Emergency Presentation on Maximizing Social Security BEFORE May 1, 2016

Listen to the mp3 version of this transcript

Listen to the mp3 version of this transcript

Critical Time Sensitive Information for Married Couples Ages 62 – 70

Dan Weinberg: Hello, I am Dan Weinberg along with CPA & Attorney Jim Lange with an emergency audio presentation. On November 2, 2015, President Obama signed the Bipartisan Budget Act of 2015 into law. What most Americans don’t know is that this new law bans two of the most effective methods ever devised for maximizing your Social Security payments: apply & suspend and filing a restricted application, both explained clearly and in detail in this audio production.

However what many also don’t know is that the federal government has granted certain Americans a six month grace period to take proactive steps so that they can enjoy the benefits of the most favorable Social Security strategies that will be banned forever after May 1, 2016.

In this special presentation, Jim is going to tell you “if and how” you can be grandfathered to avoid these losses. As I mentioned before, this is a crucial topic and it is time sensitive. Those who qualify and want to take advantage of these rules will have to act before May of 2016.

CPA and Attorney James Lange has made great efforts to compile, analyze and deliver this information to you while it is still timely.

With over three decades in financial and estate planning, James Lange is the President of three interrelated companies. His CPA firm, registered investment advisory firm and law firm provide financial solutions for retirement age clients with IRA and retirement plans. He has been following this law change closely and recognizes that there is a group of citizens who can take advantage of these strategies before they disappear.

So, Jim could you begin by telling our audience what the agenda is for this audio program?

Jim Lange: OK, Dan, first we are going to talk about maximizing Social Security obviously in light of the new law. We are going to talk about grandfathering the existing law for those who qualify, and who does qualify and who doesn’t. Really the essence is going to be spousal benefits, but we are also going to cover the survivor benefits. The areas that we will not be covering is the divorce benefits which is also important but we can only do so much in so much time. We will also talk about the synergy between Social Security maximization and Roth IRA conversions. So why don’t we do a “large forest change” and then we will get into the “trees.”

So the new law affects Social Security for certain married and divorced individuals. Many recipients (people who are already receiving Social Security or people who have already applied and suspended) will be grandfathered. Others will be grandfathered but only if they take proactive steps between now and April 30, 2016.

The areas that have really changed are my favorite techniques in the world for Social Security. One is called “apply and suspend” and other one is “claim now, claim more later” which is also known as a restricted application. Now, before we get into the new law, I want to get into the existing law and how it works because otherwise if I start talking about the changes before we have a base, it will not be meaningful.

Most of Social Security has not changed so this is not a sea change although for married couples who this applies to, it is very important that they get this right.

So first we are going to talk about the existing law; then we are going to talk about the new law; then we are also going to talk about the transition period and when the new law takes effect and how you can qualify for these benefits before the new law.

Dan Weinberg: Now I have heard you say that less than 3% of the population makes the optimal decisions regarding Social Security. Have you ever thought that maybe they were right and you were wrong? Why should our audience believe you instead of following the wisdom of the 97% of the people who made an important decision that impacted their financial security?

Jim Lange: Have I ever considered that they were right and I was wrong? No, that is not even a consideration. But in all seriousness, last year in 2014, I wrote an article regarding marital benefits for Social Security and in order to verify or have readers and listeners be able to trust the information, I actually published the article in a magazine called Trust & Estates magazine which mainly goes to CPAs, attorneys, financial advisors, trust officers, etc. But this is a peer-reviewed journal which is also very important which meant that they went through with painstaking detail all of the analysis that I had done (so obviously that was before the new law came about) but anyway the point is that I had a very good understanding of what the existing law was and if you understand the existing law, the new law is not all that tough to understand. It might be tough to implement the nuances and individualize to each circumstance but I had a pretty good idea.

I was just quoted on CNBC. The other thing is that our office actually “runs the numbers.” We have several computer programs designed to help maximize Social Security and retirement benefits for people who qualify, but we actually have very skilled people in-house who really get it. They get the software, they understand the basics, and then they have put together information, much of which as I have just mentioned, is peer reviewed. And if that is not enough for you, and I understand because one of the problems that the American public has is that there is so much noise out there, and there is so much, very frankly, “crap” out there and different “so-called” advisors are trying to get you to take your Social Security early and then buy their annuities and do stuff that I don’t think is in most people’s best long-term interest.

One of the ways that I have combatted that is with my radio show. I try to book the top experts in the country as my guests. I read their books and I develop intelligent questions. I don’t try to say “gotcha” so I send them my questions ahead of time and then we have what I consider a substantive radio talk show. Now we have had shows like this (well, we have actually had several) with Larry Kotlikoff who is the author of the #1 bestselling book on Social Security. In fact, some people blame Larry for the new changes in the law because Larry made it so clear how to take advantage of the old law, or the law that we are hoping to grandfather for ourselves on or before April 30th. Anyway we have had several shows with Larry and he gets it, and he and I are in agreement.

We have also had multiple shows with Jane Bryant Quinn. She is a great champion of retired Americans and particularly, retired women. For her, getting Social Security right is not just a financial issue but it is actually a women’s issue on the theory that women will likely survive us men by maybe seven years if we are the same age and sometimes longer if the woman is younger and much of what we are doing is for the survivor of the couple.

We have also had Jonathan Clements on the show multiple times. He was for 18 years the principal personal finance writer for The Wall Street Journal. He is on board with the strategies that we are going to present.

We have had Mary Beth Franklin who is a noted expert on Social Security, and she wrote the book for financial advisors, titled Maximizing Your Client’s Social Security Benefits.

And we have also had Elaine Floyd and by the way we are reading Elaine Floyd. She is the creator of the Social Security program for a group called The Horse’s Mouth. Now is that a great name or not? It is The Horse’s Mouth but the idea is that they supply information to financial advisors.

So we have really pretty much nailed this information and we have widespread agreement on our opinion so I actually do feel that I have the authority to speak about this, and people should pay attention.

Alright, so here is the big picture. This is the starting point and this would apply if you are single or married. To understand the base, let’s just say for discussion sake, let’s not worry about marital benefit and let’s just look at this as if you were single.

Let’s say there were two individuals and they were each 62 years old and they have the identical earnings records for Social Security and they had the identical investment portfolio, and they were in the identical tax situation. Everything is the same for both of them. One says that they don’t want to wait and I want my Social Security right now at age 62. Now in order to compare (let’s says the I Want It Now versus the I Am Willing to Wait until Later) recipient, we have to assume if we are going to compare apples to apples that if he wants it now that he is going to take the money and he is going to invest the money. And even though Social Security is about the equivalent to some extent as a fixed income, I am going to still use a 4% rate of return.

So, you have the first person who is taking his Social Security at age 62 based on his earnings record. He is compiling that money and he is investing that money at 4%. To be fair, he is paying income taxes on the interest, dividends and occasional capital gains of that money but that money continues to ride.

Now the other person is going to continue to get raises by waiting to take his Social Security, and we will talk more about how much these raises are but basically he is going to get raises (and I am going to over simplify here) of roughly 8% between age 62 and age 70. At age 70, he is starting with zero but he is getting in effect the difference between 75% of his full retirement account benefit which is what Mr. I Want It Now is getting versus 132% of his full retirement benefit. The two keep investing their money and depending on what assumptions you use, roughly the breakeven point or the point where the 70 year old who waited is going to catch up to the 62 year old who wanted it now is roughly at age 82. Now if they live into their mid-nineties or age 95, the person who waited until age 70 is going to be better off by over $200,000 using the assumptions that I did for the calculations…better off by $213,970. But here is the thing about this. It is very easy to say, “Well gee, age 82, am I going to make it to age 82? Well, I don’t know. Maybe I’d rather be certain, make sure I get the money. Well, I don’t know if Social Security is even going to be there, etc., etc.” Plus people want to get their money early so it is easy to rationalize reasons why you would want to take it early. But this isn’t the point.

This is the point where I need to give credit where credit is due and this is the point where Larry Kotlikoff comes in and says, “Don’t think like an actuary. Think like an economist.” Here’s the point. If you die early, you’re dead. You don’t have any financial problems when you are dead. So therefore, for the question of analyzing when you should take your Social Security, you should not fear dying early for financial purposes. What you should fear is living a long time and outliving your money. So it is really a conservative strategy to hold off. So what you are in effect doing is buying longevity insurance. Yes, you can get a longevity insurance product on the market (and I do not want to go into a long discussion about that) but I will tell you that the rates that the government is using and the assumptions that they are using for the people who are holding off until age 70 is much, much, much, much, much more favorable than the insurance company that would give you some type of longevity insurance. So in effect, holding off on Social Security is the cheapest type of longevity insurance you can buy. For single people and we’ll get into the marital concepts later, but the idea is to hold off longer, and yes, you will start out at a lower income but the additional money you will get every month will (depending on assumptions maybe in your mid-80s for single people), but again, think like an economist, not an actuary.

Dan Weinberg: OK, now in the example that you just gave, the two taxpayers that you were comparing, were ages 62 and 70. Tell us the reason that you picked those two ages.

Jim Lange: Well, you are right, Dan, it is not a pure coincidence. Age 62 is the earliest time that you can apply for Social Security. Age 70 is the latest age that you can apply and still receive a benefit or an increased benefit because you waited. In other words, you can’t, even if you wanted to, apply for a benefit for yourself before you turn age 62 and there is no point in waiting until after age 70 because let’s say you don’t do anything and you apply at age 71 or 72 or later, you are not going to get a bigger benefit, you just miss those years. So there is no reason to hold off after age 70 and you literally are not allowed to apply before age 62.

Dan Weinberg: And some of our listeners may have heard the term Full Retirement Age, can you tell us what that is and why it is important?

Jim Lange: Sure, the Full Retirement Age is for people who were born between 1943 and 1954 is age 66. It is an important concept because it is in effect the base of which Social Security is calculated. So if you take it before age 66, you are only going to get a percentage starting with 75% of the Full Retirement Age benefit and if you hold off until age 70, you are going to get 132% of your Full Retirement Age benefit. The other thing that is important is if you are still working, age 66 is the first year that your additional income from your work will not reduce the amount of Social Security that you will receive. I hate when people are working and they are 65 years old and they take their Social Security because their Social Security benefit is going to decrease and I would much, much rather they wait and get the increased amount, not have their income reduced by their wages and at age 66, this is the first year that this will happen.

Now one of the ways that Congress is trying to keep the Social Security system solvent is by continually raising the Full Retirement Age. So again, born between 1943 and 1954, the Full Retirement Age is 66. If you were born in 1955, the Full Retirement Age is age 66 + 2 months. If you were born in 1956, the Full Retirement age is age 66 + 4 months. And it keeps getting later and later just by the period of months until 1960 and later in which case it is age 67.

Dan Weinberg: Now can you compare the benefits of someone starting at age 62 versus waiting until that Full Retirement Age?

Jim Lange: OK, if you consider the Full Retirement Age X if you will, then starting at age 62, you will get 75% or ¾ of what you would be entitled to at Full Retirement Age. Then, for every year that you wait, it goes up so it starts at 75% at age 62, 80% at age 63, 86.7% at age 64, 93.3% at age 65, and then when you reach age 66, you are at 100% as this is your Full Retirement Age.

Dan Weinberg: Now will you compare the benefits of someone waiting until age 70 versus applying at their Full Retirement Age and what happens if you apply after FRA?

Jim Lange: Ok, at age 66, that is 100% of your benefit. Then for every year that you wait, you get an 8% raise in what you are going and remember, this is for the rest of your life. So if you apply at age 66, then it is 100%. If you apply at age 67, it is 108%. If you apply at age 68, it is 116%. If you apply at age 69, it is 124%. And if you apply at age 70, it is 132%. So again, age 70 is 132% of your full retirement benefit but age 62 is only 75% of your full retirement benefit.

Dan Weinberg: So how much can our listeners expect to receive?

Jim Lange: Well, of course, that will depend. Obviously it will depend on the credits that earned during your working career. It will depend on the age at which you apply. It will also depend on what strategies that you utilize (this is what we are going to get into).

Dan Weinberg: And what are some important web sites that our listeners need to know about?

Jim Lange: Well, one thing that I would do if I was getting ready to apply for Social Security is I would want to make sure that the Social Security Administration has records of all of the years that you worked. So one of things that I would do as a cautionary “belt & suspenders” type measure is to get a hold of your Social Security earnings statement, and you can get that by going to www.socialsecurity.gov/mystatement. Now here is why this is so important and you probably don’t remember how exactly much money you earned in 1972 or whenever you did start working, but here is what you probably do know. You would know if you had a big gap. So let’s say that you are looking at your record and they are missing two or three years and you know darn well that you did not sit on your butt and do nothing for two or three years. So you know that there is a problem with their record of your earnings record. Now, this is something that you are going to have to work through but the point is that you are going to take a look and you are going to find out and make sure that they have all of your working years accounted for. It would really be best if you went back and confirmed to the dollar what your earnings were. For most of us, it would be good enough to have an idea of what we earned and to make sure that those amounts were reflected on our earnings record. Once again, you should do this at www.SocialSecurity.gov/mystatement. Then, if you want to get an estimate of your benefits, you can go to www.SocialSecurity.gov and click on estimate your retirement benefits. They have a handy dandy calculator that you can use. Speaking of handy dandy calculators, there is one that is publicly available for free is at www.ssa.gov/planners/benefitcalculators.htm. Again, this is www.ssa.gov/planners/benefitcalculators.htm. By the way, once you apply for Social Security benefits, you can’t get the statement online. I don’t know why that is but again, once you apply for benefits, you cannot get the statement online.

Dan Weinberg: Alright, now it is time to get to the real meat of the issue that we are talking about today and that is the spousal benefits. First, let’s talk about what hasn’t changed.

Jim Lange: Alright, Dan, you make a good point. If you are single, nothing has changed. And as I mentioned, we are not going to cover divorce benefits today. Let’s just talk about the spousal benefit in general. The spousal benefit is ½ of the primary worker’s Primary Insurance Amount which is often shortened by calling it PIA if you had stared at Full Retirement Age which again is age 66. And by the way instead of ½, it would be 35% if you started a spousal benefit at age 62. But we don’t even want to go there. We basically want people to hold off and get that increased income for the rest of their life. So let’s do a quick example. Let’s assume that John’s Primary Insurance Amount that is the amount that he would collect at age 66 is $2,000. And let’s assume that his wife’s Primary Insurance Amount that is the amount she would collect at age 66 is $800. So, if she applied at Full Retirement Age for a spousal benefit rather than her getting $800 which is the amount that you would get based on her own records, she would get ½ of John’s so ½ of $2,000 is $1,000. Notwithstanding the fact that she would be getting $800 on her own record, in fact her own record could be $0, she would get $1,000 of John’s that he would be entitled to when he is age 66 or his Primary Insurance Amount. So, here are a couple of things that have not changed. The primary insurance worker must have filed for benefits in order for the spouse to qualify for a spousal benefit. The spouse must be at least 62 years old for a reduced benefit, or they must be at least 66 years old for a full spousal benefit. The spousal benefit is based on the primary worker’s Primary Insurance Amount, or, in other words, what the primary worker would be collecting at age 66. So, let’s say, for discussion’s sake, that the primary worker either didn’t collect, or applied and suspended, or didn’t do anything at age 66, and then their spouse applied for a…well, I’m sorry, they have to have applied, but let’s say that the spouse then collected a spousal benefit. It wouldn’t help the spousal benefit for the primary worker to hold off past age 66 to collect.

Dan Weinberg: Now, I want to mention here that this program is skipping the old law and the new law for divorcees. It is very important, but will not apply to everyone. Now, let’s talk about survivor’s benefits. How does that work, and has that changed?

Jim Lange: Well, this is really important, and it’s going to relate back to one of the reasons why it’s so important to get at least one benefit as high as possible, and it’s strategy, but here’s the law, and then we’ll talk about why the strategy’s so important. So, let’s go back to John and Barbara, and let’s assume that John’s benefit at full retirement age is…actually, it doesn’t even matter at full retirement age. It could be, or he could’ve actually been getting the 8% increases from his full retirement age until age 70, which would then make it, in effect, the amount at his primary insurance amount, or at age 66 times 1.32. But let’s just keep it simple and say that his benefit was $2,000 a month, and let’s say that his wife was $1,200 a month, and one of them dies, and for our purposes, at the moment, it doesn’t matter which one, but after the first death, the survivor would be entitled to the higher of the two. So, let’s take the actuarially more likely case where he dies first. The wife would get the higher of the two, or she would get the $2,000. Now, it’s still a financial loss because if they were both alive, they were getting $3,200, but if the husband dies, the wife will get the higher of her amount, or his amount (in this case, his amount was the higher, which would be $2,000).

Dan Weinberg: And is it important for the survivor that the person who dies made the best decision?

Jim Lange: Well, this is really critical. So, let’s say, for discussion’s sake, that John took the amount, he took his Social Security at age 66, or, worse yet, at age 62, and let’s assume that he had the stronger earnings record, and let’s say that he died, and then his wife would be getting the survivor benefit, which would be the same as his benefit, for the rest of her life. Now, again, let’s say that he collected at 62, she would be getting 75%, which might be a little bit more than $1,400, and let’s say that she lived another 30 years. She’s going to be getting a pretty lousy benefit into her older age and eventual death. Now, let’s say that he had waited until 70 and then he died. So, instead of around $1,400, he’d get 1.32% times the 2,000, which would be closer to $2,600-$2,700 compared to the $1,400. Not quite double, but substantially more. She would be getting that amount every month for the rest of her life plus, by the way, the cost of living increases, which substantially increases the difference between waiting and taking it early. That’s one of Jane Bryant Quinn’s big things. She hates to see the primary insurance amount worker who, at least in the old days, was usually the man, she hates to see him take that Social Security early because it’s not only dooming him to a low income, but it’s also dooming his wife to a low income for the rest of her life.

Dan Weinberg: What are some of the rules for survivor benefits?

Jim Lange: Well, the couple does have to be married at least nine months at the date of death, with the exception of an accidental death, and the other one is that the survivor must be at least 60, even for a reduced benefit, 50 if he or she is disabled, or a full retirement benefit (that is, at age 66) for the full benefit. The survivor benefit is not available if the widow or widower remarried before age 60, unless that marriage ends.

Dan Weinberg: Okay. Now, let’s get into the really good stuff. What is the apply and suspend technique?

Jim Lange: Okay. Now, by the way, for you impatient people, now we’re going to get to the interesting strategies, but I felt honor bound to go through the basics because most people don’t understand the basics, and if you don’t understand the basics, then getting into the nuances of the two techniques that I’m going to be talking about are not as meaningful. So, first, we’re going to go through apply and suspend under the old law, or existing law. So, at full retirement age, in other words, age 66 for those of us born…well, not me, but for you slightly older people born between 1943 and 1954, the higher earning spouse applies for and suspends their benefit. The lower earning spouse applies for and collects a spousal benefit while the higher earning spouse’s benefits are in suspension. Then, the higher earning spouse claims their own benefits when they are 70.

Dan Weinberg: And can you give our listeners an example?

Jim Lange: Okay. Let’s do an example of Bob and Barbara, who are each 66 years old, and let’s assume that Bob’s primary insurance amount, that is the amount that he’s entitled to at age 66, is $2,500 a month. Let’s assume that Barbara’s primary insurance amount is $1,400 a month. Now, what Bob does is he applies and suspends when he is age 66. Now, this is important because Barbara cannot get a spousal benefit unless Bob actually applies. So, that’s the difference between Bob applying and suspending because what applying and suspending is doing is you’re saying, “I’m applying for Social Security, but don’t pay me anything.” Well, what’s the difference between applying and saying “Don’t pay me anything” and just doing nothing? Well, at least under the existing law, if you apply and suspend, that enables your spouse to collect a spousal benefit, which, if you remember, was one-half of your primary insurance amount benefit, that is, the amount that you are entitled to receive at age 66. So, Bob is applying and suspending. Then, notwithstanding the fact that his wife is collecting a benefit based on his record, he is still getting an 8% raise every year for the rest of his life that stops at age 70. So, he’s getting those 8% raises notwithstanding the fact that his wife is collecting a benefit, in effect, on his earnings record. Now, here’s part of the beauty of this: Barbara is not collecting on her own record, and even though she is getting a check, her own record continues to grow at 8% between age 66 and 70. So then, when she is 70, she’ll compare which is higher: either one-half of Bob’s when he was 66, or her amount, including the 8% raises that she’s getting between 66 and 70. And we have just found that this is enormously beneficial, and it’s probably one of the reasons why Congress is taking it away, because they’re sticking it to the middle class. So, one of the limitations is that you can’t do this before full retirement age of the primary worker.

Dan Weinberg: Okay, and now, we’re really getting to why we’re here today: what is the new law regarding the apply and suspend strategy?

Jim Lange: Okay. Well, first of all, I’m going to take one minute out and pat myself on the shoulder because I’ve been giving Social Security workshops for a number of years, I’ve been writing about it, I’ve been talking about it, and we have been huge advocates of apply and suspend. Many people said, “Hey Jim, you know, that sounds great, but what if they change the law?” And I always said, “Well, jeez, you know, you can never be certain what happens if they change the law, but my best guess is that this is going to be a good thing, that is if you apply and suspend now and then they change the law later.” And it turned out I was right. So, we feel vindicated.

So, under the new law, the spousal benefits can only be collected if the primary spouse earner is collecting his or her own benefits. If you remember when I talked about Barbara before, she was collecting a spousal benefit even though Bob was sitting there letting his 8% raises accumulate, not collecting a check. So, the essence of the new law, and the essence of the change for apply and suspend, is that the spousal benefit is only available if the primary worker is actually collecting Social Security, not collecting and suspending. So, the spousal benefits cannot be collected while the primary worker’s benefits are suspended.

Dan Weinberg: Okay. So, how does the transition period for change affect apply and suspend?

Jim Lange: Okay, well, first the good news, and this relates back to what I had said, that the strategies that we had been recommending worked out really well. If you already applied and suspended, so for most of you who are actually already my clients and of the right age, you will be grandfathered. So, you can go dance in the street because it turns out you did the right thing. You’ll be hundreds of thousands of dollars better off, and you don’t have to do anything with Social Security. So, that’s the good news. You can continue to suspend your benefits while getting your 8% raises each year, and you do that until age 70, and your spouse can get a spousal benefit while you are getting your 8% raises, or your 8% raises are accumulating.

Now, and here’s the tricky part, if you were born before April 30, 1950, meaning that you will be 66 by April 30, 2016, you may apply and suspend on or before April 30, 2016. If you do that, your spouse will still be able to collect benefits based on your earnings record while your own benefits are suspended. Again, if you were born on or before April 30, 1950, meaning that you’ll be full retirement age by April 30, 2016, you may apply and suspend on or before April 30, 2016. So, if you were born after April 30, 1950, your spouse will not be able to collect a spousal benefit, unless you are actually collecting benefits on your own record, because you remember, in that example, I had Bob just sitting there not collecting anything but just getting his 8% raises when he was ready to collect. But if you were born after April 30, 1950, you’re just out of luck. So, if apply and suspend is the best strategy for you, and you haven’t already done the apply and suspend technique, this is the time to act, between now and April 30, 2016.

So, what about the transition period, and who will this help and who will this not help? Well, this will help if your spouse will be 66 before you turn age 70. So, let’s say that you are much older than your spouse. Then, it really won’t help that much because (and it’s probably a little bit beyond the scope of today’s talk). I am not a big fan of a spouse collecting a spousal benefit before they reach 66 because of the actuarial reduction and other reasons. But your spouse must wait until they are full retirement age to receive an unreduced benefit. So, again, let’s say that you’re 66, or you will be on or before April 30th. Your spouse is age 64. If you apply and suspend, then you can wait two years until you’re 68, your spouse is 66, and then your spouse can take advantage of the apply and suspend. That is, she can get the spousal benefit, you can just keep getting your 8% raises, and it would be, in effect, the same as existing law. But if you fall asleep and you don’t do anything, then your spouse is going to miss that opportunity, and you can be significantly more worse off than if you do the right thing.

Dan Weinberg: Okay. I can hear people saying, “Jim, this is getting very complicated! Is it really worth the trouble?”

Jim Lange: Well, it depends if you care about your money or not. So, in the original analysis, if you do qualify for apply and suspend, and you manage to get yourself grandfathered, I have here in front of me a chart that shows the difference between two people with the identical earnings record, identical interest rates, identical tax returns, everything else, and the difference, over their lifetime, between, let’s say, age 62 and if they live well into their nineties, is about two million dollars. So, this is not anything to sneeze at. Even the new regulations, the difference between, for example, both members of the household, or both husband and wife, taking at age 62 on their own records, depending on the assumptions you use, can still be about a $1.5 million difference. So, yes, I would say that it is very important and very worthwhile to go through these complications. In fact, Elaine Floyd says that people are going to have to come in to see us because the options and the calculations are so much trickier now. I’m just kind of talking about the basic law. I am not necessarily applying it in anything but the easiest cases.

Dan Weinberg: Now, what about the claim now, claim more later? I think you said that this is also known as a restricted application strategy?

Jim Lange: Yeah, so this is even more popular than the apply and suspend technique, but frankly, it doesn’t have quite as much impact. But for certain people, it is by far the better of the two choices. So, here’s how this works. At the full retirement age, the higher earning spouse applies for benefits, but not on their record. So, the higher earner…in the last example, I had the lower earner, but in this example, with the claim now, claim more later, which is also known as a restricted application, it is the higher earner who restricts their application to a spousal benefit. So, the lower earner must have filed for benefits on their own record. So, what’s happening is, the higher earner continues to get their 8% raises, and they are still getting a spousal benefit, which is half of their spouse’s benefit, which is typically lower than their own. They continue waiting until age 70, meaning that they keep getting those 8% raises, and then when they are 70, then they collect the full amount, including the delayed retirement credits, which is the same way of saying that they’re getting their extra 8% per year.

Now, under the old law, individuals were not allowed to claim the lesser benefit until they reached full retirement age. Now, the new law says that nobody will do it, no matter what their age, and here’s the big exception: unless they will be 62 by December 31, 2015. So, a little convoluted. Let’s go through an example. All right, so let’s keep it simple. Mike and Mary are 66 years old. Mike’s primary insurance amount is $2,000 a month. Mary’s primary insurance amount is $800 a month. Now, with a claim now, claim more later strategy, what we’re going to have is Mary file for her benefit at age 66. So, she’s getting $800 a month. Then, Mike files for a spousal benefit at the same time, and he begins collecting $400 a month, which is half of Mary’s primary insurance amount. That pattern continues until he is age 70. Then he switches to his maximum benefit, which, by then, would have been 1.32% times the $2,000, or $2,640, and then Mary adds on her $200 spousal benefit to collect $1,000. So, this worked out really well for them.

Now, under the new law, if you, meaning you being the primary worker, were born in 1954 or later, including me, and you will not be 62 by the end of 2015, claim now and claim more later (which is the same as filing for a restricted application) will no longer be available. So, people who are 62 and younger, and by the way, we can still do this in certain situations if one spouse is older than 62 and one is younger, and I don’t want to go into those nuances, but this will be a very viable strategy, but if you were born in 1954 or later, too bad.

Now, there are some limitations. The initial claim can’t be made before full retirement age, or age 66. Under the new law, a worker will not be allowed to be able to choose the lesser benefits. He’ll have to take the higher of the two. That is, their own benefits or half their spouse’s, but they could not, like the claim now, claim more later, take half the spouse’s, which is less than their own, and then allow their own to grow. That will not be possible. So, if their record is the highest, that’s what they’ll get. If it’s less than the spousal, he’ll receive the spousal if he is entitled to it, but he can’t take the lower of the two.

Dan Weinberg: So, how does the transition period for claim now, claim more later work?

Jim Lange: Okay, so if you were born before December 31, 1953, which means that you will be 62 or older by December 31, 2015, you will be able to file a restricted application, or to use the claim now, claim more later technique, when you reach your full retirement age. Otherwise, a restricted application will not be allowed. So, unlike the apply and suspend technique, where you have to act if you have not already done so, this is not an action item that you need to know right now. It will be when you’re 66, but it’s the date of birth that controls whether you’re allowed to do this or not, not whether you take proactive actions right now.

Dan Weinberg: So, what options do listeners have if they’re not eligible to take advantage of these strategies before the window closes?

Jim Lange: Well, again, I am a big believer in holding off, even for single people, but particularly for married people. So, for example, for people who are too young, I still like the idea in general of waiting until age 70, particularly for the spouse with the stronger earnings record. Then, what we like to do in our office is we recognize that Social Security is only part of the picture, but we don’t think that it should be analyzed independently. I think you have to look at the whole thing. So, for example, one of the advantages of holding off on Social Security is it creates a lower income for the purposes of Roth IRA conversions. So, let’s say your goal was to make a Roth IRA conversion up to the top of the 15% bracket. Well, in that case, taking Social Security earlier is really going to hurt you, and if you can’t make as much of a Roth IRA conversion, you’ll be worse off.

The other thing about getting the higher Social Security benefit is it changes the way we invest your portfolio. So, for example, if you wait and you have a much more substantial, in effect, fixed income guarantee, then we, as investors, are more inclined to have at least a slightly higher percentage of your long-term money invested in the market, meaning that you are likely, over time, to get a higher return. So, if you take Social Security too early, and you have to rely too much on your portfolio to get you through, you’re gonna be worse off because we also have to invest more conservatively.

And here’s the other thing, and I have heard this a bunch, and I really hope that nobody is in this position, but many people find themselves in this position. So, they’re 62 years old, they want to retire, they assumed that they were going to take Social Security when they were 62, maybe they heard this program and they said, “Well, gee, that’s great, but I can’t afford to wait until age 66, let alone age 70.” And here’s what I would say to somebody who is 62 years old, still working, and wanting to take their Social Security because they can’t afford to hold off until they’re 70. I hate to be glib, but in that situation, I don’t think you can afford to retire. I hate to see people take Social Security at 62 when I am very sympathetic, particularly if you have a job that you hate or perhaps it’s a very physical job and your body’s starting to break down or something like that, but my big thing is to make sure that both members of the couple (husband and wife) can live in the style in which they’re accustomed, and at a very bare minimum, food on the table, gas in the car, roof over head, and a little money left over for Saturday night, and maximizing your Social Security benefits is one of the best ways to guarantee that safe base.

Dan Weinberg: Okay. So Jim, where can our listeners go from here?

Jim Lange: Well, just like the government distinguishes your benefits based on your age, I’m going to distinguish your options between your physical locations. The people who live in western Pennsylvania, and they are interested in not only their Social Security strategies that we have talked about today, but also the Roth IRA conversion strategies, making sure that their tax return is reflecting the best strategies, the tax loss harvesting, making sure that their wills and trusts are okay, making sure that their appropriate provisions for their grandchildren’s education, actually looking at the whole thing, and when I say the whole thing, I not only mean the strategies, but also their investments. Of course, we’re big believers in low-cost indexing, but if somebody is interested in all of the strategies that I had just mentioned, plus a whole lot more. We didn’t even get into a lot of things like safe withdrawal rates, etc. And they are also interested in having money managed by what we feel is the best money manager certainly that I know, and his name is P.J. DiNuzzo.

I should mention P.J. and I have an arrangement whereby if somebody comes to our office first, and by the way, our minimum is now $600,000. It used to be $500,000. It will probably continue to creep up, but if they have $600,000 or more that they are interested in having managed, the deal is our office actually does the strategic work including the Roth IRA conversions and the Social Security analysis. We do what we call “running the numbers,” which is actually a big deal the first year, and then we have updates every year, and then you have, let’s call it, “strategic” reviews every year after the base year strategies have been created. That’s what our office does. Then, P.J. DiNuzzo and his office are the people who actually invest the money. Again, they’re using low-cost index funds. We believe that Dimensional Fund Advisors, which is the funds that they use, is the best set of index funds on the planet. They have just been wonderful through the years for P.J. and our investors, and P.J. and I work together.

Now, let’s say that you had never heard of me and you just went to P.J. and you said, “Well, P.J., how much do you charge for your services?” His fees, to oversimplify, would be 1% on the low end, which, again, is $600,000 and below, and then the more money that is invested, the lower the percentage, as low as 50 basis points, which is one-half of 1% if there is a lot of money invested. Now, if you come through our office first, it is the same fee, but instead of us charging you a separate fee for our work, we share the fee with P.J. Now, that arrangement whereby our office does the strategies, P.J. and his office does the actual money management, and by the way, they do a lot more. They do a personal balance sheet, a personal income statement, and they do the stack analysis. You’re really getting an awful lot for your money. But anyway, the people that we have in that arrangement, we actually have a 99% retainage rate. We think it is a win-win-win, meaning it is great for us because we get to do our strategies, it’s great for P.J. and his office because they get to do what they’re good at, but the biggest winner is the client because they’re getting the combination of those strategies for 1% or less, and they’re getting the best of our strategies and the best of his money management. Now, we’re kind of picky about who we choose. We have found that this tends not to work too well for people who are out-of-state, so this offer really is for people who live in western Pennsylvania or southwest Florida where I spend some time in the winter.

So, we do offer free consultations, and by the way, you still have to qualify, meaning that you have to have the $600,000 of investible assets. Then you would meet with either me or someone in my office, depending on my availability, and we would only go forward if we were compatible, and I really mean that. I’m not interested in working with pains in the you-know-what, and if you don’t think that we’re the right fit, then we don’t go any further. But we actually go through, typically, two, sometimes a four meeting process to determine if we are the right fit, and then if we are, then we start working together. Again, the benefit being that our office does the strategies (the Roth, the Social Security, the how much you could spend, the estate planning, tax planning, etc.), P.J. and his office, they actually do the true money management (personal balance sheet, personal income statement, asset allocation, bucket analysis, etc.).

Dan Weinberg: All right. Thank you very much, Jim, and if you are interested in that combination of services and you have at least $600,000 that you would like to have managed, you can do one of two things. You can call the Lange Financial Group at (412) 521-2732, and Alice (or whoever answers the phone) will be happy to help you begin the process of meeting with Jim or someone in his office. You can also visit www.PayTaxesLater.com and fill out the appropriate forms. If you do not live in either western Pennsylvania or southwest Florida and are interested in more information but not services, please visit www.JamesLange.com. I’m Dan Weinberg. For Jim Lange, thanks very much for listening to our emergency audio presentation on the Social Security changes.