Bogleheads® on Investing Podcast 007 – Mike Piper, host Rick Ferri (audio only)

00:00:00.000 | [MUSIC PLAYING]

00:00:09.760 | Welcome to Bogleheads on Investing, episode number

00:00:12.480 | seven.

00:00:13.680 | Today, we have a special guest, Mike Piper,

00:00:18.500 | the oblivious investor.

00:00:20.800 | Mike is an author and a CPA who has written many books.

00:00:24.760 | And today, we're talking about social security.

00:00:28.120 | [MUSIC PLAYING]

00:00:38.160 | Hi, everyone.

00:00:38.800 | My name is Rick Ferry, and I'm the host

00:00:40.520 | of Bogleheads on Investing.

00:00:43.040 | This podcast is brought to you by the John C. Bogle Center

00:00:46.840 | for Financial Literacy, a 501(c)(3) corporation.

00:00:51.720 | Today, my guest is Mike Piper, CPA,

00:00:55.520 | who is the author of several personal finance books

00:00:58.680 | and the blog Oblivious Investor.

00:01:01.760 | Mike also wrote the Open Social Security Calculator,

00:01:06.960 | which is a free online tool at opensocialsecurity.com.

00:01:13.040 | Mike has a lot of great insights for us on social security.

00:01:17.200 | Let's get right to it.

00:01:19.360 | Please welcome Mike Piper to the Bogleheads on Investing

00:01:22.560 | podcast.

00:01:23.120 | Welcome, Mike.

00:01:24.720 | Hi, Rick.

00:01:25.240 | Thanks for having me.

00:01:26.440 | Well, thanks for being with us.

00:01:27.720 | I wanted to get you on the show, because you have become

00:01:30.560 | the de facto go-to expert on social security

00:01:34.600 | with your books, some of your lectures at the Bogleheads

00:01:38.400 | meetings, and also your Social Security Calculator, which

00:01:42.760 | has become very popular.

00:01:44.040 | And the best part about it is it's free, which we all like.

00:01:49.920 | So before we get started, you're a CPA.

00:01:53.760 | But could you tell us a little bit more about yourself

00:01:55.520 | and how you got involved in finance,

00:01:57.240 | and particularly how you decided to write the Social Security

00:02:00.760 | book and do the calculator?

00:02:02.200 | So I'm a CPA, like you mentioned.

00:02:04.160 | My background originally was tax accounting.

00:02:06.840 | But I haven't done any tax preparation, any client work

00:02:10.320 | for, I guess, about 10 years.

00:02:12.560 | All of my income comes from books.

00:02:15.320 | I have a series of books on an assortment

00:02:18.080 | of financial topics, various tax topics, investing,

00:02:20.960 | retirement planning, and social security.

00:02:22.880 | No client work.

00:02:23.640 | It's just research and writing.

00:02:26.040 | As far as how I decided to write a book about social security,

00:02:29.440 | it was just that people asked me to.

00:02:31.640 | I had written a book about managing an investment

00:02:34.520 | portfolio in retirement.

00:02:36.200 | It's called "Can I Retire?"

00:02:38.080 | And I focused exclusively on the investment portfolio

00:02:41.640 | side of retirement planning.

00:02:43.360 | And some people asked me to delve more deeply

00:02:46.320 | into social security.

00:02:47.320 | And I figured that's the thing I could probably do,

00:02:49.640 | given my background in taxation.

00:02:51.120 | I are pretty comfortable reading legalese

00:02:54.280 | and figuring out what it means.

00:02:56.320 | And that's basically what social security research is.

00:02:58.800 | That's how I got into social security in the first place,

00:03:01.200 | was writing that book at the request of readers.

00:03:04.280 | About a year ago, I started working on this calculator.

00:03:08.000 | And it's been released and available

00:03:10.320 | for six or seven months.

00:03:12.200 | And how I got into that was completely accidentally.

00:03:15.400 | My wife recently changed careers.

00:03:16.920 | She became a software developer.

00:03:19.320 | And I just was interested in having a better understanding

00:03:23.640 | of what she does.

00:03:24.520 | So I learned a little bit about programming,

00:03:28.280 | about writing code.

00:03:29.360 | And it seemed like a natural way to put that to use,

00:03:33.720 | given my social security background.

00:03:35.760 | Well, I personally have used the calculator.

00:03:37.560 | And it works great.

00:03:39.480 | And I appreciate you doing that work.

00:03:41.000 | And we'll get to some of the aspects of that calculator

00:03:43.920 | a little bit later on.

00:03:44.920 | But I just want to reiterate one thing.

00:03:46.640 | You said you don't take any clients that--

00:03:48.800 | I can't call you up and pay you to help me.

00:03:50.840 | Is that true?

00:03:52.680 | That's correct.

00:03:54.320 | I'm happy to answer questions.

00:03:55.640 | But no, I do not do any client work at all.

00:03:57.960 | Let's go ahead, then, and start our discussion

00:03:59.840 | about social security.

00:04:00.880 | But before we get into the nitty gritty of it,

00:04:03.480 | I was reading a lot about how we actually

00:04:05.880 | got a social security program to begin with.

00:04:08.360 | And it goes way back to Civil War days,

00:04:12.280 | and even prior to that.

00:04:13.440 | Can you give us a little history of what social security

00:04:16.880 | was supposed to be for, and what it has become over the last,

00:04:22.080 | say--

00:04:22.880 | well, it's only been around since 1935.

00:04:25.040 | So that would give us about 85 years.

00:04:28.600 | Exactly.

00:04:29.100 | The Social Security Act was originally passed in 1935.

00:04:31.840 | And of all the different types of benefits that we have now,

00:04:34.480 | the only major one that was available then

00:04:36.560 | was just plain old retirement benefits.

00:04:38.480 | There were no spousal benefits, no survivor benefits,

00:04:40.800 | no child benefits, no disability benefits, none of those things.

00:04:44.840 | The spousal benefits for wives, and survivor benefits

00:04:47.960 | for widows, as well as child benefits,

00:04:49.520 | came a few years later, 1939.

00:04:51.840 | And then they extended those same benefits--

00:04:54.080 | so spousal benefits for husbands.

00:04:55.840 | And widower benefits came in 1950, so a little bit more

00:04:59.920 | than 10 years later.

00:05:01.160 | Disability benefits in 1956.

00:05:03.000 | So the program expanded pretty dramatically

00:05:06.200 | in the first 20 years, adding on all these different types

00:05:09.040 | of benefits.

00:05:09.960 | And then, as far as major changes since then,

00:05:12.760 | there's been several.

00:05:13.760 | The automatic inflation adjustments,

00:05:15.280 | those began in 1972.

00:05:17.240 | The increase for full retirement age happened in 1983.

00:05:21.560 | It's a program that's really evolved over time

00:05:23.600 | and continues to evolve.

00:05:24.560 | Just a few years ago, we had another change

00:05:26.320 | in terms of restricted applications

00:05:28.040 | and voluntary suspension rules.

00:05:30.320 | It's changed over time.

00:05:31.480 | And it will certainly continue to change in the future.

00:05:34.240 | I was reading that the very first person

00:05:36.600 | to receive a Social Security benefit

00:05:38.960 | was a Cleveland motor man by the name of Ernest Ackerman, who

00:05:44.640 | had put one nickel out of his pay

00:05:47.680 | into the Social Security system and received a payment back

00:05:51.840 | when he retired of $0.17.

00:05:54.520 | So we've come a long way in the last 85 years.

00:06:00.440 | Mike, let's talk about your book, Social Security

00:06:02.600 | Made Simple.

00:06:03.680 | You wrote this book to explain Social Security

00:06:06.600 | in 100 pages or less.

00:06:08.440 | Is that possible to do?

00:06:10.720 | Not every single possible rule, with all the exceptions

00:06:13.880 | to the rules.

00:06:15.000 | But most of the information that most people need to know,

00:06:18.480 | I think, is explained and hopefully explained clearly

00:06:21.560 | in that book.

00:06:22.680 | Let's go through some of, let's say,

00:06:24.240 | the top 10 things people need to know about Social Security.

00:06:29.400 | And this would be people who are just starting work,

00:06:32.840 | people who have been in the workforce for a while,

00:06:36.240 | people like me who are in their early 60s, who are looking at,

00:06:40.280 | gee, when should I take Social Security?

00:06:42.320 | Step by step, go through some of the major portions of your book

00:06:47.720 | and talk about some of these topics.

00:06:50.200 | First thing to know is that the amount

00:06:52.120 | that you get as a retirement benefit

00:06:54.320 | is based on two things.

00:06:56.400 | Number one is your earnings history,

00:06:59.520 | so how many years of earnings you have

00:07:01.640 | and how much you earn per year.

00:07:03.640 | And number two is how old you are

00:07:05.440 | when you begin taking your benefit.

00:07:08.080 | So as far as the earnings that they look at,

00:07:10.080 | the way the calculation works is they

00:07:11.760 | look at all of your years of earnings

00:07:14.600 | and they adjust years prior to age 60.

00:07:19.000 | They adjust them upward for, essentially, wage inflation.

00:07:22.560 | Essentially, it's the growth in the national average wage

00:07:25.280 | that they're using to adjust it upward.

00:07:27.640 | And then out of all of those years,

00:07:29.400 | they pick the 35 highest.

00:07:31.880 | And from there, they calculate something

00:07:34.160 | called your average indexed monthly earnings, which

00:07:36.640 | is sort of just the average monthly amount out

00:07:39.400 | of those 35 wage inflation adjusted years.

00:07:43.240 | And from there, they calculate something

00:07:46.600 | called your primary insurance amount.

00:07:48.360 | And this is-- of all of the Social Security jargon,

00:07:51.760 | this is the one term that you really

00:07:53.320 | need to know what it means.

00:07:54.440 | And it's primary insurance amount.

00:07:56.400 | And it is the amount of your monthly retirement benefit

00:08:00.800 | if you file for your benefit exactly

00:08:03.560 | at your full retirement age.

00:08:05.720 | And it's a function of your earnings history.

00:08:08.080 | The higher your earnings, the higher your primary insurance

00:08:10.520 | amount.

00:08:11.320 | You mentioned full retirement age.

00:08:13.720 | How is that calculated?

00:08:15.480 | For anybody born 1943 to 1954, you

00:08:19.720 | have a full retirement age of 66.

00:08:21.600 | And then for people born between 1955 and 1959,

00:08:26.440 | it's basically between 66 and 67.

00:08:30.080 | And then for anybody born 1960 or later,

00:08:32.240 | you have a full retirement age of 67.

00:08:34.560 | You said that they take the average of the highest 35

00:08:37.720 | years.

00:08:38.520 | What if you don't have 35 years?

00:08:40.120 | What if you have 20 years or 10 years or just five years?

00:08:43.960 | Sure.

00:08:45.080 | Good question.

00:08:46.080 | So if you only have five years, you're

00:08:47.720 | not actually going to qualify for a retirement

00:08:49.360 | benefit in the first place because you

00:08:50.520 | need at least 10 years.

00:08:52.040 | But if you have, let's say, 20 years, then they fill in zeros

00:08:54.840 | to get you up to 35.

00:08:55.880 | So they'll look at your 20 years of earnings,

00:08:57.840 | and then they'll be using 15 years of zeros.

00:08:59.920 | So definitely having 35 years of earnings

00:09:02.640 | will certainly help you to qualify for a larger benefit.

00:09:06.000 | What if you only have, say, eight years?

00:09:08.760 | You don't qualify.

00:09:09.760 | What happens to all the money you put in?

00:09:11.840 | Well, you don't get anything, the short version.

00:09:14.160 | In most cases--

00:09:15.760 | You've donated to the cause.

00:09:18.080 | Yeah, exactly.

00:09:19.520 | In cases where you only have eight years of earnings,

00:09:22.720 | potentially it's because the most common situation

00:09:26.240 | is that likely either A, you became disabled,

00:09:29.200 | in which case you can qualify for benefits with less than 10

00:09:32.800 | years of earnings, or maybe you spent a lot of years

00:09:35.880 | out of the workforce taking care of children.

00:09:38.040 | So it's likely that you're married or were married.

00:09:41.120 | So you may qualify for spousal benefits or survivor benefits

00:09:44.840 | on your spouse's work record.

00:09:46.600 | I've always had a question of, where does that money come from?

00:09:49.480 | If I worked and my wife didn't work, so I put in for me,

00:09:56.640 | but I never put in anything extra for her,

00:10:00.520 | when she starts getting paid half of my Social Security

00:10:05.160 | at some point, where does that money come from?

00:10:08.200 | I didn't put it in.

00:10:09.480 | Yeah, the system is not designed to be a retirement account,

00:10:14.200 | essentially.

00:10:14.840 | It's not designed to have what you would call--

00:10:18.160 | or what many people would call fair outcomes based on,

00:10:20.920 | this person put in x dollars, and this other person

00:10:23.240 | put in y dollars.

00:10:24.080 | So the amount they're going to get out

00:10:25.640 | is based on exactly what they put in.

00:10:27.160 | That's not how it works.

00:10:28.840 | If you've got two people who have exactly identical earnings

00:10:31.360 | history, one of them never got married,

00:10:33.680 | and the other was married.

00:10:35.200 | And so one of them is going to have a spouse collecting

00:10:38.680 | benefits on their work record.

00:10:40.680 | Well, the two people put in the same amount,

00:10:42.480 | but one of those families is going to be getting more out.

00:10:45.880 | And the same could be said just based on,

00:10:47.920 | let's say you pay in for your entire career,

00:10:49.800 | and then you had a heart attack and died at age 60.

00:10:52.880 | You didn't get anything out then, either.

00:10:54.760 | So it's really not designed, even

00:10:56.400 | with the intention of working like a retirement account,

00:10:59.240 | where the amount you put in and the amount you eventually

00:11:02.080 | get out are necessarily supposed to be proportional.

00:11:04.440 | It's more about taking care of people

00:11:07.120 | when they're most in need, is roughly what Social Security

00:11:11.040 | is designed to do.

00:11:12.480 | So really, it is an insurance program rather than

00:11:16.720 | a retirement program.

00:11:19.360 | Yes, absolutely.

00:11:20.220 | It's a social insurance program.

00:11:22.320 | That's precisely what it is.

00:11:24.280 | I think that that's really important for all of us

00:11:27.600 | who are paying in or taking out to understand

00:11:30.000 | that we often talk about Social Security retirement

00:11:33.960 | pay or the money we're going to get

00:11:35.880 | in Social Security in retirement.

00:11:37.640 | But it's really not a retirement pay.

00:11:40.760 | And the reason why all these quirky rules and regulations

00:11:44.040 | exist--

00:11:45.280 | and as you said, it may seem inequal

00:11:47.480 | that why would my wife, who doesn't have 10 years of work

00:11:52.280 | because she stayed home with the kids, why should she get pay?

00:11:55.440 | Why should I get 1 and 1/2 times my Social Security benefit

00:11:58.560 | when I never put the money in?

00:12:00.400 | It's just because that's what the insurance program says.

00:12:04.720 | And therefore, that's what happens.

00:12:07.860 | And there's no equality to it, as you said.

00:12:09.640 | Which is interesting.

00:12:10.880 | I think it's an aspect of Social Security

00:12:12.760 | that a lot of people don't really understand.

00:12:16.600 | Yeah, I think a related point, a lot of people

00:12:19.400 | look at the money they're putting in,

00:12:21.240 | and they compare it to the money that they ultimately get out.

00:12:24.200 | But what they miss is that a big chunk of what you're paying

00:12:27.920 | is not just going to retirement benefits.

00:12:30.140 | You're also essentially getting a life insurance

00:12:32.100 | policy and a disability insurance

00:12:33.640 | policy while you're working.

00:12:35.640 | And a lot of people don't recognize

00:12:37.400 | that part of the taxes that they're paying

00:12:39.520 | goes towards that as well.

00:12:41.440 | On the disability side, you said you don't need 10 years

00:12:43.840 | to collect a disability Social Security benefit.

00:12:47.720 | How many years do you need?

00:12:50.040 | It depends on how old you are when you become disabled,

00:12:53.400 | basically.

00:12:54.280 | There's a calculation I don't remember, honestly,

00:12:56.600 | off the top of my head.

00:12:58.480 | So we've talked about how your benefit is calculated

00:13:01.920 | at your full retirement age.

00:13:03.720 | But if you don't take your benefit at full retirement age,

00:13:07.360 | if you take it before or after, that also affects your benefit.

00:13:11.160 | Exactly.

00:13:12.360 | If you file for your retirement benefit

00:13:14.000 | before full retirement age, you get

00:13:15.560 | less than your primary insurance amount.

00:13:17.760 | And if you file after your retirement age,

00:13:20.400 | you get more than your primary insurance amount.

00:13:22.640 | And the math works based on months.

00:13:25.840 | So every month that you wait, you get a little bit more

00:13:28.880 | than if you had filed the month before.

00:13:31.480 | If you want to look at it from a year's perspective,

00:13:34.680 | for somebody who files four years

00:13:36.120 | before their full retirement age, for instance,

00:13:38.040 | they would get 75% of their primary insurance amount.

00:13:42.160 | Somebody who filed two years before their full retirement

00:13:44.920 | age would get a little under 87% of their primary insurance

00:13:48.800 | amount.

00:13:49.520 | Somebody two years after full retirement age gets 116%.

00:13:53.160 | Somebody four years after their full retirement age gets 132%.

00:13:57.200 | The longer you wait, the more you get.

00:13:59.280 | And roughly speaking, somebody waiting all the way

00:14:01.800 | until age 70 to file will get about 75% more

00:14:05.320 | than somebody who files as early as they can in '62.

00:14:08.760 | And that all sounds great, except there's

00:14:10.560 | a couple of issues with that.

00:14:12.000 | And you just recently wrote an article

00:14:13.640 | about this in your Oblivious Investor blog.

00:14:17.480 | Great blog, by the way.

00:14:18.920 | You do a great job with that.

00:14:20.200 | And that is that--

00:14:21.000 | Thank you.

00:14:22.320 | --this extra money that you're getting,

00:14:24.360 | there's a couple of things that are happening.

00:14:25.800 | Number one, you're getting a year older,

00:14:27.520 | you're getting one year closer to death.

00:14:29.320 | Right.

00:14:30.040 | So you're not going to collect it as long,

00:14:32.320 | even though you're collecting more.

00:14:34.280 | And the other aspect of it is, if you collect it early,

00:14:38.880 | you could take the money, and you could invest it,

00:14:41.120 | and you could make money on the money.

00:14:42.800 | And let's say you just make a 4% return, you're not really--

00:14:47.000 | I mean, what's the breakeven point?

00:14:48.560 | I mean, how does it all mesh out?

00:14:51.120 | Well, it depends on if you're married or not.

00:14:54.320 | Because if you are married, we have

00:14:55.760 | to be thinking about survivor benefits, rather than just

00:14:58.240 | retirement benefits.

00:14:59.280 | But in the simplest situation, so somebody who isn't married

00:15:02.120 | and we're only looking at one person's retirement benefit

00:15:05.440 | and one person's life expectancy,

00:15:08.160 | if you compare filing at 62 versus filing at 70,

00:15:14.080 | if the person lives to age 80, then those two filing choices

00:15:20.560 | are basically the same, if they earned a return that

00:15:23.280 | exactly matches inflation.

00:15:25.440 | It's actually 80 and 1/2, 80 and 6 months.

00:15:28.720 | And the higher the return you get earned,

00:15:31.280 | the further the breakeven age is pushed out

00:15:34.560 | into the future, basically.

00:15:36.400 | I think, though, one mistake that a lot of people make

00:15:40.040 | is that the rate of return that they're assuming

00:15:43.000 | or that they're using for this analysis

00:15:44.800 | is too high, because generally speaking,

00:15:47.880 | when we're talking about delaying social security,

00:15:50.280 | so spending down your portfolio to delay social security,

00:15:54.960 | we're not talking about spending down your portfolio overall.

00:15:57.880 | We're talking about specifically spending down

00:16:00.520 | your bond portfolio.

00:16:02.240 | You're essentially exchanging bond holdings

00:16:04.520 | to one fixed income holding for more social security.

00:16:09.240 | And that's what has, in most cases,

00:16:11.720 | a very advantageous outcome.

00:16:14.560 | Not every case, but in a majority of cases.

00:16:17.440 | So let me understand this correctly.

00:16:18.960 | You're really now looking at social security

00:16:22.480 | as a bond holding in your portfolio,

00:16:26.440 | or at least has similar characteristics.

00:16:28.960 | So if you're not going to take social security early,

00:16:33.720 | if you're going to delay, then on your portfolio side,

00:16:38.600 | your stock and bond, your investment portfolio,

00:16:42.080 | you would be taking your money out of the bond side

00:16:45.720 | and spending that, because the social security

00:16:50.960 | portion, which is like a bond, although it's not exactly

00:16:53.720 | a bond, will be increasing in value.

00:16:56.120 | Is that what I understand you saying?

00:16:58.440 | What I'm saying here is that when

00:17:00.360 | you're delaying social security, or even more broadly,

00:17:03.600 | when you're annuitizing, you usually

00:17:06.160 | want to do it by using your fixed income

00:17:09.880 | holdings to buy that annuity, or in this case,

00:17:12.560 | to buy more social security, essentially.

00:17:15.600 | Because that's what we're looking at doing.

00:17:17.560 | That's the analysis that we're making here,

00:17:19.360 | how to spend down by bonds to get more social security.

00:17:22.160 | The rate of return you want to use in your analysis

00:17:25.840 | is the rate of return that you would expect from your bond

00:17:28.120 | holdings.

00:17:28.880 | The rate of return that I usually use

00:17:30.440 | is 20-year tips, because that's the thing that's

00:17:33.240 | most comparable to social security,

00:17:35.240 | and that it's inflation-adjusted backed

00:17:37.320 | by the federal government.

00:17:38.400 | And it has a duration in the rough ballpark

00:17:41.600 | of what a social security annuity would have.

00:17:44.200 | And that's the discount rate that's

00:17:46.360 | used by default when you load the calculator.

00:17:49.240 | You can adjust the discount rate if you want to.

00:17:51.840 | And a lot of people make this mistake of using--

00:17:55.280 | they say, oh, well, I can take the money and invest it

00:17:57.520 | and get a 4% return, so I'm going to take the money

00:18:00.600 | and invest it.

00:18:02.480 | Well, OK, fine.

00:18:03.240 | But again, you have the option.

00:18:05.920 | You don't have to be spending down your stockholding

00:18:08.760 | to delay social security.

00:18:09.800 | You could be spending down your bonds.

00:18:10.920 | And in most cases, that's what makes sense to do.

00:18:12.960 | So that's the analysis that we're usually looking at.

00:18:15.920 | Well, that's interesting.

00:18:17.160 | It's a really great way of looking at it.

00:18:18.960 | I hadn't really thought about it that way,

00:18:20.760 | but it makes complete sense to do it.

00:18:23.200 | Let me throw one more zinger in there,

00:18:25.320 | that how does your health work into all of this?

00:18:29.280 | In other words, my parents are still alive.

00:18:31.280 | And my father is 90, and my mother is in her late 80s.

00:18:34.600 | They're not going anywhere.

00:18:35.760 | They're basically, unfortunately,

00:18:38.160 | bound to a small apartment where they're living.

00:18:41.080 | And my father is not going anywhere.

00:18:43.240 | So even though they might be making more money

00:18:45.840 | because my father delayed taking social security until he

00:18:48.440 | was 70 years old, the fact is he can't spend it now.

00:18:52.200 | So doesn't a quality of life also come into this equation?

00:18:55.200 | Sure.

00:18:55.720 | So there's a lot going on with that question.

00:18:58.000 | Number one is life expectancy.

00:19:00.160 | Again, we're still just talking about the simplest case

00:19:04.080 | here of a non-married person, because we

00:19:06.360 | haven't talked about how survivor benefits work yet.

00:19:09.160 | So for a non-married person, the longer their life expectancy,

00:19:13.240 | the more advantageous it is to delay.

00:19:15.120 | And the shorter their life expectancy,

00:19:16.720 | the more advantageous it is to file early.

00:19:19.200 | For a married couple, it's different,

00:19:20.800 | because we have to look at joint life expectancies.

00:19:23.480 | This is a bit of a simplification.

00:19:25.320 | But roughly speaking, the way survivor benefits work

00:19:30.200 | is that after one spouse dies, the spouse who's still alive,

00:19:35.600 | the amount that they get from that point forward

00:19:38.880 | is roughly, in most cases, the amount--

00:19:42.360 | whichever person had the higher benefit at that point,

00:19:44.960 | that amount is what the spouse who's still alive

00:19:47.440 | is going to continue getting from that point forward.

00:19:49.600 | And again, that's a bit of a simplification,

00:19:50.920 | but that's roughly how it works.

00:19:52.480 | With regard to the when to file decision for a married couple,

00:19:55.520 | for the higher-earning spouse, when

00:19:57.520 | they delay taking benefits, it increases the amount

00:20:00.760 | that the couple gets as long as either person is still alive.

00:20:04.800 | So what we need to look at there is a joint life expectancy.

00:20:08.120 | And specifically, it's the couple's joint second-to-die

00:20:11.440 | life expectancy.

00:20:13.000 | And conversely, for the lower-earning spouse,

00:20:16.480 | when they delay claiming benefits,

00:20:18.280 | it only increases the amount that the couple's

00:20:20.160 | going to receive as long as both people are still alive.

00:20:23.320 | So now we need to look at a joint life expectancy that's

00:20:25.640 | actually the couple's joint first-to-die life

00:20:28.520 | expectancy, which is shorter.

00:20:30.880 | And so the way that works out in terms of optimal filing

00:20:36.720 | strategies is that it's usually advantageous for the higher-earning

00:20:40.120 | spouse to wait until 70, and it's often but not always

00:20:43.680 | advantageous for the lower-earning spouse

00:20:45.760 | to file early.

00:20:47.400 | Micah, all this sounds great, but I'm not

00:20:49.800 | going to remember any of--

00:20:51.400 | well, maybe 10% of it.

00:20:53.400 | So I just want to find out from you,

00:20:56.360 | if I used your open social security calculator online

00:21:01.200 | and I put all my data in, this is what it does for me,

00:21:05.280 | correct?

00:21:05.800 | It helps me figure this out?

00:21:08.240 | Yeah, that's what it's doing.

00:21:10.120 | By default, it uses the Social Security Administration's life

00:21:13.520 | expectancy mortality tables.

00:21:15.080 | But you can select different mortality tables

00:21:17.120 | if you're in better than average or worse than average health.

00:21:20.680 | And it essentially looks at all of the different possible

00:21:24.720 | claiming ages for you.

00:21:27.160 | And if you're married, it looks at all

00:21:28.720 | of the combinations of claiming ages for you and your spouse.

00:21:31.880 | And it determines which one is expected

00:21:36.480 | to provide the highest total level of spending

00:21:40.000 | over your retirement.

00:21:41.440 | And then after that, you can say, OK,

00:21:44.400 | so the calculator suggested filing, let's say,

00:21:46.600 | at age 70 for me and at age 63 and seven months for my spouse.

00:21:51.560 | What if instead I filed at 67 and my spouse filed at 65?

00:21:56.960 | How does that work out?

00:21:58.120 | And it tells you the total amount

00:22:00.160 | of spending that Social Security would

00:22:02.080 | be expected to fund over your lifetimes

00:22:04.960 | with that set of filing ages.

00:22:09.400 | So you can see how different it is.

00:22:11.240 | And in some cases, what you'll find

00:22:12.640 | is that there are an assortment of combinations

00:22:15.680 | that work out fairly similarly.

00:22:18.200 | They're about as good as each other.

00:22:19.840 | And then there are claiming ages that are quite a bit worse.

00:22:24.080 | And so Social Security planning is not necessarily

00:22:26.360 | about picking the very best one, because the very best one

00:22:31.200 | and the next best one are usually

00:22:32.520 | about the same as each other, but not that different.

00:22:34.920 | It's about avoiding the really bad decisions.

00:22:38.440 | John Bogle always said, you got to get the big things right.

00:22:42.840 | Yeah, exactly.

00:22:44.320 | Don't make big mistakes.

00:22:45.520 | So your calculator will avoid big mistakes.

00:22:48.480 | And even if you're not absolutely perfect,

00:22:50.840 | you're generally getting it right.

00:22:52.680 | And so you've done well.

00:22:54.880 | Yeah.

00:22:55.400 | Let me ask a question about inflation.

00:22:58.040 | So Social Security is adjusted for inflation every year.

00:23:01.080 | Unless there's deflation, which is a lowering of prices.

00:23:08.000 | And then Social Security is not adjusted down.

00:23:12.000 | So could you talk about inflation and Social Security

00:23:15.400 | payments?

00:23:16.680 | Every year, beginning at age 62, your primary insurance amount

00:23:21.720 | is adjusted upward based on inflation.

00:23:25.120 | And because your monthly benefit amount

00:23:27.920 | is a percentage of your primary insurance amount, what

00:23:30.600 | that means is that your monthly benefit amount is going upward

00:23:33.320 | based on inflation every year.

00:23:34.560 | And that's true regardless of when you do or don't file.

00:23:37.520 | So something a lot of people ask is, if I wait until 70

00:23:41.960 | or if I wait until 68, do I miss out

00:23:44.160 | on those inflation adjustments?

00:23:45.840 | No, you don't miss out on them at all.

00:23:48.080 | The inflation investment starts at age 62,

00:23:50.400 | regardless of the age at which you file.

00:23:52.680 | A lot of people also say, there's

00:23:54.720 | also inflation in part B of my Medicare and so forth, though.

00:24:00.680 | It seems-- one Boglehead wrote in.

00:24:04.320 | He said, it seems as though whatever extra I

00:24:07.200 | get in Social Security just turns over--

00:24:11.080 | I just turn it over to Medicare because I have

00:24:13.560 | to pay higher premiums there.

00:24:16.720 | I know this isn't a discussion about Medicare,

00:24:18.760 | but is it comparable?

00:24:19.880 | I mean, is that about what happens?

00:24:22.360 | Well, it's going to vary depending

00:24:24.400 | on the size of the person's retirement benefit

00:24:27.560 | because the larger their retirement benefit is,

00:24:30.240 | the larger the dollar amount of inflation adjustment

00:24:33.600 | that they'll get every year.

00:24:34.760 | The amount of your Medicare premium

00:24:36.720 | varies based on your income level.

00:24:38.600 | So it's going to vary from one person to another.

00:24:41.680 | But it is true, of course, that health care costs

00:24:45.760 | tend to rise at a rate that's quite a bit faster than prices

00:24:50.120 | in general, so faster than overall rate of inflation.

00:24:53.360 | Yes, it's often true that the increase in Medicare premium

00:24:56.360 | that you're going to see is going

00:24:57.760 | to take a big chunk out of the Social Security inflation

00:25:00.640 | adjustment that you would get.

00:25:01.800 | I went back earlier this year, and I

00:25:03.360 | looked at how the government uses

00:25:06.320 | inflation of various things to determine levels.

00:25:10.000 | For example, how much of your earnings,

00:25:13.160 | the dollar amount of your earnings,

00:25:15.200 | do you have to pay--

00:25:18.200 | well, you have to pay into Social Security.

00:25:20.600 | I don't know what the level is right now, but maybe you do.

00:25:23.520 | What is the dollar amount?

00:25:25.120 | In other words, I make $120,000 a year.

00:25:27.800 | How much of that do I have to pay into Social Security?

00:25:31.640 | Oh, the maximum taxable earnings?

00:25:33.400 | Yes.

00:25:34.200 | For 2019, it's $132,900 is the maximum amount

00:25:39.360 | of your earnings that would be taxable under Social Security

00:25:42.400 | tax.

00:25:44.320 | But this figure is one that is adjusted not

00:25:47.960 | based on price inflation, but based on, essentially,

00:25:51.840 | wage inflation, so increases in the national average wage.

00:25:55.600 | Yeah, I find it funny that that goes up,

00:25:58.160 | it seems, faster than the benefit goes up.

00:26:02.840 | So government uses different numbers.

00:26:06.160 | I'm a military retiree, and they use yet a different number

00:26:09.840 | for determining my increase in my military pension.

00:26:15.000 | So you've got this maximum amount

00:26:18.520 | that's taxed for Social Security, 132, which goes up,

00:26:21.600 | seems to be like 6% a year.

00:26:23.720 | And then you've got Social Security,

00:26:25.400 | which goes up by something else.

00:26:27.280 | And then you've got my military pension,

00:26:29.200 | which goes up by something else.

00:26:30.840 | So it's just interesting that the government uses

00:26:32.840 | all these different numbers for inflation.

00:26:34.960 | Yes, it is true that generally, over an extended period

00:26:38.520 | of time, average wages will grow by a faster rate than prices.

00:26:43.360 | So yes, the rate at which the maximum taxable earnings grows

00:26:47.640 | will usually outpace the rate at which benefit amounts will grow.

00:26:52.800 | And I suppose that this is a way of keeping the system solvent,

00:26:57.760 | which, by the way, I do have a question on.

00:26:59.520 | And let's get to that right now.

00:27:01.520 | A lot of people on the Bogleheads forum,

00:27:04.240 | when I announced that I was going

00:27:06.120 | to be talking with you and interviewing you

00:27:08.920 | and asked the Bogleheads to submit their questions,

00:27:12.960 | there was a few people who submitted a question asking

00:27:16.400 | about the solvency of the whole Social Security program.

00:27:21.160 | Could you address your thoughts on the solvency

00:27:24.480 | of Social Security, say, over the next 50 years?

00:27:27.320 | The fundamental source to look at here

00:27:29.720 | is the trustees report.

00:27:31.320 | So the Social Security trustees put out an annual report

00:27:34.600 | that speaks in a fair bit of depth to this issue.

00:27:39.040 | And with regard to what they call the Old Age and Survivors

00:27:42.520 | Insurance Trust Fund, which is the trust fund that

00:27:44.680 | pays for retirement benefits and widow and widower benefits,

00:27:49.080 | it has a projected depletion date of 2034.

00:27:52.640 | Then after that, what a lot of people think--

00:27:54.760 | I see this all the time, especially among younger people.

00:27:57.200 | They think that Social Security is going away.

00:27:59.160 | And it's not going to go away.

00:28:00.720 | Because when that trust fund is depleted,

00:28:03.480 | taxes are still expected to be able to cover about 77%

00:28:07.200 | of promised benefits.

00:28:09.000 | So even if no legislation was passed at all

00:28:12.840 | to improve the funding status of the program,

00:28:16.040 | we end up seeing a cut in benefits that's about 23% in 2034.

00:28:22.440 | Of course, that's not exactly the most likely scenario.

00:28:25.120 | More likely will be some sort of changes before then,

00:28:27.880 | which are probably going to be a combination of tax increases

00:28:30.640 | and benefit cuts, rather than nothing happening at all.

00:28:34.440 | And then all of a sudden, on one day,

00:28:36.520 | we see a big cut in benefits.

00:28:38.240 | It's much more likely, I would assume,

00:28:39.780 | that we see a combined sort of solution here.

00:28:43.280 | It's all math, though.

00:28:44.200 | I was listening to Alan Greenspan

00:28:46.240 | speak at a conference.

00:28:48.000 | And he was saying that the Social Security system could

00:28:52.480 | be solved in 15 minutes.

00:28:54.560 | Because it's just all math.

00:28:56.880 | He said Medicare.

00:28:57.920 | Medicare is a much more difficult problem

00:29:00.760 | that we have in this country.

00:29:01.960 | Oh, absolutely.

00:29:03.040 | Health care prices, there's a lot

00:29:04.560 | going into that in terms of unknowns.

00:29:07.080 | And it's much harder to control.

00:29:08.920 | Whereas Social Security, not only is it just math,

00:29:11.160 | it's math where we know the numbers.

00:29:14.060 | I mean, we know about how long people live, on average.

00:29:18.000 | And we know exactly how many people

00:29:20.320 | there are who are currently age 60.

00:29:22.200 | And we know how many people there

00:29:23.560 | are who are currently age 59.

00:29:25.320 | So we can figure out, fairly precisely,

00:29:27.900 | how much the trust fund will have to pay out every year.

00:29:30.400 | It's more of an estimate how much it'll

00:29:33.000 | be taking in every year, of course,

00:29:34.400 | because we don't know exactly what earnings are going

00:29:37.080 | to look like.

00:29:37.640 | That depends on how well the economy does.

00:29:39.840 | But yeah, we have a very, very good estimate here.

00:29:44.200 | The projections-- so like I said,

00:29:45.760 | I put out this trustees report every year.

00:29:48.440 | And it doesn't change that much from one year to the next.

00:29:50.840 | Because the projection is basically bearing out

00:29:54.280 | according to plan.

00:29:55.240 | Things are basically-- their projection

00:29:57.340 | is proving to be true so far.

00:29:59.120 | So they don't need to adjust it very much

00:30:00.800 | from one year to the next.

00:30:02.320 | Mike, I'd like to circle back to the quality of life question.

00:30:05.400 | And I talked about my parents who

00:30:07.000 | are basically unable to travel and unable to do very much

00:30:11.840 | right now because my father is in his 90s and really immobile.

00:30:17.680 | How do you look at quality of life issues

00:30:19.720 | as far as the decision as to when to take Social Security,

00:30:23.280 | whether to delay or not delay?

00:30:25.680 | Yeah, this is something that comes up a lot.

00:30:28.680 | A lot of people say that they want

00:30:30.600 | to spend more in early retirement

00:30:32.760 | rather than late retirement because they'll

00:30:34.880 | be able to enjoy it more in the early years

00:30:37.360 | because they can travel and so on.

00:30:39.280 | And that makes a lot of sense for many people, of course.

00:30:42.880 | What a lot of people don't understand,

00:30:45.560 | though, is that in many cases--

00:30:49.120 | and this is not every case-- but in many cases,

00:30:51.760 | the plan that allows you to spend

00:30:53.400 | the most in early retirement is still delaying Social Security

00:30:58.080 | because if delaying Social Security allows

00:31:00.520 | you to spend more over the course of your whole lifetime,

00:31:04.920 | you can choose when you do that spending.

00:31:09.000 | You can spend more earlier because you

00:31:10.960 | can spend more overall.

00:31:12.280 | Essentially, what you're doing is just

00:31:13.880 | spending down your portfolio at a faster rate.

00:31:16.120 | And that's OK because--

00:31:19.000 | or I'm sorry, you're spending down your portfolio

00:31:21.040 | at a faster rate in early retirement.

00:31:23.120 | And that's OK because then once Social Security does

00:31:25.600 | kick in at this later age and at this higher amount,

00:31:29.280 | the rate at which you're spending from your portfolio

00:31:31.520 | will decline.

00:31:32.480 | So even in many cases where the person

00:31:34.320 | wants to spend more early in retirement,

00:31:37.400 | delaying Social Security is still the best option,

00:31:40.960 | especially in particular for the higher earner

00:31:43.640 | in a married couple or for an unmarried person.

00:31:47.600 | Now, wait a minute.

00:31:48.400 | Wait a minute.

00:31:49.360 | You just threw a whole monkey wrench

00:31:51.640 | into this thing called the 4% rule, which basically says

00:31:57.480 | you've got to save x amount of dollars where you can draw 4%

00:32:03.360 | off of that indefinitely for the rest of your life.

00:32:05.960 | What you're talking about, your strategy,

00:32:08.400 | where you're incorporating Social Security into this,

00:32:11.800 | just threw a whole big monkey wrench into that.

00:32:14.240 | Yeah, it does.

00:32:16.480 | It definitely, definitely does.

00:32:18.680 | Vernon, Joe Tomlinson, and Wade Fowle

00:32:21.440 | released a piece of research, I guess maybe the beginning

00:32:24.360 | of 2018 or maybe the end of 2017,

00:32:27.080 | that talked about a strategy that I think

00:32:29.520 | makes quite a bit more sense.

00:32:32.600 | And it's basically, if you are planning

00:32:35.040 | to delay Social Security, then figure out

00:32:38.960 | the amount of Social Security that you're giving up

00:32:41.120 | in the meantime, basically.

00:32:43.200 | And carve out a piece of your portfolio

00:32:45.960 | that's equal to that chunk of money

00:32:48.160 | and basically keep it in something very safe.

00:32:50.680 | And you're going to be spending that down

00:32:53.760 | to delay Social Security.

00:32:55.040 | And again, that's what we talked about.

00:32:55.920 | You're basically spending down your bonds

00:32:57.640 | while you delay Social Security.

00:32:59.760 | And then from the rest of the portfolio--

00:33:02.880 | so the rest of the portfolio is where

00:33:04.560 | you're going to be spending a roughly equal amount

00:33:07.680 | through the course of your retirement.

00:33:09.240 | That's where the 4% or 3-point-whatever-percent

00:33:13.040 | spending rules can be applied.

00:33:14.480 | And that's where you're going to use a more typical balanced

00:33:17.440 | stock bond allocation.

00:33:20.280 | That makes too much sense, Mike.

00:33:23.400 | Those are great, great, great concepts.

00:33:25.520 | And give me the name of that paper again.

00:33:28.000 | So the name of the paper is "Optimizing Retirement Income

00:33:32.440 | by Integrating Retirement Plans, IRAs, and Home Equity."

00:33:36.960 | And the authors are Wade Fowle, Joe Tomlinson,

00:33:40.280 | and Steve Vernon.

00:33:41.760 | And where would be able to find that paper?

00:33:43.960 | The website where I see it is stanford.edu.

00:33:47.720 | I'm sure if you Google the name of the paper and the authors,

00:33:52.480 | it would come up.

00:33:53.360 | Great.

00:33:54.400 | Let's switch topics here and talk about application

00:33:56.920 | strategies.

00:33:57.920 | And a lot of people thought that changes a couple of years ago

00:34:03.840 | took out a few of these strategies,

00:34:05.480 | like file and suspend, and they're no longer valid.

00:34:09.520 | Can you talk about what that was, and what happened to it,

00:34:13.320 | and what people might be able to do as an alternative?

00:34:16.560 | The file and suspend strategy was kind of weird,

00:34:19.920 | but it became the famous one, because it wasn't actually

00:34:22.480 | that useful for very many people.

00:34:24.600 | The one that was useful for a lot more people

00:34:26.560 | was the restricted application strategy.

00:34:28.960 | And hardly anybody has heard of a restricted application

00:34:32.040 | unless you've done quite a lot of reading

00:34:33.720 | about Social Security.

00:34:35.120 | And what a restricted application is,

00:34:37.320 | that's where, at your full retirement age,

00:34:40.800 | you file for spousal benefits, but only spousal benefits.

00:34:46.360 | And you let your own retirement benefit

00:34:48.680 | continue growing until age 70.

00:34:50.600 | OK, let me stop you for a second there.

00:34:52.400 | I just want to make sure I understand.

00:34:54.920 | Is it at my full retirement age, or is it

00:34:58.640 | at my wife's full retirement age?

00:35:01.320 | When would I file this restricted application?

00:35:07.680 | The requirement is that you have to have reached

00:35:10.120 | your full retirement age, and your spouse

00:35:13.000 | has to have started their retirement benefit.

00:35:15.440 | And then you can file an application

00:35:16.920 | for just spousal benefits.

00:35:19.280 | Now, the Bipartisan Budget Act is what they called it,

00:35:24.360 | and that was 2015.

00:35:26.960 | That eliminated the ability to use this strategy for anybody

00:35:33.160 | born after January 2, 1954.

00:35:39.440 | So basically, for people who are reaching

00:35:42.720 | their full retirement age roughly now,

00:35:45.280 | it's still available.

00:35:46.760 | But for younger people, it's been eliminated.

00:35:49.680 | But if you're somebody who is eligible for that strategy,

00:35:53.040 | it is extremely beneficial, because you're just

00:35:56.560 | collecting the spousal benefit with no downside whatsoever.

00:35:59.760 | You get four years of spousal benefit

00:36:02.080 | while letting your own retirement benefit continue

00:36:04.160 | growing.

00:36:05.720 | But if my spouse is younger than me,

00:36:08.480 | it would be at a reduced amount, correct?

00:36:12.040 | No, if your spouse is--

00:36:13.760 | so OK, a spousal benefit is half of the other person's

00:36:18.920 | primary insurance amount.

00:36:21.080 | And that's true regardless of when the other person files

00:36:23.960 | for retirement benefits.

00:36:25.040 | So let's say, when you reach your full retirement age,

00:36:28.600 | so let's assume you have a full retirement age of 66,

00:36:32.280 | and let's assume your spouse is three years younger.

00:36:34.800 | So if your spouse starts her retirement benefit at age 63,

00:36:39.600 | she'll be getting a reduced retirement benefit, which

00:36:44.280 | is to say she'll be getting less than her primary insurance

00:36:46.760 | amount.

00:36:47.680 | And then when you, in this scenario,

00:36:50.160 | if you file a restricted application for spousal

00:36:52.320 | benefits at that same time, because you reached

00:36:54.280 | your full retirement age, you'll be getting half

00:36:57.480 | of her primary insurance amount.

00:36:59.240 | So half of what she would have gotten

00:37:01.720 | if she'd waited until full retirement age.

00:37:03.480 | So you're getting more than half of what

00:37:05.160 | she's actually receiving.

00:37:06.760 | Your spousal benefit is not reduced as a result

00:37:10.040 | of her having filed early.

00:37:11.840 | That's interesting.

00:37:13.560 | Yeah, I don't think a lot of people know that.

00:37:16.400 | No, yeah, people get confused about that all the time.

00:37:18.680 | So that goes away, though, for anybody

00:37:21.800 | who was born after 1954.

00:37:23.640 | That goes away.

00:37:24.760 | So it's only available for people

00:37:26.080 | who right now are reaching full retirement age.

00:37:30.440 | Yeah, roughly, it's January 2, 1954 is the come off.

00:37:35.960 | What happens if the primary worker in the family passes

00:37:41.360 | and the widow is not yet full retirement age,

00:37:47.280 | or the worker who put into the Social Security system

00:37:51.480 | wasn't at full retirement age?

00:37:52.800 | I mean, what are the benefits for widowers and children

00:37:58.120 | of people who have died who have paid into Social Security?

00:38:01.480 | There's three different types of benefits here, basically,

00:38:04.080 | that we're going to be talking about.

00:38:05.640 | The first one is the regular widow or widower benefit.

00:38:11.680 | And eligibility for that begins at age 60.

00:38:15.720 | OK, is it age 60 for the widower or age 60

00:38:19.880 | for the person who was paying in?

00:38:22.160 | It's age 60 for the widow or the survivor.

00:38:24.840 | They have to be age 60.

00:38:27.400 | There's no requirement for how old the deceased spouse has

00:38:30.480 | to have been.

00:38:31.560 | And the amount that they get, this

00:38:34.760 | is one of the more complicated Social Security calculations.

00:38:38.480 | So this is a simplification.

00:38:40.440 | But it's if the surviving spouse waits

00:38:44.240 | until their full retirement age to file for survivor benefits,

00:38:49.560 | the total benefit that they would get

00:38:51.720 | is essentially whatever the deceased spouse had

00:38:55.360 | been receiving, or if they hadn't yet filed,

00:38:59.040 | if the deceased spouse died after their full retirement

00:39:01.680 | age, then the surviving spouse would

00:39:03.760 | get whatever the deceased spouse would have received if they

00:39:06.760 | had filed on their date of death.

00:39:08.560 | If the deceased spouse died before their full retirement

00:39:11.920 | age and had not yet filed, then the surviving spouse

00:39:14.840 | gets the deceased person's primary insurance amount,

00:39:17.360 | so what they would have gotten if they had lived

00:39:19.480 | to their full retirement age and filed then.

00:39:21.520 | Now again, just like any other benefit,

00:39:24.120 | survivor benefits are reduced for early filing.

00:39:27.960 | So if the widow or widower files for their widower benefit

00:39:33.720 | before their full retirement age,

00:39:35.120 | they get less than the full amount.

00:39:36.560 | Now a super important thing to know

00:39:39.600 | for any widows or widowers is that a restricted application

00:39:45.440 | strategy that we talked about for spousal benefits,

00:39:48.960 | it also applies for widow and widower benefits.

00:39:52.520 | And it was not changed by the Bipartisan Budget Act,

00:39:57.120 | so it's still available to you regardless

00:39:59.960 | of what year you were born.

00:40:01.920 | And you don't have to wait until your full retirement age.

00:40:05.640 | So a strategy that frequently makes sense

00:40:08.800 | for a surviving spouse is to either file for survivor

00:40:15.360 | benefits as early as they can, at age 60,

00:40:18.320 | while they let their own retirement

00:40:19.720 | benefit growing until age 70, or do the opposite.

00:40:23.680 | So file for their own retirement benefit as early as possible,

00:40:26.840 | so at age 62, and let their survivor benefit

00:40:29.800 | continue growing until it maxes out at full retirement age.

00:40:32.960 | So those strategies are--

00:40:35.080 | for anybody who loses their spouse before this point,

00:40:39.320 | either of those two strategies is almost always

00:40:41.800 | the best solution.

00:40:42.560 | It's almost always the case that they

00:40:44.200 | should file for one benefit, the smaller benefit specifically,

00:40:47.400 | and let the larger benefit continue

00:40:49.080 | growing until it maxes out.

00:40:51.160 | I'm going to ask a little bit of an esoteric question on this.

00:40:54.280 | So a lot of people still are not under the Social Security

00:40:57.240 | system, meaning they might work for a city,

00:40:59.200 | or they might work for the railroad,

00:41:00.760 | or there are some groups out there,

00:41:04.400 | or some professions out there where they don't pay

00:41:06.880 | into Social Security, they pay into something else,

00:41:09.240 | but it's not Social Security.

00:41:10.600 | So if I am a spouse, and I work for the railroad,

00:41:15.840 | so I'm not paying into Social Security,

00:41:18.760 | but my spouse is paying into Social Security,

00:41:22.160 | and my spouse passes away, I'm going

00:41:26.560 | to be getting a railroad pension.

00:41:28.960 | Will I still get half of my spouse's Social Security

00:41:33.760 | or survivor benefit from my spouse?

00:41:36.760 | Railroad specifically has their own rules.

00:41:39.920 | And probably more applicable to more people

00:41:43.120 | is the government pension.

00:41:46.000 | OK, let's use government pension then.

00:41:48.840 | OK, so if we assume then that you worked for, let's say,

00:41:53.760 | the state of Illinois, and you were paying into their

00:41:56.200 | retirement system, but you weren't paying Social Security,

00:41:58.600 | and your spouse was paying into Social Security,

00:42:01.480 | and then she dies, then you're going

00:42:03.560 | to be affected by something called the government pension

00:42:05.960 | offset, which means that the amount that you can receive,

00:42:10.480 | either as a spouse or a surviving spouse,

00:42:13.440 | is going to be reduced by 2/3 of your monthly government pension

00:42:18.120 | amount.

00:42:18.640 | That one does apply to a whole lot of people.

00:42:20.520 | It does apply to a lot of people.

00:42:22.640 | So Mike, we've talked about widowers and/or survivors.

00:42:26.960 | And let's talk about children now.

00:42:29.360 | What benefits do children get, and for how long

00:42:31.680 | do they get them?

00:42:32.680 | If you, when you file for retirement benefits,

00:42:36.840 | if you have a minor child, so somebody who is, in this case,

00:42:41.680 | either under 18, or in some cases, a full-time student up

00:42:46.240 | to 19, or you have an adult disabled child,

00:42:50.600 | when you start taking your retirement benefits,

00:42:53.280 | they can get benefits on your work record.

00:42:56.000 | And that benefit, that child's benefit,

00:42:58.440 | is half of your primary insurance amount.

00:43:00.920 | If or when you die, if you have minor children

00:43:04.800 | or adult disabled children, they can

00:43:06.840 | get a child benefit that is 75% of your primary insurance

00:43:11.200 | amount.

00:43:11.920 | In either case, you need to be aware of something

00:43:14.360 | called the family maximum rule, which basically

00:43:17.040 | is a maximum based on your primary insurance amount.

00:43:20.720 | And the percentage varies.

00:43:21.920 | But it could put a limit on the amount

00:43:25.000 | that your children and/or surviving spouse

00:43:27.960 | could receive as a part of their child benefits and widow

00:43:31.040 | benefits.

00:43:31.880 | I got a lot of questions on the Bogleheads forum

00:43:34.880 | about Social Security as it relates

00:43:38.640 | to working for another country, or working in another country,

00:43:44.840 | US citizen, paying into another country's Social Security type

00:43:49.440 | system.

00:43:50.640 | And how do you get credit for that here in the US?

00:43:55.080 | Could you talk about this?

00:43:56.480 | Because it came up a lot.

00:43:57.920 | In fact, three different people asked this particular question.

00:44:01.320 | The topic that you want to look up

00:44:03.440 | is called a totalization agreement.

00:44:06.480 | These are agreements that the US has with other countries

00:44:09.840 | that basically lay out the rules for how a person will

00:44:14.320 | be treated under each country's Social Security system

00:44:17.600 | when they've paid into both systems, basically.

00:44:22.040 | And the tricky thing here is that we

00:44:24.560 | have separate agreements with each country.

00:44:27.120 | So the rules and the specifics are

00:44:29.640 | going to vary from one to another somewhat.

00:44:31.920 | And they have to, because, of course,

00:44:33.440 | each country has their own system with its own rules.

00:44:36.000 | So the specifics of the agreements have to vary.

00:44:39.560 | So the tricky thing here is that you're not really

00:44:41.680 | going to find anybody who's an in-depth expert on any one

00:44:45.160 | particular country.

00:44:46.440 | For example, I mean, I write about Social Security

00:44:49.600 | all the time.

00:44:50.160 | I get tons of emails every week.

00:44:52.560 | And I get maybe two or three people

00:44:55.760 | asking about totalization agreements per year.

00:44:59.320 | And, of course, this year, they might

00:45:00.840 | be asking about Germany and the UK.

00:45:04.000 | And next year, they're asking about Canada and Japan.

00:45:06.840 | So if I'm only getting one question about Canada

00:45:10.280 | every three or four years, of course,

00:45:12.720 | I'm never going to become an expert on it.

00:45:14.840 | And same goes for anybody.

00:45:16.360 | That's even for me dealing with Social Security all the time.

00:45:19.520 | I don't get asked about any one country's agreement very often.

00:45:23.440 | I guess the takeaway here is that it's

00:45:25.800 | going to be super important for anyone in the situation

00:45:29.200 | to do their own research, to actually read the terms

00:45:33.240 | of the agreement in question.

00:45:35.400 | But as a general rule, the way they work

00:45:37.800 | is they say that if you don't have enough years of earnings

00:45:44.600 | under one country or the other country's system

00:45:48.040 | to qualify for benefits, the agreement

00:45:50.080 | will basically let you count earnings

00:45:52.360 | from the other country to qualify for benefits.

00:45:55.920 | But they don't actually then end up

00:45:57.360 | calculating the amount of benefit

00:45:59.160 | for which you qualify.

00:46:01.200 | So roughly speaking, it's going to vary from one country

00:46:04.560 | to another.

00:46:05.080 | But in the US, again, you need 10 years of earnings.

00:46:07.560 | So let's say you only paid into US Social Security

00:46:10.440 | for eight years, but you paid into Germany, for instance.

00:46:13.560 | If you paid into their system for several years,

00:46:16.000 | you can qualify for US Social Security

00:46:17.800 | under the totalization agreement.

00:46:19.320 | They'll allow you to count those years that you're

00:46:21.360 | paying into that other system.

00:46:22.800 | One thing that people have to be aware of here

00:46:25.800 | is that in some cases, you might also

00:46:28.680 | be affected by the Windfall Elimination

00:46:30.920 | Provision, which is the rule that basically reduces

00:46:35.160 | your primary insurance amount.

00:46:37.200 | So it reduces your retirement benefit

00:46:39.240 | and the benefit of anybody else claiming benefits on your work

00:46:42.360 | records, so anybody getting spousal benefits.

00:46:44.200 | So the Windfall Elimination Provision

00:46:45.660 | can, in some cases, apply.

00:46:47.840 | Well, one of the readers of the Bogleheads Forum

00:46:51.400 | just was curious, based on everything

00:46:54.000 | you know about Social Security, at what age

00:46:58.520 | are you planning on taking Social Security?

00:47:00.720 | And what is your rationale for when you are going to take it?

00:47:04.360 | And by the way, before we get to that,

00:47:08.880 | you're in your early 30s, correct?

00:47:11.520 | 34, so mid-early 30s.

00:47:16.120 | OK, so would you like to answer that question?

00:47:19.480 | Sure.

00:47:20.840 | And again, my age plays a huge role here,

00:47:23.080 | because the true answer to that question

00:47:25.360 | is, I have no idea, because I don't

00:47:28.760 | know what the system's going to look like when I'm 62.

00:47:33.200 | It's almost certain that there's going

00:47:34.780 | to be significant changes between now and then.

00:47:37.120 | My honest opinion for somebody in their 30s

00:47:41.200 | is that there's no need to spend a lot of time thinking

00:47:44.660 | about when you're going to be filing for Social Security,

00:47:47.000 | because the rules are going to change.

00:47:49.840 | Now, if I were, let's say, in my 50s or 60s right now,

00:47:56.800 | coming up on the age in question,

00:47:59.080 | then I would almost certainly be waiting until 70

00:48:02.400 | would be my plan.

00:48:04.080 | That's because I'm married, and so far, my earnings record

00:48:08.480 | is higher than the earnings record of my spouse.

00:48:10.480 | That could certainly change.

00:48:11.680 | And if that did change, if she ended up

00:48:13.960 | being the one with the higher earnings record,

00:48:15.840 | then I would encourage her to wait until 70.

00:48:19.120 | The strategy that I would be following

00:48:21.120 | is the same rough draft strategy, I think,

00:48:23.560 | makes sense for most married couples,

00:48:25.100 | which is higher earner waits until 70,

00:48:27.360 | lower earner files somewhat before that.

00:48:30.400 | And it depends on their life expectancies.

00:48:32.600 | So if either person is in particularly poor health,

00:48:36.080 | the lower earner should file pretty early.

00:48:38.200 | If they're both in very good health,

00:48:40.680 | the lower earner should wait, but not necessarily wait

00:48:43.880 | all the way until 70.

00:48:46.160 | Well, Mike, thanks.

00:48:46.960 | We could go on for probably a week

00:48:49.000 | talking about all the different scenarios that

00:48:51.120 | could take place.

00:48:51.880 | But I want to thank you for being our guest on Bogle

00:48:54.960 | Heads-On Investing.

00:48:56.960 | We wish you a lot of luck with all of your book sales.

00:49:00.560 | Again, Mike's website is obliviousinvestor.com.

00:49:04.640 | Please go there, check it out, and check out

00:49:07.240 | his Open Social Security Calculator.

00:49:10.600 | And Mike, what's the website for the Open Social Security

00:49:13.320 | Calculator?

00:49:14.800 | It's opensocialsecurity.com.

00:49:17.200 | Great.

00:49:17.960 | I've used it.

00:49:18.720 | It worked well for me.

00:49:20.840 | I know what I'm supposed to do now.

00:49:23.640 | Mike, thanks for being our guest.

00:49:25.240 | Thank you.

00:49:26.840 | This concludes the seventh episode

00:49:29.280 | of Bogle Heads-On Investing.

00:49:31.080 | I'm your host, Rick Ferry.

00:49:33.320 | Join us each month to hear a new special guest.

00:49:36.680 | In the meantime, visit bogleheads.org

00:49:40.040 | and the Bogle Heads Wiki.

00:49:41.800 | Participate in the forum and help others find the forum.

00:49:46.040 | Thanks for listening.

00:49:48.760 | [MUSIC PLAYING]

00:49:52.480 | [MUSIC ENDS]

00:49:55.520 | [MUSIC PLAYING]

00:49:58.880 | [BLANK_AUDIO]

Bogleheads® on Investing Podcast 007 – Mike Piper, host Rick Ferri (audio only)

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