Episode 127 – Enhanced Social Security Planning: Getting the Most Out of Your Social Security Benefits

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Enhanced Social Security Planning: Getting The Most of Your Social Security Benefits
James Lange, CPA/Attorney
Episode 127

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TOPICS COVERED:

  1. Show Subject Introduction:  Social Security Planning
  2. When to Apply for Social Security
  3. Taking Advantage of “Apply and Suspend”
  4. Taking Social Security Benefits on a Divorced Spouse
  5. How Much Money Are We Really Talking About?
  6. Suspending the Collection of Benefits After You’re Started Taking Them
  7. The Synergy Between Social Security and Roth IRA Conversions

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1. Show Subject Introduction:  Social Security Planning

David Bear:  Hello, and welcome to this edition of The Lange Money Hour, Where Smart Money Talks.  I’m David Bear, here in the KQV studios with James Lange, CPA/Attorney and author of three best-selling books, Retire Secure!, The Roth Revolution and now, Retire Secure! For Same-Sex Couples.  As you approach retirement decisions, the decisions you make about taking Social Security will have long-term consequences.  Every case is different, but making the right choices will greatly increase your financial security for you, your spouse and your heirs.  Today, Jim will share thoughts and techniques on how to make the most of Social Security, a subject far more complex than most people realize.  It’s sure to be an interesting and informative hour, and listeners, since our show is live, you can join the conversation.  Call the KQV studios at (412) 333-9385.  And with that, I’ll say hello, Jim.


2. When to Apply for Social Security

Jim Lange:  Thank you, David.  What I would like to talk about to start is when you should apply for Social Security, and I have some bad news for people because most people…let’s say that you’ve been working hard, you’re 62 years old, you’re retired.  Let’s keep it real simple for a moment, and let’s assume that you are single and you’re not worried about taking care of anybody other than yourself.  So, the issue then becomes, do you take it at age 62, or should you wait and have the benefit increase for every year that you wait, and then wait until your full retirement age, which is age 66, or wait even longer until you are 70, at which case there’s no point in waiting any longer because you’re not going to increase your benefit by waiting longer.  So, what you would do is, you would just start collecting at 70.  So, we could have all kinds of discussions about whether the government is going to fail, and whether Social Security’s going to be changed.  In fact, that’s actually one of the questions that I had for Larry because he is literally a world class economist.

But let’s, for the moment, put those issues aside and let’s look at the math of collecting at 62 versus 66 or 70, and not only looking at the math, but looking at what makes sense from a financial standpoint.  So, here’s the situation: let’s assume that you have two people.  They have identical earnings records, all right?  They’ve worked the exact number of years at the exact salary, and everything is the same.  And by the way, I am going to assume that these are people who were born between 1943 and 1954.  That’s the relevant group that we are talking about now.  So, the one person says, “Hey, you know, I don’t know if the government’s going to be here.  I’m not sure how long I’m going to live.  I want to make sure and collect my Social Security.”  So, they apply for and they start getting their Social Security benefits.

Now, to compare apples to apples, I think it would only be fair if we said okay, if we’re going to compare somebody taking it at 62 compared to somebody taking it at 70, then the issue is the only way you can do an apples to apples comparison is if you literally say instead of the person who’s taking it at 62 spending the money, in which case, there would be no way to do a legitimate apples to apples comparison, we have to say okay, what happens if the person taking it at 62, rather than spends the money, invests the money?  Then, we’re going to, over a period of time, compare his investment with the person who is waiting until, let’s take the two extremes, 62 and 70.  So, the person who’s taking it at 62, and let’s say that they’re getting $2,000 a month, or whatever they’re getting, and they’re saving that money.  And let’s assume, for discussion’s sake, that they’re earning 4% on that money.  And they continue to accumulate, and obviously, by the time they’re 70, they will have a fair amount of money.  But the person who waited until 70 will have nothing.  But when the person starts taking it at 70, that is, the person who waited, they’re going to get a substantial increase.  Between 62 and 66, not including cost of living, we’re going from a 75% benefit at what is considered full retirement age to a 100% benefit.  So, there’s a 25% increase.  Then, between 66 and 70, we get an 8% increase for every year that we wait plus cost of living.  So, we’re really talking about a huge difference in those amounts, and the cost of living difference becomes even more substantial.

So, what happens, eventually, the person who waited until 70 is going to catch up.  So, using a bunch of assumptions that I’m not going to bore you with, the answer is, the breakeven point is age 81.  That is, if the person who waited until 70 makes it to age 81, they will have as much money as the person who took early.  But here’s the other very important factor: they not only have tied the amount of money that they will have, but because they’re getting that additional income every month for the rest of their life, they are ensuring themselves of a much more fruitful retirement and a much more comfortable retirement.  In fact, over, maybe, 33 years, there might be an $800,000 difference.  And I would say that this might even be more important for people who don’t have one or two million dollars, and for whom Social Security is an important issue.  So, that is the starting point.

In this kind of analysis where the breakeven point is age 81, and let’s assume that my math is right, and let’s assume that you can challenge my assumptions and if you use a higher interest rate, then it’s going to take a little longer to break even, or a different rate, etc.  Larry Kotlikoff would say is, “Stop thinking like an actuary.  Start thinking like an economist.”  So, let’s say that the person who is taking the money early at 62, let’s say that they die at 70 or 75.  Yes, they will have more money, and yes, they can leave more money in their estate to their heirs, but they didn’t accomplish any true financial goal because they’re dead!  You don’t fear having to die for financial purposes.  If you die, you’re dead.  Your financial problems are over.  That isn’t the legitimate financial fear.  The legitimate financial fear is living too long, in which case, you run out of money or you don’t have sufficient income in your older age.  So, what Larry would say is “Think like an economist.  It’s not a win to die early and have more money for your heirs.”  And by the way, I think I’m going to show you if you are married, how you will have much more money for your heirs by holding off and doing a couple of the techniques that we’re going to talk about.

But I think it’s going to be really critical to understand you are, in effect, buying longevity insurance.  You are ensuring yourself of a higher income when you are older, and here’s the kicker: when you look at the math of it, the longevity insurance is at a tremendous bargain.  In other words, you couldn’t even touch this kind of rate with any kind of insurance company.  The United States government, in effect, is this insurance company and they’re giving you a great deal.  So, the first thing to think about, unless you really have a serious health problem, and you don’t have a spouse that you’re concerned about, is you’re probably better off waiting at least until 66, and sometimes until 70, in order to start collecting Social Security.  That’s probably the beginning stages.  All right, so, that’s the basics.

Now, let’s take it to the next step.  And this is even probably more important, and this is something that I think is critical in the event that you are married.  Let’s keep it simple.  Let’s say that you and your spouse are 62 years old.  Then, what happens is you say, “Okay, I’m going to collect Social Security.”  So, remember, you are dooming yourself to a smaller Social Security benefit for the rest of your life.  And let’s assume that you go along this way, and let’s assume that something unfortunate happens and you die when you’re 70.  Now, your spouse will be able to collect the higher of your benefit and his or her own benefit.  Let’s assume for the moment that the person who died had the higher earnings benefit.  In that case, what’s going to happen is the surviving spouse will get the benefit of the higher earner.  In the old days, that was inevitably the husband.  That’s changing.  But let’s say that you are one of these more traditional couples.  You take Social Security when you’re both 62.  The higher earner dies at age 70.  Then, the survivor is doomed to that lower Social Security for the rest of their life.  If, on the other hand, the higher earner had waited until age 70 and then died, then the surviving spouse is going to be entitled to a survival Social Security benefit of…and assuming that he waited at least until 66, of the same amount that the higher earner would’ve received.  And let’s say that she lives another 20-25 years, that can literally be the difference between her being in poverty, or him being in poverty, and being fine.

So, it is enormously important for the benefit of the surviving spouse, and we have actually had a number of IRA experts and Social Security experts on the show, and what I’m saying is basically not my own…although it is confirmed with our own numbers, but basically, what I’m saying was confirmed by Jane Bryant Quinn.  Jane Bryant Quinn actually looks at this as a woman’s issue.  She said that since the guy is likely to die first, it is an unselfish act of love for him to wait until later.  And we’re going to talk about the really fun techniques called apply and suspend later on, but the basics, before we get into some of the details, are, in general, it is better to wait because a) it will guarantee you, that is, the person with the higher earnings record, a higher income between either waiting until 66 or even until 70, for the rest of their life, and if they should die, it will guarantee the surviving spouse a higher income for the rest of his or her life.  And if you think like Larry Kotlikoff, like an economist, you don’t fear dying early because you’re dead, and the extra money that you got isn’t really of consequence, but what you are trying to do is make sure that you never run out of money.

David Bear:  All right.  Well, at that, let’s take our first break.

BREAK ONE

David Bear:  Hello, and welcome back to The Lange Money Hour with Jim Lange.  I’m David Bear, and Jim, we’ve been talking about Social Security, and actually, this week, we have a couple of questions that have been e-mailed in that I thought this would be an appropriate time to read the first one.

Jim Lange:  Okay, let’s hear it.

David Bear:  This is from Claude H.  He says, “Most discussions on Social Security center on sophisticated claiming strategies for married couples or divorced people.  Please discuss strategies available to the single population.  In my case, I’m a 63-year old single never married female with no children, currently unemployed professional worker seeking to return to work full-time, but nothing worthwhile has materialized yet.  I’m healthy and youthful, living the last four years on personal savings and about to exhaust these funds and move on either to IRA or 401(k) assets in lieu of Social Security, hopefully waiting to at least full retirement age at 66 before filing for Social Security, or if a job pans out before then, age 70.  Longevity mixed, mother’s side all of the family all died young, mom at 62, father in his late seventies, to eighties, dad died at 85, his youngest sister just celebrated her 90th birthday.  What should I do?”

Jim Lange:  Okay, Claude.  That’s a little bit of a tough question, but it actually addresses what we had talked about before.  The quote, some people would say, “Gee, the safe thing to do is just take your benefit.  You know, right now, you need it.  Nobody wants to go into their IRA and have to pay income taxes on money that you have to pull out to live when you could just take Social Security.”  And yes, that strategy might work out for you, frankly, if you die early, or if you die young.  But, like you said, you don’t have any kids.  I’m going to assume, if you have nieces and nephews, that that is not a high priority in your life, and that right now, we’re worried about making sure that you’re okay for the rest of your life.  So, here’s the answer that you probably don’t want to hear, and also to complete my recap of the question, let’s say uncertainty as to longevity, but it’s not like you have a deadly cancer or a terrible heart condition that you know darn well there’s no chance you’re going to make it to age 81.  The numbers that I had mentioned in the early half would basically say that the breakeven point is age 81 for you.  So, if you think there’s even a chance that you’re going to make it to age 81, I think the right thing to do is to hold off at least until 66, maybe even until 70, because remember, for every year that you go from 66 to 70, you’re going to get an 8% increase.  If you live to a ripe old age, waiting will have made a huge difference, I mean, literally hundreds of thousands of dollars, and if you don’t have a lot of money to start with, that difference could be enormous for you.  Yes, you are potentially hurting yourself if you die young.  And here’s why your case is a little bit tougher.  Because the only way that you could pay for your current expenses is you have to take money from your IRA.  That makes it a little bit worse.  It will be a little bit of an easier call if you had, what I’ll call, ‘after-tax’ dollars.  But for every dollar that you withdraw from your IRA, you’re also going to have a tax hit, which, in a way, would make it a little bit more comfortable to take the Social Security.  And, of course, the answer to all of these questions is yes, you should have somebody run the numbers.  But, from what I could tell, my own personal opinion at this point, if you can stand it, is actually to wait at least until 66, if not 70, and that way, you assure yourself that in the event that you do live a long life, that you will have sufficient income.

And see, my big thing as a planner, and this is probably even more important for people who don’t have a million dollars, and I know there’s a lot of listeners that don’t have a million dollars.  The big thing is not necessarily getting the highest return on your investment if you’re ready to roll the dice, or, you know, some kind of crazy financial product, or whatever it is.  The big things, let’s get back to basics, are a roof over head, food on table, gas in car, and a little money for Saturday night.  I want to see that no matter what.  The economy tanks, if almost anything happens, that, to me, is kind of like my bottom line minimum, and holding off on Social Security is much more likely to ensure that guaranteed income than taking it early.  So, anyway, I know you’re…I hope you’re out there listening, and I know that you can’t respond because this is an e-mail, but I hope that answers your question.

Okay.  Also, we have another question from Trevor, and Trevor, if you could call in, I would appreciate it because your question just isn’t clear enough for me to understand exactly what you are saying, and I’d be happy to take your question, but as is, the way you wrote it, it was a little bit confusing to me.  So, if you could call in, we would be happy to…and by the way, I’ll also mention, and particularly since our guest doesn’t look like he’s going to show, you can call in at…David, what’s the number for people to call in?

David Bear:  It’s (412) 333-9385.


3. Taking Advantage of “Apply and Suspend”

Jim Lange:  Okay.  So, I’m going to go back to what I was talking about before.  So, what we had established is, in general, it’s better to wait, and we talked about the spousal survival benefit being equal to the benefit of the higher of the two Social Security benefits.

Now, I want to talk about…now, the survivor…not the survivor benefit, but the spousal benefit, in the event that you are…let’s say you’re married, and let’s go back to our original example where you are both 62, and you decide you’re at least going to both hold off until 66, and let’s use the old paradigm, which I think is changing, but the old paradigm is the husband made more money, has a stronger earnings record, and because he held off between 62 and 66, the benefit keeps rising.  So, what do I want the husband, and I don’t mean to be sexist here, if the wife has the stronger earning record, it would be the wife, but what do I want the person with the strongest earnings record to do if they are married and they are, let’s say, 66, and let’s keep the example simple and assume that their spouse is also 66.  I want them to use a technique called “apply and suspend.”  And what “apply and suspend” is is that when you apply for Social Security, but you tell them not to send it to you.  Now, what good does that do?  What’s the difference between doing apply and suspend and just doing nothing?  Because if you do nothing, you’re not going to get it.  If you apply for Social Security and then you say, “Don’t send it to me,” you’re not going to get it.  So, what’s the difference between apply and suspend and doing nothing?  Well, if you apply and suspend, that means your spouse is entitled to a spousal benefit, and that spousal benefit will be one-half of what your benefit would have been.

So, let’s just say, for discussion’s sake, that your benefit at age 66 is, let’s say, $3,000 a month, or $2,000 a month.  It doesn’t really matter for our purposes.  Let’s just say $3,000 a month, all right?  In that case, what you could do is, you could say, “I’m going to hold off collecting myself.  I’m going to apply and suspend.  Now, my spouse can apply for a spousal benefit,” and she would get one-half of what you would get.  So, if you were going to get $36,000, she would get $18,000 a year as a spousal benefit, or if we do it per month, $1,500 a year, as a spousal benefit.

Here’s the really cool part about this: if you apply for Social Security and suspend, and your spouse collects on your record, and again, they could get a lot of money per month every month, what we could do is, your benefit continues to grow until you turn 70 as if you had never taken a nickel.  All right?  Do you understand the power of this?  So, your benefit grows.  Your spouse is collecting half of what you collected, but your benefits continue to grow, and at 70, you will get the same amount as if nobody had taken a nickel.

Now, here’s the other beauty about this: your spouse, when she is 70, can make the decision, “Oh, that’s okay.  I can either continue taking the spousal benefit, which is half of what my husband was making, or my benefit, which has increased every year between 66 and 70,” because the fact that she took on the husband’s benefit doesn’t hurt her benefit.  Her benefit continues to rise at 8%.  Then she gets to collect the higher of the spousal benefit, which, again, is half, assuming the husband is still living, or her own.  So, that is a technique that has been enormously helpful.

Okay, we do have Trevor on the line.  So, thank you for calling, Trevor, and why don’t we take your call?  But I do want everybody to understand that technique of apply and suspend.  Now, to be fair, I used the easiest example when they were each the same age because it gets a little trickier if you’re not the same age.  But that is an enormously valuable strategy that can often lead to hundreds of thousands of dollars of additional wealth for the family over time.

Okay, Trevor, why don’t you ask your question on the radio, and we’ll see if we can help you out.

Trevor:  Okay.  Hello, Jim.  I’m 62.

Jim Lange:  All right.

Trevor:  My wife is 65 in September.

Jim Lange:  All righty.

Trevor:  And she has never worked.

Jim Lange:  All right.

Trevor:  So, I was told that she has to…my first question is, can she apply for Medicare at 65 in September?

Jim Lange:  Well, I’m not a Medicare expert…

Trevor:  Okay.

Jim Lange:  …but I don’t see any particular reason why she couldn’t.  I mean, she would’ve hit the age for Medicare, and that’s obviously a health benefit, and that wouldn’t have, I don’t think, anything to do with your work record.  But, to be fair, I’m answering as a non-expert.  I know a lot more about Social Security than I do about Medicare.  So, if you would, don’t ask me another Medicare question, because I don’t want to do another answer off the top of my head where I could be wrong.

Trevor:  All right.  My other question is, should I wait until at least 66, at which time, she’ll be, like, 69, to collect Social Security?

Jim Lange:  All right.  Waiting until 66 would probably be a very interesting idea.  What I am thinking about, there is another strategy…all right, so, she never worked, and are you still working or are you retired now?

Trevor:  I’m retired now.

Jim Lange:  You’re retired now.  All right.

Trevor:  I retired last year.

Jim Lange:  All right.  This is what I would say off the top of my head: if you wait until 66, she will be 69, and what might work out is if you apply and suspend, and then she collects a spousal benefit based on your record for just one year.  All right?  Until she is 70.  Actually, it might make sense for her to apply for a spousal benefit, not just for one year, but from the time that you are 66 to age 70.  If you had the resources that you could hold out until age 70, and again, by the way, the answer to a lot of these individual questions is you have to run the numbers, but off the top of my head,  I kind of like the idea of you holding off until 70, building up that benefit for yourself, so if either one of you lives a long time, you would be able to enjoy a higher income and get that base that I was talking about of food on table, shelter over head, gas in car, a little money for Saturday night.  Now, if one or both of you had a serious health condition, that might be something else.  Or if you literally don’t have the money, you just can’t make it, not even a matter of…

Trevor:  Right.

Jim Lange:  …going into your IRA.  You just can’t make it.  I’m not going to tell somebody to live on the street because they can get more money when they’re 70 or 75 or 80.  But, in almost all cases, the kind of people that would listen to this show and actually care, probably have enough money that somehow they could scrape by.  So, off the top of my head, I would probably say that it probably makes sense for you to hold off until 66, and then do apply and suspend.  Your wife could collect until you’re 70.  Actually, she would then collect half of what your benefit is for the rest of her life.  You would collect your full benefit at age 70, and then what would happen is, if one of you died, the survivor would get the higher benefit, and by holding off, it will be considerably higher than if you took it at age 62, or even 63 where you are now.

Trevor:  Now, if I claim the benefits now at 62…

Jim Lange:  Right.

Trevor:  …when she gets to 66, if she claims next September when she’s 66, I’ll be, like, 63 in a few months.  Can I do that and suspend?

Jim Lange:  Well, there’s actually an expert in our firm that knows these nuances, but let me tell you the conclusion without telling you the technical reason why.  If you take it before 66, spousal benefits are going to be dramatically reduced, and I would really urge you to wait at least until 66 in order to start taking.  If you start taking early, you’re dooming yourself, the spousal benefit goes way down, that is, it won’t be half of yours, it’ll be less than half because I believe it is half at full retirement age, and there is what’s called an actuarial reduction if she takes it before you turn 66.  That is, she applies for a spousal benefit.  So, I’m going to say to wait until age 66 before you either file and suspend, or just file.

Trevor:  When she turns 66, she’ll get half of whatever.

Jim Lange:  No, see, that’s the problem.  She doesn’t get half of what you get because you didn’t wait until 66.  There is an actuarial reduction if you try to take a spousal benefit.  And it gets really tricky, but there are two situations: one, if you take it before 66, which is a problem, and two, if you are older than her and she took it before she turned 66.  So, I don’t think anything else I’m going to say is going to be all that helpful, and again, I’d like to know the nuances of why I want you to wait until 66, but of that, I am very confident that you should wait at least until 66.

Trevor:  Okay.

Jim Lange:  Okay?  Thank you so much for your question.

Trevor:  Thank you very much.  Okay, thank you.

Jim Lange:  Okay.  So, what I had just finished is, I was talking about what is known as the apply and suspend technique.  By the way, I’ll also tell you, one of my favorite areas to review when I do this in workshops, and by the way, I do have a two-hour workshop on Social Security.  That’s not the one coming up, is it?

David Bear:  No.


4. Taking Social Security Benefits on a Divorced Spouse

Jim Lange:  No.  But it is on the website.  We do have different workshops, and we change the subject.  So, we’ll do one on Roth IRAs and one on irregular IRAs and then one on Social Security and one on low-cost indexing, one on trusts and estates and one on just estate planning, etc., etc.  But one of my favorite things is to take a benefit on a divorced spouse.  So, let’s say, for discussion’s sake, that you are divorced and you were married for more than ten years.  You would actually be entitled to a spousal benefit even if you’re not married.  And then, to have more fun, you can have more than one spouse claim on the same earner’s record.

So, theoretically, let’s say somebody had a job at 20.  They got married and had a job at 20, and then they got divorced at 30, and then they kept the job and then they married somebody else, and then they divorced and married somebody else at 40 and then again at 50 and then again at 60 and then again at 70, you could have all those divorced spouses collect a spousal benefit on that person.  And one of the things that happened, I’ll never forget this, I was in a workshop and I was explaining this, and a woman just…she didn’t raise her hand or anything.  She finally said, “Now, the no-good SOB is finally good for something!”  And the other benefit about divorces and divorce benefits is you don’t even have to contact your ex-spouse, and your ex-spouse isn’t even alerted to the fact that you are taking a benefit on their record.  So, that is a very fun thing, and what we have often done is we take a divorce benefit, we hold off on taking your…so, let’s say you’re a single woman and you are taking a benefit on your divorced spouse, but you have an earnings record yourself.  By not taking your own earnings record, your earnings record actually continues to increase, even though you are taking a benefit based on your divorced spouse’s record.  Or sometimes, you could do the same thing with a deceased spouse’s.  That is, you can take money on a deceased spouse’s record, and you can continue to grow your own benefit.  So, this is a very cool thing.

So, survivor benefits, divorce benefits, spousal benefits, these are all really important things.

David Bear:  All right, well, this is a good time to take another break.

BREAK TWO

David Bear:  And welcome back to The Lange Money Hour.  I’m David Bear, here in the KQV studios with Jim Lange.  Before we go back to the show, I’d like to remind our audience of a valuable resource.  Every single edition of The Lange Money Hour, 115 now to date, have been recorded and transcribed and are available in the archives at www.paytaxeslater.com.  Just go to the website, click on ‘Listen on Demand,’ and choose the show that interests you most.  We’ve had a lot of wonderful guests and a lot of informative information, and you can either listen to the show or read the transcript, and Jim’s attempted to make the shows more accessible by introducing titles, subheads, tables of contents and all of that.  And the other thing I want to remind listeners who prefer to listen live, the show streams live on KQV.com, and the sound quality is crystal clear, so Jim?

Jim Lange:  Okay, so that’s two websites.  If you wanted to listen to it live and wanted a little bit of a really crystal clear sound quality, that’s www.kqv.com, and if you are interested in the archives, and I think that we have the best IRA and financial information available anywhere at any price.  We’ve had all the top IRA experts on the show.  There’s one guy out there who just wrote a book, and I’m trying to get him on the show.  We kind of collect IRA experts on this show!  And if you are interested, we would really encourage you to go to the archives, listen to some of those shows, we’ve tried to do a table of contents, both by subject matter and by guest.  We’ve had some terrific people on.  We’ve had John Bogle and Ed Slott and Jane Bryant Quinn and Bob Keebler, and I could just go on and on.  And the website there is www.paytaxeslater.com.

And then one other little piece of information before we get back to the news: I would like to publicly thank KQV news anchor Dan Weinberg, who is sitting here right now with a very sheepish smile, who has produced virtually all of our 115 shows.  I don’t know if you’ve noticed, but the shows have really basically gone off without a hitch.  We’ve had listeners.  We’ve done this from the studio.  Sound levels are fine.  We’ve had guests that have spoken at different levels, and David and I speak at different sound levels, and all of this is just…we don’t even think about it because Dan has just been doing this.  He is one of the literally unsung heroes of KQV radio history for the last 17 years, and this week, this Friday, is his last day, which means this will be his last show, and we certainly wish him all the best in his future, both personally, and I know his family, and he’s from a family of wonderful people, and in his career.

Dan Weinberg:  Well, thank you very much, Jim.  I appreciate it.  It’s been fun doing the show.


5. How Much Money Are We Really Talking About?

Jim Lange:  Okay.  So, you might say, “Well, gee, Jim, this married, and this apply and suspend, that sounds kind of great, but maybe how much money are we really talking about?”  So, again, I’m not going to bore you with all of the statistics because we’re going to be running out of time, and I usually prefer to go for the concepts, and for the engineers and for the people who really want to see the numbers behind it, we actually have that for you.  But the analysis that we just finished doing, and by the way, we did an analysis for the book Retire Secure! For Same-Sex Couples, and basically, the emphasis of the book was that same-sex couples should get married for financial purposes, and collecting spousal benefits for Social Security was one of the big deals.  And that’s equally applicable to unmarried couples.  That is, they should consider getting married for financial purposes.

But in one scenario, where we had two people, and one didn’t use apply and suspend, and the other did, after a bunch of assumptions, between age 62 and 92, the people that took the money at 62 and didn’t apply and suspend ran out of money.  The people who did hold off on Social Security, and they did utilize the apply and suspend technique, not only did they not run out of money, but they had $2 million at age 92.  So, there’s a $2 million difference between, let’s say, two different Social Security strategies.  And in addition to the $2 million, if they live beyond age 92, they still continue to get a very high income, where the people that run out of money, yes, their Social Security will continue, but at a very meager level.

So, let’s say that Trevor (who had called earlier) decides to take his Social Security at 63, and let’s say that he lives until age 93.  The difference in his situation could just be enormous.  Hundreds of thousands of dollars, depending on his work record, and maybe even over a million.

6.  Suspending the Collection of Benefits After You’re Started Taking Them
David Bear:  Well, here’s a question that several people I’ve heard ask about: if you do take Social Security prior to full retirement age because you need to do it, you don’t have work, and then, all of a sudden, you do get work.  What happens then?  Can you suspend payments at that point?

Jim Lange:  Yeah.  The law has changed with that, and the question is, can you, in effect, stop taking your benefit?  And yes, you can, and frankly, a lot of times, we have clients that have come in who have already started taking their benefits.  We have shown them the wisdom of not taking it.  Now, part of the damage has been done.  So, you will still never get as much as you would have had you waited.  And the other change in the law, that I think happened in 2011 or 2012, is that under the new law, you can’t give the benefits that you’ve already received back.  So, we used to have a lot of fun returning the benefits that you collected.  So, let’s say you collected starting at age 62, and then, let’s say, you met me at age 66 and I said, “Hey, you know what will be really cool?  Why don’t you give these benefits back?”  And let’s just say, for discussion’s sake, it was $25,000 a year.  So, you write a check back to the IRS for $100,000, which I know sounds really miserable.  But here’s what was really interesting then: if you wrote them a check for $100,000, and since you had had to pay tax on that Social Security when you got it, you would get a tax deduction for the $100,000 that you gave back.  Now, very few people who are retired at that point have the income to, in effect, benefit from a $100,000 tax deduction.  So, then what we used to do is we would do a Roth IRA conversion the same year that you gave it back.  So, that was a lot of fun, but the IRS closed that, which wasn’t as much fun for me!


6. Suspending the Collection of Benefits After You’re Started Taking Them

David Bear:  Well, here’s a question that several people I’ve heard ask about: if you do take Social Security prior to full retirement age because you need to do it, you don’t have work, and then, all of a sudden, you do get work.  What happens then?  Can you suspend payments at that point?

Jim Lange:  Yeah.  The law has changed with that, and the question is, can you, in effect, stop taking your benefit?  And yes, you can, and frankly, a lot of times, we have clients that have come in who have already started taking their benefits.  We have shown them the wisdom of not taking it.  Now, part of the damage has been done.  So, you will still never get as much as you would have had you waited.  And the other change in the law, that I think happened in 2011 or 2012, is that under the new law, you can’t give the benefits that you’ve already received back.  So, we used to have a lot of fun returning the benefits that you collected.  So, let’s say you collected starting at age 62, and then, let’s say, you met me at age 66 and I said, “Hey, you know what will be really cool?  Why don’t you give these benefits back?”  And let’s just say, for discussion’s sake, it was $25,000 a year.  So, you write a check back to the IRS for $100,000, which I know sounds really miserable.  But here’s what was really interesting then: if you wrote them a check for $100,000, and since you had had to pay tax on that Social Security when you got it, you would get a tax deduction for the $100,000 that you gave back.  Now, very few people who are retired at that point have the income to, in effect, benefit from a $100,000 tax deduction.  So, then what we used to do is we would do a Roth IRA conversion the same year that you gave it back.  So, that was a lot of fun, but the IRS closed that, which wasn’t as much fun for me!


7. The Synergy Between Social Security and Roth IRA Conversions

But that actually leads to the final topic of the day, and that is the synergy between Social Security and Roth IRA conversions.  Now, if you go back to what I wanted people to do in my simple example when they’re each 62 years old, and I want them to hold off until 66, and then, at 66, do the apply and suspend technique where the stronger earner applies for Social Security but suspends benefits, then the spouse files for a spousal benefit and gets half of what the higher earner spouse would get, and then their benefits continue to increase until age 70.  If you think about that, what you have done is you have reduced income from the years…let’s just say you’re comparing it between 66 and 70.  You have reduced income between 66 and 70.  Now, at this point, think about it: you’re not working, so you don’t have income from wages or your job or self-employment, for discussion’s sake, you are not yet 70, so you don’t have minimum required distributions from your IRA, so you’re really in a pretty low income bracket.  If you are holding off on Social Security, the other benefit of that is you don’t have that income for Social Security that you would potentially pay tax on, or would increase your income.  So, that becomes the ideal year to make Roth conversions.  I know a lot of you were just waiting for that, particularly those of you who know me, and you know I’m a big fan…I have this reputation of being a Roth IRA conversion fan.  I would prefer the reputation of the way I look at myself, which is a guy who likes to run the numbers, and then recommend the best course based on the numbers and what’s going on with the family.  But the result of that analysis is usually doing Roth IRA conversions.  And my favorite years to do Roth IRA conversions are the years between when you are retired and you no longer have income from your job or wages, and age 70, when you start your minimum required distribution from your IRA, because you’ll be in a lower tax bracket.  I would maintain that there is a synergy of the combination of doing the apply and suspend Social Security technique and the Roth IRA conversions.

So, let’s use a kind of a simplistic strategy.  Let’s say that you say, “Okay, I’m going to make Roth IRA conversions up until the top of the 25% bracket.”  All right?  And then, you compare that to, let’s say, taking Social Security early and making Roth IRA conversions to the top of the 15% bracket.  The difference, literally, is hundreds of thousands of dollars.  Now, the Roth IRA, if you remember, has no minimum required distribution for you.  It has no minimum required distribution for your spouse.  And then, even if you and your spouse die and you leave your Roth IRA to, let’s say, children or, better yet, grandchildren, they will have a minimum required distribution of the inherited Roth IRA, but that will be income tax-free.  So, the numbers that work out are that you, yourself, depending on the assumptions, are better off by $219,000 in today’s dollars using that.  And, if you then die and leave that to your kids, your kids will be better off by over $500,000 in today’s dollars.

There’re so many things that could be done, and we love to do these strategies.  We like to run the numbers.  This audience, I can’t see you, but I very much appreciate your patience.  Usually, we have more back and forth, and I apologize for that, but our guest was detained.  So, I was just kind of winging it for this program.  But these strategies for Social Security and Roth IRA conversions can change people’s lives, and when you add in low-cost indexes and the ideal estate plan, I think you’re really making a huge difference, and I’d encourage you to go to the workshop that was mentioned earlier, which is coming up…

David Bear:  On July 27th.

David Bear:  At the Pittsburgh Golf Club in Squirrel Hill.

David Bear:  Well, this is the place where we’re going to say good night, and I wanted in addition to thanking Dan Weinberg again, this is his final show, I also wanted to thank Lange Financial Group program coordinator, Amanda Cassady-Schweinsberg.  As always, you can hear an encore broadcast of this show at 9:05 this Sunday morning, here on KQV, and as we mentioned before, you can always access the audio archive of all 115 past programs, including written transcripts, on the Lange Financial Group website, www.paytaxeslater.com.  Finally, mark your calendar for Wednesday, July 16th at 7:05 and our next new show when our special guest will be Pittsburgh Mayor William Peduto.

END

 

 

jim_photo_smJames Lange, CPA

Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans.  Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.

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