Weekend Economists Toast the Apostle of Ireland March 14-16, 2014

[Demeter]

16. Five strategies to get the most Social Security

http://www.marketwatch.com/story/five-strategies-to-get-the-most-social-security-2014-03-15?siteid=YAHOOB

President Barack Obama wants to eliminate, as part of his proposed fiscal year 2015 budget, aggressive Social Security claiming strategies “which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits to maximize delayed retirement credits.” Now, that plan to stop upper-income beneficiaries from claiming and then suspending their Social Security benefit may or may not become a reality. But what remains a reality, at least for now, is this: The incentive for waiting to claim Social Security until age 70. And that incentive, according to a series of just-released fact sheets and the like from National Association of Social Insurance, is significant.

Consider: If you claim Social Security at age 62 you’ll get just 75% of the monthly benefit you would have received had you waited until full retirement age. But if you wait until age 70, you’ll get 132% of what would have been your full retirement age benefit. Or put another way, if your full retirement age benefit is $1,000 a month, you’d get just $750 a month if you claim at age 62, or $1,320 if you wait until age 70. The decision about when to claim Social Security decision is, for most people, not an easy one. To do it right, you need to consider many factors and answer many questions, some of which are, frankly, unanswerable. What are some of those factors and questions? Well, the NASI addressed many of the factors and questions in its just-released tool kit, Social Security: It Pays to Wait, which includes, a three-minute video: Social Security: It Pays To Wait

a one-page fact sheet, When Should I Take Social Security? http://www.nasi.org/sites/default/files/research/FACT_SHEET_When_to_Take_Social_Security.pdf ;

and a 16-page brief, When Should I Take Social Security? Questions to Consider. http://www.marketwatch.com/story/five-strategies-to-get-the-most-social-security-2014-03-15?pagenumber=2 To be sure, it’s well worth reading and studying the NASI’s tool kit. It’s also worth learning what experts participating in an email discussion had to say about the NASI’s tool kit and what they think beneficiaries need to consider before taking Social Security.

1. Take it seriously

First, what’s especially difficult about the when-to-claim-Social Security decision is that you have to decide what to do early in your 60s, long before you know the answers to your questions about your health and life expectancy. And two, the decision is irrevocable.

“Unfortunately, some decisions have to be made early in the game, such as the decision about when to take Social Security, or what option to take from the defined benefit plan, and once made, are generally irrevocable,” said Chuck Yanikoski, the president of Still River Retirement Planning Software and RetirementWORKS.

“Other decisions can be put off, or modified, but once made limit one’s future choices. So the further a person gets into retirement, the fewer options they have — and not only because of past decisions that they can’t take back, but because of declining health, fewer or no opportunities for re-employment, possibly declining asset balances, and generally no likelihood of other new sources of income or assets.”

Yes, there’s a continuing need to reassess and modify your plan as things change during retirement, but that cannot be an excuse for not doing the best possible job at retirement, Yanikoski said.

“Planning around the time of retirement has a much bigger impact than individual course corrections during retirement, so it is best to do that planning as if you were only going to get one shot at it,” Yanikoski said.

2. Don’t use your break-even age

Advisers sometimes suggest, as part of the process, that you ought to determine the age at which you would come out ahead if you delay Social Security. In other words, the experts want you to determine your break-even age. Now the break-even age, according to an analysis by Rande Spiegelman, a vice president of financial planning at the Schwab Center for Financial Research, depends on the amount of your benefits and the assumptions you use to account for taxes and the opportunity cost of waiting. In his analysis, Spiegelman calculated the break-even ages for a top wage earner turning 62 in 2013 with monthly benefits (in 2013 dollars) at ages 62 and one month of $1,923; 66, $2,591; and 70, $3,447. And what he found was this: The break-even age is between:

• 77 and 78 for the top wage earner deciding whether to take Social Security early at age 62 vs. at age 66, the full retirement age (FRA);
  
  
• 80 and 81 for those deciding whether to take Social Security early at age 62 or at age 70; and
  
  
• 83 and 84 for those deciding whether to take Social Security at FRA vs. at age 70.

Research, however, shows the Social Security Administration’s historical use of “break-even analysis” has the effect of inducing individuals to retire early, according to Jeff Brown, a professor at the University of Illinois...So instead of using a break-even analysis, Brown recommends using “alternative frames,” much more in the spirit of how the NASI does this in its toolkit. That sort of framing, he said, increases intended claiming ages by 18 to 24 months. Indeed, in its tool kit, the NASI suggests that older Americans consider not their break-even age, but their life expectancy when deciding when to take Social Security. For instance, the NASI notes that an average 65-year-old male can expect to live 19 more years, to age 84, while an average 65-year-old female can expect to live about 22 more years, to age 87. In addition, the NASI suggests that nearly four in 10 women and three in 10 men age 65 today can expect to reach age 90.

3. Focus more on longevity risk

Brown, however, suggest that those trying to decide when to claim Social Security focus less on average life expectancy and more on the odds of living a long time.

“My concern about focusing on life expectancy rather than the full distribution of longevity possibilities is that one could inadvertently put people back into the mind-set of thinking in terms of break-even dates, rather than thinking about the sustainability of consumption,” said Brown. “Indeed, one of my pet peeves about financial planners (and financial planning software) is that they rarely discuss longevity ‘risk’ as opposed to average life expectancy.”

Said Brown: “An arbitrary extension of life expectancy ‘to be conservative’ is not a substitute for a fulsome discussion of longevity risk. If one does not explicitly consider the risk around average life expectancy, then one will never see why an annuity is an appropriate solution. It would be like trying to sell fire insurance, but instead of discussing the risk that your house will burn down, you only point out that on average 1% of everyone’s house will burn once a year.”

Others, however, have a different point of view. The Social Security decision is significantly different from some other longevity issues,” said Yanikoski. “Financial planners need to look at extra-long life scenarios, because they are, usually, trying to figure out how to amortize savings — and obviously, a planned amortization using life expectancy leaves 50% of people in a catastrophe.” Social Security isn’t like that, he said. “None of the choices leads to a catastrophic outcome, regardless of what happens,” Yanikoski said. “So with Social Security the task is not to avoid catastrophe, but to optimize the chance of getting the best result. And the way to do that is to plan around the most likely longevity outcome.”

4. Consider personalized life expectancy

Other experts, meanwhile, say factoring life expectancy into the Social Security-claiming decision is important, but that it needs to be personalized. “What is conspicuously absent, however, is that many people, roughly 50%, do not live to their life expectancy or longer,” said Steve Mitchell, a consultant Oculus Partners and founder of Stephen W. Mitchell & Associates. “The important question that every potential beneficiary should ask that is totally missing from the discussion and most of our industry discussion on outliving retirement income is whether or not the overall average life expectancy is a good estimate of personal life expectancy, or are their personal health or family history factors that should be factored into the individual’s decision.” According to Mitchell, an important step for most considering the Social Security decision is to use a tool to estimate a “personal” life expectancy such as that found at the Living to 100 Life Expectancy Calculator https://www.livingto100.com/ . “At best, it’s still just an estimate, but better than making a big financial decision based on broad population averages,” he said.

In many cases, for those in good health, who don’t smoke and who have good family history, Mitchell said calculating your personal life expectancy will reinforce the key message that you may live longer than you expect and Social Security becomes an increasingly important source of income as you get older. However, for others who are in poor health, and who have family history of premature death, and the like, Mitchell said the considerations are different. “Of course for married couples, both spouses’ expectancy need to be considered and some of the more complex Social Security claiming strategies may provide significant benefits,” Mitchell said. The exercise of creating a personalized life expectancy is a worthwhile one, but one shouldn’t go overboard. In his practice, for instance, Yanikoski considers only sex, smoking status, and a five-level self-evaluation of current factors health...MORE CAVEATS

5. Stay flexible

Others, meanwhile, remind us that retirement planning is not a once-and-done exercise.

“Retirement-income planning is not static and is not a one-time decision,” said Diane Savage, a certified financial planner and educator. “It requires attention throughout retirement with many course adjustments, if you will.”

“So many of the factors related to retirement-income management are not controllable even though we like to think they are,” she said. “It appears to me that there are many attempts to create certainty around something that is far from certain.”

The best plans, she said, are those that provide some guaranteed income sources as well as other income sources that can adapt and move with forces beyond the control of the retiree. “This is the most appropriate path to provide more certainty for the retirement-income stream,” said Savage. “The best advice someone planning their retirement income can be given is be prepared to be flexible.”