Maximizing
Your Social Security Benefits
John Mauldin
I
mentioned a few weeks ago in Thoughts
from the Frontline the statistic I read that 47% of Americans have
less than $400 in savings to meet emergencies. Many of those people are
elderly. When I was at Rob Arnott’s Research Affiliates conference a few weeks
ago, we heard two presentations on the state of the Social Security system, and
looked at two approaches to fixing the system. One presentation was by my
friend and Boston University professor Dr. Larry Kotlikoff, who has contributed
today’s Outside the Box.
It
will probably come as no surprise that I would prefer to fix Social Security
differently from the approaches that were suggested at the conference; but
there’s no disputing that we’re going to have to figure out how to fund $25
trillion, and that sort of money doesn’t just show up as spare change in your
sofa.
It
should be apparent that more strain is going to be put on the Social Security
system. And that is bad for the elderly. About two-thirds of older
Americans rely on Social Security for the majority of their income:
Over 60 percent of Americans derive most of their
monthly income from Social Security. That is enormous. This is
something that is not going to go away but will place additional burdens on
those working. Those working are the young and they are in a world full
of deep college debt and lower wages. You also have many older
Americans working into old age because they simply need additional income.
(goldsilver.com)
I
was introduced to Larry Kotlikoff by my good friend Scott Burns (his personal
finance and investing columns appear in newspaper everywhere). Scott and Larry
collaborated on a book on the total unfunded debt of the US, which is now
approaching $200 trillion. Larry went on to write a book (with other
co-authors) about the Social Security maze. He came down to visit me about a
year ago, and as we sat chatting in my living room he said he could probably
make me tens of thousands of dollars in the Social Security system in five
minutes if I would answer a few personal questions. I laughed and told him what
he wanted.
To
my amazement, even though I have put off taking personal Social Security
retirement benefits to maximize the total payout later, I was leaving almost
$40,000 on the table. It didn’t take Larry even five minutes to set me
straight.
It
turns out, as Larry says, that
Social Security has 2,728 rules in its Handbook
covering retirement benefits, spousal benefits, child benefits, disabled child
benefits, widow(er) benefits, child-in-care spousal benefits, mother (father)
benefits, divorced spousal benefits, divorced widow(er) benefits, divorced
mother (father) benefits, disability benefits, and parent benefits.
The system’s Programming Operating Manual System
has hundreds of thousands of rules about those 2,728 rules. The number of
potential benefits, legitimate months for initiating collection of the various
benefits, ways in which one spouse’s benefit collection decisions can affect
the other’s, and all the rules within rules limiting what you can receive and
when you can receive it makes Social Security far more complicated than even
the federal income tax. This is why www.maximizemysocialsecurity.com
needs to consider so many cases.
And
by the way, they made some rather radical changes in how those benefits are
calculated after Larry’s book came out and somebody (effectively, the White
House) decided to block some of the paths to getting your benefits. So, Larry
sat down and rewrote the book, and he also completely revamped his software.
For roughly $40 you can go to his website, type in a bit of data, and learn
what you should be doing about your own Social Security benefits.
Larry’s
book is called Get What’s Yours
– the Revised Secrets to Maxing Out Your Social Security.
For
today’s OTB I asked Larry to give me a simple introduction to what he does and
how he thinks about Social Security and to provide links to his website. This
will probably not be a useful article to many of my readers who are not US
citizens; but if you are an American who is retired or near retirement, or if
you have parents who are retired, it might pay you to do a little homework.
At
the very end of the piece is a paragraph where Larry talks about his plans to
run for the US presidency as a write-in candidate. We all know the likelihood
of that campaign succeeding, but Larry does want to get his ideas about dealing
with the federal deficit out there to his many people as possible. While he and
I don’t agree on some of the solutions, we are an absolute agreement about the
size and dimensions of the problem. Not solving these problems is going to result
in a massive crisis, not only here in the US but around the world. We need to
start having a serious discussion about the elephant in the room and stop just
rearranging the furniture.
I’m
beginning to recover from the emotional high of the last week’s Strategic
Investment Conference. I was so proud of my staff and team as we pulled off
what everyone agrees was the best SIC ever. In another month, we will start to
sit down and figure out where the next conference will be and how to make it
even better.
You
have a great week, and I hope that some of you figure out how to get a little
more efficiency out of your own Social Security benefits.
Your
trying to figure out how he got old enough to qualify for Social Security
analyst,
John Mauldin, Editor
Outside the Box
Maximizing Your Social Security Benefits
By Dr. Larry Kotlikoff
Social Security benefits are a big deal, income
wise, for most retirees. For 20 percent, it’s the only deal. For 30 percent
it’s the main deal. And for another 20 percent, it’s the second biggest deal.
So it’s passing strange, to use a Mark Twain expression, that most households,
be they poor, middle class, or rich leave tens to hundreds of thousands of
dollars in Social Security benefits on the table.
You can be the smartest person in the world and
make the dumbest Social Security mistakes.
My friend, Glenn Loury, a brilliant
economist at Brown University, is an example. Glenn is a widower. His magical
wife, Linda, tragically passed at 58 after a distinguished economics career at
Tufts.
Glenn and I had dinner one night a few months shy
of his 65th birthday. Somehow we got onto his Social Security plans.
Glenn knew next to nothing about widower benefits. When I mentioned them, he
dismissed the idea saying he had earned too much compared to Linda.
Glenn was wrong. Within two minutes I made him
$120,000. The strategy was simple. Glenn, who was still working, would collect
his widower benefit starting at his full retirement age, 66 (when Social
Security’s stops applying their their earnings test that taxes the
benefits of those still working).
Given Linda’s salary, Glenn’s widower benefit
would, I figured, total more than $30,000 a year for four years. Meanwhile
Glenn would let his own retirement benefit grow by 8 percent per year through
age 70. Since Glenn had been planning on taking his own benefit at 70, the
$120,000 was found money. Needless to say, Glenn paid for dinner.
How
I Became a Social Security Expert
I learned about Social Security by necessity. I’m
an economist at Boston University, but I have a personal financial planning
software company, whose website is www.economicsecurityplanning.com. Our goal is to find safe
ways to sustain and raise people’s spending power. And there are many such
ways, particularly taking Uncle Sam’s best benefit and tax deals.
One of our programs, www.maximizemysocialsecurity.com, sells for just $40. But
it considers each of your potentially millions of benefit-claiming strategies,
finding precisely the one that will maximize your household’s lifetime
benefits. Creating this program required learning Social Security’s rules,
which I did at great cost to my sanity.
Social Security has 2,728 rules in its Handbook
covering retirement benefits, spousal benefits, child benefits, disabled child
benefits, widow(er) benefits, child-in-care spousal benefits, mother (father)
benefits, divorced spousal benefits, divorced widow(er) benefits, divorced
mother (father) benefits, disability benefits, and parent benefits.
The system’s Programming Operating Manual System
has hundreds of thousands of rules about those 2,728 rules. The number of
potential benefits, legitimate months for initiating collection of the various
benefits, ways in which one spouse’s benefit collection decisions can affect
the other’s, and all the rules within rules limiting what you can receive and
when you can receive it makes Social Security far more complicated than even
the federal income tax. This is why www.maximizemysocialsecurity.com
needs to consider so many cases.
Becoming
a Social Security Columnist
As a “reward” for learning all the mind-boggling
details, Paul Solman, my friend and long-standing economics correspondent at
PBS NewsHour, asked me to write a weekly column for the PBS NewsHour’s website
answering Social Security questions. Three and half years later, the column is still one of the site’s top draws.
Given the huge thirst for Social Security answers,
Paul and I, together with www.money.com columnist, Phil Moeller, decided to write a
book describing the best strategies for collecting Social Security. The book, Get
What’s Yours – the Secrets to Maxing Out Your Social Security was released
in February 2015 and instantly became a #1 NY Times Best Seller.
Unfortunately, the book’s success had untoward
consequences. The White House, we learned, didn’t like the idea of our telling
people how to get what they paid for. In November, as part of the 2015 Budget
Bill, they teamed up with Congress to change Social Security’s rules, taking
away certain claiming options for many younger households.
From one day to the next, my company’s software and
my co-authored Best Seller were out of date. This was no fun, to put it mildly.
But my company’s exceptional engineers fixed our software within two weeks, and
my co-authors and I immediately started rewriting our book. Our marvelous
publisher, Simon & Schuster, also went into crash mode. They just released Get
What’s Yours – the Revised Secrets to Maxing Out Your Social Security.
Three
General Rules to Maximizing Your Lifetime Benefits
Our book became a best seller in part because
Paul’s is an exceptionally funny writer and because Phil and I pulled no
punches in describing Social Security as a bureaucrat’s daydream and a user’s
nightmare. But the main draw was distilling Social Security’s gobbledygook into
English and providing four central strategies for getting what’s yours.
Rule 1 – Be patient where patience pays.
Take a high-earning 60 year-old couple. Under the
new law, they both make too much and are both too young for either to collect
spousal benefits from the other. If the lower of the two earners dies first,
the survivor can, however, collect a widow(er) benefit. But the immediate issue
for this healthy couple is when to take retirement benefits.
If they take their retirement benefits as early as
possible – at 62, they’ll receive $1.30 million in lifetime benefits (present
valued as of their current age 60). If they wait till 70, the figure is $1.65
million. That’s an extra $350,000! It too represents found money. If the couple
takes their benefits at 62 and finds $350,000 hidden in their attic they’d be
in the same boat (ignoring federal income taxes). Had the law not changed, the
$350,000 in found money would be $410,000. But $350,000 is still a massive
bonanza.
Why does patience pay so much? The answer is that
Social Security pays much higher benefits if you wait to collect them. For
example, retirement benefits starting at 70 are 76 percent higher than those
starting at age 62. This is above and beyond the annual adjustment for
inflation. And these benefits continue for as long as you live.
Most people view Social Security as an asset, like
any other. But it’s actually insurance – insurance against the worst thing
that, financially speaking, can happen to you in retirement – you keep
living! Dying early and not collecting your benefits entails no financial
risk. You are, well, dead. But you’re also in heaven, where everything is free
and there are no regrets. In particular, you aren’t sitting around kicking
yourself for having not taken Social Security before you died.
No, the real financial danger in retirement is not
dying. It’s living -- living to the ripe old age of, say, 100. It’s a danger
because you have to keep paying for yourself, day after day, month after month,
year after year. If the money runs out, things can get mighty unpleasant as
anyone who has tasted cat food can attest.
Much of our book’s success involved implanting the
following simple thought in our readers’ brains -- You can’t count on dying
on time. Nor can you analyze Social Security on a breakeven, i.e.,
play-the-odds basis.
Insurance companies can play the odds. They can
pool over their thousands of clients’ death dates. You can’t pool. You have
only one life to lose and you could lose it at your maximum, not your expected
age of death. As with any insurance, when it comes to Social Security’s
longevity insurance you need to consider the worst cast scenario and make sure
to get catastrophic coverage. With Social Security, this means, in most cases,
waiting till 70 to receive your highest possible retirement benefit.
Many rich investors poo poo treating Social
Security as insurance. They are so well heeled they don’t worry about risk,
including longevity risk. But if they are smart, they will also wait till 70 to
take their retirement benefits unless there is an even better way to maximize
their family’s collective benefits (see below). The reason is that even on a
pure investment basis, waiting to collect higher retirement benefits is a no
brainer. In deciding in the 1970s ago how much to reward patience, Social
Security used actuarial tables that are now decades old. They also used a safe
internal rate of return that was over 200 basis (2 percentage) points higher
than you can now earn on 30-year TIPS (Treasury Inflation Protected
Securities). These factors make patience a terrific arbitrage opportunity.
Rule 2 – Understand All Your Benefits
I listed above the 12 different types of benefits
you can collect from Social Security. You may be focusing on only one or two of
these benefits right now thinking the others aren’t relevant. But you never
know what might happen. My 96 year-old mom is my financial dependent. Were I to
croak, she could collect 82.5 percent of my full retirement benefit instead of
her own lower benefit. I made a special point of telling my siblings this fact.
They two are very well educated people (my brother is the Provost of Cornell
and a leading scientist), but they had never heard of the parent benefit.
With Social Security there is a host of gotchas.
(We list 40 bad news gotchas in one chapter in the new book and 60 good news
secrets in another.) Perhaps the worst gotcha is Use It Or Lose It.
Had Glenn not mentioned Social Security, he’d
probably have lost $120,000. Benefits that aren’t taken on time are gone.
(That’s not 100 percent true. In some cases, you collect 6 months of benefits
retroactively.) Another top economist, this one at Harvard, called me recently
about what to do with Social Security. He hadn’t read the book or run the
software. When I explain he’d called three years too late and had lost $35,000
in spousal benefits, he was none too happy. Then there was a recent email
from a 75 year old who was still waiting for Social Security to start sending
him his retirement benefit, for which he had never applied.
Let me be clear. Social Security doesn’t know or
very much care about you. They don’t know if you are alive or dead, if you are
married, if you are divorced, if you are widowed, if your ex is deceased, if
you have children, if your kids can collect benefits on your record, and the
list goes on. You need to tell them, not ask them what you can collect and when
you want to start collecting it.
Rule 3 – Time Your Collection of Benefits
One of Social Security’s worst gotchas is that you
can’t take two benefits at once. If you are entitled to collect two benefits
simultaneously they will give you either exactly or approximately the larger of
the two. To collect two benefits, you need to take one first, while letting the
other grow and then take the later benefit when it stops growing. This was the
strategy I laid out for Glenn – take widower benefits at 66, hold off
retirement benefits, letting them grown by 32 percent between 66 and 70, and
then take retirement benefit.
In the case of married couples, the optimal timing
of benefit collection often has to be coordinated between spouses. Take a
hypothetical couple I ran through maximizemysocialsecurity.com to discover the
best strategy. Let’s call the husband, age 64, Ted and the wife, age 60, Joan.
Joan is the higher earner. Ted is thinking of taking his retirement benefit
immediately and Joan is considering starting hers at 62. Can they do better?
They certainly can.
Thanks to the grandfathering provisions of the new
law, Ted can collect just a spousal benefit on Joan’s work record between 66
and 70 and take his own retirement benefit at 70. But for Ted to do this, Joan
has to take her own retirement benefit at age 62. Yes, this is the opposite of
being patient. But at 66, Joan can suspend her retirement benefit and restart
it at a 32 percent higher value at 70. Joan will still reduce her own lifetime
retirement benefits, but the couple’s combine lifetime benefits will end up
$155,053 higher!
Here’s another quick hypothetical example of how
timing can matter. Jerry is 61 and just retired after a career as a middle
manager. Jane is 45. She’s been a top-paid lawyer, but is retiring to look
after their severely disabled son, Charley. Their optimal strategy is for
Jerry to take his retirement benefit at 62 at which point Charley can start
collecting a disabled child benefit and Jane can receive a child-in-care spousal
benefit. Thanks to the new law Jerry can’t suspend at full retirement age
without cutting off Charley and Jane while his retirement benefit remains
suspended. So he ends up stuck forever with his age-62 retirement benefit. At
70 Janes take her retirement benefit. At this point Charley starts collecting
on Jane’s work record.
When Jerry dies, Charley collects a child survivor
benefit on Jerry’s record. Finally, when Jane die, Charley starts collecting as
a survivor on Jane’s record. This multi-step strateg y can also produce a major
gain in the family’s lifetime benefits.
Rule 4 – Tell, Don’t Ask Social Security
What To Do
The staff at Social Security are overworked,
underpaid, and undertrained. Most are well meaning. But a vast number are
arrogant beyond belief. I’ve written about case after case where multiple
Social Security staff have told the same person something that was 100 false
while claiming they were 100 percent correct. In almost all of these cases,
only my threat of writing up their mistake in my column led the staff or Social
Security’s top brass to fix the problem. Indeed, I could write an entire book
about the nature of Social Security’s “advice,” its failure to comprehend
longevity risk, and why I would, were I elected President, fire the Social
Security Commissioner on my first day in office.
My advice is read our book. It’s very inexpensive.
Buy it from the local bookstore if possible or Amazon or Barnes and Nobles if
necessary. Read it, then run the software. Then you’ll know exactly what to
order not ask from Social Security.
Fixing
Social Security for Real and for Good
My goal of becoming President is, actually,
extremely serious as you can see at www.kotlikoff2016.com. Part of my platform, provided on
that site, involves replacing the antiquated Social Security system with one
that’s solvent and simple, indeed, one that requires not a single government
bureaucrat to operate. Social Security, by its Trustees’ own admission in
their 2015 Trustees Report, is in the red to the tune of $26 trillion. That’s
far larger than a year’s GDP! Stated differently, the system is 31 percent
underfinanced. I.e., it needs a 31 percent immediate and permanent hike in its 12.4
percent FICA tax to pay all promised benefits through time. Make no
mistake. The $26 trillion is a massive bill we are dumping squarely in our
children’s laps. It’s part of the far larger $199 trillion present value fiscal
gap separating all future projected federal spending and all future projected
federal taxes. The longer we wait to address our overall fiscal gap and Social
Security’s in particular, the greater the economic damage to our children. This
is why, It’s Our Children, not Vote for Me Because I’m Rich and
Brilliant or Vote for Me Because My Name Ends in Clinton is my
campaigns’ one and only sound bite.
Laurence Kotlikoff is a professor of economics
at Boston University, a fellow of the American Academy of Arts and Sciences,
co-developer of www.maximizemysocialsecurity.com, and
co-author of Get What’s Yours – the Revised Secrets to Maxing Out Your Social
Security.
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