risk mitigation. Once you focus on these, you can potentially build more wealth with your remaining portfolio.

sscritic
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Post by sscritic »

JMahaney has raised the issue of the taxation of social security benefits. The formula has some seemingly perverse effect. While the percentage of ss income that is taxable increases as your other income increases, the percentage of ss income that is taxable can decrease as your ss income increases for a fixed level of other income.

For example, suppose social security benefits = 12 thousand (all figures in thousands from here on) and your other income is 34. Your adjusted total is 34 + 12/2 = 40. You pay tax on (40 -32) / 2 = 4. As a percentage of your 12 in benefits, you pay tax on 4/12 = 33% of your benefits. If your other income stays the same but you wait to start and increase your social security benefits to 16, your adjusted total is 34 + 16/2 = 42 and you pay tax on (42 - 32)/2 = 5. As a percentage of your 16 benefits, you pay tax on 5/16 = 31.25% of your benefits.

If your other income is greater than 44, the same effect can occur. If ss = 20 and other is 45, you pay tax on 76.75% of your benefits. If ss = 24 and other is 45, you pay tax on 71.04% of your benefits.

Note that these are the actual percentages that are taxable, not the marginal rates (50% or 85%).
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Vig Oren
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JMahaney

Post by Vig Oren »

JMahaney ,


Hi Joe, the following table is from your report. May I ask if these projected returns are still valid (and from where in the Whitehouse did you get them)? :roll:

Regards

Projected Real Rates of Returns (%) Anticipated Over the Next 40 Years


Financial Expert.......Organization.......Stocks......Gov Bonds..Corp Bonds
Name......................Name...................%.................%..............%

William Dudley.....Goldman Sachs.......5.00..............2.00...............2.50
Jeremy Siegel......Wharton.................6.00..............1.80...............2.30
David Rosenberg..Merrill Lynch...........4.00..............3.00..............4.00
Ethan Harris.........Lehman Broths.......4.00...............3.50..............2.50
Robert Shiller.......Yale.......................4.60...............2.20..............2.70
Joseph La Vorgna.Deutsche Bank.......6.50...............4.00...............5.00
Parul Jain.............Nomura.................4.50...............3.50..............4.00
John ..Lonski........Moody’s.................4.00...............2.00..............3.00
David Malpass......Bear Sterns............5.50...............3.50..............4.25
Jim Glassman.......J. .P. .Morgan.........4.00...............2.50..............3.00

........................Average...................4.81.................2.80.............3.33

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ | "One of the greatest piece of economic wisdom is to know what you do not know"{John Galbraith}
JMahaney
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Vig

Post by JMahaney »

Vig - I don't know if they are still valid. We used them to illustrate a point that investment returns may indeed not be what people hope. There is a constant argument that one should take SS early and invest it and you can do better. Well, I think this is not going to be true for the majority of folks - even ignoring the tax angle. The Wall Street Journal article was taking a pulse on what "experts" thought future returns would be like - before expenses. I think the big thing is the rate of return for fixed income instruments. Rates on the 10 yr treasury are now below 4.5%..If you could safely get 8 - 9% guaranteed then the value of SS income goes down. But we are no longer there..Even when we were there years ago, inflation was much higher...

And when you factor in behavioral factors that influence investing during the retirement years, the average individual doesn't approach the returns of market anyway....So we were using it to make a point...As opposed to the old DB pension years, retirees took their pensions and SS as soon as they retire...With 401ks, you now have more choice on "staging" your income...Maximizing SS, we think can help lower the overall next egg size that is needed. Regards.
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AzRunner
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Post by AzRunner »

Thanks for the link to the informative article by James I. Mahaney and Peter C. Carlson and the discussion that it has generated. I had read the Jennings and Reichenstein paper and I am happy to see how this paper builds on that effort. The basic approach and conclusions seem to make sense.

In my own situation where I have a significant tax deferred account due to the rollover of a cash balance pension and a 401(k), I can see the advantages of delaying SS even though I think I will still use the IRA withdrawal to fund my Roth IRA and live on my taxable account.

I'll have to look at the tax implications of delaying both of our SS (my wife's SS benefit is now 57% of mine) vs. starting my wife's SS benefit early. This impacts the amount of money I can move from my IRA to a Roth while staying in the 15% tax bracket.

The slam dunk seems to be to start my wife's SS benefit early since the second to die probability far exceeds that of one of us dropping off early. Right now I still have about five years to think about it :)

Norm
johndcraig

Post by johndcraig »

Jim Mahaney

I hope you are still reading this.

Assume I am 65 and my wife is 66. She has no earnings history. As I understand it, the best approach will be for me to take SS benefits at age 66 (FRA) and then temporarily suspend them. As a result she will receive one-half of my FRA benefit at age 67 and I will take full benefits at age 70. Make sense? Is the SS generally aware of this technique?

Thanks

John
JMahaney
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JohnDCraig

Post by JMahaney »

Yes, that approach is often beneficial for folks in your situation. Knowing nothing more about your situation, it seems that you are leaving spousal benefits on the table if you are planning on delaying SS since your wife is already past her FRA. You need to have reached your FRA, so if that is 65 and 10 months, you would have to wait until then.

SS is not that familiar with it. You often have to print out the two pieces of the Procedure Manual (known as the POMS) to show them that you can voluntarily suspend your benefits at FRA and the second part shows that this does not affect the eligibility of other beneficiaries (i.e. you wife) to take benefits off of your record.

If you need the exact POMs, they are GN 02409.100 and GN 02409.110.
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