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Author: yodaorange Big red star, 1000 posts Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 449508  
Subject: Social Security Withdrawal Options Date: 8/4/2012 2:26 PM
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If you work(ed) in the US, chances are good that you paid into the Social Security system. The exceptions are some government workers that did not pay into SS and hence will not receive any benefits. When you paid into SS, you and your employer were not given any options. You pay in X, your employer pays in Y and that it the end of the story.

SS makes it easy to put money into the system. For better or for worse, taking money out of the system is a lot more complicated. Most people do not understand all of the options available when they decide to start taking SS benefits. Part of the reason is that many people reach age 62.5 and need SS payments to make ends meet. They realistically cannot afford to delay receiving benefits. METARites being smarter and wealthier than average have more options as to when they start receiving SS.

Social Security’s Handbook has 2,728 separate rules that govern its benefits. Each rule has its own explanation in the Program Operating Manual System. A simple example would be a married couple before they reach retirement ago. They ask a simple question: When should each of us take our SS benefits to maximize the net present value of income for the family? There are 6,571 different choices for this couple under the current SS rules. This is because each person can choose to take their own benefits or “spousal” benefits. Plus they can choose to start the benefits in any of 9 years. And this is a simple case.

It gets more complicated from there. For example, if you are divorced, you have the option of getting benefits based on your SS history or your ex-spouses SS history.

Boston University Laurence Kotlikoff has spent many years learning and analyzing the different options for receiving SS benefits. He has recently published: 37 Social Security 'Secrets' All Baby Boomers and Millions of Current Recipients Need to Know – Revised. [1] It is impossible for me to say which of the 37 MIGHT apply to your particular situation. Here are a few of the cases that might apply to many METARites:


1. If you are already collecting your retirement benefit and are at or over full retirement age, you can tell Social Security you want to suspend further benefits and then ask them to restart your benefits at a later date, say age 70. Social Security will then apply its Delayed Retirement Credit to your existing benefit once you start collecting again.

2. If you’re married, you or your spouse, but not both, can receive spousal benefits after reaching full retirement age while deferring taking your retirement benefits and, thereby, letting them grow. This may require having one spouse file for retirement benefits, but suspend their collection. This is called the File and Suspend strategy.

3. Millions of Baby Boomers can significantly raise their retirement benefits by continuing to work in their sixties. This may also significantly raise the spousal, child, and mother and father benefits their relatives collect.

4. Social Security’s online benefit calculators either don’t handle or don’t adequately handle spousal, divorcee, child, mother, father, widow or widower benefits, or file and suspend options.



So you are saying, “We METARites are a very smart group. We can figure this out for ourselves.” In a separate article, When Should I Take Social Security?-- A 'Simple' Formula [2] Kotlikoff published the formula used to determine one spouses benefit:

B(a) = PIA(a) x (1 – e(n)) x (1 + d(n)) x Z(a) + max((.5 x PIA*(a) – PIA(a) x (1+d(n))) x E(a), 0) x (1- u(a,q,n,m)) x D(a)

The article explains all of the variables. Good luck!

After you give up on determining the optimum withdrawal strategy yourself, you say: “No problem, I will just go down to the local SS office and have them help me.” Good luck with that. The SS employees, much like IRS employees, have been given a near impossible task. They are supposed to know all of the 2,728 rules plus how to apply them in all situations. Give me a break. Even Albert Einstein would throw up his hands on this one.

Financial columnist Scott Burns who has published several books with Kotlikoff wrote an article about looking at the different withdrawal options. [3] Scott finds a large difference in benefits in his test case: $539k versus $645k for a gain of $106k. Obviously, there are a lot of caveats and assumptions that went into this calculation.

BOTTOM LINE is that you should carefully examine the options for receiving SS benefits to make sure you get maximum benefits. At a minimum, you should consult with someone knowledgeable about the alternatives. I do NOT know a single, nationally available reference where you can find such a person.

The other option is to invest $40 in the online program that Kotlikoff has put together. [4] You input all of your statistics and it automatically goes through all of the options and shows you the choices. Then it recommends the one that maximize NPV.

I have NO financial ties or benefits for recommending Kotlikoff program, but it does seem like the best option to me. Potentially receiving a $10k to $100k benefit for a $40 investment is attractive IMO.

In Yodaspeak:

Give a concise, I wish I could, actionable answer, apply to most cases, that would, but beyond Yoda's ability, it is. Herh herh herh.

Thanks,

Yodaorange


[1] Laurence Kotlikoff article: 37 Social Security 'Secrets' All Baby Boomers and Millions of Current Recipients Need to Know – Revised
http://www.forbes.com/sites/kotlikoff/2012/07/03/36-social-s...

[2] Laurence Kotlikoff article: When Should I Take Social Security?-- A 'Simple' Formula
http://www.forbes.com/sites/kotlikoff/2012/07/17/when-should...

[3] Scott Burns article: An Online Calculator that Maximizes Your Social Security Benefits
http://assetbuilder.com/blogs/scott_burns/archive/2011/10/07...

[4] Laurence Kotlikoff: Maximize my Social Security program
http://www.maximizemysocialsecurity.com/
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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400094 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/4/2012 3:04 PM
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BOTTOM LINE is that you should carefully examine the options for receiving SS benefits to make sure you get maximum benefits.

While making the correct allowance for future changes in the benefit rules. Realizing that the minimum necessary changes are greater than the maximum changes that are currently politically feasible - and while delay may make drastic change feasible, it also makes the minimum necessary change larger.

(Which is why, assuming no change before then, I will start taking benefits the moment the current law allows. I have nearly ten years to wait before "early" benefits, another five years for "regular" benefits. At this point my expectation is that my non-means-tested but reduced-because-it's-early early benefit will be greater than my reduced-because-of-crisis, means-tested "regular" benefit.)

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Author: desertdaveataol Big funky green star, 20000 posts 10+ Year Anniversary! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400097 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/4/2012 3:12 PM
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(Which is why, assuming no change before then, I will start taking benefits the moment the current law allows. I have nearly ten years to wait before "early" benefits, another five years for "regular" benefits. At this point my expectation is that my non-means-tested but reduced-because-it's-early early benefit will be greater than my reduced-because-of-crisis, means-tested "regular" benefit.)

Ayup! That's what my wife & I did and why.

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Author: steve203 Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400115 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/4/2012 6:08 PM
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(Which is why, assuming no change before then, I will start taking benefits the moment the current law allows. I have nearly ten years to wait before "early" benefits, another five years for "regular" benefits. At this point my expectation is that my non-means-tested but reduced-because-it's-early early benefit will be greater than my reduced-because-of-crisis, means-tested "regular" benefit.)

The trick will be in *how* SS is means tested, by net worth, or annual income.

My bet is by income as that will snag the most people, people with IRAs, either conventional or Roth, or a 401K, or a conventional pension. We are already half way there, as SS income becomes taxable above a set level of income from other sources.

I can start pulling out of my conventional IRA at 59 1/2, one year from now, so my plan is to deplete the IRA as fast as I can, while staying in the bottom tax bracket, rolling the money over into dividend paying stocks, which get preferential tax treatment.

Once the IRA is liquidated, then apply for SS.

What would be really interesting would be if I could count the IRA withdrawls as "self employement income", paying SS tax on it, which would cause my low pay years in the 70s to fall out of the benefits calculation, while deducting the SS tax paid from my taxable income....but I'm sure someone already thought of that.

Steve

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Author: PucksFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400117 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/4/2012 6:24 PM
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The Kotlikoff formula is interesting but seems to be missing an important consideration: life expectancy.

If your family swims in the deep end of the pool, historically lives into the upper 80s or 90s, deferring SS benefits until full retirement age or even 70 may make sense.

But if your family history is more toward the shallow end of the pool or the wading pool, 62 may be your number.

PF

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Author: bjchip Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400129 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/4/2012 7:30 PM
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...and then there are the other variables like how long you expect to live in excess of the actuarial tables and what is the money going to be worth when you get it out, given the changes in value of money over the years (inflation, deflation, reflation, gyration).

The Yoda is wise. :-) We have to recognize each, what by us cannot be done.

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400132 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/4/2012 8:17 PM
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PucksFool writes,

The Kotlikoff formula is interesting but seems to be missing an important consideration: life expectancy.

If your family swims in the deep end of the pool, historically lives into the upper 80s or 90s, deferring SS benefits until full retirement age or even 70 may make sense.

But if your family history is more toward the shallow end of the pool or the wading pool, 62 may be your number.

</snip>


Exactly!

I'd want to get a handle on my life expectancy before it would be worthwhile to spend $40 on Kotlikoff's Social Security program.

intercst

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Author: yodaorange Big red star, 1000 posts Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400140 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/5/2012 12:34 AM
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A few comments in reply:

1) I agree that long term SS is NOT actuarially sound. The benefits will likely be cut in one form or the other. This will likely be more of a factor for a 20 something today instead of a 60 something. Stated differently, exploring all of the options is probably more pertinent for the folks in the 50 to 70 year old range today. For that demographic, I still think the exercise is worthwhile.

2) I agree that SS payments will be means tested in one form or the other. We do not know if it will be income based or net worth based. As soon as rules are known, we will see if there are any legal/moral alternatives. We might be able to solve that problem with DesertDave’s mayonnaise jar buried in the back yard with cash or gold coins.

3) I agree that longevity is a major factor in the calculations. The Scott Burn’s article I referenced talks about it. Kotlikoff’s program allows you to change the life expectancies for you and your spouse if applicable. Then you rerun the optimization. Obliviously if you plan for low life expectancy, it would encourage you to start taking your benefits earlier. There are still a lot of variables, particularly when you are married and your spouse has a significantly different life expectancy. For example if one spouse is 62 and the other spouse is 42, the optimum choice MIGHT NOT be intuitively obvious. Kotlikoff’s personal bias is to plan for maximum life expectancy, instead of an average. Average life expectancy is good for insurance company underwriting, but is less applicable to the individual. What if you mess up and live a lot longer than the average? You might get tired of the Alpo diet every year you live beyond the average.

4) IMO going through the exercise and paying the $40 is still worthwhile. The question to ask is: Am I 100% sure that the program can NOT find a more optimum strategy that will likely pay out more than $40 extra? Even when the force is with me, I would NOT be 100% confident I would get the correct answer without the program. Stated differently, this is ROCKET SCIENCE!

Thanks,

Yoda

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Author: AndrewXnn Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400147 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/5/2012 8:54 AM
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What if you mess up and live a lot longer than the average?

I tend to think of "messing up" as living a shorter time than average. For example, becoming involved in some type of avoidable accident or needlessly stressing out over finances to the extent that it deteriorates my health.

That said, the nice thing about average life expectancy is that it tends to rise as we live longer. However, the average person will only live to the average.

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Author: karenlj Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400156 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/5/2012 1:10 PM
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I don't understand the following:

If you are already collecting your retirement benefit and are at or over full retirement age, you can tell Social Security you want to suspend further benefits and then ask them to restart your benefits at a later date, say age 70. Social Security will then apply its Delayed Retirement Credit to your existing benefit once you start collecting again.

If you're collecting benefits, you can stop at 66 and restart at 70--Delayed Retirement Credit will apply.

if you started collecting at 62 and are now at your full retirement age, i.e., 66, you can suspend benefits until 70 and then start collecting 32 percent higher benefits for the rest of your life.

If you started collecting at age 62, your restart benefits at 70 will be 32% higher than when you stopped.

If you aren’t now collecting and wait until 70 to collect your retirement benefit, your retirement benefit starting at 70 can be as much as 76 percent higher than your age-62 retirement benefit, adjusted for inflation.

If you never started, then waiting 'til 70 will give you benefits up to 76% higher than age 62.
_______________________

If you start, stop at 66, then restart at 70, the Delayed Retirement Credit will be applied.

If you never collected and start at age 70, your benefits will be up to 76% higher than your benefits would have been at age 62. But if you started at 62, stopped at 66, and restarted at 70, your benefits will be only 32% higher.

Is there a penalty? Why the different percentages?

Karen

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Author: CM001 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400158 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/5/2012 1:49 PM
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rolling the money over into dividend paying stocks, which get preferential tax treatment. - Steve

The dividend tax could potentially change if Bush Tax Cuts are not extended.

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Author: steve203 Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400168 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/5/2012 4:18 PM
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The dividend tax could potentially change if Bush Tax Cuts are not extended.

How many times have those "temporary stimulus" tax cuts been extended already?

Even if the rate was increased for "high income" people, the preferential rate will be continued for the mob, because ending it would be a "tax increase", thus not politcally doable.

That's why the debate is extending all the tax cuts for everyone, vs only extending them for non-high income people. There is no option for letting them expire that any pol will allow.

Steve

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Author: CM001 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400185 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/5/2012 7:14 PM
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There is no option for letting them expire that any pol will allow.

We are living in stranger times. If Obama and democrats decided to make tax cuts for rich a political issues and to run on that, given the current GOP's stand that they cannot accept raising the tax rates for the rich folks, even those who make more than 1 million annual income, I don't see how they are going to reach a compromise.

We may very well end up letting the tax cuts expire without a deal. I don't know what kind of odds to put on this, but something to factor. I can understand you disagree and that's what makes the market.

If dividends lose their preferred tax treatment, I guess there will be a bloodbath on dividend paying stocks.

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Author: steve203 Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400212 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/6/2012 12:29 AM
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We may very well end up letting the tax cuts expire without a deal. I don't know what kind of odds to put on this, but something to factor. I can understand you disagree and that's what makes the market.

I can see Wendy warming up her whip, so I'll make this as non-partisan and realpolotik as possibe.

Position #1: extend tax cuts for people making <$250K only.

Position #2: extend tax cuts for everyone.

Position #2 says it will block position #1, and if position #1 prevents position #2 passing, then the people making <$250K get a tax increase and position #2 says "it's all the fault of the position #1 people".

I can't imagine anyone doing anything that can be labeled a "tax increase"

If dividends lose their preferred tax treatment, I guess there will be a bloodbath on dividend paying stocks.

Where would the capital be redeployed to that would produce a yield comperable to common stock dividends? No place to go = no change.

Steve

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Author: CM001 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400215 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/6/2012 1:01 AM
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Where would the capital be redeployed ...No place to go = no change.
Capital will flow out of these stocks that's for sure. With the big raise in dividend based ETF's, the money will flow out of those ETF's causing the stock prices to fall, to increase the yield to adjust for taxes. One place I could think is Muni's.

It doesn't really matter where the money flows, but the dividend paying stocks will certainly get re-priced.

For Ex: EXC, a very big utility has a very juicy dividend with uncertain growth, the price is held by the dividend, at least in my opinion. I could easily see the prices go down by 10 to 20 % to adjust for the taxes.

While, nothing may change on the dividend taxes, but if it happens I hope no one is going to claim it is a black swan.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400249 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/6/2012 10:39 AM
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If dividends lose their preferred tax treatment, I guess there will be a bloodbath on dividend paying stocks.

History would generally not suggest such.

I don't approve of the increase because that money has already been taxed but historically, the market has not blown up when it was increased - and I doubt it would this time either.

Might help the muni market as people turn to true tax-advantaged investments.

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400267 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/6/2012 11:42 AM
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Yoda

Thanks for this rather detailed explanation of SS benefits. However after all this, I think someone is silly not to take the early benefits. You get paid for 4.5 yrs by the time you reach 70. If you don't need the money save it or invest it. Anything can happen in 4.5 yrs. You can get hit by a truck or get some serious disease and die. In this political environment, it takes a lot of courage to think that the government won't change the rules on SS, and not in your favor, over the next five years. We live in the land of push and shove and anything goes (My late brother taught me that.).

Incidentally when you hear that the Federal government is going to run out of money at a certain date and then hear they could go several months longer, one thing they are doing is "borrowing" the FSP (Federal Savings Plan) for Federal employees. The government does not have to pay that back(!), but so far they have done so. When I was prematurely retired, I got my money out of that as quickly as I could and put it into an IRA with Vanguard.

Disclosure: I do not get SS as I am under the old Federal government CSRS system.

brucedoe

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Author: steve203 Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400271 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/6/2012 11:59 AM
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...it takes a lot of courage to think that the government won't change the rules on SS, and not in your favor, over the next five years.

Every proposal I have seen, for means testing, privatization or benefit reductions, only applies to people currently under 50 or 55 years of age. Everyone closer than that to retirement is assured that *their* benefits will not be changed.

The irony is that every one of my former coworkers in their 30s and 40s constantly whined that they don't expect anything from SS, so the propaganda has been successful. How much do these people, who are so sure they will never get anything from SS, have set aside for their retirement? Not one nickel. There is always a vacation, or concert, or extra charge cable TV service that they "need"...then there are the expendatures for lottery tickets and trips to the casino.

Steve

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Author: CM001 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400276 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/6/2012 12:28 PM
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historically, the market has not blown up when it was increased - and I doubt it would this time either.

I am not talking about the entire market, but a section of dividend paying stocks taking hit. Especially stocks that are trading at higher multiple because of their dividends like Utilities, REIT's could take a hit.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 400283 of 449508
Subject: Re: Social Security Withdrawal Options Date: 8/6/2012 2:04 PM
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I can't speak to utilities but REIT payments are normally taxed as income. They occasionally throw off some qualified divs but an increase in the div tax is not likely to have a huge impact overall on REITs.

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