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Open Social Security: New Feature & Social Security Planning Takeaways

The Open Social Security calculator has a new feature.

Specifically, the output now includes a color-coded graph that shows the desirability of many of the different filing dates all at once. (In most cases, it shows all of the options, but there are some situations where a 2-dimensional graph simply cannot represent every possible option.) The benefit is that you can immediately see which filing dates are almost as good as the recommended filing date(s), which dates are “pretty good,” and which dates are not so good.

In addition, you can click on that graph to very quickly compare many different alternative options. (It functions as an alternative to the dropdown inputs for filing dates on the “test an alternative claiming strategy” part of the page.)

Also, when the option to assume a future cut in benefits is activated (under “advanced options”), the graph has radio buttons that allow you to quickly flip back and forth between “benefits are cut” and “benefits are not cut” calculations to see how different strategies fare under the different assumptions.

Credit where credit is due: both the original idea for this feature and the overwhelming majority of the code involved were contributed by Brian Courts.

For reference, the new feature is intentionally designed to not be displayed when the calculator is being used on a device with a display width of 710px or less. (On a larger display you can quickly click all over the graph and see the corresponding output, but on mobile you would have to constantly scroll back and forth. So, with the goal of providing the best mobile experience, the calculator still works how it always has.)

In short, the new feature allows you to make a lot of comparisons in a short time, which can both:

  1. Help you make a more informed decision about your own Social Security benefits, and
  2. Speed up the learning process about Social Security planning in general.

With regard to that second point, some of the things that you will likely find include:

One: what matters most isn’t picking the very best strategy. What matters most is just avoiding a really bad one. There are usually plenty of strategies that are practically as good as the very best strategy. That is, for most people, moving the filing date a few months in one direction or the other won’t have a huge impact. (So, for example, if there’s a compelling tax-planning reason to do so, go for it.)

Two: the filing ages that work best for a person depend significantly on their marital status and earnings history.

  • It’s usually very advantageous for the higher earner in a married couple to wait.
  • It’s usually somewhat advantageous for an unmarried person to wait. (But anywhere from age 68-70 is generally pretty similar.)
  • It’s not especially advantageous for the lower earner in a married couple to wait. But it’s not usually very impactful (in either direction) either.

Three: whether the strategies that work well in a “benefits will not be cut” scenario also work well in a “benefits will be cut” scenario depends significantly on your date of birth.

To be clear, these are the very same things that people have been telling me that they’ve learned from the calculator over the last couple of years. But, again, I hope that this new feature can help speed up that learning process.

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."

Social Security in a Down Market: Does it Make More Sense to File Early?

The most common question I’ve gotten from readers over the last few weeks has been whether the current stock market downturn is a point in favor of filing for Social Security earlier than would otherwise make sense.

Let’s try to tackle this question in a few different ways.

Which Assets Are You Spending Down?

As we’ve discussed in various places in the past (e.g., here, here, or my book), the money that is being used to fund the delay should be invested in something like a short-term bond fund, bond ladder, or CD ladder. That is, the portfolio that’s being used to delay Social Security should be (mostly) inoculated against market risk and sequence of returns risk.

Here’s how retirement expert Steve Vernon explains it:

In the years leading up to retirement, an older worker might want to use a portion of their retirement savings to build a “retirement transition bucket” that enables them to delay Social Security benefits. While there’s some judgment involved with the necessary size of this bucket, a starting point would be an estimate of the amount of Social Security benefits the retiree would forgo during the delay period.

[…]

The retirement transition bucket could be invested in a liquid fund with minimal volatility in principal, such as a money market fund, a short-term bond fund, or a stable value fund in a 401(k) plan. This type of fund could protect a substantial amount of retirement income from investment risk as the worker approaches retirement, since the retirement transition bucket would be invested in stable investments and Social Security isn’t impacted by investment returns.

In Social Security Made Simple, I suggest something similar, using a CD ladder instead.

More broadly, assuming that you have bonds (or other fixed-income) in your portfolio, the Social Security decision is primarily, “do I want to exchange some bonds (or other fixed-income) for more Social Security?”

And that decision isn’t especially impacted by what the stock market has done lately. It is impacted by market interest rates. Right now, real interest rates are super low, which is a major point in favor of delaying Social Security (because the bonds that you’re giving up have lower expected returns than they would if interest rates were higher).

Do the Analysis: Using a Calculator

One useful thing to do when answering the question of “do I want to exchange some bonds for more Social Security?” is to use a Social Security calculator. Naturally, I’m partial to Open Social Security because:

  1. It’s free,
  2. It’s open-source,
  3. It uses more realistic mortality modeling than other calculators do, and
  4. I built it, so I’m super duper biased.

But use a different calculator if you’d like.

When you do that analysis, you will find that in most cases:

  • Spending down bonds in order to delay filing is very beneficial for the higher earner in married couples (with some specific exceptions, such as when there is a minor child or adult disabled child, or when the lower earner does not qualify for a retirement benefit of his/her own and will be at least full retirement age by the time the higher earner reaches age 70);
  • Spending down bonds in order to delay filing is somewhat beneficial for unmarried people (i.e., beneficial on average — more beneficial if you’re in good health and less beneficial if you’re in bad health); and
  • Spending down bonds in order to delay filing is not especially beneficial for the lower earner in married couples. (Though if the lower earner is significantly older than the higher earner and/or both are in very good health, delaying would be more beneficial.)

What About Risk?

A common counterargument to the idea of spending down bonds more quickly in order to delay Social Security is something to the effect of, “but then I’m left with a higher stock allocation! And that’s too risky!”

But that makes no sense. Spending down bonds in order to delay Social Security doesn’t leave you with any more dollars in stocks than you would have had otherwise (i.e., when we look at dollars, which is what matters, rather than percentages, you have not increased your exposure to stock market risk).

For example if you have $400,000 in stocks and $400,000 in bonds — and you spend down $150,000 of those bonds in order to delay Social Security — you still have $400,000 in stocks. A stock market decline of a given percentage would not result in a larger loss than it would have previously.

In fact, a strong case can be made that a stock decline (or, in today’s case, a potential further stock decline) becomes less damaging when you exchange bonds for Social Security. The ultimate reason that stock market declines are a source of risk for retirees is that they mean an increased probability of outliving your portfolio. But if you have more Social Security income and less bonds:

  1. You are less likely to outlive your portfolio, because the Social Security income lasts for life and because it supports a higher level of spending than bonds do (which allows for you to spend from the rest of the portfolio at a lower rate), and
  2. If you do outlive your portfolio, you’re in a better situation with a higher Social Security check each month.

And yes, in some cases, it can make sense to spend bonds all the way down to zero in order to delay Social Security.

In case you think that that sounds crazy, here’s what Wade Pfau wrote in his recent book Safety-First Retirement Planning:

As for bonds, ultimately, the question is this: why hold any bonds in the part of the retirement portfolio designed to meet spending obligations? The income annuity [Mike’s note: Social Security is an income annuity.] invests in bonds and provides payments precisely matched to the length of retirement, while stocks provide opportunities for greater investment growth above bonds. Bonds alone hold no advantage.

Or here’s what Steve Vernon has to say:

Our analyses support investing the [unannuitized portion of the portfolio] significantly in stocks – up to 100% – if the retiree can tolerate the volatility. The resulting volatility in the total retirement income portfolio is dampened considerably by the high proportion of income produced by Social Security, which doesn’t drop if the stock market drops.

Spending/Withdrawal Rates

It can also be helpful to look at spending rates (i.e., the percentage of your portfolio that you’re spending each year in retirement).

Forget about Social Security for a moment. And forget about what the market has done over the last few weeks. Just look at where your portfolio balance is right now in relation to your spending. That is, what is your current spending rate when expressed as a percentage of your portfolio balance?

Almost certainly, your current spending rate (as a percentage) is noticeably higher than it was a month ago. Maybe it’s still low, and you’re not worried at all. Or maybe it’s now high enough that you’re starting to worry.

When a retiree’s desired spending level is high relative to their portfolio balance, that’s precisely the scenario in which annuitizing (i.e., buying a lifetime annuity with a part of the portfolio) is most likely to make sense.

Lifetime annuities allow you to safely spend more money than a stock/bond portfolio. We’ve discussed this before, but in brief the idea is that with lifetime annuities, the annuitants who die prior to their life expectancy end up subsidizing the retirement of people who live beyond their life expectancy. So each individual person can essentially spend an amount that’s based on their life expectancy, whereas in a normal (no-annuity) situation you have to spend less because you don’t actually know how long your retirement will last (e.g., spend a low enough amount each year such that you’d be confident your portfolio would last 30 years, even if your life expectancy is only 20 years).

And if you’re in a situation where a lifetime annuity makes sense, delaying Social Security is the best annuity around. (Though again, that’s much more true for higher earners in married couples and less true for lower earners in married couples.)

To Summarize

  1. Use the Open Social Security calculator. It helps you identify the filing age (or combination of filing ages) that is most likely to maximize the total amount you can spend over your lifetime.
  2. If you are concerned about the possibility of depleting your savings, please note that exchanging bonds for Social Security (i.e., spending down bonds in order to delay filing) generally has the effect of a) reducing the likelihood that you outlive your savings and b) reducing the ramifications if you do outlive your savings (i.e., you’ll be left with more income than if you hadn’t delayed).
  3. As far as the lower earner in married couples, it is generally not particularly advantageous for them to delay (though today’s very low interest rates do make it more advantageous than otherwise).
  4. The recent stock market downturn does not affect points #2 or #3 above.
  5. The Open Social Security calculator can help you identify the exceptions to points #2 and #3 above.

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."

Can a Year of Low Earnings Reduce My Social Security Benefit?

A reader writes in, asking:

“I’m in the not-quite-retired-but-probably-could-afford-to-if-I-wanted-to stage of my career. I am pondering many options, including cold-turkey retirement, switching to fewer days per week, or retiring but starting a new type of work that I hope would be more fun on a daily basis. One concern I have about the last two options is that they will result in one or more years of lower earnings at the end of my career, and I have heard that could reduce my social security retirement amount. Is that true?”

Short answer: no, that’s not true.

Many pensions are based on things like “average of last 5 years of earnings.” For pensions like that, yes, a year of low earnings at the end of one’s career could result in a smaller pension.

But that’s not how Social Security works. Your Social Security retirement benefit is based on your 35 highest years of earnings (after adjusting years prior to age 60 for wage inflation). If you have a new year of low earnings, worst-case scenario is that it isn’t one of your 35 highest and it therefore is simply not included in the calculation. In other words, that year of earnings wouldn’t reduce your benefit — it just wouldn’t increase it, as an additional year of high earnings might.

However, a year of low earnings could cause the benefit estimates on your Social Security statement to go down. Similarly, a year of low earnings could cause your actual benefit to be lower than the benefit estimate that you are seeing on your statement.

The key point here is that the benefit figures that appear on your statement are estimates. And those estimates include a projection about future earnings. Specifically, the estimates assume that you continue earning — at the same earnings level as your most recent earnings year for which the SSA has data — until you retire and file for benefits (the estimated figures on the statement assume that those two things will happen simultaneously*).

So:

  1. If you have a year of earnings that was lower than your prior year, once your benefit estimate reflects the new lower year of earnings (and therefore projects that lower earnings level forward) it could result in a lower estimate, and
  2. If your actual earnings turn out to be lower than the assumed/projected earnings baked into the estimated benefit figures, your actual benefit could turn out to be lower than the estimated benefit.

But again, an additional year of low earnings will not reduce your actual benefit. Worst-case scenario is that a year of low earnings will have no effect on your actual benefit (i.e., will not increase it).

*This article explains how to use the SSA’s calculators to calculate what your benefit would be if you retire at a different age than the age at which you file for benefits.

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."

The Effect of Taxes on the Social Security Filing Decision

A reader writes in, asking:

“Could you write something explaining the effects of taxes on the age you decide to begin Social Security. Especially since RMD’s may be delayed to age 72 under new legislation. Also, my state doesn’t tax Soc. Sec. benefits. Thanks.”

In most cases I have looked at, tax planning has worked out to be a point in favor of delaying.

The mechanism at work is that Social Security is, at most, 85% taxable. In contrast, distributions from tax-deferred accounts are usually fully taxable. And spending down your tax-deferred accounts in order to delay Social Security has the effect of increasing the portion of your lifetime income that is made up of (not-fully-taxable) Social Security and decreasing the portion of your lifetime income that is made up of (usually-fully-taxable) distributions.

And a similar thing is usually going on at the state income tax level. Only 13 states tax Social Security benefits, whereas a majority of states treat distributions from tax-deferred accounts as taxable income.

But, to be clear, the effect of taxes on the Social Security decision is very case-by-case. While the above effect is pretty broadly applicable, there could be any number of other factors that could point in the other direction. Almost anything that appears on a person’s 1040 could end up being a relevant factor in the analysis.

Ideally, the way to do the analysis (e.g., when comparing two possible claiming strategies) is to:

  1. Use tax prep software (or other similarly fully featured tax planning software) to estimate the total household tax bill year-by-year under each claiming strategy that you want to test. (For a married couple, you actually want to estimate 3 different tax costs for each year for each claiming strategy: a scenario in which both people are alive, one in which only Spouse A is alive, and one in which only Spouse B is alive.)
  2. Do a typical net present value calculation for each strategy, including the differences in tax costs as cash flows. For example, if you are comparing two strategies, and Strategy 2 has higher taxes by $1,000 in a given year, include that as a $1,000 negative cash flow for Strategy 2 that year. (Again, for a married couple, you would be doing three calculations for each year for each strategy — both spouses alive, only A alive, only B alive — then weighting each one by its probability, using a mortality table of your choosing.)

With regard to step #1, I would caution against using a spreadsheet or other similar DIY tax calculation. It’s very easy to accidentally fail to include a given credit/deduction/exclusion that would affect the analysis — especially when we consider state income taxes as well.

And of course it’s important to remember that all of this is just a projection. There are many unknowable factors involved.

Tangential note: my spreadsheet for doing step #2 of this analysis is what originally served as the starting point for the Open Social Security calculator. And it’s part of why I was surprised to realize that most (all?) other Social Security claiming calculators use a fixed life expectancy assumption in the calculation (i.e., assuming with 100% certainty that a person dies on a given date). Doing so is fine for an unmarried person, but for a married couple it significantly underestimates the length of time for which only one spouse will be alive. That really messes with the value of survivor and spousal benefits, and it also really messes up the expected tax cost calculation (because taxes change significantly once one spouse dies).

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."

How Important is Social Security Planning?

A reader writes in, asking:

“Just how important is it to learn about all the ins and outs of social security? When I look at the benefit estimates on my statement, they aren’t exactly small amounts, but this doesn’t look like it’s going to be the most important financial decision I’ve made in my life. And yet people go back and forth forever (eg on bogleheads) about whether filing at 62, 66, 70, or whatever is best.”

In terms of expected spending (in today’s dollars) over the course of a retirement, the difference between the ideal Social Security filing strategy and a very bad strategy is often in the $20,000-$40,000 range for a single person. For a married couple, the difference between the ideal strategy and a very bad strategy would often be in the $50,000-$100,000 range.*

The difference between the ideal strategy and a fairly similar strategy is much smaller. For instance if filing at 70 is ideal for you, filing at 69 and 6 months is likely to have a very similar result — a few thousand dollar difference over the course of your retirement.

So even if we’re comparing a good strategy to a very bad strategy, no, it’s not even close to the most important financial decision you’ll ever make. The career you pick, the city/cities you choose to live in, the home(s) you buy or don’t buy, the job(s) you take, whether you get married/divorced/have kids — all of those things will have a larger impact on your finances over your lifetime than your Social Security claiming decision(s).

But, for most people, you can learn most of what you need to know about Social Security from just a handful of hours of reading (in addition to my book Social Security Made Simple, I can also enthusiastically recommend Andy Landis’s Social Security: The Inside Story or Jim Blankenship’s Social Security Owner’s Manual). And if a few hours of self-education can provide a mid-five-figure expected return, those are some well-spent hours.

A key point here is that if you are not a financial planner (i.e., you are not trying to become an expert in all of the situations your clients might face), you only need to learn about the parts that apply to you. You can (probably) ignore most of the complexity. For example:

  • If you don’t have minor children or adult disabled children, you can ignore everything about child benefits and the family maximum.
  • If you don’t have a pension from non-covered employment, you can ignore everything about the windfall elimination provision and government pension offset.
  • If you have never married (or if you were married less than 10 years prior to a divorce), you can ignore everything about spousal/survivor benefits.
  • If you are married and you and your spouse were both born after 1/1/1954, you can ignore everything about restricted applications.

Most unmarried people and married couples have either one or zero complicating factors. A basic cookie-cutter-type plan works reasonably well for most people.

Social Security planning is primarily about avoiding a particularly bad strategy, and that mostly means:

  • Don’t miss a restricted application if you have the chance.
  • Get within a year or so of your ideal filing age. (For example if age 70 is the mathematically ideal age for your circumstances, don’t file at 62 or 63. But don’t worry too much about the difference between 69 and 70.)

*The differences are often greater when we also account for tax planning. Also, delaying has a risk-reduction effect that isn’t reflected in these numerical differences.

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."

Social Security: It Is an Asset, But Not a Bond

A reader writes in, asking:

“At our local Bogleheads chapter meeting, there was a heated discussion about Social Security, specifically, whether it should be counted as a bond in your asset allocation. My view is that it’s not really an asset because you can’t sell it. But one of the more experienced people in our group was emphatic that it’s a mistake to leave Social Security out of an asset allocation analysis and that it should be counted as a bond because it provides predictable payments.”

This question comes up over and over, year after year — both in my email inbox as well as on the Bogleheads forum.

Social Security is an asset. It’s true that it is not a liquid asset (i.e., you cannot sell it). But even illiquid assets show up on balance sheets. Same goes for lifetime annuities. They are assets, even if they are not liquid.

And yes, Social Security is a fixed-income asset. So it’s more bond-like than stock-like.

But it’s definitely not a bond.

There are a lot of differences between a) having a $2,000 monthly Social Security benefit at full retirement age (i.e., a stream of income with a present value of about $350,000) and b) having $350,000 of bonds in your brokerage account.

Social Security is what it is — and it isn’t what it isn’t.

The desire to classify everything as either a stock or a bond is completely bananas.

For example, do you classify your house as a stock, because its value goes up and down considerably over time? Or do you classify it as a bond, because it pays you “interest” in the sense that you do not have to pay rent each month? (I hope the answer is obvious: it’s neither a stock nor a bond, because it is a house.)

The distinctions between different types of assets are real and useful.

Social Security:

  • Is inflation-adjusted,
  • Will last your entire lifetime,
  • Will not extend beyond your lifetime (or beyond you and your spouse’s lifetimes if married, child benefits notwithstanding),
  • Is absolutely illiquid (i.e., it’s not just hard to sell; it cannot be sold at all), and
  • Is subject to political risk.

By shoehorning that into the “bond” category, you are ignoring some or all of those unique characteristics. You are ignoring useful information.

Relatedly, if you have decided, for example, that you want 40% of your portfolio in bonds, but you haven’t yet decided what will count as a bond, how did you decide that 40% was the right number? Perhaps the line of reasoning that went into that decision had some flaws.

Rather than counting Social Security income as part of your bond allocation, I’d suggest using this method for fitting it into your overall retirement plan:

  1. Determine how much money you plan to spend each year during retirement.
  2. From that, subtract any part-time job or business income you expect to earn.
  3. From the remaining amount, subtract your Social Security/pension income to determine how much you will need to spend from your portfolio each year.
  4. Then make any portfolio-related decisions (including asset allocation) with that net required-spending-from-portfolio figure in mind.

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: Open Social Security