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Social Security Withdrawal Options



August 09, 2012 – Comments (0)

Board: Macro Economics

Author: yodaorange

[Note: Post of the Day will be on hiatus until August 14. Please check the archive for great posts you may have missed.]

If you work(ed) in the US, chances are good that you paid into the Social Security system. The exceptions are some government workers that did not pay into SS and hence will not receive any benefits. When you paid into SS, you and your employer were not given any options. You pay in X, your employer pays in Y and that it the end of the story.

SS makes it easy to put money into the system. For better or for worse, taking money out of the system is a lot more complicated. Most people do not understand all of the options available when they decide to start taking SS benefits. Part of the reason is that many people reach age 62.5 and need SS payments to make ends meet. They realistically cannot afford to delay receiving benefits. METARites being smarter and wealthier than average have more options as to when they start receiving SS.

Social Security’s Handbook has 2,728 separate rules that govern its benefits. Each rule has its own explanation in the Program Operating Manual System. A simple example would be a married couple before they reach retirement ago. They ask a simple question: When should each of us take our SS benefits to maximize the net present value of income for the family? There are 6,571 different choices for this couple under the current SS rules. This is because each person can choose to take their own benefits or “spousal” benefits. Plus they can choose to start the benefits in any of 9 years. And this is a simple case.

It gets more complicated from there. For example, if you are divorced, you have the option of getting benefits based on your SS history or your ex-spouses SS history.

Boston University Laurence Kotlikoff has spent many years learning and analyzing the different options for receiving SS benefits. He has recently published: 37 Social Security 'Secrets' All Baby Boomers and Millions of Current Recipients Need to Know – Revised. [1] It is impossible for me to say which of the 37 MIGHT apply to your particular situation. Here are a few of the cases that might apply to many METARites:

1. If you are already collecting your retirement benefit and are at or over full retirement age, you can tell Social Security you want to suspend further benefits and then ask them to restart your benefits at a later date, say age 70. Social Security will then apply its Delayed Retirement Credit to your existing benefit once you start collecting again.

2. If you’re married, you or your spouse, but not both, can receive spousal benefits after reaching full retirement age while deferring taking your retirement benefits and, thereby, letting them grow. This may require having one spouse file for retirement benefits, but suspend their collection. This is called the File and Suspend strategy.

3. Millions of Baby Boomers can significantly raise their retirement benefits by continuing to work in their sixties. This may also significantly raise the spousal, child, and mother and father benefits their relatives collect.

4. Social Security’s online benefit calculators either don’t handle or don’t adequately handle spousal, divorcee, child, mother, father, widow or widower benefits, or file and suspend options.

So you are saying, “We METARites are a very smart group. We can figure this out for ourselves.” In a separate article, When Should I Take Social Security?-- A 'Simple' Formula [2] Kotlikoff published the formula used to determine one spouses benefit:

B(a) = PIA(a) x (1 – e(n)) x (1 + d(n)) x Z(a) + max((.5 x PIA*(a) – PIA(a) x (1+d(n))) x E(a), 0) x (1- u(a,q,n,m)) x D(a)

The article explains all of the variables. Good luck!

After you give up on determining the optimum withdrawal strategy yourself, you say: “No problem, I will just go down to the local SS office and have them help me.” Good luck with that. The SS employees, much like IRS employees, have been given a near impossible task. They are supposed to know all of the 2,728 rules plus how to apply them in all situations. Give me a break. Even Albert Einstein would throw up his hands on this one.

Financial columnist Scott Burns who has published several books with Kotlikoff wrote an article about looking at the different withdrawal options. [3] Scott finds a large difference in benefits in his test case: $539k versus $645k for a gain of $106k. Obviously, there are a lot of caveats and assumptions that went into this calculation.

BOTTOM LINE is that you should carefully examine the options for receiving SS benefits to make sure you get maximum benefits. At a minimum, you should consult with someone knowledgeable about the alternatives. I do NOT know a single, nationally available reference where you can find such a person.

The other option is to invest $40 in the online program that Kotlikoff has put together. [4] You input all of your statistics and it automatically goes through all of the options and shows you the choices. Then it recommends the one that maximize NPV.

I have NO financial ties or benefits for recommending Kotlikoff program, but it does seem like the best option to me. Potentially receiving a $10k to $100k benefit for a $40 investment is attractive IMO.

In Yodaspeak:

Give a concise, I wish I could, actionable answer, apply to most cases, that would, but beyond Yoda's ability, it is. Herh herh herh.



[1] Laurence Kotlikoff article: 37 Social Security 'Secrets' All Baby Boomers and Millions of Current Recipients Need to Know – Revised

[2] Laurence Kotlikoff article: When Should I Take Social Security?-- A 'Simple' Formula

[3] Scott Burns article: An Online Calculator that Maximizes Your Social Security Benefits

[4] Laurence Kotlikoff: Maximize my Social Security program

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