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Investing Blog Roundup: Selecting a (Next?) Career

I know that many readers are currently in the process of planning a next career (in many cases, as part of a phased retirement process). There’s no shortage of advice on career selection, but this week I encountered a brief article that actually has some evidence-based advice on the matter.

Relatedly, if you are currently trying to improve the satisfaction/fulfillment you derive from your existing line of work, you may enjoy Cal Newport’s book Deep Work.

Other Recommended Reading

Thanks for reading!

Social Security with Foreign Work History: Totalization Agreements

Last week I was a guest on Rick Ferri’s Bogleheads on Investing podcast. You can listen to that podcast here. (The Bogleheads discussion thread is here, if you want to post any comments.)

One question that a few Bogleheads had asked was about how a US citizen can qualify for U.S. Social Security benefits if they were covered under a foreign social security system for a portion of their working career.

I gave a very brief answer on the podcast, but I wanted to discuss that topic more thoroughly here.

In short, how exactly it plays out depends on which other country you worked in. The U.S. has “totalization agreements” with many countries that provide the rules for how a worker will be treated, but the exact details vary from one agreement to another. (There’s no way around such a situation, given that each country has its own unique tax and social security systems.)

And, unfortunately, given that the specifics vary for each of the agreements, it’s unlikely that you’ll find anybody who is a true expert on any one of them. (I most definitely am not. Despite dealing with Social Security topics all the time, it would be rare for me to get even two people asking about the same totalization agreement in a given year.)

Generally speaking, however, the effects of the totalization agreements are to:

  1. Eliminate dual taxation that would otherwise occur (i.e., simultaneously paying into two countries’ social security systems), and
  2. Allow you to qualify for benefits when you might not otherwise qualify.

Qualifying for Benefits (“Totalization”)

If you meet all the basic requirements under one country’s system, you will get a regular benefit from that country.

If you have at least 6 credits (“quarters of coverage”) under the U.S. Social Security system, but you do not have the 40 credits that would ordinarily be necessary to qualify for a retirement benefit, your credits will be “totalized.” That is, your credits under the foreign social security system will be counted toward qualifying for U.S. Social Security.

And the opposite would happen as well — if you don’t quite qualify for coverage under the foreign social security system, totalization would allow your U.S. periods of coverage to be counted toward qualifying there.

Calculating Benefits

If you end up qualifying for U.S. Social Security benefits via totalization, there is a special set of rules for calculating the benefit. You can find the exact details here, but very roughly what’s going on is that:

  • Only your U.S. earnings are included in the calculation, and
  • The benefit that is calculated based on those U.S. earnings is ultimately multiplied by a fraction, which represents the portion of your career for which you were paying into the U.S. system.

Windfall Elimination Provision and Government Pension Offset

Usually, when you receive a pension from employment for which you did not pay U.S. Social Security taxes, the windfall elimination provision (WEP) applies, reducing your primary insurance amount. With regard to foreign social security benefits, however, the WEP will not apply if you are:

  • Entitled to a U.S. totalization benefit (i.e. you only qualified for a U.S. Social Security benefit by counting your credits from the foreign social security system), or
  • Entitled to a regular U.S. benefit, as well as a foreign benefit which is based on a totalization agreement with the U.S. (i.e. you only qualified for the foreign social security benefit via counting your U.S. credits), and you are not receiving any other pension based on non-covered work (e.g., a pension from the state of Illinois).

Finally, a foreign social security benefit will not trigger the government pension offset (GPO).

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: Phased Retirement and Managing a “Life Portfolio”

This week Michael Kitces featured a guest article from semi-retired actuary Anna Rappaport about phased retirement (i.e., versions of retirement other than transitioning abruptly from full-time work to full-time retired).

What I particularly enjoyed about the article though was Rappaport’s concept of managing a “life portfolio,” which is just as applicable to people in the earlier stages of their careers as it is to people in retirement.

Recommended Reading

Thanks for reading!

Can You Trust Information from the SSA?

A reader writes in, asking:

“I’ve heard from a few different acquaintances that they received bad information or advice from the SSA. Is it really true that you can’t even trust information coming directly from the Social Security Administration?”

It’s true that SSA employees sometimes provide inaccurate information. SSA representatives are dealing with a complex set of rules regarding a broad range of topics. And they only get a limited amount of training before being put on the front line, answering people’s questions. Mistakes happen, despite best efforts and good intentions.

It’s also important to recognize that Social Security rules use very specific terminology. I have encountered many situations in which an SSA employee provided an answer that was 100% correct — but the person asking the question misunderstood the answer. I’ve also encountered numerous situations in which a person accidentally asks something other than what they meant to ask (e.g., they ask whether they are entitled to a benefit, when they really wanted to know whether they’re eligible for that benefit), and the SSA employee correctly answers the question asked. And, again, the net result is that the person comes away with a misunderstanding, even though the SSA employee provided a correct answer to the question that was asked.

The key takeaway here is that, if you want to be truly sure of something, you have to look at the official rules. I know that stinks, because they can be challenging to read. But before relying on something somebody tells you (whether that somebody is an SSA employee, me, or anybody else), try to find confirmation from an official source. Here are the three official sources to check, in order of authority (from highest to lowest):

A few points about the above sources:

  1. The Regulations have not been updated for the changes made by the Bipartisan Budget Budget Act of 2015. (If you need information relating to deemed filing or voluntary suspension, I would go to the POMS.)
  2. The POMS is by far the most thorough of the sources above. It does not, however, have any legal authority. So if, for example, something in the POMS contradicts something in the Act, the Act wins.
  3. Other than the three above sources, most pages on the SSA website are akin to IRS publications in that they’re intended to be plain-english explanations of the rules, but they may use imprecise language or omit exceptions that could be relevant to you.

Finally, let me offer two related tips about dealing with the SSA:

  1. Remember that SSA employees are not financial planners. They are not really trained for giving advice, because that’s not their job. Rather, they are essentially “order takers” whose job is to process the application that you file and to answer questions about what benefits you are/aren’t entitled to (or eligible for).
  2. When you apply for Social Security, apply online. In all the time I’ve been working with Social Security, I’ve only ever heard from one person whose online application was processed incorrectly. Conversely, I have heard from I have-no-idea-how-many people about their in-person or phone applications being processed incorrectly.

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: Why Delaying Social Security Doesn’t Provide an 8% Return

It’s common to see articles stating that delaying Social Security is a great deal, because it gives you an 8% return per year. Delaying Social Security is indeed a good deal, in a majority of cases. But it doesn’t give anything close to an 8% return — not usually anyway.

Recommended Reading

Thanks for reading!

Using an Advisor or a Target Retirement Fund

A reader writes in, asking:

“Would the average investor be better off using the services of a financial advisor or just buying and holding a Vanguard Target Retirement Fund in their IRA and their 401K?”

Target-date fund by a mile. Not even close.

To be clear though, that answer is the result of the way the question has been phrased.

First, Option #1 — buying and holding target-date funds — is actually quite a good plan, in most cases. It’s almost a best-case scenario for a DIY investor. The average DIY investor is not likely to do as well as this plan (either because they would construct a worse portfolio than they’d have with the target-date fund(s) or because they would not properly execute the “and hold” part of the plan).

Second, Option #2 — using a financial advisor — has a questionable outcome. The average investor is likely to end up using a typical financial advisor. And the typical financial advisor is poorly informed and up to his eyeballs in conflicts of interest.

For every well informed, fee-only financial planner who charges a reasonable price, there’s another advisor who’s going to tell the client to stop contributing to their Roth IRA and 401(k) so that they can throw money into a fixed-indexed annuity or cash-value life insurance policy when there’s no need for life insurance.

The typical/median/”middle of the road” advisor is the Edward Jones sort of guy — no real experience in broader financial planning and probably just going to sell the client a portfolio of reasonably diversified yet semi-expensive actively managed funds.

Relative to the “buy and hold target-date funds” plan, an investor using a middle-of-the-road advisor will end up with a portfolio that’s a) considerably more expensive when considering all the applicable costs, b) no better diversified (and possibly worse), and c) no better allocated. And to the extent that the investor receives any advice other than portfolio recommendations (e.g., incidental tax planning advice), it’s going to be questionable at best.

But good advisors are out there. And many investors (most, even) would benefit from using them, because:

  • Most people taking a DIY approach will not do as well as the DIY approach outlined above, and
  • Most people could use financial planning advice with regard to topics other than just their portfolio.
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My new Social Security calculator (beta): Open Social Security