Archives for June 2015

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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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Investing Blog Roundup: Affordable Care Act Subsidies Are Here to Stay

The big personal finance news this week is that the Supreme Court ruled in favor of the federal government in King v. Burwell. The issue being decided was whether taxpayers in states that declined to establish their own health insurance exchanges could receive premium subsidies. The Court definitively ruled that, yes, they can.

Investing Articles

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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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Investing Blog Roundup: Assume Your SSN Has Been Stolen

Financial fraud/identity theft is an ever-growing problem, and it has the potential to cause you both financial losses and a heck of a lot of hassle. This week, Dirk Cotton has good advice for how to minimize your risk:

Investing Articles

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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.

Investing Blog Roundup: Getting the Most Value from Your HSA

For those who are eligible to use them, health savings accounts are a powerful tax-saving tool. This week, physician/financial blogger Jim Dahle gives some tax tips on maximizing the benefits of your HSA.

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