The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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- Show Introduction: Social Security Law Changes
- The Social Security Basics
- Apply and Suspend
- Claim now, Claim More Later
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.
1. Show Introduction: Social Security Law Changes
Dan Weinberg: And welcome to The Lange Money Hour. I’m Dan Weinberg, along with CPA and attorney Jim Lange. Tonight, we will be talking about some late breaking Social Security changes that could be devastating to investors. With virtually no warning, Congress is likely to eliminate Jim’s two favorite Social Security strategies: apply and suspend and claim now claim more later, which can account for additional benefits of tens to hundreds of thousands of dollars over a life time for married couples. Tonight, Jim is going to tell you how you can be grandfathered into avoid those losses. Now, this is a crucial topic and it is time sensitive. Those who want to take advantage of these rules will have to act by May of 2016 and right now Jim is going to run down exactly what’s happening and what you need to do to protect yourself
Jim Lange: Thanks Dan. This is actually a sad day for people in their 60’s who were planning to maximize their Social Security strategies. I have been giving Social Security workshops for the last several years because I realized that there is, if you will, a lot of strategy of play in the joints in determining how much, when and in what manner to collect your Social Security. So anyway, with virtually no warning, Congress passed and President Obama signed something that is called the Bipartisan Budget Act of 2015 and what it effectively did was eliminate two of my favorite Social Security maximization strategies.
The first thing that it killed was the apply and suspend technique. One of the things I do in my workshops is show how many married couples can be sometimes hundreds of thousands of dollars, even more than a million dollars better off by using the apply and suspend technique and they are effectively eliminating it. Now, it is really important to know who they are eliminating it for. They are not eliminating it for people who are already in process. So I have been advocating these techniques, including the apply and suspend technique, for years now and the question I always got was, “Gee, if they change the rules on Social Security, will I be much worse off because I did this?” And I, without perfect knowledge, would say, “Gee, you could be, but I don’t think so. I think more likely they will grandfather people who are already utilizing the apply and suspend technique.” So the first good piece of news is, that if you are currently utilizing the apply and suspend technique, you will be grandfathered. Now, people who are not currently utilizing the apply and suspend technique or the collect now, collect later technique, if you are sleeping and don’t do anything until May 1st 2016, you are going to forever lose that opportunity.
Here is the tremendous opportunity and why I have actually kind of taken over this radio show, when I had originally planned to talk to Mary Hunt about women because it is so critical that you do take the appropriate action. So if you fall into the category of people who could benefit from either of the two techniques we are talking about and you take action between now and May 1st, 2016, you could very well be grandfathered and that could save, again, hundreds of thousands of dollars and potentially more. So that is what I really want to come out and talk about. I am going to do my best in the relatively short remaining time that we have.
What I am doing is I am going to add a workshop, not this Saturday but on the following Saturday, which is November 14th. On November 14th, I actually have a full day of workshops planned in Squirrel Hill at the Pittsburgh Golf Club. We are starting in the morning with Roth IRA conversions, and then we are doing trusts, and then we are doing a section on indexing. I sent out that invitation and I promised that was what I was going to do and I am going to keep doing that. But this is so important, and it is so timely, that I am actually going to add another two hour workshop and if you like, you can just come to that one, which is going to start at four o’clock. That’s in Squirrel Hill at the Pittsburgh Golf Club. If you are interested, please call 412-521-2732, again that is 412-521-2732. I will spend two hours talking about what the old law is, what the new law is, and what you can do to take advantage of it.
So, with not enough time to properly explain this, I am still going to try and go through some of the Social Security basics and talk about what apply and suspend is. And, again, for those people who would benefit from this strategy, and there are probably millions of you out there, if you have not already taken advantage of it, using the apply and suspend technique, and you will be 62 or older May 1st 2016, this is really a tremendous opportunity to take advantage of one of two techniques. If you don’t take advantage of it by then, you lose it forever. And if neither you nor your husband is yet 62 or will be 62 in 2016, you are, and I don’t want to use a bad word, you are not going to get the advantage that you might if you were just a few years older.
So anyway, very important, if you are of that age, if you will be 62, between 62 and 70 and you are married. And by the way this law is also going to affect people who are divorced. The prior law was going to be much more favorable for divorcees. You have to learn what the law was, learn what the law will be and if you are part of that group that will benefit by taking action between now and May 1st 2016, you could literally change your financial future.
Jim Lange: Why don’t we go back, after that scary introduction, and talk about a couple of basic concepts of Social Security, how apply and suspend works, who it will be good for, and looking for those people who have not already utilized apply and suspend but could benefit. By the way, the changes really apply to married people, divorced people, and survivors of a marriage, either by divorce or death. It does not apply to people who are single and don’t have children or don’t have a spouse.
As a background, let’s talk about what the basic premises of Social Security strategies are, which is, in general, comparing two people who have identical earnings records. Let’s say that you started working when you were 22 or 32 or whatever it is and you have 30 years in or 35 years in and you have a certain amount of money that you earned each year and, presumably, Social Security is keeping track of that, although, frankly I would double check. You could, under the old and new law, apply for Social Security at age 62 and then you would get a certain benefit, you would get cost of living raises every year, presumably, and that pattern could potentially continue the rest of your life. This is assuming that you reach 62 and you are very anxious to collect Social Security. It is almost never the right thing, for single people or for people who are married and thinking in the long run to start collecting Social Security at age 62. Why? Because you are really hurting yourself. You are only getting 75% of the benefit that you would get if you waited until you were age 66. And if you run that out over a period, what would happen is, if you live longer than age 84, you would end up being much better off if you had waited until age 66. Now the other thing that you could do is you could actually wait beyond age 66, until age 70 and for every year that you wait from age 66 to age 70, you get another 8% bonus. So if you take it at age 62 you get 75% as much you would get at , the technical term is, your full retirement age or age 66. Or, if you actually waited until age 70, instead of getting 100%, you would get 132%. So, the comparison between age 62 and age 70 is 75% of your core benefits or 132% of your core benefits. And then, again, the math on it says that if you are comparing apples to apples, and theoretically you were not taking money from your portfolio, there is “break-even” period. That is, if you are collecting money now, you are going to have more money than if you are not collecting anything, but if at a certain point, say 66 or 70, you’re collecting more, you are eventually going to catch up to the person who is collecting a smaller amount, but started earlier. When is that quote break-even point? Well depending on the assumptions that you use, and we could talk about that for a long time, but let’s keep it simple, that break-even point might be age 84.
So let’s say, that you say, “Gee, I don’t know how long I’m going to live. You know, I have a little high cholesterol, I’m a couple pounds overweight, I’m 62 now, am I going to make it to age 84? Well maybe, but I kind of want the money.” If you are in that indecisive area, by the way, I will tell you the much easier calls. You are healthy as a horse, you jog over to your parents’ house and they are 95 years old and you go run after you meditate and drink your wheat grass juice, etc., and you think you are going to live a long time, that is a pretty easy call. That is you wait till 70. Or the doctor says, “Hey, bad news, you have cancer, you should take care of your affairs.” Then, maybe it makes sense to start collecting at 62. Again, I am using single people. If you are somewhere in between and you are not sure, what a lot of people do in that situation is they say, “Well I just want to take it, I want to make sure that I get it.” But then I don’t think you are thinking about it the right way. I think the right way to think about it is what should you be afraid of, financially, for the purpose of your Social Security decision? If you die young, you’re dead, game’s over. It does not matter. You should not fear dying young because you won’t have any financial problems if you die young. What you should fear is living a long time and not having enough money to support your life style.
So one of the things that you are doing, when you are holding off on Social Security, is you are, in effect, buying longevity insurance. That is if you live a long time, you will get a higher income. And when you work the numbers in the terms of it being a good deal for the longevity insurance, I will say this, it is a much better deal than any insurance company will give you. There are actually products that you can buy, well they don’t call them longevity insurance, but that is, in effect, what it is. So let’s say, for discussion’s sake, you plunk down $100,000 when you are 65 years old and if you die anywhere before age 65 and 85 years old, you and your estate get nothing. But if you make it to age 85, you get $100,000 a year for the rest of your life. By the way, don’t quote me on that. That is the idea but that’s probably not all that far from reality. Well, if you work out implicit interest rates and actuarial rates and etc., you are going to find that is a much worse deal. Even if you go to ten insurance companies and get 10 quotes and get the best quote there is, it is still going to be a much worse deal than holding off on Social Security.
Jim Lange: So, one of the things I really like to do is hold off on Social Security. Let’s say that is the base. Now let’s talk about if you are married and this is really where the new law is going to take effect. If you are married, there is something called a spousal benefit. So let’s take any easy case. Let’s say that John is entitled to $2,000 a month when he is age 66 and let’s say his wife, Jane, is entitled to $800. So if they both start taking it at age 66, they would get $2,800. First of all, it would be really silly for Jane, at least under the existing law, to collect an $800 benefit when what we could do is, we could either have John apply and accept his $2,000 a month or, John could apply and suspend. This is my real favorite strategy that Congress and President Obama basically just killed, with the exception of if you take advantage of that window between now and May 1st 2016, if you qualify and it is advantageous. This is how it works. John could apply for Social Security but not collect it. So, in other words, he fills out the application and says, “Yes, I am interested in my Social Security, but don’t pay me yet.” That way he gets his 8% raises that I had alluded to earlier, every year. So, by the time he is 70, he will have a very substantial increase, literally a 32% plus cost of living over and above what he would have if he was 66. And under the existing law, Jane who would otherwise be entitled to an $800 benefit, could take what is called a spousal benefit, which would be half of what John’s was when he was 66. So, basically, you could have Jane take $1,000 a month, and here is the beauty in this, the fact that she is collecting a $1,000 a month on his record does not reduce the 8% raises that he gets. Here is the other thing, she was entitled to $800 a month before, and the fact that she is taking a spousal benefit on his record does not even hurt her in terms of what her future benefit will be. That is, she will still continue to get 8% raises on her primary amount, which we said was $800, then when she is 70, she can compare which one is more: half of John’s when he was 66 or her own with all those raises.
Depending on what numbers you use, we sometimes find that couples are literally hundreds of thousands of dollars better off. This technique is called apply and suspend because what is happening here is John is applying for Social Security, but he is not actually collecting it. By applying and suspending, what that does is that enables his wife, Jane to collect the spousal benefit. If he just sat there when he was 66 and didn’t apply and suspend, she would not be entitled to a spousal benefit.
So, here is the essence of the change in the law. The essence is, and let’s say we miss the grandfather day of May 1, the essence is in order for Jane to collect a spousal benefit, John will actually have to be collecting his own benefit. So, very simplistically, let’s say using that $2,000 a month or $24,000 a year, half of that is $12,000. If Jane does that for 4 years, right there, that is $48,000 that the couple is better off, that she will not be able to do if you don’t take the appropriate action by May 1st 2016. That is immediate and that doesn’t include some of the raises that John and Jane would get. So this is really some critical stuff and when we come back from the break we will talk about another technique but here is the lesson: if you haven’t figured out the Social Security Strategies or you have figured them out but you are not yet taking them because you are waiting or you are too young, you are not going to have an opportunity to take up spousal benefits for Social Security using the apply and suspend technique unless you actually utilize the technique before May 1st 2016. That is why we are having this emergency added Social Security program and why we are going so in-depth on this. That will be is on November 14th at the Pittsburgh Golf Club in Squirrel Hill. That will literally be after a full day of workshops, but I am going to plug on and we are going to do it from 4 o’clock to 6 o’clock and if you are interested in attending, which for the people that are affected, I highly recommend, I would recommend calling 412-521-2732. That is 412-521-2732. I am actually expecting that to fill because most of the people who were already planning to attend, I think are going to want to stay and I think we are going to get a lot of response, not just from the radio but other communications that are office is sending out.
So you might be thinking, “Well, ok it’s not going to be that big a difference and I am kind of busy and I don’t really want to bother with this,” but before I go to the claim now, claim more later technique, I do have a peer reviewed chart in front of me. What it is comparing is a couple in 2 variations. Variation one: both members of the couple start collecting social security at age 62. Then given certain assumptions on interest rates and spending etc., they run out of money during their lifetime. If that same couple, with the identical investments and the identical spending and the identical taxes and identical everything else, use the apply and suspend technique, which is the existing law today, but only in effect if you have already started this apply and suspend technique or you utilize the apply and suspend technique between now and May 1st. , then instead of running out of money the other couple literally has 2 million dollars. Now I will admit, most people will not be able to save anywhere near that much money, but hundreds of thousands of dollars between getting this done right and getting this not done right really is life changing, particularly for those whom Social Security would be a major source.
Jim Lange: There is another technique that is basically going to be eliminated unless action is taken, and that is the claim now, claim more later technique. Sometimes that is called “filing a restricted application.” So, in the first example, the husband and wife were 66 years old and the husband had the higher earnings record and it was the husband who applied for Social Security and suspended collection, which meant that the spouse could get a spousal benefit. That allowed the husband to have the 8% raises and we always want to have a least one person in the couple to have a very high Social Security benefit, and one of the reason for that is because of the survival spousal rules. Thank goodness they didn’t try to touch that. What that basically says is, let’s say that one or both members of the couple are over 70 years old and one of them dies, the survivor will be entitled to the benefit of the person who died. So let’s say the husband’s benefit was $30,000 and the wife’s benefit was $20,000, it doesn’t actually matter who dies first, the survivor will get the higher of the two, which is one of the reasons it is so critical for at least one of the people to have a high value.
So there will be people who will come to this workshop and they will come in and we will run the numbers and the advice might be, “Hey, there isn’t anything that you can do because it is too important for the husband to reach the highest amount. Therefore we don’t recommend that you do anything, that you just accept the fact that you are going to end up with less.” I am going to be honest with you, not everybody that is going to come to that workshop is going to benefit, depending on their age and their situation because, again, we always like to have at least one benefit be much higher. Frankly, this usually ends up being for the benefit of the survivor of the two between the husband and the wife, and it’s usually the wife, at least actuarially. It can depend on how old they are, but the women are out living us men by maybe 7 or 8 years, and that could be very important for women.
Now there is another technique that is still consistent with the idea that we want one of the benefits to be very high and that is when the higher earner actually takes a spousal benefit based on the lower earners’ record. Typically, we do that when, perhaps, the higher earner is younger and it might make sense and we have always run the numbers. We are actually very fortunate to test which one is better, but that is when the higher earner is getting a spousal benefit from the lower earner. This is actually more popular than the apply and suspend technique, but not quite as powerful.
We have to talk more about this, and I would love to talk more about this, what you can do between now and May 1st, but I will tell you that it is critical. If you don’t do anything and you miss this deadline, you are going to potentially kick yourself for years and years because it can make an enormous difference. That is why we are hurrying up and doing this last minute workshop. I expect a lot of people to be there, I expect the interest to be very high. We are going to be writing about this. It would be my recommendation, if you are between 62 and 70 and your Social Security strategy is not cemented and in process, that you should come to that workshop. You can follow me for years and years, I hardly ever push me personally on the air and coming to a workshop, but this time I am. Four o’clock this Saturday, November 14th, call Alice because it could easily fill up.
Dan Weinberg: You want to give the number and the website again?
Jim Lange: The telephone number is 412-521-2732, again that is 412-521-2732 and you can also sign up by going to our website which is www.paytaxeslater.com, again www.paytaxeslater.com.