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Investing Blog Roundup: Keeping Up With the Joneses, When the Joneses Won the Lottery

A recent study from the Federal Reserve Bank of Philadelphia looked at the effect of (small-to-medium-size) lottery winnings on the neighbors of the winners. They found that, on average, neighbors of the winners increase their spending and are more likely to become bankrupt the larger the size of the winnings. It’s hard to ignore the spending of the people around you.

Other Recommended Reading

Thanks for reading!

How Long Will You Collect Social Security Survivor Benefits?

Today I just wanted to give you a quick heads-up about some updates to the Open Social Security calculator, as well as address a question many people have asked about it. I promise we’ll discuss something other than Social Security next time.

  • The calculator now reflects withholding (and eventual benefit adjustment) for the earnings test (i.e., for people receiving benefits and working while under full retirement age).
  • The default mortality table has been updated for the newly-released 2015 SSA period table. (It previously used the 2014 table, as that was the newest available until this month.)
  • The calculator now allows for the selection of a specific “I will die at” age rather than using a mortality table.
  • The calculator now allows for situations in which one of two spouses has already filed, in order to get a suggestion for the other spouse. (Important caveat: It does not currently have “voluntary suspension” functionality, so if the ideal solution is for the spouse who has already filed to suspend benefits at/after full retirement age, the calculator won’t know to suggest that.)
  • Now, when you load the page, the calculator automatically looks up the yield on 20-year TIPS to use as the default discount rate.

In the last two weeks, a common question about the calculator has been why it uses mortality tables (to calculate a probability of being alive in each given year) rather than simply assuming the user will die precisely at their life expectancy. The answer has to do with survivor benefits for married couples.

Specifically, assuming that each person will die at their expected date often results in an underestimation of the total amount of survivor benefits that are likely to be received — and that could cause the calculator to suggest a suboptimal strategy.

As one quick example, consider a husband and wife, each born 4/15/1960. The husband has PIA of $1,800, and the wife has PIA of $1,000. And let’s assume that they are in average health.

The calculator as it’s written now suggests that the husband files at 70 and the wife files at 62 and 3 months. The total present value of this strategy (i.e., the total amount of spending it can be expected to fund over their lifetimes) is $549,164, of which $102,742 comes from survivor benefits.

Now what if we instead do the analysis using fixed “death date” assumptions?

Well, if we look at the SSA 2015 period life table to find their life expectancies at age 62, we see that:

  • The husband has a life expectancy of age 82, and
  • The wife has a life expectancy of age 84.81.

If we used those as the fixed “death dates,” the calculator would be calculating for 2.81 years of survivor benefits.

If filing at 70 the husband has a retirement benefit of $2,232 per month. If filing at 62 and 3 months the wife has a retirement benefit of $712 per month. The difference between $2,232 and $712 is $1,520, which tells us that if the wife outlives the husband, she’ll get a survivor benefit of $1,520 per month — or $18,240 per year.

Multiply $18,240 by the “expected” 2.81 years, and we get a total survivor benefit of $51,254, before discounting for time value of money.

When we discount that back to age 62 with the 0.89% real rate the calculator is currently using, we get a PV of $42,399.

In other words, with this particular set of inputs, by assuming fixed dates of death, the calculator would only assign about 41% of the value ($42,399 rather than $102,742) to survivor benefits that it really should.

In some cases (depending on difference in ages, PIAs, etc) this might not matter much in terms of the suggested strategy. But in other cases it will be important. Accepting and accounting for uncertainty in death dates is, in general, useful.

Why Is There Such a Difference?

Even though each approach (year-by-year mortality, or fixed death date assumption) is using the same “expected” date at death, the year-by-year mortality approach accounts for scenarios in which there’s a long length of time where survivor benefits are relevant. For example, it accounts for a scenario in which the husband dies at 71 and the wife lives until 84. And a scenario in which the husband dies at 72 and the wife lives until 83. And a scenario in which the husband dies at 82 and the wife lives until 96, etc.

Each such scenario is unlikely, but when taken together they add up to a nontrivial probability. And in such scenarios, the payout for strategies that maximized survivor benefits is quite a bit higher than for strategies that did not do so. It would usually be a mistake not to take that into account.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

Investing Blog Roundup: Lessons from the Past 25 Years

Christine Benz is likely the most well-rounded personal finance expert I’ve met. At the drop of a hat, she can talk about the nitty-gritty details of any personal finance topic — and communicate the concepts in a clear way.

Benz recently celebrated her 25-year anniversary at Morningstar, and wrote an article to share some of the most important lessons she’s learned in that time. It’s an excellent read.

Other Recommended Reading

Updates on the “Open Social Security” Project/Calculator

There’s been a huge amount of feedback this week, which has been very helpful. Thank you all for the input!

I started a Bogleheads thread for feedback/bug reports, and to keep people updated as to my “to do” list with the project. I’ve spent most of this week working on adding “earnings test” functionality, and frankly it’ll probably require most of next week also.

For anybody who couldn’t get the calculator to run, it appears to be one of two things:

  1. Please don’t use anything other than digits/decimals in the input boxes (i.e., no dollar signs, percent signs, or commas)
  2. If you’re 70 or over, unfortunately the calculator doesn’t (yet) know what to do with you. I designed it so that it won’t suggest a claiming date that’s in the past. (I was thinking that, for example, somebody age 64 doesn’t want to be told that they should file at age 62.) But for somebody age 70 or over, there are no possible filing dates in the future. A high priority on my to-do list is giving users the option to input a date on which they already filed for benefits. (For example, “Spouse A already filed 6 years ago at age 67. Given that, when should Spouse B file?”)

New Free, Open-Source Social Security Calculator

When deciding when to claim Social Security benefits, it can be helpful to use a calculator that runs the math for each possible claiming age (or, if you’re married, each possible combination of claiming ages) and reports back, telling you which strategy is expected to provide the most total spendable dollars over your lifetime.

Maximize My Social Security and Social Security Solutions are the two best-known paid calculators in the field. For a few years though, there was a decent (basic) free option as well: “SSAnalyze,” hosted by an advisory firm called Bedrock Capital. Unfortunately, Bedrock Capital was bought by another financial firm late last year, and the buyer did not repost the calculator on their own site.

So, in April of this year I decided to make my own. It’s available now, and you can try it out it here:

https://opensocialsecurity.com/

I’m calling it “Open Social Security,” because I’m making it open-source, with three goals in mind:

  1. This way, anybody who is especially interested in the details can see for themselves how the calculator functions, rather than having to trust me or wonder about what assumptions I’m using.
  2. Possibly, somebody else will make use of the code in some other way — building some Social Security-related functionality into other financial planning software for instance.
  3. If something happens to me  — or I simply stop updating the calculator — somebody else can take the code and put it up on their own website so people will still have access to a useful tool.

I’ve been testing the heck out of it, but it’s certainly possible that there are still bugs. If you see something that doesn’t make sense or isn’t working, please let me know.

FYI, it runs much faster in Chrome or Firefox than it does in Safari. And Safari is in turn several times faster than Edge or Internet Explorer. In other words, if you’re using the calculator as a married person (i.e., a situation that requires your computer to do a lot of calculations), you might not want to use Internet Explorer or Edge, especially if you have an older computer.

Also, I would encourage you to please read the About page, as it has some basic information about how the calculator works, and it notes some important caveats.

Finally, for anybody who’s interested, here’s the GitHub page, where you can view/download the source code.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

Investing Blog Roundup: Is This a Terrible Time to Retire?

Given the market’s performance over the last nine years (a gain of roughly 400% since the bottom in early 2009), many people are asking themselves whether they can now afford to retire. The flip side of that coin is that portfolio values are high precisely because stock valuations are also quite high. And high stock valuations means low expected returns. In addition, inflation-adjusted interest rates are not especially generous right now.

This week Christine Benz takes a look at these concerns and asks what, if anything, would-be retirees can do about them.

Other Recommended Reading

Thanks for reading!

Claiming Social Security Early to Invest It: What Rate of Return (Discount Rate) Should We Assume?

A reader writes in, asking:

“In your social security talk at the White Coat Investor conference, you mentioned that when considering whether to delay social security or claim it early and invest it, the appropriate rate of return to assume is the rate of return from TIPS bonds. But I didn’t catch the reason for that. Would you consider discussing that for an article?”

As a bit of background for other readers: when deciding whether to delay Social Security or claim it now and invest the money, you have to make some assumption about the rate of return that you would earn on invested benefits. The higher the rate of return you assume, the more advantageous it is to claim benefits early.

Alternatively, you can think of the analysis as, “what part of my portfolio would I spend down in order to delay Social Security? And what would be the rate of return that I’d be giving up by no longer having those assets in my portfolio?”

In my view, the most appropriate rate of return to assume is that from Treasury Inflation-Protected Securities (TIPS), because:

  1. They are the investment with the most comparable level of risk to Social Security benefits, and
  2. TIPS or other low-risk holdings are often the part of the portfolio that should be spent down in order to delay Social Security.

For reference, at any given time you can find current TIPS yields here. (Right now, the yield on TIPS of comparable duration is just shy of 1%.)

Comparing Risk Level

TIPS and Social Security are both backed by the federal government, and they are both inflation-adjusted. Taken together, those two things mean that they have a very similar level of risk — more similar to each other than to most other things.

That said, the risk characteristics of Social Security and TIPS are not identical. With TIPS, the rate of return is as close to certain as you can get. In contrast, the rate of return that you get from delaying Social Security is uncertain, because you don’t know how long you will live.

However, that uncertainty is actually helpful for most people, because it precisely offsets a type of risk that you face.

By way of analogy, consider the purchase of term life insurance by a 30-year-old single mother with two young children. It’s uncertain whether the policy will pay out. And as such we cannot calculate a rate of return from her insurance purchase. But that uncertainty is good. We don’t know whether the policy will pay out, but we do know that it will pay out in exactly the scenario in which it is needed (i.e., if the mother dies).

The same thing goes for delaying Social Security (or buying any other lifetime annuity). We don’t know whether the decision will pay off, but we do know that it will pay off in a scenario in which you live a long time, which just so happens to be the financially scary retirement scenario. So the uncertainty here is actually reducing your overall financial risk level.

On the other hand, Social Security has a degree of political risk that TIPS do not have. As we’ve discussed before, that political risk doesn’t necessarily weigh in favor of claiming early. But there’s no question that that source of uncertainty is undesirable.

So, relative to the return from TIPS, the return from delaying Social Security (or, if you prefer to think of it this way, the return from selling some of your holdings in order to “buy more” Social Security) has one helpful source of uncertainty and one unhelpful source of uncertainty. Without any way to quantify the political risk, I generally consider TIPS and Social Security to have roughly similar overall risk levels — more similar to each other than to anything else.

Spending Down Bonds to “Buy More” Social Security

As financial planner Allan Roth has been arguing for years (here for example), it doesn’t usually make sense to own bonds earning a certain rate of interest while simultaneously paying a higher rate of interest on your mortgage. It’s generally advantageous to sell the bonds and pay down the mortgage.

A similar concept applies for Social Security.

For an unmarried male, the necessary rate of return that would make claiming Social Security at 62 as good as claiming at 70 is about 1.7% above inflation. For an unmarried female, the necessary return would be about 2.9% above inflation.* If delaying Social Security provides such an expected return, with a low level of risk, it doesn’t usually make sense to forgo additional Social Security in order to continue owning bonds that have a lower expected return (or a similar expected return and a higher level of risk).

*These rates of return use the SSA’s 2014 period life table for life expectancies. This understates the average life expectancy somewhat. As a result, the necessary rates of return would actually be somewhat higher. For a married couple, the “breakeven” rates of return will vary based on their difference in earnings history and difference in age. In general though, the breakeven rate of return for the higher earner will be significantly higher than for an unmarried person (meaning it’s usually super advantageous for this person to delay) and lower for the lower earner (meaning it’s less advantageous for this person to delay).

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."
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My new Social Security calculator (beta): Open Social Security