Maximizing Your Social Security with Larry Kotlikoff, Ph.D.

Episode: 56
Originally Aired: July 6, 2011
Topic: Maximizing Your Social Security with Larry Kotlikoff, Ph.D.

The Lange Money Hour - Where Smart Money Talks

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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Maximizing Your Social Security with Larry Kotlikoff, Ph.D.
James Lange, CPA/Attorney
Guest: Larry Kotlikoff Ph.D.
Episode 56

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  1. Introduction of Larry Kotlikoff, Expert in Social Security Strategies
  2. Delaying Social Security Until Age 70 Increases Benefit by 74%
  3. Your Goal Is to Protect Yourself Against ‘Excessive Longevity’
  4. Divorced People Get Spousal Benefit Based on Ex’s Earnings History
  5. ‘File and Suspend’ Allows Married Couples Greater Options
  6. Despite Its Fiscal Shape, the Government Will Pay Social Security Benefits
  7. If You Take Social Security, 401(k) Withdrawals Factor intoTax Calculations

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1. Introduction of Larry Kotlikoff, Expert in Social Security Strategies

Nicole DeMartino: Hello, and welcome to The Lange Money Hour. This is Nicole DeMartino; thanks so much for joining us today. Today, we’re going to be focusing our attention on Social Security, and our guest today is certainly back by popular demand, but first, let’s start with a few introductions. We’ll start with the president of the Lange Financial Group, Jim Lange. Jim’s been practicing for nearly thirty years here in Pittsburgh and he is a CPA/Attorney and the author of the best-selling books Retire Secure! (the first and second edition) and The Roth Revolution: Pay Taxes Once and Never Again. Now, today, we have joining us Dr. Larry Kotlikoff, who was actually on our show last April, so back by popular demand. Dr. Kotlikoff has taught at Yale and MIT, but right now, he is coming to us from Boston University where he is an economics professor. He is responsible for writing hundreds of articles published in the world’s most notable journals and is the author of 14 books, and specifically, we’re going to be speaking about his latest, Spend ’Til the End and Jimmy Stewart Is Dead. I’m going to turn it over to Jim.

Jim Lange:  And before we get into the substance of the show, and we’re really going to delve into when to take Social Security and some of the interesting strategies that can really make an enormous difference, I have a quick Larry Kotlikoff story.  So, he was on the show last April, and he had some very interesting things to say about Social Security, and I thought they were wonderful, and back then, you were actually allowed to return your Social Security, and that was particularly interesting to me because I was very involved in Roth IRA conversions, and I found out that if you returned your Social Security, which Larry thought was a good strategy because you would get more later on when you started collecting again, that giving it back, if you get a tax deduction, will allow you to do a Roth IRA conversion, in effect, for free.  So, I was so excited about that information.  I was writing a book on Roth IRA conversions at the time.  By the way, it’s out there, The Roth Revolution: Pay Taxes Once and Never Again, and the information that Larry gave me, which was so good that I actually had it transcribed, and I was trying to make sure that I got everything right when I was writing the chapter in the book, and I actually quoted Larry and I gave him credit.
When I was done, I thought, “You know, I think that this is right, but I’d sure like to have someone double-check it.  I wonder if Larry would?”  So, I emailed the proposed chapter to Larry, and I said to Larry, “Here’s the proposed chapter.  You see that I quoted you.  Could you tell me if this is right?”  And, you know, Larry is a pretty serious big shot and I didn’t even know if he was going to look at it, but not only did he look at it, and I more or less had it right, but the thing that was really great was, he said, “You know, if you add this one other point,” and it was talking about applying and suspending and collecting on your spouse’s Social Security.  So anyway, he basically said, “If you add this one extra point, it’ll really make the chapter a lot stronger,” and rather than having me write it, he actually wrote it out for me, and it was about maybe two or 2½ pages, and it was wonderful!  So anyway, I was really excited to be able to put this in my book, and I do have a professional editor who edits for content, but I also have a non-professional editor who edits for the clarity of the language, punctuation, and the kinds of things that a journalism professor would edit for, and by the way, it’s my mom, who is 94 years old and a retired journalism professor.  So, my mom was editing the book, and usually about every page or two, there’s some red ink and she’s making some kind of correction.  Every once in a while, she’ll say, “Well done” or something like that.  Anyway, the section that Larry did, now, remember, he basically … well, he didn’t basically, he wrote it, this two-page or 2½-page section.  There was a) not one red mark, which was pretty unusual for something that long, and then at the end, it was “Very good!”  So, Larry, you survived the scrutiny of my mom, who not only didn’t mark you up but wrote “Very good,” which was more than I got.
Larry Kotlikoff:  Well, thanks Jim, it’s great to be with you again, and tell your mom hi for me.
Jim Lange: I sure will.  So anyway, you gave us some wonderful information about Social Security and talking to you about Social Security, I almost feel a little bit like we’re having Bill Mazeroski on and talking about batting instead of fielding.  Of course, yes, Bill Mazeroski hit the big home run in the seventh game against the New York Yankees in the World Series in 1960, but the people who remember Bill Mazeroski really remember him as a fabulous fielder, and that’s what he did day in and day out.  I kind of consider some of the work that you’ve done is so important, and it’s really just on a major scale, and there’s so many things that I’d love to talk to you about, for example, the future of the country, inflation, what people should be doing in many areas related to the economy, but I think that to give people some really practical advice that I think would be very valuable.  I’d like to at least start and maybe just concentrate on the issue of when to take Social Security, and though that we can’t give it back, I know that you are very involved in some of the interesting strategies in applying and suspending collection of Social Security.  So, I was hoping that we could just talk about first, maybe in a simple case, and I guess that we could do a simpler case if we could take a look at somebody who is single, and let’s assume that the person has worked for a number of years, will be eligible for Social Security, and let’s assume, for discussion’s sake, in good health, not necessarily the healthiest person in the world, but no cancer, no heart problems, no reason for us to think that they would have a shortened life expectancy.  Could you give us a little run-through of when you think that person should take Social Security or any other way that you’d want to introduce the topic?

2. Delaying Social Security for 8 Years Increases Benefit by 74%

Larry Kotlikoff:  Well, I think that’s a good way to start it with the simplest case because it gets quite complicated when you’re dealing with married couples, even for single people, if they’re divorced or widowed, they have some more complicated decisions, but just take somebody who’s never been married, who’s single, who’s, let’s say, 62 and they’re trying to decide whether to take benefits right then or to wait possibly up until 70 and get much higher benefits, get roughly 74 percent higher benefits adjusted for inflation starting at age 70.  So, you have to go without benefits for eight years, but then you get this much higher benefit for the rest of your life.  Now, if you live to 100, which is possible, then that’s 30 years of 74percent higher benefits.  It’s going to far exceed the eight-year sacrifice of not getting benefits.  And frankly, we have to plan to live to our maximum age of life because of the possibility that we may live that long.  We can’t count on dying on time.  We can’t use our life expectancy analysis because that is something for an insurance company to do, but we’re not an insurance company.  We don’t have many lives over which to gamble or throw the dice.  We’re only going to have one particular life, and the really big risk of old age is actually too much of it and outliving your resources.
So, Social Security is providing you an inflation-protected pension backed 100 percent by the government, and it’s an annuity.  It continues as long as you live, and therefore, waiting to get a 74 percent higher benefit by giving up eight years of benefits before then, that’s the price you’re paying for, in effect, a higher annuity from the government.  So, you’re buying, in effect, an extra annuity from the government in waiting, and you’re doing so at a really attractive price, a really low price.  So, I try and encourage everybody who can to try and wait to collect as long as possible and to try and use other resources earlier on, like their 401(k)s or their regular assets or to keep working longer to get over that hump between 62 and 70 in order to take advantage of this.  Now, if know for sure you’re going to die by 80, then it’s a different consideration, and we have this new software program at, which we just introduced, my little software company, that allows people to enter what they want to do, but also the program will tell them what collection dates will give you the highest present value of your lifetime benefits.
Jim Lange:  Yeah, and let me interrupt for one second.  I’ll tell the audience, there’s a lot of people out there selling different software programs, and there’s all kinds of Roth IRA calculators, and frankly, there’s a lot of stuff that I really don’t think is wonderful, and I don’t think it’s in your interest to even go to that.  Larry’s stuff is the top of the industry, and, to be fair, I just learned about this site actually a couple of minutes ago, but knowing Larry and knowing the quality of the work that went into his other sites that are just superb, I can’t imagine that this wouldn’t be wonderful, and that the potential information that you would gain from both listening to this broadcast and then going to this software, and for a couple bucks to have this run for yourself, or perhaps if you wanted some professional help to have us look at it also, is just invaluable because some of the things that you have said in the past, and I assume that they are still true, is that we’re really talking about an enormous difference in the quality of somebody’s life if they live a long time, you know, the difference between literally being comfortable and not being comfortable.
Larry Kotlikoff:  Well, if you’re sitting here at age, let’s say, 62 and you’re single and you have maybe $500,000 in assets, maybe the most of that’s in a retirement account, and you’ve got Social Security, which might be a pretty good situation for a lot of single 62-year-olds, well, taking your Social Security at 70 versus 62 might mean potentially a 10 percent, maybe even a 15 percent, higher living standard for the rest of your life starting immediately because you can count on this higher chunk of money coming in starting at 70, and before then, you can use your own resources to consume.  So, you get to have your cake and eat it, too, potentially, which is a higher living standard after 70, but also a higher living standard between 62 and 70.  So, it’s like free money and it’s also safe.  We’re not talking about taking anybody’s money and putting it in the stock market or buying specific securities that are risky.  We’re just talking about deciding when to walk into the Social Security office, whether to do it at age 62 versus 70.  That’s a safe decision.
Jim Lange:  All right, and I’m just going to interrupt for one minute because it’s really important, and by the way, I drank the Kool-Aid, Larry.  You convinced me, and I have talked to a lot of my clients about this, and emotionally, they often want to collect at 62, and we haven’t even talked about 66 versus 70, but then they’ll say something like, “Well gee, that means that I’m going to have to lead a frugal lifestyle between 62 and 70,” and I say, “No, no, it’s fine to spend more because you can spend more knowing that you’re going to get a higher income later.”
Larry Kotlikoff:  Yes, exactly.
Jim Lange:  So, when you tell people that this isn’t a deferred gratification idea, this is an idea for spending more now and spending more later.
Nicole DeMartino:  And you know what?  I’m actually going to pop in.  Larry, I’m going to give you a chance to talk to Jim right back when we come back from our break.  You’ve been listening to The Lange Money Hour with Dr. Larry Kotlikoff, Social Security expert, and Jim Lange.  We’ll be right back.
Nicole DeMartino:  Alrighty, welcome back to The Lange Money Hour.  We are here with Dr. Larry Kotlikoff, Social Security expert.
Jim Lange:  OK, Larry, you were starting to say, or, at least, I was starting to reaffirm, or to help clarify your point of, no, if you hold up on your Social Security, it’s not eat beans until you’re 70 and then live like a king; it’s you can spend more money before you’re 70.
Larry Kotlikoff:  Potentially.  It depends on your household circumstances, and what we’re really saying is people want to have a smooth living standard.  They want to have a higher one, but they also want it to be smooth, and so we have this other software program called ESPlanner — Economic Security Planner — which, in the Plus version, people have all the options for looking at when to take Social Security, but the program also gets to your bottom line, which is your living standard.  It tries to smooth your living standard, and it shows you if you can’t have a perfectly smooth living standard because you can’t borrow against your future Social Security benefits what the tradeoff is, how many beans do you get to eat before 70 and what do you get to eat after 70?  So, you can see this tradeoff, and then you can also think about other options like taking more money out of my 401(k), like doing a Roth conversion if that saves some taxes.  It incorporates all of the tax issues, state and federal, while it’s doing this, so it really does get to your bottom line, which is your living standard, and that’s what economics has to say on the subject.  “Is your living standard stupid?” is our mantra here.
Jim Lange:  Yeah.  In fact, I remember you admonished me because the last show when we were talking about this issue, I kind of said, “Well, gee, if you take it early and you die before roughly age 82, depending on your interest rates and your assumptions, that you actually come out ahead, but if you live longer than that, you’re better off taking it.”
Larry Kotlikoff:  Yeah, that’s not a valid way to look at it.
Jim Lange:  Yeah, you told me, and this is the exact quote, you said, “Lange, quit thinking like an actuary!  Think like an economist!  If you die early, before age 82, you’re dead.  It doesn’t matter.  What you’re worried about is if you live and you run out of money!”  And frankly, you were right.

3. Your Goal Is to Protect Yourself Against ‘Excessive Longevity’

Larry Kotlikoff:  That kind of break-even analysis is kind of like thinking about whether or not to buy homeowner’s insurance.  You say, “Well, gee, I don’t need homeowner’s insurance because on average, the premiums I pay are going to equal the probability of the fire times the value of the home.  And therefore, I shouldn’t buy homeowner’s insurance.”  And nobody does that because we don’t have a hundred homes that may or may not burn down and we break even on average, or a thousand homes.  In this case, we don’t have a thousand lives to lead.  We just have one.  So, this whole break-even analysis that the industry is focused on is completely nuts, and the reason that they’re focused on it, to tell you the truth, Jim, is either it’s bad training, because they haven’t had enough economics in school, or, at least economics that focus on this point, or they’re trying to keep people from buying annuities, because annuities is insurance, and a lot of the financial planners out there and investment companies are trying to retain people’s money, not have them buy annuities, because then the money goes over to the insurance companies and they don’t make their commissions.  So, the goal here is to make sure you’re protected against excessive longevity.
Jim Lange:  Right, and if I could just clarify for one quick moment, the annuities that you are talking about, Larry, are not the tax-deferred annuities or commercial annuities that many life insurance agents sell.  You are talking about something called an immediate annuity, which is a relatively simple low-cost low-fee investment where, in effect, you give the insurance company a chunk of money and they give you an income, sometimes adjusted for inflation, sometimes not  — it’s your choice on that — sometimes with IRA or retirement-plan dollars, sometimes not, for the rest of your life, and you can use my simplistic break-even analysis of determining, you know, gee, if you live to this long, it’s a good thing if you die early, you would’ve been better off without it, but your point is on these immediate annuities as well as the issue of holding up on your Social Security, that it’s not really an actuarial calculation.  What you have to think about is the real human side of being old and broke, which is what you don’t want to do.
Larry Kotlikoff:  Yeah, but you have to plan to maximize your life because you may.  Now, what economists say is that the right planning horizon is your maximum age of life, and to ensure yourself against living to your maximum, you buy the right insurance policy, which is a true annuity, which is what you’re referring to, which is like an immediate life annuity.  Now, we would also say you want to stay away from anything that’s not fully inflation indexed.  You don’t want to buy a graded annuity, you don’t want to buy a nominal annuity because these things are very risky to inflation, and I think we’re going to have tons of inflation coming because the government can’t pay its bills that are coming, and we’re already printing money out the wazoo as it is.
And then you’ve got to worry about will AIG or MetLife or the other companies, there’s only a couple that are selling inflation-indexed annuities, the Principal insurance company, these are three companies that are selling them, but will they be around in 30 years?  So, they may or they may not.  But the government is likely to be around.  It’s likely to be paying off its Social Security benefit payments, and that’s why, in effect, buying a much higher annuity from Social Security directly is a really good way to go.  So, for the single person, getting back to that person, if they’re not widowed or divorced, it’s pretty simple.  They have to decide when to take their retirement benefit and then they have to think about whether they can get over the hump between 62 and 70, where maybe they can’t get all the way to 70, they make it out to 68.  Anyway, that’s the issue, and our software ESPlanner can help people sort that one out.

4. Divorced People Get Spousal Benefit Based on Ex’s Earnings History

Now, what if they’re divorced?  Well, then they have another decision.  If they take their benefit between 62 and their full retirement age, which, right now, is around 66, well, then they’re going to be forced to take their spousal benefit based on their ex’s earnings history.  So, if you take your retirement benefit early, you’re forced to take your spousal benefit early.  If you take your spousal benefit early and you’re divorced, you’ll be forced to take your retirement benefit early.  So, that may not be the best strategy because in either case, you’re going to get a benefit that’s reduced and you’re going to be getting this permanently reduced benefit, and we just said that it makes sense to try and wait.
So, here’s a different strategy: suppose you’re divorced and you make it to full retirement age.  You don’t take anything.  But then, let’s suppose that you had a decent earnings history, so that your own retirement benefit is actually equal to more than your spousal benefit.  So, here’s a way for you to get a free spousal benefit if you’re divorced.  What you do is, you wait until the full retirement age and you apply just for the spousal benefit, and then you collect that spousal benefit up through age 70, and at age 70, you apply for your retirement benefit, and in doing this, you get the maximum retirement benefit.  First of all, it’s not reduced because you’re waiting until 70, and it’s actually increased for every year that you wait to collect between 66 and 70.  That’s called the delayed retirement credit.  It’s 8 percent a year.  So, you wait four years at a 32 percent higher benefit than collecting at full retirement age.  So, here’s the idea: You get a free spousal benefit on your ex’s earnings history.  If you were married for 10 or more years before you were divorced, you can get a spousal benefit, and then you start collecting your own retirement benefit.  So, that’s the strategy that most divorced people should be focused on.
Jim Lange:  Very few people know about this, by the way, and when I tell people, a lot of times, they’re even shocked to think that I would even consider having them hold up on Social Security.  Now, one quick question and it’s going to be relevant for later on, but let’s just talk about the divorce situation.
Larry Kotlikoff:  You know, let me just say, even Social Security is now advising people to wait, in effect.  They used to tell everybody to go early until I and other economists started yelling at Social Security for doing that.  I had lunch with the chief actuary, Steve Goss, who’s now the chief actuary and a friend of mine.  I sat down and explained how to think about this.  He pretty quickly got the point and now they’ve taken away all the admonitions to people to take their benefits early.  They’re now saying pretty much the opposite.
Jim Lange:  Well, that’s a real social change that you have started, and hopefully people will listen.  Now, one of the things, and the question’s going to be the same when we get to the non-divorce situation, but by you taking benefits based on your spouse’s earnings, are you in any way hurting your spouse, or, in the case of a divorce, does the spouse …?
Larry Kotlikoff:  If you’re divorced, anything you do doesn’t affect your ex, and anything he or she does doesn’t affect you.  No interaction.
Jim Lange:  All right, so when you say “free money,” basically you’re kind of taking it from your divorced spouse’s shoulders, but it’s not costing them anything either?
Larry Kotlikoff:  Not a penny.  It’s completely available to you.  It’s really a benefit available to you based on their earnings history, and if you’re widowed, let’s say you’re 62 and you’re widowed, and your dead spouse had a decent earnings history, you can collect a widow’s benefit starting at 60.  Actually, you don’t have to wait until you’re 62.  That benefit you can start at 60.  You can collect that right up through 70 and start your retirement benefit at 70 and it’ll be the maximum benefit possible because you will have not taken it before full retirement and even delayed it until age 70.  So, you’ll get 10 years of the widow’s benefit, or the survivor’s benefit, and then you’ll get your highest possible Social Security benefit kicking in.  So, for most widows or widowers, who are, let’s say, below age 60, this is probably going to be the best strategy.
Now, it depends.  If their widow benefit is higher than their own retirement benefit, then it won’t necessarily be the best strategy.  It may be a better strategy to wait until full retirement age and then take a non-reduced widow’s benefit, which you’ll just keep getting for the rest of your life.  So, again, our software at is designed to help people sort this out.  We just introduced it and we’re still improving it.  It’s an early-stage product.  It’s 40 bucks a year for the license to see what it is that is actually going to give you the highest benefits, and then the download version, which is called ESPlanner Plus, can also look at all these different options, but also has the advantage of showing you the living standard implications.  Should we talk a bit about married people?
Jim Lange:  I’d love to do that, but I think it is time for another break right now.
Nicole DeMartino:  I’m giving Jim the look!  We are.  It is time for a break, and I think this is a great resource:  Definitely take a visit at that.  You are listening to The Lange Money Hour, Where Smart Money Talks.
Nicole DeMartino:  Welcome back to The Lange Money Hour.  We are here with CPA and attorney Jim Lange and Dr. Larry Kotlikoff of Boston University, Social Security expert and author of Spend ’Til the End.
Jim Lange:  Another one of his fine books.
Nicole DeMartino:  Another one, yes.
Jim Lange:  And before we had to take a break, Larry, I think you were going to talk about what happens if you are married and, let’s say, one or both spouses has an earning area, and by the way, for all the listeners right here, what you’re about to hear is some gold that can make an enormous difference in your lives.  You should pull over, listen to the replay on Sunday, a month from now, when we eventually get this on our website, listen to it again, read the transcript of it.  This is gold.  Go ahead, Larry.
Nicole DeMartino:  Quite an intro there!  It’s true though, yeah.
Jim Lange:  Because I’ve heard something similar before and we’ve made an enormous difference, and honestly, Larry, a year ago, I didn’t know this stuff and I think I am a better advisor today because you were on the show and I recognized, hey, this is something that I should pay attention to.  So, anyway, with that modest introduction, why don’t you go ahead?
Larry Kotlikoff:  Yeah, sure.  Well, let me just talk about a married couple.  Let’s suppose that they’re both age 62 and they have the same exact earnings history and they’re trying to decide when to take their benefits, and let’s suppose that they have enough 401(k) money or regular assets to get through to age 70 to collect.  So, they’re sitting there and they say, “Should both of us take benefits at 62?”  I would say no, that’s a big loser as a move because they have to worry about living to the maximum age of life and they can get 74 percent higher retirement benefits each if they wait until 70.  So, they give up eight years, but they’re going to get a whole lot more later, and by waiting, they’re going to get their living standard up dramatically, you know, it could be 10 to 15 percent starting immediately at age 62.  Now, is that the best they can do?

5. ‘File and Suspend’ Allows Married Couples Greater Options

And the answer is no, there’s something else they can do when they hit full retirement age, which is that one of them can do something called file and suspend.  Let’s say the husband does this.  He files and suspends for his retirement benefits, and at the same time, the wife applies just, and I want to repeat and emphasize just, for her spousal benefit.  So, in applying just for her spousal benefit, her retirement benefit continues to grow, which she hasn’t received yet, but when she hits age 70, she’ll be getting the delayed retirement credit tacked on to her, let’s call it, primary insurance amount, so she’ll have the highest benefit possible, and because the husband has filed and suspended, he’s not collecting his retirement benefit until 70 and he also is going to get the maximum benefit.  He’s going to have the delayed retirement tacked on.  But by his filing and suspending starting at full retirement age — you can’t really do this before full retirement age — he allows her to apply just for her spousal benefit.  So, this means that between 66 and 70, for four years, she’s going to get this free spousal benefit.  It’s going to be about half of his, what’s called primary insurance amount, his full retirement benefit if he were taking benefits at full retirement.  So, if this full retirement benefit, let’s say, is $30,000, then we’re talking about her getting $15,000 a year for four years.  That’s $60,000 all inflation indexed.  So, that may not be exactly a huge pot of money, but for a lot of people, that’s important.  $60,000 might be more than a year’s living standard in terms of what people are actually spending.  So, one has to deal carefully with Social Security because there is a lot of money to be made and lost by not handling this system correctly.
In principle, there are two benefits that a couple can take: a spousal benefit and a retirement benefit.  So, there are four benefits potentially at each age, from age 62 to 70.  So, that’s like four to the eighth potential possible combinations of when one spouse takes one thing versus the other.  That’s 65,532 combinations.  Now, not all of these combinations are actually available to you because Social Security has restrictions.  For example, if the husband were to take his retirement benefit early at age 62, let’s say, and the wife were to try and take just her spousal benefit at age 62 and wait until 70, no, no, that’s not allowed by Social Security.  She’ll be deemed to be applying for both if she applies for one if he’s actually getting a retirement benefit.
Jim Lange:  So, you can have, in effect, two benefits from the same person simultaneously?
Larry Kotlikoff:  Well, I don’t want to say it quite that way, but there is a provision.  At, if you click “Learn More,” there’s a case study, the title of which is “When Should I Take Social Security?”  That lays out a lot of these options and talks about them, and then, of course, we have the tools, and you can read the case study for free.
Jim Lange:  I hate to interrupt, but that is a wonderful resource.  By the way, for $40, I think is probably a great investment, but there are a lot of people who don’t even want to spend $40, but they are willing to take a look for free, and particularly some of the quantitative types.  To me, I think that every engineer, even if it’s not relevant to them, should take a look at that case study.  So, could you again give the URL for that particular case study?  Because I know exactly what you’re talking about.
Larry Kotlikoff:  Yeah, sure.  So, it’s  It stands for Economic Security Planner, so that’s why it’s ESPlanner, and then just click on “Learn More” and then just click on “Case Studies.”
Jim Lange:  And that is well worth it to go through that.
Larry Kotlikoff:  And by the way, Jim, I want to tell your listeners that if you go to, which is our simplified online version, you can run that program for free without a penny, and you just run it without logging in.  If you log in, we’re going to ask you if you want to save your data, we’re charging $40 a year, and then you can add some extra features and do what’s called upside investing.  You and I should talk on the radio about that in the future, Jim, and our Monte Carlo simulation or even conventional financial planning if you want.  But, for free, you can just run this thing.  If you just don’t log in, you can run ESPlanner Basic and certainly get a pretty good lifetime plan for no cost whatsoever.  We’re doing that as a public service and also to try and get people interested in the economics way of planning.
Jim Lange:  Yeah, and like I said before, to have you on and basically limit our talk to Social Security is kind of hurtful, but as it is, we’re going to run out of time in not too long, and all we’ve been talking about is Social Security.  So, anyway, why don’t you continue with the analysis?
Larry Kotlikoff:  This can get pretty complicated.  For example, suppose that the husband is older than the wife.  Let’s suppose that he’s at full retirement age.  He’s 66 and she’s 62, and she’s had a pretty low level of earnings in the past.  Actually, let’s suppose that they’re both 62 and she’s had a low level of earnings and he’s going to wait until 66 to file and suspend, and what should she do?  Well, I was kind of just telling you that if she was a high earner, she would probably want to wait until 66 to go just for her spousal benefit and then wait until 70 to get her retirement benefit.  But what if she had been a really low earner so that the spousal benefit is actually going to be bigger than her own retirement benefit?  Well, then it would make sense for her to start collecting her retirement benefit at 62, provided that he’s not collecting his retirement benefit.  If he is collecting his retirement benefit, then she’s deemed to be applying to collect her spousal benefit as well, and then that will be permanently reduced, but the idea that we’re trying to get to here is to have her be able to collect a non-reduced spousal benefit starting at full retirement age.
So, the trick then is for him not to collect anything until, let’s say, full retirement age, to go in at 66 and file and suspend, and she takes her retirement benefit at 62.  OK, so here she is taking her retirement benefit at 62.  I just told you that if you take one thing early, you have to take the other early, and that’s really what happens.  She’s filed for her retirement benefits, so she’s deemed to be taking her spousal benefit, but because he’s not yet taking his retirement benefit, she’s undeemed.  So, Social Security deems her and then undeems her.  Now, I could not make this up.  This is from the actuaries at Social Security.  You’ll not find this in the 2,700 and 28 rules in the handbook.  There’s a program operating manual system which has got thousands of rules explaining the handbook rules, but I don’t think you’ll find it there either.
The way we learned about this is by interacting intensively with Social Security actuaries by sending them emails and they email us right back.  They’re brilliant people and a great treasure, but this system is so complicated that how would you know about deeming and undeeming?  But for that kind of a couple, where the wife has a lower earnings history, it may be optimal for her to take her retirement benefits starting at 62.  She’ll be deemed to take her spousal benefit, but since he’s not collecting a retirement benefit, she’ll be undeemed.  So, that’s the one way in which she can actually collect one benefit without the other before full retirement age, and then she gets her retirement benefit for free for four years, from 62 to 66, and then she goes on to a spousal benefit, which is half of his retirement benefit, and it’s unreduced, and it’s for the rest of her life.  Now, when you go from the 65,532 options to impose all the restrictions that Social Security sets, you end up with about 81 or so options, and our software’s trying to maximize all those options and look at what to do.  You know, no mortal human being can actually do this in his own brain.  You have to have pretty sophisticated software and also have to get the rules right.  I got to tell you, I got a Ph.D. from a pretty good place called Harvard.  I don’t think I’m all that smart, but they were dumb enough to accept me.  Anyway, I’ve studied this stuff all my life and I learn new things all the time.  I’ll tell you one thing I just learned the other day.
Jim Lange:  Before you do, I’m getting the look from Nicole, and by the way, before we come back, and I’d like to go into some of the minutiae, but I know one of the questions that a lot of our listeners is asking, they’re going to say, “Oh, the United States is going broke, I’m just going to get the money while I can because the whole Social Security system isn’t going to be there, it’s not going to be there so why should I wait?”  But if we could get to that answer after our break, I would sure appreciate it.
Nicole DeMartino:  We’ll get to it right after the break.  You’re listening to The Lange Money Hour with Jim Lange and Dr. Larry Kotlikoff.  We’ll be right back.
Nicole DeMartino:  Alrighty, welcome back to The Lange Money Hour.  We have been talking with Dr. Larry Kotlikoff, Social Security expert, and before I turn it back over to these gentlemen, I want to make sure that if you cannot wait, you’re just too anxious, you can’t wait until August to see Jim’s workshop, if you go to our flagship website,, it’s actually a brand new site … actually, it’s not brand new, I mean, we’ve had it for a long time but it’s revised a little bit, but if you go on there, Jim has made available his Roth IRA workshop and his estate planning workshop.  Both of them are on there.  Depending on which one you want, they’re just $99, but if you do order both, they’re $149, so you get a very nice discount.  You can see those at
Jim Lange:  OK, so before we get into some of the issues that are important that you wanted to, I just wanted to take a step back for one minute because I get this a lot, and I don’t mean from uneducated people, but from people who are very on top of it, who themselves have, if not Ph.D.s from Harvard, at least college degrees and often advanced degrees, and they’re saying, “Hey, you know, with the way this country is and Social Security, how do I know if it’s going to be there?  Right now, I can get it, that way, I can get it and I can invest it.  Aren’t I just better and safer just getting the money while I can?”

6. Despite Its Fiscal Shape, the Government Is Likely to Pay Social Security Benefits

Larry Kotlikoff:  Well, all our software programs at and allow people to specify cuts in Social Security benefits in the future, so you can certainly see whether waiting makes sense, even given that you think there’s going to be a cut of 30 percent or something starting at some point in the future.  I think that the government would sooner default on its official debt than cut the benefits of Social Security participants or retirees who are already receiving their benefits or who are very close to receiving their benefits.  Basically, age 62 or older and are waiting to collect, I think the probability of that is very, very low, but we built the software to allow people to explore that.  They may have different views.
The other thing is that the taxation of your Social Security benefits might go up under the income tax or the state income taxes, and our software allows you to anticipate higher income taxes, and we have the whole taxation of your Social Security benefits programmed in our income tax calculations.  So, those are the channels by which you might get hurt, either a direct cut in benefits or indirectly getting hit with higher taxation of your benefits through the back door or through the income tax, and you can explore both issues.  And that’s the best I can say.  I’m not clairvoyant.  I can tell you that I think the country’s broke.  I have a column up on Bloomberg today that says “Stop the fiscal war on our kids,” which points out exactly how broke we are.  We’re in much worse fiscal shape than is commonly believed, so on this issue, I’m far to the south, or whatever.  I’m much more pessimistic than the typical person about the fiscal condition of the country, but I think that the last thing that the government will do is to take away people’s Social Security benefits directly.
Jim Lange:  All right.  Well, I think that that’s really important because I think a lot of people really don’t even want to get to the point of whether they should analyze it.
Larry Kotlikoff:  Yeah, I think they’re going to leave a lot of money on the table because I think the most likely proposition is that the Social Security benefits will be there.  If they take benefits at 62, they’re going to get much lower benefits than if they wait, and their living standard will be permanently reduced.  For the next forty years, it’s going to be much lower, 10 to 15 percent lower, for the rest of their life.  That’s the equivalent of giving away a significant pot of money.
Jim Lange:  And particularly for people who don’t have a lot of money.  So, a lot of people say, “Well, oh, I can’t afford to wait until I’m 70.”
Larry Kotlikoff:  They can’t afford not to wait.
Jim Lange:  Right.  That, I think, would be more accurate.
Larry Kotlikoff:  I think that’s the way to put it.  Poor people, in some ways, can’t afford not to wait.  They have to do whatever it takes, live with their kids, downsize their home, maybe even consider taking a reverse mortgage, although there are some risks associated with that and some issues one would have to raise and what we’d have to talk about, but use your 401(k) money up early.  I’m not clairvoyant here, and I would hate to say for sure to do anything.  I don’t say for sure to do anything.  I’m just throwing out opinions or probabilities here, but I don’t know for sure what’s going to happen and nobody else does either.
Jim Lange:  And by the way, I’ve done a pretty good job of shutting up up until now, but I just can’t hold back any longer.  There are two things that you have mentioned in passing that I think are really important, and one is you are getting income tax breaks by holding out on your Social Security because you’re not paying income taxes, and that’s consistent with my general strategy of pay taxes later except for the Roth, and the other advantage that you have by holding up on your Social Security is that you can make Roth IRA conversions without increasing the taxes on your Social Security.  So, for a lot of people, for example, who are in the 15 percent bracket and they make a Roth IRA conversion, all of a sudden, the percentage of the tax on their Social Security goes up, so that the tax on the Roth IRA conversion, instead of being at 15 percent, might actually be at, say, 45 percent when you calculate it.  Another advantage of holding up on your Social Security is that you can do more Roth IRA conversions.

7. If You Take Social Security, 401(k) Withdrawals Factor in to Tax Calculations

Larry Kotlikoff:  Yeah, let me say it this way.  If you withdraw from your 401(k) after you start taking Social Security, all those withdrawals are going to be included in your adjusted gross income, and that’s going to be used to calculate how much tax on your Social Security benefits you owe.  But as you say, Jim, if you wait until 70 to take Social Security and you take, let’s say, a good chunk of your money out from your 401(k) earlier, either you spend it to get over the hump, or you can convert it into a Roth.  Then let’s suppose you converted it into a Roth at age 67, 68, 69, 65, you know, all these years, 62, you do these conversions, and then you’re sitting here at age 73 and you’ve got Roth money, and you take the Roth money out to spend at that point.  Well, that does not show up in the adjusted gross income, so it doesn’t lead your Social Security benefits to be subject to taxation.  They might be still subject to taxation because you have some other income that’s pushing you into an AGI bracket that makes your Social Security benefits now become, first, 50 percent of them and then 85 percent, subject to taxation, but it may be that you don’t have enough other income and you then receive your Social Security benefits without any taxation on them whatsoever by using this strategy.  So, the Roth strategy is a way to get more out of Social Security potentially in terms of less taxation on your Social Security benefits, and what you have on your website in terms of your planning services and what we have in our software allows you to explore this issue because we’re doing all the taxes each year separately, taking into account all these issues of Social Security benefit taxation, and we allow you to do the conversion very simply and our software is very quick.  So, you can see in a couple seconds whether a conversion is actually going to raise your living standard and save you taxes over the rest of your life.
Jim Lange:  Well, to cut your taxes and get more money from the government is great.  The one other thing that I wanted to say on the taxes, you mentioned a couple times taking money from your 401(k).  If you have money outside your 401(k), let’s assume, for discussion’s sake, that you have both, I call it, after-tax money, but whether you want to call it savings or investments or my savings or whatever it is, and money in your 401(k), in general, following my rule of pay taxes later, except for the Roth, I would prefer that you spend money from outside your 401(k), preserving your 401(k).  So, that’s just, let’s say, another tax tip.  All right, and Larry, I’m getting about the two-minute sign.
Larry Kotlikoff:  Well, let me raise an issue here, which is that if I’ve got some money in my regular assets and also money in a 401(k), I’m thinking about taking some and putting it into a Roth.  If that’s the question, I think it might be better to take it out of the 401(k).  It depends on your current tax bracket, but you see, when you spend the principle of your regular assets in the future, that’s not going to be subject to taxation and not be counted as part of your AGI.  But when you take your money out of your 401(k) when you’re 73, it will be included as part of your AGI.  So, anyway, a little point.
Jim Lange:  All right, that’s fair enough.  You don’t have to be right about everything, Larry!
Larry Kotlikoff:  I may be off.  We may need to talk about this one!
Jim Lange:  OK, fair enough.  Is there anything else that you wanted to tell our listeners?  The way I would conclude today’s session is that there are great opportunities to really strategically determine when you should take Social Security, and if you are divorced, when you should apply for a spousal benefit, if you are married, whether it makes sense to apply and suspend and then take a spousal benefit, and that there are great tools, Larry’s software at, or if you want a real live professional to help you with this, and frankly, this is not my real area of expertise, my real area of expertise is IRAs, retirement plans, Roth IRA conversions, but this is part of it, as well as investments, estate planning, etc., or to come and see me, or perhaps the combination of using the software and seeing me.
Nicole DeMartino:  Alrighty, Larry, thank you so much for joining us.
Larry Kotlikoff:  My pleasure.
Nicole DeMartino:  I’m sure you’ll be on again.  I’m sure you’ll be back.
Larry Kotlikoff:  Happy to do that.
Nicole DeMartino:  If you want to hear this show again, just listen on Sunday morning at 9 a.m.  We’re on every Sunday at 9 a.m., and then this will appear, both in an audio file and a text file, on  Bye.

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.