Social Security Planning – The impact of delaying

[Matt]

The decision as to when you decide to take social is not to be taken lightly. Taking payments early will reduce the monthly amount, and delaying them will increase it, for the duration of your life. This post will attempt to shed some light onto the factors that come into play in this decision.

Calculating your PIA


The first consideration when looking at social security would be to understand the monthly ‘base’ payment. You start with a number called Primary Insurance Amount (PIA) which is calculated based on how much you have paid into the system over your lifetime. The calculation is:

(a) 90 percent of the first $826 of his/her average indexed monthly earnings, plus​

(b) 32 percent of his/her average indexed monthly earnings over $826 and through $4,980, plus​

(c) 15 percent of his/her average indexed monthly earnings over $4,980.​

Source SSA.gov PIA Calculations

Note that the max PIA that can be attained is $2663 in 2015, this is prior to boosting it by electing a later distribution.

It is important to know when your payments into the fund are considered 100% vested, also known as the ‘Full Retirement Age’.



From the table, people who are born after 1960 have a full retirement age of 67. This means is you elect to take payments prior to this age you will be penalized for early distributions, an if you elect to delay receipt of this you will actually be paid a bonus rate when you do elect to receive distrubtion.

The full rate table for penalty and its impact on spousal benefits is here. The bonus rate table is found here.

Note that the earliest you may elect to receive social security is at 62 and the latest that will incur the bonus is 70 (you may defer later, but it stops gaining the boost). As an aside, it is possible to receive social security payments in the event of death, where a surviving spouse will may receive it from 50 (at a reduced rate) or at any age if the spouse is caring for a child 16 or under.

The impact of the bonus on monthly payment


The maximum penalty is 30% and the maximum bonus is 8% per year of deferral.the penalty is calculated based on how early is ‘early’ in that it phases out. The maximum bonus depends on your year of birth. Anyone born in 1943 or later would get the full 8% per year.

Should you delay payments?


The penalty and bonus amounts are calculated actuarially. That means that the SSI administration decided that overall, this will average out for them. So the question really comes down to how long you plan to live, and where is the breakeven point. Wade Pfau wrote a great piece on this topic and shows the breakeven level for delaying to be around age 79-80.

The way to figure out the value here is to consider the payment starting at 62. In another example, If you were to die at age 90 that would be 28 years of reduced payments. Compare that with if you delayed until 70, and received only 20 years, but at an enhanced rate.



In the example here, I set the life expectancy at 90, and as you can see the money received from the SSI fund is $166,171. Clearly, the decision here ‘appears’ wiser than taking the early payment. But there is another thing to consider:

The Discount Rate


In today’s low rate environment the guaranteed increase in SSI payments of 8% is attractive. However, a factor in that is the rate of return that could be earned on the penalized payments. We need to remember that by delaying 8 years (from 62-70) we are opting out of the ability to invest that reduced monthly payment.

As such, one of the biggest considerations regarding the delaying of social security is the underlying interest rate that could be earned between the age of 62-70. Interestingly, this rate could be a lot higher than many expect if there was any family debt. A simple example might be if there were large car loans. The interest on these could be avoided by prepayment via the additional cash flows of social security.

A more sophisticated approach might be to consider interfamily lending opportunities. For example, if a child or grandchild had student loan or other debt at a high rate, they could receive a loan from the parent using the IRS Applicable Federal Rate table this could create value opportunities for family wealth. There are many opportunities to put the cash flow to work and some may offer an edge even with the penalized level of payment.

Further considerations


Opportunities abound within married couples, including same sex couples. A classic strategy would be to elect to defer one of the couples social security payments so that it gains in value, while drawing off the others as spouse. This would work as follows:

If Sam and Bob are married and both have a PIA of $1500 at 67, Sam could elect to defer his payment to age 70, gaining a 24% upside at that time. In the interim Bob could elect to receive $1500 per month at age 67, and Bob could claim spousal benefits (50% of PIA). As such that would mean that for the three years between 67-70 the combined monthly payments would be $2,250 and at age 70 Sam would swap to his own payments at the enhanced rate. The new benefit level would be $1,860 meaning a combined income of $3,360 going forward.


The post Social Security Planning – The impact of delaying appeared first on Saverocity Finance.

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[Annie H.]

I hope there's a part two to this because you haven't gotten into a few of the more complex techniques, most of which I've forgotten. There are websites, charts, books and tables to calculate the "breakeven" point.

There's the repayment option/withdrawing application-- you file for benefits and change your mind. It now has a time limit of 1 year ( a couple years ago when I did it, there was no time limit and I repaid 3+ years as I'd change my mind and wanted to defer to 70.)

In your Sam and Bob example (file and suspend) above it needs to be noted than one must reach FRA in order to *choose* which benefits to take. Prior to FRA (full retirement age) one must take half the spousal benefit or one's own benefit whichever is higher.
http://www.ssa.gov/planners/retire/suspend.html


Once you hit 70 no more benefits accrue but you can continue working and still collect SS (some folks don't believe it's true). If you have kids under 18 they can also collect benefits. There's the option for divorced folks-- if marriage lasted more than 10 years one can collect on ex-spouse accoun (few more rules to this one). Another case is the death of an ex-spouse when marriage has lasted more than 10 years. Say your benefit is $1800 a month, spouse who dies had a benefit of $2500 a month. As an ex spouse now a widow/widower you are entitled to $2500 a month but SS will not notify you of this so it pays to keep good track of exes .

Strategy for widow/widowers benefits are moe complex.

https://www.fidelity(dot)com/viewpoints/retirement/social-security-tips-for-couples

Finally, early retirement can affect whether one is able to collect at all. Be sure you have your 40 quarters!

On to part two...

 

[Mountain Trader]

Often overlooked is the unexpected long life factor. That is, what if you live to be 90, or 95 or 100? Will you run out of money or have to cut back severely to get by?

Deferring SSI provides an enhanced, higher income for however long you live.

Look at it this way: If you die later, you had a higher income stream. If you die earlier, do you really care?

 

[Sesq]

Nice write up. My wife is one quarter short. We'll need to pick that one up one of these days.

Some of the interesting points is around the bend points and the fact that they are cumulative. I calculated that you reach the second bend point after about 19 years at the max. I have 14 max earning years and some close to it, and should hit the second bend point this year. From there on my wages will only credit at the 15% rate. Lousy, but it means I won't have to shoot for filling all 35 years.

 

[Matt]

Good points folks. I cut the post short because I felt if it went too deeply into the part 2 that Annie mentioned it would be overwhelming for a beginner. I do have a strong interest in exploring the quarter strategy and bend point analysis, the former is pretty easy to achieve now as you can earn all 4 in one pop these days. As an immigrant myself I've been considering the amount I contribute based on expected return.

Re a couple of points:

In your Sam and Bob example (file and suspend) above it needs to be noted than one must reach FRA in order to *choose* which benefits to take. Prior to FRA (full retirement age) one must take half the spousal benefit or one's own benefit whichever is higher.
http://www.ssa.gov/planners/retire/suspend.html

It seems logical that you cannot elect to suspend prior to being at FRA?

Once you hit 70 no more benefits accrue but you can continue working and still collect SS (some folks don't believe it's true).

If you work when collecting SS you may have to pay taxes on that income, this can range up to 85% of SS being taxable which is quite a hit.

Strategy for widow/widowers benefits are moe complex.

Yep, wanted to jump into that but backed off. I didn't read your link here but IIRC there are cases where it is more beneficial to be widowed or divorced over being married.

Lots to get into, but one step at a time

These days I write to help with learning a particular topic, and i've moved on for now.

 

[Matt]

Often overlooked is the unexpected long life factor. That is, what if you live to be 90, or 95 or 100? Will you run out of money or have to cut back severely to get by?

Deferring SSI provides an enhanced, higher income for however long you live.

Look at it this way: If you die later, you had a higher income stream. If you die earlier, do you really care?

One thing for the Part 2 that I was wondering about -impact of delaying and dying early on surviving spouse and family - which you might actually care about.

 

[Annie H.]

Go I didn't read your link here but IIRC there are cases where it is more beneficial to be widowed or divorced over being married.

Definitely and it doesn't have to do with Social Security. As we've pointed out there are lots of ins and outs of this and use it to your best advantage it takes planning and knowledge of the extremely complex SS law. You do need to research the affect of filing early or filing late on a surviving spouse and family. You need to factor in taxes to the strategy. I'm not absolutely sure about suspending only at FRA, I think you can do it earlier.

The one certain thing that doesn't need research is that if you're divorced after 10 years of marriage you have interesting options. At FRA age (prior to FRA I had to take the higher of half his or mine)le to collect 1/2 of the benefit amount due my ex-spouse (SS doesn't even notify ex, multiple former spouses can collect from one ex) and postpone collecting my own benefits to age 80. Sweet. My benefit is till much less than his but if he dies before I do, I'm entitled to his benefit amount BUT SS will not notify someone about this. In the past SS did not even notify widow(ers) they were entitled to the larger benefit when they applied but I think that's fixed.

There are many threads on SS at Bogleheads and there's a resident expert there "sscritic" who often helps folks. There's a new book out that apparently is at the top of the best seller list but a BU economics professor who is expert at this== Lawrence Kotlikoff.

http://www.amazon.com/Get-Whats-Yours-Secrets-Security-ebook/dp/B00LD1OPP6

 

[cocobird]

Social security was designed to include the life expectancy as a factor. Ostensibly, taking social security early would result in payouts equivalent to taking social security later if people died according to life expectancy. So if one died earlier than expected, taking social security as soon as possible would be better, and if one's life exceeded the life expectancy, than taking social security later would result in getting more.

The complication for someone like me is when social security is reduced because I have the Civil Service Offset. Whether I choose to take social security or not at age 62, my retirement annuity is immediately reduced for social security. Furthermore, since I have also earned a social security for working in the private sector as well as the public one, I'll get a portion of my social security that does not reduce my retirement, just not sure how much. Finally, I had to leave work early in order to take care of my parents, further impacting both my social security and my retirement. I'm sure there are math wizards around who can figure all this out, but for me, it feels like a crap shoot.

 

[Matt]

I'm sure there are math wizards around who can figure all this out, but for me, it feels like a crap shoot.

I'm reviewing advisor software that covers things like this now, its a lengthy process but I hope to find one that will help model these scenarios well.

 

[Annie H.]

Whether I choose to take social security or not at age 62, my retirement annuity is immediately reduced for social security.

Good point. This is another thing to be aware off for folks that haven't fully paid into SS or have done what you have done, or are married to someone like this. I have a friend in CA who was a teacher-- paid into state pension fund instead of SS and thus gets a pension from the state. When her husband died, SS reduced her widow's benefits by 2/3 or more because of *her* pension status. She had no idea this would happen and a lot of folks don't and it is unfair--fine reduce her SS benefit but her deceased spouse paid into SS. Bills are introduced by one of our CA senators quite often but the law has not been changed.

"The two rules that cover government employees are the "windfall elimination provision" (WEP) and the "government pension offset" (GPO). The WEP applies to workers, and the GPO applies to government pensioners who are applying for Social Security spousal and survivor benefits.
Read more at http://www.kiplinger(dot)com/article/retirement/T051-C000-S001-a-public-pension-and-full-social-security-benefits.html#dfJKMtejP7It1ZGt.99"

 

[Annie H.]

I'm sure there are math wizards around who can figure all this out, but for me, it feels like a crap shoot.

You should be able to hire someone to do this, it's important- and if you really research it you can also figure it out. There's a GPO and a WEP calculator at SS website:
http://www.socialsecurity.gov/planners/retire/gpo-calc.html
http://www.socialsecurity.gov/planners/retire/anyPiaWepjs04.html

 

[Annie H.]

I note that Lawrence Kotlikoff whose book I recommended above has both personal and advisor versions of "Maximize my Social Security" and also offers a 1 hour, $100 expert review consultation after purchase of the product.

https://www.maximizemysocialsecurity. com/purchase

His book, Spend Still the End – The Revolutionary Guide to Raising Your Living Standard, Today and When You Retire. Simon & Schuster, (with Scott Burns), 2008 is quite interesting as are a few others he's written.

 

[Mountain Trader]

One thing for the Part 2 that I was wondering about -impact of delaying and dying early on surviving spouse and family - which you might actually care about.

I was too quip-of course one would care, but clearly things change when a SS beneficiary taking benefits dies early. While the beneficiary's heirs are out the funds that could have been taken with an earlier start date, there are less expenses as well. Plus a surviving spouse can bump his or her benefits level up to that of the deceased beneficiary, if it was higher.

Back to my earlier post-my real point was that there is built in protection to a point against the financial impact of living a long life which can be attained by beginning benefits later. This can't really be quantified, and I rarely see it given much emphasis.

 

[Andrew]

I have been trying to calculate my mother's SS benefit as she nears retirement. She is currently 67 and is mandated to retire from her state employee position at 70. She can retire now with her full defined benefits pension but is thinking to continue to work until 69 or 70. She is also currently collecting my step-father's SS benefits as a widower.

Figuring out her SS have been a bit tricky since she also need to deal with the WEP (windfall elimination provision) since her current position does not have SS tax taken out, however she does have 22 years of "substantial earnings" from previous employment and her income from being an adjunct faculty member at a university.

I have a question about the bend points in calculation her PIA. PIA is the benefit she would receive is taken at her full-retimenet age, which for my Mom is 66 (she is born in 1948). In calculating the PIA, do I take the bend points from the year she turned 62 (2010) to calculate her PIA or from another year? The link Matt referred to in his post says
"The PIA is the sum of three separate percentages of portions of average indexed monthly earnings. The portions depend on the year in which a worker attains age 62, becomes disabled before age 62, or dies before attaining age 62." Which seems to me I calculate her PIA with the bends points that where for 2010 (when she was 62).

 

[MickiSue]

Some of those questions are actually answerable by the SSA.

My oldest son works at their SF office, and that's his job: to walk people through some of the tortuous calculations so that they can make informed decisions.

 

[Annie H.]

Some of those questions are actually answerable by the SSA.

My oldest son works at their SF office, and that's his job: to walk people through some of the tortuous calculations so that they can make informed decisions.

I'm sure your son is just as smart as his mother so no disrespect . My exerience with SSA and it is extensive is that's it's worse than IRS or CC-- it's HUCA. Three different reps, three different answers.
TL:dr
Several years ago when it was allowed I repaid my SS (I'd started collecting at 62 and had decided to defer to FRA). I went to my local office, right outside SFO BTW, with my calculations. They said I owed more. I had my 1099s and all my info. Example-- SS benefits were $10K, $1K went to Medicare ins., I rec'd $9K. They wanted me to repay $11K. They could not understand the math. At one point there were 5 folks in the office including supervisor fiddling around with calculators--they all said I was wrong but IKNEW I was right.

I escalated to my senator's office. They contacted their liason at the SS office, oops-- the supervisor who'd said I was wrong. I escalated to the regional west coast office, no luck. I wrote to the author of a Kiplinger's article on the technique and she put me in touch with her PR contact who escalated to his boss. I went online to Bogleheads, found some folks who'd previously had this problem in the East and MW-- apparently a very common problem-- and contact their SS contacts who finally solved their problems. It took about 4 months but I finally prevailed and they agreed I was right and refunded the overpayment they'd demanded.

Fast forward to the next January when I receive an incorrect 1099. I basically repeat the process escalating all the way and discovered that 1099s of this sort are prepared by hand and mine was prepared by an employee-- I actually spoke and emailed with home--who prepared the 1099 in accordance with the way the law should have worked. Then I find out that SSA will NOT forward "corrected" 1099s to IRS and that the computers can't talk to each other. I attach the corrected 1099 and a lengthy explanation to my tax return.

Fast forward 1.5 years later to a "letter audit" from IRS wanting to collect tax because of the second 1099-- in correcting, they'd showed income. It only took about 6 months to get that straightened out, about 3 years start to finish for my repayment.

There's a reason I'm so cynical...

 

[MickiSue]

Oh, of course. I'm certainly no expert. I trust DS is becoming one.

 

[Matt]

I have been trying to calculate my mother's SS benefit as she nears retirement. She is currently 67 and is mandated to retire from her state employee position at 70. She can retire now with her full defined benefits pension but is thinking to continue to work until 69 or 70. She is also currently collecting my step-father's SS benefits as a widower.

Figuring out her SS have been a bit tricky since she also need to deal with the WEP (windfall elimination provision) since her current position does not have SS tax taken out, however she does have 22 years of "substantial earnings" from previous employment and her income from being an adjunct faculty member at a university.

I have a question about the bend points in calculation her PIA. PIA is the benefit she would receive is taken at her full-retimenet age, which for my Mom is 66 (she is born in 1948). In calculating the PIA, do I take the bend points from the year she turned 62 (2010) to calculate her PIA or from another year? The link Matt referred to in his post says
"The PIA is the sum of three separate percentages of portions of average indexed monthly earnings. The portions depend on the year in which a worker attains age 62, becomes disabled before age 62, or dies before attaining age 62." Which seems to me I calculate her PIA with the bends points that where for 2010 (when she was 62).

Have you tried this http://www.ssa.gov/planners/retire/anyPiaWepjs04.html ?

You can see the impact of 22 years substantial earnings on page two (right hand side, 50%) http://www.ssa.gov/pubs/EN-05-10045.pdf

 

[Andrew]

Have you tried this http://www.ssa.gov/planners/retire/anyPiaWepjs04.html ?

You can see the impact of 22 years substantial earnings on page two (right hand side, 50%) http://www.ssa.gov/pubs/EN-05-10045.pdf

Hi Matt -

Yes I have looked at both the link you pasted as well as the PDF.

In order to use the Online Calculatetor (WEP Version) that you linked, it says I "need to enter the monthly amount of your pension that was based on work not covered by Social Security". Seeing as my mother is still working at the job in which she will be receiving this pension, how do I calculate her "monthly pension amount" since she is not currently receiving the pension? Assuming I know that her pension will 75% of her current salary, can I simply divide that number by 12 (for every month of the year) to get the monthly pension amount, or do I need to factor what will be withheld from the monthly pension payments (taxes, etc.)

Also, regarding the detailed calculator that they provide via download, unfortunately, it is not comparable with the operating system on my Mac, as referenced here (see special note for Mac OS version: http://www.ssa.gov/oact/anypia/description.html

 

[Matt]

Hi Matt -

Yes I have looked at both the link you pasted as well as the PDF.

In order to use the Online Calculatetor (WEP Version) that you linked, it says I "need to enter the monthly amount of your pension that was based on work not covered by Social Security". Seeing as my mother is still working at the job in which she will be receiving this pension, how do I calculate her "monthly pension amount" since she is not currently receiving the pension? Assuming I know that her pension will 75% of her current salary, can I simply divide that number by 12 (for every month of the year) to get the monthly pension amount, or do I need to factor what will be withheld from the monthly pension payments (taxes, etc.)

Also, regarding the detailed calculator that they provide via download, unfortunately, it is not comparable with the operating system on my Mac, as referenced here (see special note for Mac OS version: http://www.ssa.gov/oact/anypia/description.html

I'd imagine (but not certain) you would use gross pension amount. This is the case for Govt Employees http://www.ssa.gov/planners/retire/gpo-calc.html

 

[Andrew]

Some of those questions are actually answerable by the SSA.

My oldest son works at their SF office, and that's his job: to walk people through some of the tortuous calculations so that they can make informed decisions.

Yes, it was in fact at my Mom's local SSA office that she signed up for widower's benefits and the agent she worked with was very helpful.

However, about six months after she started receiving widower's benefits she realized she could no longer access her estimated benefits online. It only showed what she was receiving on her widower's benefits. She called her local office and was informed that since she is currently receiving benefits (even though they are widowers') they don't provide HER estimated benefits. We are trying to calculate what her benefits will be once she retires and begins collecting her state pension, as the GPO (government pension offset) will reduce her widowers' benefits severely and she will want to collect her own benefits.

If you wouldn't mind asking your son, I have a question for him. If my mother makes an appointment at her local SSA office, will they be able to tell her what her estimated benefits currently are? Because she was led to believe that they could not calculate these for her given she is currently receiving benefits. Thank you.

 

[Andrew]

I'd imagine (but not certain) you would use gross pension amount. This is the case for Govt Employees http://www.ssa.gov/planners/retire/gpo-calc.html

Thanks.

 

[MickiSue]

I can ask him, Andrew.

 

[Andrew]

I can ask him, Andrew.

Thank you, it is much appreciated.

 

[MickiSue]

I talked to him this morning. He said that your mom can call the 800 number, and make an appointment for a phone consultation. She can also call the local office, but she'd get an appointment sooner through the 800 number than at the local office.

 

[Andrew]

I talked to him this morning. He said that your mom can call the 800 number, and make an appointment for a phone consultation. She can also call the local office, but she'd get an appointment sooner through the 800 number than at the local office.

Thanks for checking with your son. As I mentioned previously, my mother knows about making appointments at her local SSA office, as she did it to arrange receiving my deceased father's benefits.

The question I specifically had, and believe I iterated in my previous post, was about whether an SSA agent would be able to tell her what her benefits will be when she begins collecting at 70, even though she is currently receiving benefits. As I said in my previous post, she was told that they could not calculate her benefits (which she will need to collect when she retires instead of my father's) because she is currently receiving benefits.

Thanks for all your help though.

 

[MickiSue]

I'm not the expert, he is. But he was of the opinion that they WOULD be able to tell her.

 

[Matt]

Thanks for checking with your son. As I mentioned previously, my mother knows about making appointments at her local SSA office, as she did it to arrange receiving my deceased father's benefits.

The question I specifically had, and believe I iterated in my previous post, was about whether an SSA agent would be able to tell her what her benefits will be when she begins collecting at 70, even though she is currently receiving benefits. As I said in my previous post, she was told that they could not calculate her benefits (which she will need to collect when she retires instead of my father's) because she is currently receiving benefits.

Thanks for all your help though.

I hope that they can give you a firm answer. Though I will say that perhaps it is time to start looking at the problem differently. Would you be able to get a 'range of possibilities' and do something akin to a Monte Carlo sim on them? EG, what would the cashflows/balance sheet look like if she were to receive zero SSI? Would she still be able to maintain a lifestyle? If the answer is yes, then maybe a better focus would be to present these different scenarios, one with no SSI, one with 'some', one with 'some more'....

The key question (to me) is not how much she will get, but what impact the amount of what she will get will have on her retirement.

I know it isn't perhaps the perfect answer, but I have to say that sometimes when it comes to the convoluted BS that is the tax code and the SSA that you have to just plan around a variety of outcomes, and trust no opinion... even if you were to be told 'officially on the phone' that doesn't mean you'll get the check you were expecting.

 

[Andrew]

I'm not the expert, he is. But he was of the opinion that they WOULD be able to tell her.

Thank you. Didn't see that addressed in your original response back to me (this my reiteration of the question), but perhaps it was implied in the suggestion to call the SSA office. I really appreciate all your help, and your son's.

 

[Andrew]

I hope that they can give you a firm answer. Though I will say that perhaps it is time to start looking at the problem differently. Would you be able to get a 'range of possibilities' and do something akin to a Monte Carlo sim on them? EG, what would the cashflows/balance sheet look like if she were to receive zero SSI? Would she still be able to maintain a lifestyle? If the answer is yes, then maybe a better focus would be to present these different scenarios, one with no SSI, one with 'some', one with 'some more'....

The key question (to me) is not how much she will get, but what impact the amount of what she will get will have on her retirement.

I know it isn't perhaps the perfect answer, but I have to say that sometimes when it comes to the convoluted BS that is the tax code and the SSA that you have to just plan around a variety of outcomes, and trust no opinion... even if you were to be told 'officially on the phone' that doesn't mean you'll get the check you were expecting.

Honestly, the reason why I want to know the exact amount is simply to see if the calculations I have been able to run are correct. This is more of a experiment to me, seeing if I have been able to come up with her SS benefit on my own. I like figuring things out.

And yes, I have run multiple scenarios (no SSI, one with some, one with some more) and in all of them my Mom is in a really good place, its simply a matter of "how good".

 

[Matt]

Honestly, the reason why I want to know the exact amount is simply to see if the calculations I have been able to run are correct. This is more of a experiment to me, seeing if I have been able to come up with her SS benefit on my own. I like figuring things out.

And yes, I have run multiple scenarios (no SSI, one with some, one with some more) and in all of them my Mom is in a really good place, its simply a matter of "how good".

My overall concern is that at certain points I don't trust people anymore.... no offense to Micki's son here, but if he was to tell me on the phone X what would that be worth when my payments came in at Y? There will be times when things get too murky and you have to just go with the best option, but perhaps without 100% certainty. The IRS has Private Letter Rulings for things like this.

Though having said this, I do think your case should be easy enough to figure out by the right people....