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Social Security Made Simple: 2022 Edition

Just a brief announcement for today: the 2022 edition of Social Security Made Simple is now available (print version here and Kindle version here).

Relative to the prior (2019) edition, various figures have of course been updated.

And with this year’s large COLA, one of the questions I received repeatedly was whether a person has to have filed for their retirement benefit already in order to receive the COLA. So I’ve added an explanation that you get the annual cost-of-living adjustment beginning at age 62, regardless of whether you have filed for benefits.

There’s also a new example in the chapter on spousal benefits that illustrates another topic that has been a source of question for years: how is a person’s total monthly benefit calculated if they a) start their own retirement benefit early and then b) later start to receive a spousal benefit? (In short, the dollar-value reduction to your retirement benefit that was applied due to filing early continues to apply after your benefit as a spouse kicks in.)

For anybody who has not read the book, the outline is as follows:

Part One: Social Security Basics
1. Qualifying for Retirement Benefits
2. How Retirement Benefits Are Calculated
3. Spousal Benefits
4. Widow(er) Benefits
Part Two: Rules for Less Common Situations
5. Social Security for Divorced Spouses
6. Child Benefits
7. Social Security with a Pension
8. The Earnings Test
Part Three: Social Security Planning (When to Claim Benefits)
9. The Claiming Decision for Single People
10. When to Claim for Married Couples
11. The Restricted Application Strategy
12. Age Differences Between Spouses
13. Accounting for Investment Returns
Part Four: Other Related Planning Topics
14. Social Security and Asset Allocation
15. Checking Your Earnings Record
16. How Is Social Security Taxed?
17. Do-Over Options
Conclusion: Six Social Security Rules of Thumb
Appendix A: Widow(er) Benefit Math Details
Appendix B: Restricted Applications with Widow(er) Benefits
Appendix C: The File and Suspend Strategy

You can find the print version here and Kindle version here.

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 Planning Approaches: Insurance Approach vs. Maximizing Expected Outcome

When it comes to Social Security planning, people often take one of two approaches:

  • The insurance approach: Social Security is meant to be longevity insurance, so in order to get the most protection from it, I will delay until age 70.
  • The maximizing approach: I want to get the most total dollars (or present value of dollars) from Social Security over my lifetime, so I will file at whatever age results in the highest expected sum. (Note: this second approach is what calculators such as Open Social Security are doing — recommending the filing age(s) that maximize the expected present value of dollars collected.)

In short, most people should be accounting for both perspectives in their planning.

Taking only the maximizing approach fails to account for the fact that a reduction in risk is valuable. Waiting to file for Social Security generally reduces longevity risk, because it makes you less likely to deplete your savings in a live-a-long-time scenario, and it means that you would be left with a greater monthly income in the undesirable event that you do deplete your portfolio.

Conversely, taking only the insurance approach makes no sense either. Yes, Social Security does function as longevity insurance. And when you delay Social Security you are, essentially, buying more of that insurance. But just because a type of insurance is available doesn’t mean that you need it or that it’s a good deal. (I’m sure you can come up with several examples of this concept on your own.)

For some people, the risk reduction that comes from delaying Social Security isn’t really important, because they’ve already reached a point where their level of savings relative to their desired level of spending is such that there’s very little chance of running out of money, regardless of what decisions are made with regard to Social Security.

Similarly, for some couples (most especially, married couples in which one person is in very poor health or the higher earner is much older than the lower earner), having the spouse with the lower earnings history delay filing doesn’t necessarily even reduce risk. It makes the “we both live a long time” scenario better. But it makes the “one of us lives a long time” scenario worse. And for such couples, it’s that second scenario that’s far more likely.

“Delay until 70” happens to be a respectable rule of thumb for an unmarried person, because:

  1. It does happen to be a pretty good deal (not astonishingly good, but good) for most unmarried people, and
  2. If you choose to delay, then you die at an early age, it’s not as if you’ll be upset about having waited to file for your benefits.

But once we look at married couples, it’s more complicated because:

  1. It’s often not a good deal (for the lower earner to delay). In some cases (again, if one person is in very poor health or if the higher earner is much older than the lower earner), it can be quite a bad deal.
  2. And if you’re the lower earner and you choose to delay, then one spouse dies soon thereafter, the surviving spouse will still be alive and will be in a worse position as a result of you not having filed for benefits early.

Point being, Social Security planning should be treated much like any other personal financial planning topic in that:

  • It’s helpful to actually do an analysis that looks at your personal facts and circumstances, and
  • When performing that analysis, the evaluation of any particular strategy should account for both the effect that that particular strategy would have on the risk(s) to which you are exposed and the effect that that strategy would have on the expected (i.e., probable) outcome.

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."

Does a 401(k) Rollover Count as a Pension for the Social Security Windfall Elimination Provision (WEP)?

A reader wrote in recently with the following story/question:

For the last several years of my wife’s work before retiring, she had worked for a government agency and no SS had been collected. However, she did have a 401(k) which she contributed to. I knew that she fell under the WEP/GPO provisions.

Subsequent to my wife retiring but before she applied for SS, we rolled her account into an IRA. Two different representatives from SSA told me that if we had not rolled it over, we would NOT have been subject to the WEP. We were allowed by my wife’s plan to keep our funds there and they actually had some very good investment choices. If I had known that and if it was true, I would never have moved the account. And if I understand correctly, the WEP would not come into play and we could have had a considerably higher benefit over the years until we had started to use it.

I had read that the WEP only comes into play when you receive a pension or a lump-sum retirement distribution from a job that was not covered by Social Security. I had taken “distribution” to mean cashing out the 401(k), not rolling it over into an IRA, but I am guessing from what the SSA is saying, that is not the case.

If we had known that we could “let it ride” in the 401(k) and delaying being subject to the WEP, I would have jumped at the chance. This would seem to be another way to significantly increase your benefit if you were in the right circumstances.

So I would appreciate your view of this. I am assuming I can’t do anything for myself, but hopefully for others.

The SSA employees are correct that a rollover does count as a payment/withdrawal from the plan. Therefore, if:

  1. The plan itself counts as a pension, and
  2. The payment counts as a pension payment from that plan…

…then the rollover would trigger the WEP.

And, you are correct that in some cases the effect of the WEP can be delayed as a result of delaying a rollover (and also delaying any other payments, including payments from a defined benefit plan, if any).

So those are the two questions we have to answer:

  1. Does the plan count as a pension at all?
  2. Does this particular payment count as a pension payment? (Sometimes the plan can count as a pension, but this individual payment does not count.)

Does the Plan Count as a Pension?

To determine whether the plan counts as a pension for the sake of triggering the windfall elimination provision, we first have to know whether the worker paid Social Security tax at the job in question. If so, then the plan will not trigger the WEP.

If the worker did not pay Social Security tax (i.e., the job was “noncovered employment”), then we need to know whether the plan includes employer contributions. If it does, then it’s a pension. If it does not include employer contributions, then it’s only a pension if it is the primary retirement plan.

Does the Payment Count as a Pension Payment?

A withdrawal of the employee’s contributions + interest will not count as a pension payment if the employee is not yet eligible to receive a pension and the employee forfeits all rights to the pension.

If the employee is already eligible for the pension, any payment from the plan will count as a pension. Or, if the payment included any amounts that were employer contributions, the payment will count as a pension — regardless of whether the employee is eligible to receive a pension.

What does it mean to be “eligible” for a pension? An individual becomes eligible for a pension the first month he or she meets all requirements for payment except stopping work and applying for the payment. The pension-paying agency, not the SSA, determines pension eligibility and entitlement.

So just to summarize/reiterate the key points here: in some cases a distribution (including a rollover) from a defined contribution plan such as a 401(k) can trigger the windfall elimination provision. And in such cases, delaying taking any distributions (including rollovers) might allow you to delay applicability of the WEP, thereby allowing you to receive a larger Social Security benefit for a period of time.

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 Do Social Security Inflation Adjustments Work?

A reader writes in, asking:

“I’d be interested in an article on the specifics of Social Security inflation adjustments. I have a vague awareness that my wages are indexed so that my wages from early years count for more than just the actual dollar amount earned. And I also know that the SSA publishes a COLA figure every year for people already receiving benefits. Are those the same thing? And does a person have to file for benefits in order to start getting the COLA?”

The indexing of prior-year earnings is completely separate from the annual cost-of-living adjustments. Let’s discuss how each works.

Wage/Earnings Indexing

Wage indexing occurs at one point in time: in the year you turn 62 — or the year in which you die or become disabled if such happens before you reach age 62.

All of your wages (and net earnings from self-employment) up to 2 years prior to the year in question are indexed based on the national average wage index (NAWI) — sometimes just referred to as the average wage index (AWI). This can be roughly thought of as adjusting your old earnings for “wage inflation” up to age 60.

Example: Bob (alive and not disabled) turns 62 in 2020. All of Bob’s historical earnings up to 2018 are indexed based on the ratio of NAWI in 2018 to NAWI in the year of the earnings in question. So for example if Bob’s earnings in a given earlier year were exactly twice the NAWI figure for that year, then his earnings for that year would essentially “count for” twice the 2018 NAWI.

In the year 2000, NAWI was $32,154.82. If Bob earned twice that amount (i.e., $64,309.64) in the year 2000, then his 2000 earnings would be adjusted to twice the 2018 NAWI when originally calculating his benefit. In 2018, NAWI was $52,145.80, so Bob’s year-2000 earnings would count for $104,292 in 2018 dollars.

Earnings after age 60 are not indexed. In most cases this means that earnings after age 60 actually count for more than they would if they were indexed — because if they were indexed, they’d have to be indexed downward to age-60 dollars, given that NAWI usually grows over time. (There are exceptions of course. NAWI shrank in 2009 with the recession, and it’s certainly going to be lower for 2020 than it was for 2019.)

Another relevant point here — one you may have seen discussed in the news lately — is that your Social Security benefit is ultimately rather dependent on the NAWI figure in the year you turn age 60. If NAWI is low in that year, all of your prior earnings will be multiplied by the low age-60 NAWI. While we won’t know 2020 NAWI until (roughly) September 2021, it’s clear that the figure will be unusually low, given the dramatic amount of earnings loss this year. This is not a good thing for people born in 1960. (And to the extent that it doesn’t recover by 2021, this is not a good thing for people born in 1961.)

Cost-of-Living Adjustments (COLA)

The second type of indexing is the annual cost-of-living adjustment based on actual price inflation. Beginning with the year you turn 62 (or, if earlier, the year you die or become disabled), each year, your primary insurance amount is indexed upward based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Specifically, the COLA for a given year is based on the average of the CPI-W for the third quarter of the prior year, divided by the average of the CPI-W for the third quarter of the year before that. For example, the average CPI-W from July-Sept of 2019 was 1.6% higher than the average CPI-W from July-Sept of 2018, which is why we had a 1.6% COLA in 2020.

If the calculated figure is negative (i.e., CPI-W went down), then there is no COLA rather than there being a negative COLA. And in the following year, the denominator in the calculation will be the third quarter CPI-W from the last year for which there was an inflation adjustment. For example, in 2015, the third quarter average CPI-W was lower than in 2014. So there was no COLA for 2016. Then, in 2017, the COLA was calculated based on the ratio of average CPI-W from third quarter 2016 relative to third quarter 2014 (rather than being compared to 2015 as would typically be the case).

Finally, to answer the reader’s second question, a critical point about Social Security cost-of-living adjustments is that they do not depend on whether or not you have claimed your retirement benefit. That is, you will get the applicable COLAs beginning age 62 onward, regardless of the age at which you file for your retirement benefit.

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 and Tax Planning

A reader writes in, asking:

“I think there is more to deciding when to file for SS income than just the maximum benefit. I plan to coordinate SS with regular IRA, Roth IRA, and portfolio income in order to avoid as much taxes as possible. Any recommendations for how to optimize for the total portfolio?”

The tax aspect side of Social Security planning is very case-by-case (just like any tax planning, really). In a majority of cases I have looked at though, it has turned out to be a point in favor of delaying — for two reasons.

The first reason is that Social Security is taxed favorably relative to most other types of ordinary income such as distributions from tax-deferred accounts. So it’s usually advantageous to spend down tax-deferred accounts in order to delay Social Security — with the effect being to reduce the percentage of lifetime income that’s made up of tax-deferred distributions (which are normally fully taxable) and increase the percentage of lifetime income that’s made up of Social Security (which is not fully taxable).

The second reason is that, once you start receiving Social Security benefits, your marginal tax rate on other types of income could increase significantly. (Not only because you have a new source of income, but also because of the way Social Security is taxed, in which one additional dollar of ordinary income can cause not only the normal amount of income tax, but also cause 50 or 85 cents of Social Security to become taxable.)

Delaying Social Security gives you some years with a relatively lower marginal tax rate prior to that higher marginal tax rate kicking in. It’s often advantageous to spend down tax-deferred accounts (and often do Roth conversions as well), thereby making use of the relatively lower marginal tax rate in the pre-Social Security years. In some cases, this has the additional benefit of allowing your Social Security to remain nontaxable once it does begin, because your “combined income” is below the applicable threshold due to having done conversions.

To summarize, there are multiple mechanisms that point in favor of the same exact plan: delaying Social Security and using that pre-Social Security period of time to spend down tax-deferred accounts and make some Roth conversions.

But again, tax planning is case-by-case. Basically anything that appears on your Form 1040 could be a relevant factor, and some of them could point in the opposite direction (i.e., in favor of filing for benefits earlier rather than later).

Working with a financial planner can provide a lot of value here.

For anybody taking a DIY approach, I would caution that attempts to actually do the tax calculation on your own (e.g., with just a spreadsheet) are as likely to be harmful as helpful. DIY tax calculations frequently fail to account for all of the various income-threshold-based tax provisions that can apply to a person. A better method is to use tax-prep software (which can account for the phaseouts/phase-ins of every applicable tax provision) to run hypothetical year-by-year calculations in different scenarios. Then record those results in a spreadsheet (or other software of your choosing) and factor them into a broader analysis.

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."

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