Guest: Dr. Laurence Kotlikoff
The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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- Guest Introduction: Dr. Larry Kotlikoff
- Reasons to Hire an Advisor
- Holding off on Collecting Social Security
- Spending More Money, Not Less with Apply and Suspend
- Roth IRA Conversions at the Lowest Tax Bracket
Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.
Dan Weinberg: And welcome to The Lange Money Hour. I’m Dan Weinberg, along with CPA and attorney Jim Lange. This week’s subject: making the most of your Social Security benefits. We’re happy to welcome Professor Laurence Kotlikoff back to the program. A renowned economics expert, Dr. Kotlikoff is a distinguished Professor of Economics at Boston University. He served as a consultant to the World Bank and the IMF, among other organizations, and has provided expert testimony to congressional committees on numerous occasions. Just last year, he was named by the Economist as one of the world’s twenty-five most influential economists. Professor Kotlikoff has also authored or co-authored seventeen books and hundreds of professional journal articles, and today, we’re going to be focusing on his latest book, Get What’s Yours: The Secrets to Maxing Out Your Social Security, which recently hit number one on the Amazon bestseller list. Now, over the next hour, we’ll be talking about some of Jim and Professor Kotlikoff’s favorite Social Security strategies, and they’d like to hear from you and answer some of your questions. To join in the conversation, give us a call here in the studio. The number is (412) 333-9385. And with that, let’s say hello to Jim Lange and welcome to Dr. Laurence Kotlikoff.
Jim Lange: Welcome, Larry.
Larry Kotlikoff: It’s a great pleasure to be with you, Jim. Thanks for having me.
Jim Lange: Well, I just love your book, and the name of the book is, again, for our audience, Get What’s Yours: The Secrets to Maxing Out Your Social Security, which, you know, I do a lot of Social Security work and I read a lot, and this book is the best. This is just great. But before we get into the meat of the show…
Larry Kotlikoff: Thanks so much, Jim.
Jim Lange: I really mean it and it is well deserved to be at number one, and it’s a great resource for people, and there’ll be people that don’t like it, or they won’t like the content of it, but frankly, everything that you say makes so much sense, and I’m really on the same wavelength. But before we get into the content, I just do have to tell our listeners a real quick story.
So, Larry’s been on several times because he’s such an excellent guest and he provides so much value for our listeners, and we were talking about Social Security, and then we were also talking about Roth IRA conversions, and I actually literally got an idea on air of combining what you’re not allowed to do now, which is give back your Social Security, even for years, and do Roth IRA conversions, and when I was doing my Roth IRA conversion book, I thought I would, you know, write about it, but Social Security wasn’t really my area of expertise. It was Roth IRA conversions, and I was writing about Social Security and I thought, “You know, I’d better really check this, and who in the world,” and I really mean this, still mean it today, “would be better at checking what I wrote about Social Security?” So, I sent Larry an e-mail. I didn’t even know, you know, he’s a big shot Professor, very busy, I didn’t even know if he was going to respond. Anyway, not only did he respond and make some edits, but he wrote about three pages that really helped clarify the issue, and it was just terrific. Anyway, I gave the manuscript to my mom, who was a journalism professor, and not very many paragraphs, let alone pages, escaped her red pen. She just edited everything, and for the entire section that Larry wrote, about three pages, it was the only section at all that didn’t have any red marks, and then, at the end, my mother, not knowing that Larry wrote it, wrote “Very good!” So, not only is he a brilliant economist with some fabulous information, but he’s a great writer, and by the way, the book is very readable, and actually funny. I mean, you obviously have a terrific sense of humor.
Larry Kotlikoff: Well, thanks so much, Jim. The readability is, in part, thanks to my co-author. Paul Solman who, many of your listeners may know, is the economics correspondent for PBS NewsHour and has been for many years, so he’s a really great expositor of economic issues and financial issues, and the other co-author is Phil Moeller, who is a personal finance columnist of longstanding. So, I think it’s a good combination of three different voices. I was more the technical guru, the nerd, the geek, if you like, and those guys, I think, probably did the most in terms of making it readable, in terms of making it fun, yeah.
Jim Lange: Well, even if it’s readable and fun, you are still, and maybe this isn’t fair, but let’s call it the ‘technical brains’ of the operation, and you talk about the enormous complexity of the system. So, let’s assume that you’re right. It’s really complex. Why can’t somebody just go to the Social Security office, explain their situation, whether in person or over the phone, get some advice, and why do they have to read your book and hire an advisor and to do all these things when, presumably, the person’s Social Security office ought to know this stuff? Isn’t that reasonable?
Larry Kotlikoff: Well, they ought to, but there are 2,728 rules in the handbook, and then in their program operating manual system, there’s probably 300,000 rules to explain those 2,728 rules. So, the system is enormously complicated. The staff is not well trained. It really takes you years to get this stuff in your brain. It is so, in many ways, mind-bogglingly boring. So, I would say that about forty percent of the time, it’s been my experience that people who approach Social Security, they come away with the wrong advice or the wrong answer, or it’s a partial answer. It’s technically correct, but it’s not really helping them go in the right direction.
I had a person call the other day when I was on NPR Radio’s “On Point” and they told me they went to two different offices and got two different sets of advice about what they should do, and they explained their situation. It turned out that both of the offices were giving the wrong advice, different wrong advice. Now, another example of the problem here is that you can’t even rely on Social Security to give you the right benefit estimate. If you’re under sixty, they’re going to make assumptions of that future inflation and wage growth in the economy which are totally unrealistic. Mainly, they’re going to assume no inflation any time in the future forever in this country and no wage growth in the country, and those things can bias down the estimate of your future benefits by, you know, if you’re fifty, by twenty percent. So, you can’t rely on them to give you the right benefit estimate that would be the minimum with respect to your retirement benefit, and then, for people that are still working, they can also overestimate what your benefit will be because they assume that you’re going to keep working until full retirement age. That may not be true. So, as a companion to this book, I also have a software program through my company, which is called www.maximizemysocialsecurity.com. That’s the website, and I think the book is, kind of, good ammunition for people to have. It’s like a Social Security bible. If you’ve figured out what you need to do in general terms, and then there’s still some questions about specifically what to do, the software can help, but it’s very good to have in your brain what you’re going to do before you go talk to Social Security.
Jim Lange: Well, I think that’s actually great advice, and again, the name of that software, or the place that you can get it, is www.maximizemysocialsecurity.com. Well, Larry, can we start with a kind of a basic issue? So, let’s assume, for discussion’s sake, and let’s even talk about a single taxpayer, and we’ll maybe work in some of the spousal strategies later, but let’s say a single taxpayer who’s sixty-two years old, and let’s say they are retired, and they are saying, “Well, gee, if I start taking the money now,” and let’s assume that they are in the fortunate position that they don’t need the money. So, they would be taking the money for Social Security, their benefit. They would be investing that money, whatever interest rate assumption you want to use. At a certain point, they will have X dollars. But if they waited until age seventy, where they’re starting at zero compared to if they started at sixty-two, they would obviously have a fair amount of money by the time they were seventy, but since they’re getting an extra seventy-six percent of a benefit plus cost of living, it will eventually, in effect, break even. And depending on what interest rate assumptions you use, and a few other factors, that might be in their, let’s say, early to mid-eighties, and a lot of people say, “Gee, I’m not really sure if I’m going to make it that long. I don’t know if the government is still going to be paying out Social Security. Maybe I’d better just take it at sixty-two.” How would you respond to somebody who, let’s assume, for discussion’s sake, really doesn’t know about their life expectancy, and the mid-eighties is probably a reasonable estimate, at least in their mind right now?
Larry Kotlikoff: Well, I’d respond that life expectancy is not really the relevant thing to think about. You need to think about not when you’re going to die, on average, because you’re only going to die once. You only have one life to lose, and you have to worry about the worst case scenario. The worst case scenario is to live to a hundred, to live to your maximum age of life, and let’s assume that’s a hundred. So, we’re trying to get across the notion in this book, and we do so in chapter two right up front, that people really, we think, have their heads turned around the wrong way when it comes to thinking about longevity risk, and everybody’s sure they’re going to die on time, but there’s no guarantee. It’s not necessarily in the cards, and we’re all very focused, of course, on dying. So, all the attention we pay is to dying and the terrible aspect of that, but if you think about life’s real risk, it’s not dying because, if you die, you get to go to heaven. Heaven is heavenly, right? There’s no problem. Once you die, you get to be in heaven. The real risk of life is living to a hundred and not having enough money to support yourself because you outlived your money.
Now, Social Security, when you give up eight years of low benefits from sixty-two to seventy, it is in order that the opening of the check from age seventy possibly to a hundred be seventy-six percent larger every single month, month in and month out. The money that you give up for those eight years is really paying a premium, and the extra benefits you get are really the extra annuity, if you like, that you bought, and it’s a fantastic investment. It is inflation protected. It’s got a built-in three percent real return, even over and above the issue of longevity, that aspect of the annuity payoff. So, you know, a good analogy here, Jim, would be thinking about a homeowner’s policy. Suppose we were to think about breaking even on a homeowner’s policy. We’d pay for the value of our home, times the probability it burns down. That would be the expected payoff from that investment, and then we compare it with the premium. Well, if we thought about it that way, none of us would ever buy homeowner’s insurance. Instead, we’d realize we only have one house that’s either going to burn down or not. We have to worry about it burning down even though the chance is very small. We look at that worst case scenario and we buy homeowner’s insurance to protect us against that worst case scenario. Even though it’s very expensive, we do it. Here, the worst case scenario is living to a hundred, and we need to buy insurance for that possibility, and Social Security is giving us this insurance opportunity that’s an opportunity to buy insurance at this incredibly low price, if you like, if you think about it that way. So, that’s what we’re trying to get across, that people should be patient. That’s kind of rule one in our three rules for how to maximize your Social Security benefits.
Jim Lange: Well, do most people get this right, or, you know, particularly we’re going to get into some of the spousal issues, but do people get this right? If forty percent of the people that actually go to the Social Security office walk away with wrong answers, or, let’s say, suboptimal answers, it sounds like there might be a lot of people making some pretty serious Social Security mistakes. Is that true?
Larry Kotlikoff: I think virtually everybody’s getting this wrong. You know, we have ten thousand baby boomers retiring every day. They almost all take the Social Security benefits as soon as possible. In the process, they give up this opportunity to insure their longevity, to deal with the longevity risk in a terrifically inexpensive and safe manner. They also, by not thinking carefully of what they’re doing, they can lose benefits because Social Security won’t pay two benefits at once, and you need to time your benefits, which benefit you’re going to take first so that you can take one benefit by itself, and then get the other one because, again, Social Security won’t give you two benefits at once. They’ll just give you the larger of the two, which means that one of the two benefits, if you try and take them both at once, will wipe out the other. So, the strategy for maximizing your benefits is to take one benefit early and wait to take the other benefit. Now, in the case of somebody who’s single, never married, never will be married, there’s only one benefit involved here, which is the retirement benefit. But if we’re talking about somebody who is married and there’s a spousal benefit in play, we’re talking about somebody who’s widowed, there’s a survivor, a widow benefit. If we’re talking about a divorced person who was married for ten or more years, we’re talking about a divorcee spousal benefit and a divorcee widow benefit, potentially, when the ex passes away. There’s also child benefits for young children. If you’re collecting a retirement benefit, or have at least filed for it, your child under nineteen, if they’re still in school, can collect on your record, or if they’re disabled before twenty-two, they can collect. There’s also child in care spousal benefits. So, if you’re married and you’ve got a child who’s…I know a sixty-eight year old friend of mine who’s got young children. They’re just juniors in high school. They’re going to collect on his record. He didn’t realize, but he could’ve been filing earlier, and then the mom would also have been able to collect her child in care spousal benefit because she had young children who were collecting a benefit on his record. And there’s also mother and father benefits for the parents of deceased ex-spouses who have young children or disabled children. There’s even a benefit for parents. You mentioned your mom. Well, suppose you were providing most of the financial support for your mom and you passed away, she could collect about eighty-two and a half percent of your full retirement benefit as a parental benefit, a parent benefit. So, there are all these benefits, and most people know nothing about them, and the first thing they say is, “Well, I’d better get my money because if I don’t get it and I die right away, I’ll lose it.” Well, if I die right away, I’ll be in heaven. I won’t be unhappy. So, our rules are be patient, the second rule is to understand all your benefits, and the third rule is to time your benefits so that you can take over your retirement years more than one benefit, and you don’t zap or eliminate one of these two benefits.
Jim Lange: Well, I hope we have some people who are in their sixties instead of seventies listening to this show, because I can’t tell you…now, we have made the study of Social Security a very serious issue at the Lange Financial Group. In fact, we took one of our estate attorneys, who’s very quantitative, and basically said, “You’re going to be the Social Security expert,” and she read all types of books and we bought all kinds of programs and things like that. I can’t tell you how many times, or even when I give my Social Security workshop, I can’t tell you how many people have said, “Oh, I wish I would’ve known that,” and they are forever compromised. So, to me, in that workshop that I give (which we’ll actually put in a little plug for), I just hope that I get people who are not too late to take advantage of some of the great strategies that you are recommending. It’s really just an incredible difference.
All right. Again, that’s Get What’s Yours: The Secrets to Maxing Out Your Social Security, which I would recommend anybody of Social Security years, anywhere between sixty-two and seventy, or actually it’s probably broader than that, but certainly if you’re between sixty-two and seventy and you have a spouse of that age, I wouldn’t even think about it. I would get that book. The other resource that Larry offers is his website that is Social Security software, which can be found at www.maximizemysocialsecurity.com. Now, software that he has either written or participated in, which I’ve thought the world of for a long time, is software that, it’s not just limited to Social Security, but actually incorporates a lot of different aspects, can be found at www.esplanner.com. And then, one that I didn’t know about until actually yesterday, he has a website for people who are considering divorce called www.fairdivorcedecisions.com. But the main thing we’re talking about is his recent book Get What’s Yours: The Secrets to Maxing Out Your Social Security.
So, during the break, Dan said, “Well gee, don’t sometimes people take Social Security because they have to?” And I said that I am actually more worried, and it’s even more important for people who are on the edge. In other words, the decisions that you make if, let’s say, you have a $300,000 estate for Social Security are much more important than, let’s say, if you have a $3,000,000 estate because, though, yes, you could be much better off if you have the $3,000,000 estate. It might not make as big a difference in your lifestyle. Larry, how do you deal with the issue of when people sometimes just have a hard time getting by if they’re holding off on their Social Security? And what if the only assets they could spend while they’re waiting to get their Social Security is their IRA? What would you tell somebody in that situation?
Larry Kotlikoff: Well, first of all, I mean, the first thing I would do is tell everybody to work as long as possible, part-time, full-time, whatever you can do to stay in the game because physically, psychologically, financially, just keep working as long as you can. The second thing I’d say is that if you have other resources, whether it’s IRAs or regular assets that are not retirement accounts. Think about using those to get by so that you can pursue the optimal Social Security claiming strategy, which is not always to wait until seventy to collect. I can give you some examples where it’s not always optimal, but because, for example, I know a sixty-three year old guy who inquired about what he should do. The optimal thing for him to do is to take his retirement benefit right away because he has a child who is disabled who’s young, and his wife is not working. She’s forty-five. So, he’s sixty-three. She’s forty-five. If he takes his retirement benefit right away, he can activate child in care spousal benefits for the wife and a child benefit for the son, and he’ll lose on his benefits because he’ll take his retirement benefit early, but at sixty-six, at full retirement age, he can suspend his and start it up again at seventy, and this will somewhat reduce his lifetime benefits for himself, but the benefits for his family members will go up. So, the total family benefits will be higher. So, again, it’s not always the optimal strategy just to wait.
So, I just talked about two options here, which is for somebody who’s really tight on cash, working longer if possible, using your retirement accounts if needed. Another option would be to borrow money on your house, if it’s not at too high an interest rate, knowing that you’re going to have the funds in the future from a larger Social Security check to pay back the mortgage. There are reverse mortgages, which I think are somewhat dangerous ways to borrow, because it helps you in one respect because if you live for a very long time, the bank, in effect, owns your house and you get to stay there for free, but if you have to move out early in life to a nursing home or to live with your kids or near your kids, then the bank makes out, and you, in effect, gambled on whether or not you’re going to have to move. So, there’s plusses and minuses to reverse mortgages.
Another thing you might do is team up with your kids and think about can they help you out for a while so that you can pay them back with a higher Social Security check? This is really a family, an intergenerational decision. Kids should be buying the book to help their parents and grandparents, depending on the age of the parents and grandparents, to make sure that they get the most out of Social Security because they paid this money and they shouldn’t lose the money on the table, and if the parents and grandparents don’t get the most, the kids are not going to be getting as much from their relatives, but also then they have to shell out themselves to help their relatives. So, this is kind of a joint optimization problem, but you’re absolutely right. If somebody is desperate, they have absolutely no other sources of money, they can’t work, then they’re going to have to take the benefits early and that’s that. I mean, it’s not all that fair the way the system is set up. There’s a lot of inequities. But the other thing is, some people may need to take their benefits early, but at full retirement age, you do have an option to get back into the game of raising your benefit by suspending it at full retirement age and starting it up again at seventy at a thirty-two percent higher inflation adjusted level. So, anybody who’s listening right now who felt that they’d made a mistake in taking their Social Security benefits early, and if they’re below age eighty and above full retirement age, they do have the option right away to suspend the benefit, and for every year that they suspend it, the benefit will start up eight percent higher at seventy and when you start it up again.
Jim Lange: And by the way, that’s a relatively frequent recommendation that we make after running the numbers, even though the main book that we’re talking about is called Get What’s Yours: The Secret to Maxing Out Your Social Security, and again, the primary author, our guest, is Larry Kotlikoff, which I’m going to highly recommend. Larry wrote another book called Spend ‘til the End, and one of the points that I liked about that book is you were saying, “Holding off on Social Security doesn’t mean that you’re living like a pauper between sixty-two and seventy, but knowing that you’re going to get the higher benefit later on, you can actually afford to go into your portfolio and more or less spend what you would’ve received, potentially an argument for even more.” So, this isn’t a “be a Spartan” lifestyle now so you can live it up later. This is the idea of actually spending more money, not less. Is that fair?
Larry Kotlikoff: Absolutely, Jim, yes. That book in economics, entire approach, you know, I’m an economist, Professor at Boston University of economics, our approach is to try and get people the highest living standard on a sustainable basis. So, the goal is not to starve now and party when you’re ninety, nor is it to splurge now and starve when you’re ninety. The goal is to have a smooth ride, and that’s really what the ESPlanner software is about is trying to find the smoothest living standard passed to the household. And you’re absolutely right. If you have some resources on hand, or you can keep working, and then you do something to raise your income after age seventy, Social Security, that means you can afford to spend more before seventy. So, it can be a win-win situation. You can have a higher living standard now and also a higher living standard later.
Jim Lange: Well, I think that that’s a great point, and the other thing is, you talked about, you know, not necessarily getting nothing until seventy. So, let’s talk about what one of my favorite…in fact, I would even say it is my favorite Social Security strategy, and you explain it very well in the book and the application of it, but can we talk a little bit about apply and suspend? And maybe we’ll take the simple example when both husband and wife…so now, we’re getting into the area of spousal benefits. So, let’s take the simple example when husband and wife are both sixty-six years old, and let’s be sexist for a moment and assume that the husband had the higher earnings record, and let’s say they came in to see you and they (although I know that you actually don’t really do this as a service) looked at your software, or even read your book, what do you think is a likely positive outcome for a married husband and wife couple, husband with a stronger earnings record, both retired, and they are, or will be, sixty-six years old?
Larry Kotlikoff: So, the higher earner, the husband, by assumption, would suspend his benefit rate at sixty-six, which is currently the full retirement age. So, he goes in and says, “Look, I’d like to activate my benefit, but I want to suspend it immediately. So, I want to file and suspend.” And by doing that, he permits his wife to file just for a spousal benefit, and that avoids her taking her own retirement benefit and her spousal benefit at the same time, which they shall wipe that one because she’ll just get the larger of the two, basically. So, by doing this, she can collect a full spousal benefit, which will be fifty percent of the husband’s full retirement benefit, every year, year in and year out, through age seventy. So, that’s four years of a benefit. And then, she can file at seventy for her own retirement benefit, and if it’s larger than her spousal benefit, she’ll get that from that point on. The husband will restart his retirement benefit at seventy, and because he’s waited until seventy, if he passes away (and husbands typically pass away before wives because males die sooner than women), his entire check will go to her as a widow benefit, in other words, his age seventy check. So, the widow benefit, unlike the spousal benefit, is not based on your full retirement benefit, but it’s based on your actual benefit received. So, every year that he waits to collect his retirement benefit, he’s upping the amount of widow benefit that his wife can potentially get if he passes away before she does. He’s also, if he was married, let’s say, three times in the past to different women, or men if he’s a…well…
Jim Lange: We’ll get to that one.
Larry Kotlikoff: It would be possible that if he’d been married for ten years each to three women, all three of them would receive higher divorcee widow benefits when he passes away, and they can all collect spousal benefits on his record, as well. They can all wait until full retirement age and file just for a spousal benefit and collect full spousal benefits on his record.
Jim Lange: All right. Just so everybody understands this: so, let’s say you have two sixty-six-year old people, husband and wife, husband is applying for Social Security but suspending. So then, what’s happening is even though he’s not getting a check, his Social Security benefit is going up by eight percent per year between sixty-six and seventy, meaning when he eventually takes it at seventy, it’ll be thirty-two percent higher. His wife is actually taking half of what he would be entitled to at sixty-six, but here’s the beautiful thing about that: her benefit is continuing to grow, and the fact that she’s taking half of his doesn’t hurt her benefit. Again, the fact that she’s taking half of his doesn’t hurt his benefit. His benefit keeps growing, which is going to be a protection for her, and then if we have the bonus of a couple ex-spouses, that’s going to be even better for, let’s call it, the big family. But even forgetting the ex-spouses, this is enormously powerful.
Larry Kotlikoff: This is free money. So, the origins of this book is my co-author Paul Solman didn’t know about this, except for free spousal benefit, we’ll call it free spousal benefit, if you like, and I told him about this over tennis. This is what we describe in chapter one, and within two minutes, I made him $50,000. A few weeks later, I was having dinner with an economist from Brown University, Glen Mowry, a very bright guy. He knew nothing about widower benefits. His wife had passed away a couple years earlier, tragically. So, Paul was about to lose $50,000, leave that on the table. Glen was about to lose $120,000. So, I made Glen $120,000 in about two minutes. Both of these guys had to pay for dinner. My friend Dana, the other night, I made him $15,000. At sixty-eight, if you have some kids, you can get child benefits for them. It’s just on and on and on. It’s rare that we can’t do something for somebody, and the book lays all that out, and the software helps for difficult cases. But getting back to your point that these auxiliary benefits, the spousal benefit and the widow benefit, the divorcee spouse, the divorcee widow, these benefits can help you get by through age seventy, as well, financially. So, it’s very important, again, if you go to Social Security and say, “I’d like to do X, Y or Z,” you need to know what you’re asking for because you may be eligible for something and they won’t tell you about it. I’ll give you one clear example of Social Security’s mistakes. When Paul went, after I told him that he could go get a full spousal benefit, that his wife had to file and suspend (she was a little bit older) and that he should then go at full retirement age, do Social Security and ask Jess for a spousal benefit while deferring his own retirement benefit, he called them up on the phone to ask to do this and the lady, she was a very nice lady on the phone, she said, “No, you can’t do that. You can’t file just for your spousal benefit at this age.” And he said, “Yes, I can,” and she said, “No, you can’t.” And it went back and forth. Finally, she got a supervisor, and she came back to Paul and she said, “You’re right! You can, and I’m really happy you taught me this, and I’m going to tell all the future people that come and ask me how to do this.” That’s exactly what happened. That’s a real story.
Jim Lange: Well, anyway, people don’t necessarily have to buy you dinner, but at a lower cost than dinner, what they can do is the book Get What’s Yours: The Secret to Maxing Out Your Social Security, by Larry Kotlikoff. The accompanying software, which I’m going to recommend, is www.maximizemysocialsecurity.com. Larry’s traditional financial planning software, that has much more than Social Security, is www.esplanner.com, and then the new one that I just learned about, so I can’t really endorse it because I don’t know it. The other two, I really like. But the new one is www.fairdivorcedecisions.com, and that’s for people who are getting divorced.
Larry Kotlikoff: Divorce, if you’re married, if we go back to that sixty-six-year old couple, only one of them can get a full spousal benefit because of the technicalities and the rules. But if they were to get divorced, they could both collect…well, if they were to get divorced at sixty-four, they’d have to be divorced for two years, they can both then collect a divorcee spousal benefit on each other, assuming that they have been married for ten years before they divorced. So, divorcees have an advantage, and so there’s an advantage to get divorced and, at seventy, get remarried.
Jim Lange: So now, you’re talking about gaming the system, where you’re having two sixty-four-year olds get divorced so then at sixty-six, they could each claim a spousal benefit for each other, continue to get an eight percent raise on their money, and then, hopefully, by the way, get remarried at seventy. By the way, big problems if they die with an IRA, particularly with some of the IRA rules coming. But there are some really interesting things where you could take some of the information in your book and game the system. Maybe we’ll talk about one or two of those ways after our break.
Larry Kotlikoff: Yeah, I’m not much interested in games.
Jim Lange: Yeah, I know you’re not.
Larry Kotlikoff: I’m not really trying to game the system. I think the system needs to be frozen in place and changed overnight. I think the system is out of control, crazy complex. It’s a disgrace the way it is set up, and it’s underfinanced by thirty-three percent. It’s in worse shape than the Detroit pensions. I’m not for gaming the system. I’m for fixing the system, and I’ve tried for years to scream about how underfunded this is. One way, I think, to really make Congress pay attention is to explain all the crazy, wacky things that they’ve put in place over the years, and get their attention to fix this from scratch. You can’t take this cobweb of provisions, 300,000 rules, and fix it piecemeal. You need to really freeze the current system in place, pay off what you owe to people that have contributed, but then put a rational, simple system in place for the margin for workers.
Dan Weinberg: And welcome back to The Lange Money Hour, and we had a call during the break, a listener who did not want to go on the air, but did have a question for Jim Lange and for Dr. Laurence Kotlikoff, and here’s that question. He said, “If a person took Social Security early at age sixty-two and is now sixty-eight, is there anything that can be done to modify that now since you guys tonight are recommending waiting until seventy to take Social Security?”
Jim Lange: Do you want to take that one, Larry?
Larry Kotlikoff: Sure. He could suspend his benefit immediately and start it up at seventy at a sixteen percent higher level. So, every month, he will be opening a sixteen percent higher larger check for the rest of his life, and it could be through age one hundred. I’ll give you an example of somebody I know who’s sixty-eight who is in a different situation. He was just diagnosed with pancreatic cancer. I ran into him at a dinner party. He’s a terrific doctor here in Boston, and he told me that he had just recently gone into Social Security and asked them what to do, and they said, “Well, you need to take your benefit immediately because you’re about to pass away, so you’re just going to lose the money if you don’t. It’s important to take it.” Well, that was the wrong advice because he has a sixty-five-year old wife who didn’t earn much money, and if he takes his retirement benefit at sixty-eight, his wife’s widow benefit when he passes away, which will likely be about two years from now, will be sixteen percent smaller than it would otherwise be if he were to just wait and never collect even a penny, and he’d pass away at seventy and his wife is going to collect a sixteen percent higher check starting from sixty-seven through a hundred. That’s, like, thirty-three years of collecting a sixteen percent higher check. When I explained this to him, he instantly realized that he had made the wrong decision, and since he’d filed and he still had a year or two to undo his mistake, he went back and undid it. And so, this issue of when to…you know, even somebody who’s got a very short lifespan, a maximum lifespan, it may still be optimal to wait, or to suspend your benefit if you’ve already been taking it and start it up again. If this doctor had taken his benefits starting at sixty-two and he was sixty-eight, it would be optimal for him to suspend it at sixty-eight because his wife would get a sixteen percent higher check. She’ll be collecting his check, and his suspended check will be then increased in the form of the widow benefit by sixteen percent.
Jim Lange: Again, we are talking with Dr. Larry Kotlikoff, the author of Get What’s Yours: The Secret to Maxing Out Your Social Security, a book I highly recommend. He also has software at www.maximizemysocialsecurity.com. The software that I really like, which is Social Security and financial planning software, is www.esplanner.com, and then a new one that, frankly, I can’t endorse because I just didn’t know about it until yesterday, but knowing Larry, it’s probably terrific, is www.fairdivorcedecisions.com.
Larry Kotlikoff: I’ll mention this real quick, Jim, just what that does. It uses the ESPlanner software. We actually do the calculations for people so they don’t have to deal with software, and they just give us their information, and we just figure out the two living standards of each spouse under any given divorce agreement. And so, we get to show people, gee, if you go with this divorce agreement, the husband’s living standard will be here and the wife’s will be here, and then you can think about whether that’s fair or not. So, that’s all being planned as a service rather than a software program. We do the calculations for people.
Jim Lange: All right. Well, again, I can’t imagine that it wouldn’t be a smart thing for somebody going through a divorce, and I don’t know if divorce attorneys are saying, “Yeah, that’ll be great,” or “That’ll be miserable.” But one of the points that you brought up for your terminally ill doctor is that…and just in general, even forgetting terminal illness, that men do die sooner than women, and by taking Social Security at sixty-two, a man is not only dooming himself to a lower rate for the rest of his life, but he’s also, assuming he’s the primary earner, dooming his spouse to a lower standard of living for the rest of her life.
Larry Kotlikoff: And his ex-spouse and any children that may be collecting child survivor benefits on his record, and if you have a disabled child, or even young children, which is possible, they will collect less when he passes away.
Jim Lange: But isn’t this kind of a woman’s issue? Because let’s say, for discussion’s sake, that the woman is obviously interested, or should be interested, in not only his, but also her own financial security, and let’s say he just can’t wait and he just really wants to take it at sixty-two. Shouldn’t the wife, at this point, say “Wait! Hang on a second. This isn’t just about you. This is about us.” And isn’t this really a woman’s issue?
Larry Kotlikoff: Absolutely. It’s a joint decision. It’s even an ex-spouse’s issue, because their benefit is going to be affected by what the ex is going to do here, and so they should be aware that if they’re on some kind of decent terms with people, with their ex, they should have that conversation. “Look, you know, if you’re really indifferent to taking it now versus waiting, I’m not, because you’re going to hurt me…well, you know, also hurt yourself, but you’re going to hurt me too.” So, this is an interconnected decision making process here.
Jim Lange: And that ex-spouse might be the co-parent of your common child. The other advantage that we didn’t talk about (and I just have to slip it in because I can’t help myself), another advantage of some of the waiting strategies, holding off until seventy, even the apply and suspend strategy, is a lot of times…so, let’s assume that you are retired. You’re not yet seventy, so you don’t have income from your job or your wages, and I know you know what’s coming, Larry. You don’t have your minimum required distributions from your IRA, and we’re doing these holding off strategies for Social Security. You’re likely to be in the lowest tax bracket that you’ll ever be in for the rest of your life, and that’s the perfect time to make Roth IRA conversions. So, one of the little twists that I do in my Social Security workshop is I not only explain many of the important concepts that you’re talking about, but I also add in the synergy of holding off on Social Security and then doing Roth IRA conversions.
Larry Kotlikoff: Absolutely, yeah. This is another way to get a higher living standard, which is end up paying less taxes, and you’re absolutely right, Jim. Taking money out that’s taxable and paying the taxes when the rate is low, and then converting the money, rather than spending it, putting it into a Roth IRA, and then when you take the Roth money out later in life, after age seventy, the nice thing about that is it’s not going to trigger higher Social Security benefit taxes. It’s not going to trigger any additional Social Security benefits. It has no implications for Social Security benefit taxation, whereas withdrawals from a 401(k) or a regular IRA would. So, there’s really three advantages here. You optimize your Social Security, you be patient if that turns out to be an optimal strategy. You take your taxable retirement account withdrawals at a point where the tax rate is low, and then you are into Roths. You’re converting to Roths, where withdrawals from the Roth in the future don’t trigger higher Social Security benefit taxation.
Jim Lange: Yeah, and the other thing is if you do your Roth conversions while you’re taking Social Security, that will increase the taxation on your Social Security. So, you might think you’re in the fifteen percent bracket, but you might be closer to the forty percent bracket if you consider the fact that you’re bumping up your tax on Social Security.
Larry Kotlikoff: Right. Timing in life is everything, right?
Jim Lange: Well, it really is. Unfortunately, we only have just a few minutes left. Is there anything else that you wanted to tell our listeners, let’s say, within the next two minutes? You know, you have some great strategies on page 127 and 129, but there might be one other thing that you want to tell our listeners. And before I give you a chance to do that, I’ll say that people should be getting your book, Larry Kotlikoff’s book Get What’s Yours: The Secret to Maxing Out Your Social Security, the software, www.maximizingmysocialsecurity.com, the financial planning software that’s much more than Social Security, www.esplanner.com, and then a service for people going through a divorce that can be found at www.fairdivorcedecisions.com. Any parting words for our listeners, Larry?
Larry Kotlikoff: Well, I would say that it’s important for everybody to realize that they are different. What their neighbor does, what their parents did, what their brothers did, doesn’t mean it’s what you should do. Everybody’s in a different boat. The optimal strategy, if you’ve got a spouse who’s ten years younger, is different than if you have a spouse who’s two years older. So, in the book, in addition to putting across the general ideas here, we have separate chapters for people that are gay. We have a disability chapter, if you’re married, divorced, single, never married. So, it’s important to refer to this volume, and then refer to it again and again because some of this stuff needs to be repeated into your brain so you get it exactly right before you go off and do something. Social Security has many pitfalls. It’s got these traps, and we have a chapter called ‘Twenty-Five Gotchas’ where we lay out twenty-five big traps that Social Security lays for us in trying to get our benefits. And then, there’s another chapter called ‘Fifty Secrets.’ So, even if you just read those two chapters, it would be worth the price of the book.