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Helpful Social Security References

From time to time, I hear from people who have visited their local SSA office (or spoken with an SSA employee on the phone) to execute a legitimate Social Security strategy, only to have the SSA employee (incorrectly) tell them that they cannot do such a thing.

Generally, the best thing you can do in such a situation is to respectfully direct the SSA employee to an applicable reference in the Code of Federal Regulations or Program Operations Manual System (i.e., the SSA’s internal employee manual). What follows are a few such references that may be helpful in getting things moving in your favor.

File and Suspend

These days, most SSA employees are familiar with the ability to voluntarily “suspend” your benefits after filing for them. Every once in a while, however, a person will be told (incorrectly) that he cannot suspend his retirement benefit at full retirement age, simply because he started receiving that benefit prior to full retirement age. CFR 404.313 (in particular, the bolded sentence) indicates very explicitly that that’s not the case:

“You earn a [delayed retirement credit] for each month for which you are fully insured and eligible but do not receive an old-age benefit either because you do not apply for benefits or because you elect to voluntarily suspend your benefits to earn DRCs. Even if you were entitled to old-age benefits before full retirement age you may still earn DRCs for months during the period from full retirement age to age 70, if you voluntarily elect to suspend those benefits.”

Filing a Restricted Application

When you are eligible for two different benefits, but choose to apply for only one of them (in order to allow the other one to continue growing), you are making what is known as a “restricted application.” Some SSA employees, however, will tell you that if you file for one benefit, you are automatically forced (“deemed”) to file for the other benefit as well.

This rule about deemed filing comes from CFR 404.623, which answers the question, “Am I required to file for all benefits if I am eligible for old-age and husband’s or wife’s benefits?” The Code section is rather lengthy to quote in its entirety, but the relevant point is that it states that if you file for a retirement (i.e., “old-age”) benefit or spousal benefit prior to your full retirement age, you are automatically presumed to have filed for the other benefit as well.

The key things to note here (and to bring to the SSA employee’s attention) are that:

  • This only applies when you file for something prior to FRA, and
  • This doesn’t apply to widow/widower benefits at all. (That is, if you’re eligible for a retirement benefit and a widow/widower benefit, you can file a restricted application for one or the other — even prior to full retirement age.)

6-Month Retroactive Lump-Sum

If you file for your retirement benefit after full retirement age, you have the option to essentially backdate your application by up to 6 months. In such a case, you will receive a lump-sum for those 6 months of benefits, and your ongoing monthly benefit will be smaller, as if you’d claimed it 6 months earlier than you actually did.

The applicable reference here is CFR 404.621, starting with paragraph (a)(2), which states:

“If you file an application [...] you may receive benefits for up to 6 months immediately before the month in which your application is filed. Your benefits may begin with the first month in this 6-month period in which you meet all the requirements for entitlement.”

Important note: CFR 404.621 also states that you cannot backdate an application to a point earlier than your FRA.

Retroactive Lump-Sum to Date of Suspension

If you suspend your benefits at any point in time, you can essentially change your mind later (but prior to age 70), and ask to retroactively “unsuspend” your benefits. For example, you could file and suspend at your full retirement age of 66, then at age 69, after being diagnosed with a condition that makes your life expectancy much shorter than you previously thought, you could ask to a) have your benefits unsuspended and b) receive a lump-sum for the months between 66 and 69. Going forward, your benefit would then be calculated as if you had never suspended at all (i.e., you would not get the delayed retirement credits for delaying from 66 to 69).

The ability to change your mind with regard to a suspension of benefits comes from POMS GN 02409.130, which states that your effective month for reinstatement of benefits (after a voluntary suspension) can be, “the current month, a future month or any past month during the suspension period.”

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Investing Blog Roundup: Ignoring the News

This blog was originally started to share the concept that you don’t have to follow market news in order to achieve investment success. (That is, it’s OK to be “oblivious” to it.) This week, MarketWatch writer Chuck Jaffe shares a similar message:

Investing Articles

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Does Overweighting Domestic Stocks Count as Active Management?

A reader writes in, asking:

“I’ve read in the past that you utilize Vanguard’s LifeStrategy funds.  You and I share the same passion toward favoring passive strategies rather than active. My question is then, do you consider the funds’ home bias reflective of an active strategy that deviates its asset allocation away from traditional weightings (based on actual market cap) inconsistent with Vanguard’s overall approach to indexing?”

I don’t have any strong opinion on whether the domestic tilt of the LifeStrategy portfolio (i.e., the fact that the LifeStrategy funds overweight domestic stocks and underweight international stocks relative to their market capitalization) constitutes active management.* If, however, it does count as active management, then there are several other characteristics of the LifeStrategy (and Target Retirement) funds that we must also consider active management. Specifically:

  • The overall stock/bond breakdown does not reflect the respective sizes of those markets,
  • Non-investment-grade bonds, bonds with maturities of less than 1 year, muni bonds, and TIPS are generally excluded from the portfolio (because none of those bonds are included in the Vanguard Total Bond Market Index Fund), and
  • The portfolio is rebalanced rather than simply allowing the allocation to each piece to shift naturally in accordance with market capitalizations.

If we’re treating one of those decisions with skepticism — because it could be considered active management — then we must be skeptical of each of the others as well.

Personally, I don’t worry too much about whether something is or isn’t active management. The primary problem with the most popular forms of active management (e.g., paying a fund manager to pick stocks or time the market) is that they increase costs without increasing returns by a sufficient amount to overcome those additional costs.

But the LifeStrategy (and Target Retirement) funds’ policy of overweighting domestic stocks doesn’t actually increase costs. In fact, it reduces costs slightly because the domestic index funds have somewhat lower expense ratios than the international ones. In other words, the skepticism with which I generally regard active management strategies (because they, in general, don’t improve returns enough to overcome the additional costs) doesn’t really apply in this case (even if it could be considered active management).

*With regard to whether the fund is somewhat out of character for Vanguard in particular, I can only say that Vanguard is pretty consistent in their message that they aren’t an indexing-only company and they have no philosophical opposition to active management.

Investing Blog Roundup: Using PE 10 for Retirement Planning

One of the more common methods of market timing (a.k.a dynamic asset allocation) is to shift your allocation toward or away from stocks based on PE 10 (a.k.a. Shiller PE).

But as author/advisor Michael Kitces explains this week, PE 10 isn’t actually that useful for market timing. It does, however, have other valuable applications for retirement planning.

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Why Would Somebody Buy a Deferred Lifetime Annuity?

After our recent discussion about the new “qualifying longevity annuity contract” rules, several readers wrote in to ask why anybody would buy a deferred fixed lifetime annuity — a product which has a significant likelihood of paying nothing whatsoever (i.e., in the case that the annuitant dies before the income kicks in).

Relative to an immediate lifetime annuity, the advantage is simply that you have more liquid assets available after the purchase of the annuity. This is preferable for a few reasons:

  • If you die soon after purchasing the annuity, your heirs get a lot more money, given that a smaller portion of your overall net worth went toward the annuity purchase;
  • You have more liquidity, which is good for handling unexpected expenses; and
  • You have more of an upside, given that more of the portfolio will remain to be invested in asset classes with higher expected returns (namely, stocks).

How About an Example?

Juanita just retired at age 70. She wants $45,000 of total income per year. She has $20,000 of annual Social Security income, meaning that she needs an additional $25,000 per year to come from her portfolio. She could purchase an immediate lifetime annuity paying $25,000 per year for $337,051 (based on a quote from Income Solutions).

Alternatively, she could purchase a deferred lifetime annuity, for which the payments start at age 85. If she purchased such an annuity right now at age 70, it would cost $68,479, thereby leaving her with an additional $268,572 in liquid assets relative to purchasing an immediate annuity. (Of note, however, is that the goal for this money is to satisfy $25,000 of annual spending from age 70 to age 85.)

But There’s a Catch

Our example above has one big problem: We’ve ignored inflation. In reality, Juanita probably wants to spend $45,000 adjusted for inflation every year for the rest of her life.

And that brings up my major qualm with deferred lifetime annuities: They leave you with quite a bit of inflation risk. You can purchase deferred lifetime annuities with an inflation adjustment, but, with the only such annuities I’ve seen, the adjustment doesn’t kick in until the income kicks in. For example, if you purchase an inflation-adjusted deferred annuity at 65 that will begin paying you $1,000 per month at 85, you really do get just $1,000 per month at 85. It’s only inflation after age 85 for which you would be protected. If there’s a ton of inflation between age 65 and 85, tough luck.

In contrast, with an immediate lifetime annuity, the inflation adjustments begin immediately — thereby making immediate annuities significantly more useful as a tool for creating a safe “floor” of income (i.e., for ensuring that your standard of living does not drop below a certain level).

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Investing Blog Roundup: Individual Stock Perks

This week I came across an interesting Bogleheads discussion about perks offered by certain companies to their shareholders.

For example, I learned that if you own shares of Berkshire Hathaway — even just a single Class B share, which currently runs just $125 — you can get an 8% discount on GEICO car insurance (unless you already have some other “affiliate” discount). For me, that’s a savings of about $65 per year — a pretty good effective dividend for a $125 investment!

I don’t usually think it’s a good idea to buy individual stocks, but I’ll be making an exception in this case.

Investing Articles

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