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Social Security for Same-Sex Couples

As you have surely heard, on Friday, the Supreme Court ruled that, “the Fourteenth Amendment requires a State to license a marriage between two people of the same sex and to recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-State.”

The following articles do a good job of briefly summarizing the overall personal finance impacts:

But I haven’t yet seen a complete explanation of how this does/doesn’t change things with regard to same-sex couples’ ability to claim marriage-related Social Security benefits.

How Did Things Work Before the Ruling?

With regard to whether the Social Security Administration will recognize a given marriage, the Social Security Act itself — in Section 216(h)(1)(A) — explicitly imposes a state-of-residence standard. That is, the state in which the worker lives (or lived at the time of death) must recognize the marriage in order for the worker’s spouse (or surviving spouse or ex-spouse) to be eligible for benefits.

So, until the recent ruling, even if a same-sex couple got legally married in a state that recognized such marriage, if they lived in a state that didn’t recognize the marriage, they were out of luck as far as Social Security was concerned.

Now, however, states are required not only to allow same-sex marriage but also to recognize same-sex marriages that occurred in other states.

Can Same-Sex Couples Receive Spousal Benefits Immediately?

Each type of marriage-related benefit has a waiting period that must be satisfied:

  • In order to receive spousal benefits, you must (with two exceptions) have been married to your spouse for at least one year,
  • In order to receive widow(er) benefits, you must (with a few exceptions) have been married for at least 9 months by the time your spouse died, and
  • In order to receive spousal or widow(er) benefits as an ex-spouse, the marriage must have lasted at least 10 years.

So for couples who are getting married in the very near-term future*, none of the marriage-related benefits would kick in immediately. On the other hand, for couples who were already legally married — but who live in a state that, until now, didn’t recognize their marriage —  marriage-related benefits could kick in immediately if the applicable waiting period has already been satisfied (and the other relevant requirements for benefits are met).


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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.

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How Does Income or Education Level Affect Social Security/Retirement Planning?

A recent paper published by the Center for Retirement Research at Boston College (authored by Barry P. Bosworth, Gary Burtless, and Kan Zhang of The Brookings Institution) looks at how mortality rates are affected by socioeconomic status. As the authors put it, “A large empirical literature has established that there are significant differences in life expectancy between people with high and low socioeconomic status as measured by indicators such as income and educational attainment.”

For example, if we look at women age 50-74, for those with a college degree, the mortality rate (i.e., the likelihood of dying in a given year) is 49% lower than the average mortality rate. In other words, if you’re a woman between the ages of 50 and 74 and you have a college degree, you are only half as likely to die each year as the average woman in your age bracket. (For men with a college degree, the mortality rate is 38% lower than average.)

And for women age 75 and above, the mortality rate for those with a college degree is 20% lower than the average mortality rate for women in that age bracket. (For men, it is 27% lower.)

And a very similar effect is found if you sort by career earnings rather than education level. For instance, for people in the highest quartile of household career earnings:

  • The mortality rate for women age 50-74 is 46% lower than the mortality rate for all women in that age range,
  • The mortality rate for men age 50-74 is 34% lower than the mortality rate for all men in that age range,
  • The mortality rate for women age 75 and over is 19% lower than the mortality rate for all women in that age range, and
  • The mortality rate for men age 75 and over is 23% lower than the morality rate for all men in that age range.

Obviously, this raises important questions about social justice and about what policy actions, if any, should be taken. But because our focus here is personal finance, we will set those questions aside and look instead at how this information affects financial planning.

The big takeaway is that if you have a college education or if you have had higher than average income throughout your career, your life expectancy is meaningfully higher than average — unless of course you have a known health condition indicating otherwise.

As you might imagine, for those with above-average education/income this is a strong point in favor of waiting to claim Social Security benefits (because doing so works out well in scenarios in which you live a long time).

But it has other effects as well. Specifically, after delaying Social Security to age 70, it would be a point in favor of further annuitizing via an immediate lifetime annuity or a deferred lifetime annuity. And it would be a point in favor of using a lower withdrawal rate for the non-annuitized portion of the portfolio.

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What to Do When Index Funds Are More Expensive

A reader writes in, asking:

“The problem my husband and I have encountered is that the index funds in his work retirement plan have high expenses, around 1%. The gap between index and non-index is small or non-existent for some asset categories. When confronted with such a situation, should you still go for the index fund, or is the non-index fund worth considering? What if the non-index fund is actually a little less expensive than the index fund, as is the case for one of our asset categories?”

My primary reason for (usually) preferring index funds is that:

  1. There’s been quite a bit of research over the years showing that funds with lower expense ratios tend to outperform funds with higher expense ratios, and
  2. Index funds tend to be less expensive than actively managed funds.

In other words, it’s (primarily) about costs. Given the choice between a) an active fund with a given expense ratio or b) an index fund with a higher expense ratio, I would usually be inclined to go with the lower-cost fund, even though it isn’t an index fund.

For instance, several of Vanguard’s actively managed bond funds (such as their Inflation-Protected Securities Fund, Treasuries funds, or tax-exempt bond funds) have lower expenses than many index funds in the same categories, and I would have absolutely no qualms about using the Vanguard actively managed fund rather than a more expensive index fund.

That said, there is one big concern about using an actively managed fund, even when it’s the lowest-cost option: manager risk. That is, because the manager has more leeway in how to invest an actively managed fund’s assets, there is a greater chance that the manager will use that leeway to do something stupid.

Fortunately, there are a few steps you can take to at least somewhat minimize the likelihood that you’ll be caught off guard by manager risk.

  1. To the extent possible, only use fund companies that you trust.
  2. Check the fund’s prospectus to see how much leeway the manager has in changing the fund’s asset allocation.
  3. Check to see whether there have been dramatic allocation changes in the past. One way to do this is to chart the fund’s performance against that of an index fund in the same asset class. If they have very closely tracked each other, it’s likely that the fund manager is not wildly changing the allocation over time.

Why Do Expensive 401(k) Plans Exist? And What Can You Do About It?

A reader writes in, asking:

“My daughter works for a company that provides relatively high cost investment options in her 401K plan. I’ve encouraged her to speak with senior management to encourage them to add low cost funds (such as Vanguard) so that every employee could realize these potential savings while employed there.

It seems only logical that management would want to have low cost funds available since they probably have 401K savings as well. What I don’t know and understand, is does a business or HR office benefit in various ways by only offering funds that are higher costs?”

There are two primary reasons why an employer might use a 401(k) plan with expensive funds.

First, the decision makers might simply be unaware of the importance of costs when it comes to investment performance. Perhaps they’re choosing funds based on past performance or based on the recommendation of a salesperson.

Second, the decision makers might have chosen to go with a plan that was inexpensive for the employer. In many cases, a plan is inexpensive for the employer precisely because it is expensive for the plan participants. That is, rather than making money by charging the employer, the plan provider charges administrative fees directly to the participants and/or offers funds that have substantial 12(b)-1 fees.

How to Get Less Expensive Funds in Your 401(k)

I’ve heard from many readers who have tried to get big changes made to their 401(k), such as switching from a provider with expensive actively managed funds to a provider such as Vanguard. Unfortunately, such attempts are usually (though not always) unsuccessful. There are several possible reasons why employers might be reluctant to comply with this request:

  • It sounds like a lot of work.
  • It may mean higher costs for the employer.
  • It appears risky. What if they anger a plan participant who likes the current investment options? Would they have to worry about a lawsuit?
  • It may mean having to “fire” a salesperson whom they’ve come to trust (and who, in some cases, may even be a family member or friend).

In addition, if the decision makers are using the current plan provider because they personally subscribe to an investment philosophy that involves using relatively expensive actively managed funds, you would have to convince them that they’ve been making poor decisions with their own money in order for them to see the wisdom of switching. That’s a big barrier to overcome.

Conversely, I’ve heard from several readers who have had success with a much simpler approach: Ask the employer to add one or two low-cost index funds. Phrase the request as a simple favor — a relatively easy way to make an employee happy. Something along the lines of, “I personally really like to use low-cost index funds. Would it be possible to add a stock index fund to the plan, such as Vanguard’s Total Stock Market Index Fund or Fidelity’s Spartan Total Market Index Fund?” Then follow-up as necessary.

With this approach:

  • You’re making a request that’s much easier (i.e., less work) to satisfy.
  • There would (likely) not be any additional costs for the employer.
  • There’s little risk of making any employees unhappy, because they wouldn’t be removing any investment options.
  • There is no need for a discussion in which you have to convince anybody of the merits of your investment philosophy (or the lack of merits of their philosophy).

Unfortunately, even this method isn’t foolproof. For example, in some cases, the plan provider will be unwilling to include lower-cost investment options. And in other cases, the salesperson representing the plan provider may talk management out of adding low-cost funds when asked about doing so.

Social Security Benefits for Dependent Parents

A reader writes in, asking:

“My mother is financially dependent upon my wife and I. I recently heard something about the possibility that she could receive a Social Security parent’s benefit based on my retirement benefit. I had never heard of this before. Can you explain how it works and how it should factor into my own Social Security decision?”

Parents’ benefits don’t get much coverage, because they’re not very common. And, for reasons we’ll discuss momentarily, the possibility of your parent receiving a parent’s benefit should not affect the decision of when you claim your own Social Security benefit.

In short, a parent’s benefit is a survivor benefit for a parent who was financially dependent upon their now-deceased child.

How to Qualify for a Parent’s Benefit

In order for a parent to be able to claim a benefit on the work record of their child (including a stepchild and adoptive child in some cases):

  • The child must be deceased and have had sufficient Social Security work credits to be considered “fully insured,”
  • The parent must be at least age 62,
  • The parent must not have gotten married since their child died (though it’s OK if the parent was married at the time of death and is still married),
  • The parent must not be entitled to a retirement benefit that is greater than or equal to their benefit as a parent, and
  • The deceased child must have been contributing at least 50% of the parent’s support.**

How This Affects Social Security Planning

The fact that your parent is financially dependent upon you (and may therefore someday receive a benefit based on your work record if he/she outlives you) should not play any role in your own Social Security claiming decision, for two reasons.

First, the age at which you claim your own retirement benefit doesn’t affect the time at which your parent can start receiving a parent’s benefit. (It is your date of death that determines that.)

Second, the age at which you claim your retirement benefit doesn’t affect the amount of your parent’s benefit based on your work record. The amount of a parent’s benefit is 82.5% of the deceased person’s primary insurance amount if there is one eligible parent. If there are two eligible parents, each parent’s benefit as a parent is 75% of the deceased person’s primary insurance amount. (If the parent is already receiving a different Social Security benefit — such as their own retirement benefit — then the total amount they will receive is the greater of the two benefits.)

**To meet the “contributing 50% of support” requirement:

  • The deceased child must have been making regular contributions for the parent’s ordinary living costs, and those contributions equaled or exceeded 50% of the parent’s ordinary living costs, and
  • The parent’s income (from sources other than the child) that is available for support purposes is 50% or less of the parent’s ordinary living costs.

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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