Archives for June 2018

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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.
  • 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."
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My new Social Security calculator (beta): Open Social Security