Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Social Security claiming strategies can be devilishly complicated. Joining me to discuss some of the frequent mistakes that investors make in Social Security claiming is Phil Moeller, he is the co-author of a new book about Social Security called Get What's Yours.
Phil, congratulations on the book. Thank you for being here.
Philip Moeller: It's my pleasure, Christine.
Benz: Let's talk about some of the key pitfalls. You deal a lot with individuals grappling with Social Security questions and problems; let's cycle through some of the key pitfalls that you observe while working with individuals. One of them, you say, is relying on break-even analysis to guide your decision-making--thinking about potentially investing Social Security proceeds. You say that individuals should actually think about Social Security more as an insurance policy.
Moeller: Absolutely. But I will say one of the strongest discussions we have with readers is this idea of a break-even analysis. It's very beguiling to think if you take benefits at 62 and invest them for eight years at a reasonable rate of return, you end up with a very nice pile of money and it would take you a long time to earn that money back in the form of higher benefits that you would get if you waited until age 70. So, when people look at these break-even ages of mid-80s or even older, they say, "Why should I possibly wait to take benefits?" Our feeling is that Social Security is the absolute best longevity insurance we have.
The payments are guaranteed by the government. It's maybe not what it used to be, but it's the best we have. They are inflation-protected. And the tax rate on Social Security is never more than 85% on your federal tax returns in terms of the number of dollars that are taxed. So, we think Social Security dollars are the valuable dollars and the ones you should really hold on to.
But because of gains in longevity, the average age of someone who is now age 65 is going to be in mid-80s--and later 80s for a woman. By the time people in their 50s are getting ready to retire, it could well be in the 90s. If you are a couple, the odds are very high that one of the two of you is going to live well into their 90s. So, as we say in the book--only partially tongue-in-cheek--your greatest fear in life isn't dying, your greatest fear is living to a really old age and outliving your assets. So, viewing this as longevity insurance, we think, is a good way of taking the best advantage of this great asset we have.Read Full Transcript
Benz: And delaying benefit claiming really gives you the full merit of that longevity insurance.
Moeller: Absolutely. That 76% benefit from delaying that you get every month for the rest your life, we think, can guarantee that you won't outlive your money. It will certainly do that for most people.
Benz: And one point you drive home in the book that I think is an important one is if someone looks at life-expectancy tables and says, "Well, I'm 60 now, and the average life expectancy is 85." You point out that 50% of people will live to be older than 85.
Moeller: Much older. And again, there is some self-selection here. But you know that if you're taking good care of yourself physically and you're paying attention to what you eat, the odds of you living longer are frankly somewhat greater, and the studies bear that out.
Benz: Another mistake to avoid--something that you say is a hobbyhorse of one of your co-authors, Larry Kotlikoff--is to avoid deeming. And I would say even people who are steeped in Social Security decision-making may not have heard this term. So, let's talk about deeming--what it is and how it comes into play.
Moeller: Again, when you take a benefit before full retirement age, which is 66 for people nearing retirement today, if you claim your retirement benefit before that age, under Social Security rules, you will also be deemed to be taking any other eligible benefits. So, for example, if you're eligible to take a spousal benefit, you would be taking both of those and Social Security will not pay you the full amount of each of those benefits. It will pay you an amount roughly equal to the greater of the two.
Not only that, it will reduce the amount of money you get from those benefits for the rest your life. So, deeming is a surprise to a lot of people. We've talked to many readers who never even realized that this had happened to them. They actually thought they were getting only the benefit they asked for and they learned later that they were actually getting a deemed benefit that was the greater of the two. And in some cases, when people said, "I want to file for a spousal benefit and then later I'll file for my own retirement," they came back later and they realized they'd already filed not knowing it. So, that's why full retirement age is a very important measure. If you do something before that and are deemed to have filed for another benefit, it can be a serious gotcha.
Benz: And it's kind of irrevocable.
Moeller: In most cases, it is. We can talk later a little bit about a case where it may not be; but in most cases, it is irrevocable.
Benz: Another key pitfall, you say, is failing to coordinate your claiming strategy with that of your spouse. Let's talk about why that is so important for couples who are attempting to figure out the optimal time.
Moeller: Sure. Beyond optimal, many people don't even know that spousal benefits exist. There have been research studies indicating that upwards of $10 billion a year in spousal benefits are literally left on the table unclaimed every year. Well, in our view, that's money that you should get; it's part of Get What's Yours. So, trying to alert people to the availability of spousal benefits is a big, big need. The second need is, again, going back to the cardinal rules, making sure you time those benefits properly so that you can take ultimate advantage of them. So, this can depend; it can be complicated. Spouses can be different ages or they can have different income levels that will affect the decision over which spouse should take a spousal benefit while the other one defers their retirement benefit.
In some cases, again, you can have the same income levels, but if the spouses are different ages, the indicated action can be different depending on when their claiming windows are the most ideal, which is going back to this idea of waiting till full retirement age to claim a benefit.
The other thing that happens when people claim benefits early--which they do. Fewer than 2% of people on Social Security wait until age 70 to claim their benefit. So, our advice may be great, but it's clear the world does not rush to our doorstep--
Moeller: So, the issue is when you take a reduced benefit early, it adversely affects the survivor benefit that your spouse will get if you pass away. Well, in the real world, this means that women are really disadvantaged because they are often younger than their husbands, they live longer than their husbands, and they make less money. So, in this context, Social Security is a significant women's issue. And I would just urge men everywhere to think about how they can optimize the retirement benefits of the people they love the most and the people they may leave behind--their wife and their children. Well, I would say one way is to defer taking your benefit to make sure their benefits, when you pass away, are the greatest they can be.
Benz: Another pitfall, you say, is that people don't necessarily take advantage of the fact that they can do a do-over. If it turns out that their initial claiming strategy was misguided or that something changed the calculus somewhat, there is an escape hatch. Let's talk about that.
Moeller: You have a year in which to, in effect, say, "I want to change my mind." If you do that, you have to pay back all the money you've received. And if you have Medicare premiums taken out of your benefit payment, you have to repay those premiums as well. You basically are wiping the slate clean, which means it's as if you never filed at all. So, if you've made a mistake and you say, "Wait a minute--I didn't realize [the benefits of waiting] till 70, and I want to go back." You have a year to do that. It used to be you had an unlimited window, and several years ago they reduced it to a year. But you do have that period of time in which you can effectively change your mind.
Benz: You mentioned that one particular situation where that might have applicability would be a same-sex couple. Let's talk about that. The laws are changing so quickly, and so you say that that might be something to consider.
Moeller: When we started researching the book, the number of states that were approving same-sex marriages was single digits. By the time we finished the book, it was above 30. It's been a tremendous change. If you are in a same-sex relationship, perhaps you took Social Security before marriage was legalized in your state. If that happened within a year of your claiming decision, you should go back and look at whether or not you should rescind that claiming decision so that you can take full advantage of all of these ranges of other benefits we've talked about. You can get spousal benefits; you can get child benefits.
So, I think for everybody who is in that kind of situation, again, if you can, think about whether or not you might be entitled to go back and basically do a do-over.
Benz: There is so much great, practical information in the book. Thank you so much for being here to share at least a little bit of it.
Moeller: It's been my pleasure, Christine. Thank you.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.