Oblivious Investor http://www.obliviousinvestor.com Low-Maintenance Investing with Index Funds and ETFs Fri, 19 Sep 2014 12:00:04 +0000 en-US hourly 1 http://wordpress.org/?v=3.9.2 Investing Blog Roundup: Market Valuations and Retirement Asset Allocation http://www.obliviousinvestor.com/investing-blog-roundup-market-valuations-and-retirement-asset-allocation/ http://www.obliviousinvestor.com/investing-blog-roundup-market-valuations-and-retirement-asset-allocation/#comments Fri, 19 Sep 2014 12:00:04 +0000 http://www.obliviousinvestor.com/?p=7294 Housekeeping note: We have family and friends visiting from out of town this week and early next week, so there will be no article on Monday.

This week researchers Wade Pfau and Michael Kitces released a new paper looking at an assortment of different asset allocation strategies in retirement — ranging from various static allocations, to various “glide path” allocations that either increase or decrease the stock portion over time, to various valuation-based allocations that adjust the stock/bond ratio over time based on whether stock valuations are high or low.

The paper and the authors’ respective summary articles can be found here:

If I were to offer my own very brief summary, it would be as follows:

  • Based on historical US data, adjusting asset allocation based on market valuations has modestly improved results for retirement portfolios, and
  • A fixed 60%-stock allocation is pretty darned good as well.

Investing Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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A Look at Vanguard’s Managed Payout Fund http://www.obliviousinvestor.com/a-look-at-vanguards-managed-payout-fund/ http://www.obliviousinvestor.com/a-look-at-vanguards-managed-payout-fund/#comments Mon, 15 Sep 2014 12:00:00 +0000 http://www.obliviousinvestor.com/?p=7295 A reader recently wrote in asking for a discussion of the Vanguard Managed Payout Fund — how it works and what it might be good for.

In short, the fund is meant to be a tool for investors who are spending from their portfolios (i.e., retirees). It’s an all-in-one fund (like the LifeStrategy or Target Retirement funds), but it also implements a withdrawal strategy for you. In other words, the fund handles not only asset allocation and rebalancing, but also the implementation of a distribution strategy. Pretty neat idea, in my opinion.

What is the Distribution Strategy?

Perhaps the best way to assess the Managed Payout Fund’s distribution strategy is to compare it to other strategies.

The best known retirement distribution strategy is the classic “4% rule,” in which the retiree spends 4% of the portfolio balance in the first year of retirement, then automatically adjusts spending upward each year in keeping with inflation, regardless of how the portfolio performs. The advantage of this strategy is a steady level of spending (in inflation-adjusted terms), with the disadvantage being that someday the portfolio (and, therefore, the spending) could hit zero if things go poorly.

An alternative, equally simple strategy is to take 4% out of the portfolio each and every year. Relative to the classic “4rule,” this results in widely varying levels of spending (which is undesirable), but it has the advantage of never fully depleting the portfolio.

The strategy of the Vanguard Managed Payout Fund sits between these two — with a level of spending that does vary based on portfolio performance, but that is “smoothed” by basing the withdrawal on the average share price over multiple years. (Specifically, the fund sets a monthly distribution in January of each year, based on 4% of the fund’s average share price over the last three years.)

Vanguard Managed Payout Asset Allocation

As of this writing, the Managed Payout Fund’s allocation is as follows:

  • Vanguard Total Stock Market Index Fund 25.0%,
  • Vanguard Global Minimum Volatility Fund 20.1%,
  • Vanguard Total International Stock Index Fund 14.9%,
  • Vanguard Total Bond Market II Index Fund Investor Shares 13.3%,
  • Vanguard Market Neutral Fund Investor Shares 10.0%,
  • Vanguard Total International Bond Index Fund 6.9%,
  • Vanguard Emerging Markets Stock Index Fund Investor Shares 5.1%, and
  • Commodities 4.7%.

Frankly, I’m not exactly a fan of this allocation. I’m not talking here about the stock/bond allocation (though with a net** stock allocation of roughly 65%, it is rather aggressive for many retirees) or the US/international allocation. I’m talking about the fact that roughly one third of the portfolio is actively managed. If I were to bet on active management, it would be Vanguard’s that I’d want to bet on, given their low costs and strong track record. But I’d rather have the option to use this sort of all-in-one tool without having to make such a bet.

Conclusion

In short, Vanguard’s Managed Payout Fund might be a good fit for investors who:

  • Are retired and drawing from their portfolios,
  • Appreciate the simplicity of an all-in-one fund and an automated distribution strategy,
  • Don’t have any qualms about active management, and
  • Find that the fund’s allocation is a good fit for their risk tolerance.

In addition, like all funds-of-funds, this fund will be less tax-efficient than a DIY portfolio with individual index funds, making it somewhat less desirable for investors with significant assets in taxable accounts.

** I say “net” stock allocation because the Market Neutral Fund shouldn’t, in theory, be contributing any stock market volatility.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Investing Blog Roundup: Fixed Indexed Annuities http://www.obliviousinvestor.com/investing-blog-roundup-fixed-indexed-annuities/ http://www.obliviousinvestor.com/investing-blog-roundup-fixed-indexed-annuities/#comments Fri, 12 Sep 2014 12:00:12 +0000 http://www.obliviousinvestor.com/?p=7286 As I’ve written on several occasions, I’m a big fan of annuities as a tool for providing retirement income. But that doesn’t really extend beyond boring lifetime annuities. Fixed indexed annuities (a.k.a. equity indexed annuities) are an entirely different animal. And as Allan Roth explains this week, there are a number of potential “gotchas” involved with such products.

Investing Articles

Other Money-Related Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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How Big Does Your Portfolio Have to Be Before It Should Look Different? http://www.obliviousinvestor.com/how-big-does-your-portfolio-have-to-be-before-it-should-look-different/ http://www.obliviousinvestor.com/how-big-does-your-portfolio-have-to-be-before-it-should-look-different/#comments Mon, 08 Sep 2014 12:00:37 +0000 http://www.obliviousinvestor.com/?p=7266 A reader writes in, asking:

“For the last several years I’ve been following a basic Boglehead strategy with a few index funds. How big does a portfolio have to be before it makes sense to start moving into other strategies?”

There are certain portfolio-related considerations that can become relevant as your wealth grows to a certain point. For example:

  • If your portfolio starts to get to the point that estate taxes might be an issue (with the exemption currently at $5.34 million – or twice that if married) and your primary goal is leaving money to heirs rather than funding your retirement, purchasing life insurance as an investment can make sense, or
  • If you have a larger, mostly taxable, 7-figure portfolio and a desire to be hands-on, individual stocks can make sense for the large-cap part of the portfolio — not with the idea of picking stocks that will outperform, but rather with the idea of creating a portfolio that roughly replicates the overall large-cap part of the market, while having expenses of zero (no expense ratios and no commissions) and having the ability to tax-loss harvest very aggressively due to having many unique holdings.

But, the truth is, most investors’ portfolios never reach those points — or even come close.

In addition, the basic principles of diversifying and keeping costs low remain applicable regardless of portfolio size.

As a result, for most people, it’s not exactly portfolio size that causes a need for a significant change to the portfolio. Instead, it’s usually a change in life/career stage that dictates major changes. That is, once the primary objective for the portfolio changes from an accumulation goal (i.e., accumulating assets while not exceeding your tolerance for volatility) to a spending related goal (e.g., satisfying $X of spending each year), the ideal tools for the job change somewhat.

Specifically, as you near retirement, it can make a lot of sense to start shifting toward a liability-matching strategy with a portion of the portfolio — creating a “safe floor of income” with things like Social Securityannuities, or TIPS. As author/advisor Bill Bernstein puts it, “If you’ve won the game, why keep playing it?”

Of course, portfolio size is a factor in determining when you make the shift from living off of work income to living off of the portfolio, but it’s only one of several factors (including ability to continue work, interest in continuing work, anticipated level of spending per year, and anticipated level of non-portfolio income per year).

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Investing Blog Roundup: Is a 4% Withdrawal Rate Too High These Days? http://www.obliviousinvestor.com/investing-blog-roundup-is-a-4-withdrawal-rate-too-high-these-days/ http://www.obliviousinvestor.com/investing-blog-roundup-is-a-4-withdrawal-rate-too-high-these-days/#comments Fri, 05 Sep 2014 12:00:40 +0000 http://www.obliviousinvestor.com/?p=7284 Last week, I linked to an article from Wade Pfau and David Blanchett discussing the usefulness (and limitations) of Monte Carlo simulations. This week, Pfau and Blanchett follow up with an article that uses Monte Carlo simulations to address the question of whether a 4% withdrawal rate is still a good idea for today’s retirees:

Other Money-Related Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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When Does it Make Sense for Married Taxpayers to File Separately? http://www.obliviousinvestor.com/when-does-it-make-sense-for-married-taxpayers-to-file-separately/ http://www.obliviousinvestor.com/when-does-it-make-sense-for-married-taxpayers-to-file-separately/#comments Mon, 01 Sep 2014 12:00:48 +0000 http://www.obliviousinvestor.com/?p=7283 A reader writes in, asking:

“Under what circumstances does it make sense for a married couple to file separate tax returns rather than file jointly?”

In most cases, it doesn’t make sense. That is, in most cases, a married couple will end up paying more total tax by filing separately than by filing jointly. There are, broadly speaking, two reasons for this.

Reasons Not to File Separately

First, by filing separately, you’re made ineligible for a number of tax breaks, including (but not limited to):

  • The student loan interest deduction,
  • The American Opportunity Credit,
  • The Lifetime Learning Credit,
  • The earned income credit,
  • The premium tax credit (with a possible exception for victims of domestic abuse),
  • The child and dependent care credit (with a possible exception for married people who live in separate homes), and
  • The adoption credit (also with a possible exception for married people who live in separate homes).

The second reason has to do with tax brackets. For married couples in which one spouse earns significantly more than the other, filing jointly allows the income from that higher-earning spouse to stay in a lower tax bracket. Conversely, if the couple files separately, the low-tax-bracket space of the spouse with no/low earnings will go unused.

Reasons to File Separately

There are four general types of reasons for filing separately.

The first reason is simply that the couple is in fact separated (though still married) and filing jointly simply wouldn’t be feasible.

A second, less common reason for filing separately is that one of the spouses has to publicly disclose his/her tax returns for some reason, and the couple wants to keep as much information private as possible (by keeping it off the publicly-disclosed return).

A third reason for one spouse wanting to file separately is to avoid being made jointly liable for any amounts due on the other spouse’s return. (If this is a concern for you, you would do well to discuss the issue with a tax attorney.)

Finally, there are some uncommon cases in which filing separately can actually result in tax savings. These cases tend to be the result of the couple wanting to take better advantage of a particular deduction that is reduced by a certain percentage of their income. For example, the itemized deduction for medical expenses is reduced by 10% of your adjusted gross income (7.5% if you’re age 65 or over). As a result, if one spouse has a lot of medical expenses in a given year, it can sometimes make sense to file separately so that the amount by which the deduction is reduced is a smaller figure (because it’s based on just that spouse’s income rather than the couple’s combined income).

Other deductions that could provide a similar motivation to file separately would include:

  • The itemized deduction for casualty losses, which is reduced by 10% of your adjusted gross income, and
  • Miscellaneous itemized deductions that are (collectively) reduced by 2% of your adjusted gross income (e.g,. unreimbursed employee expenses and tax preparation fees).

Of note: If you’re claiming one of these itemized deductions, rather than simply filing separately, it’s important to do the math both ways (i.e., filing separately and jointly) to see which works better, as the disadvantages of separate filing that we discussed above often outweigh the additional savings you might get from being able to claim a larger itemized deduction.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Investing Blog Roundup: Vanguard Interviews Jonathan Clements http://www.obliviousinvestor.com/investing-blog-roundup-vanguard-interviews-jonathan-clements/ http://www.obliviousinvestor.com/investing-blog-roundup-vanguard-interviews-jonathan-clements/#comments Fri, 29 Aug 2014 12:00:57 +0000 http://www.obliviousinvestor.com/?p=7281 When I first started reading about personal finance, Jonathan Clements (writing for The Wall Street Journal at the time) was one of my favorite writers. After a several-year hiatus, Clements began writing for WSJ again this year. You can find a collection of his articles here.

This week, in an interview with Vanguard, Clements argues that today is a great time to be an investor:

Investing Articles

Other Money-Related Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Why I Prefer Vanguard LifeStrategy Funds to Target Retirement Funds http://www.obliviousinvestor.com/why-i-prefer-vanguard-lifestrategy-funds-to-target-retirement-funds/ http://www.obliviousinvestor.com/why-i-prefer-vanguard-lifestrategy-funds-to-target-retirement-funds/#comments Mon, 25 Aug 2014 12:00:37 +0000 http://www.obliviousinvestor.com/?p=7280 A reader writes in, asking:

“I enjoyed the Bogleheads piece. [Editor's note: He's referring to this recent Money article by Penelope Wang.] I noticed that there was a recommendation for the Target Retirement Funds. I wonder if you’d run your preference for the LifeStrategies Growth Fund by me one more time?”

As a tool for investors in general, I prefer the LifeStrategy funds primarily due to their naming convention (i.e, the use of the names Growth, Moderate Growth, Conservative Growth, and Income rather than date-based names). When presented with a menu of LifeStrategy funds, an investor is forced to actually think about his/her risk tolerance in order to decide which fund is the best fit. In contrast, with the Target Retirement funds, there’s an easy alternative: just pick based on the date.

The problem here is that, while time to retirement is a factor that affects your risk tolerance, it is just one of several factors. And, in many cases, it isn’t even the most important factor.

For example, I know many Gen-Y investors who are chronically underemployed, yet who have nonetheless managed to scrape together some money to invest in a Roth IRA. Despite the fact that they’re a long way from retirement, they need to use conservative allocations in their IRAs, because there’s a significant chance that they’ll have to tap into the money in the not-so-distant future, due to income instability and small emergency funds.

On the other end of the spectrum, there are retirees whose day-to-day needs are completely satisfied via pensions and/or Social Security. Despite the fact that they’re already retired (i.e., time to retirement = zero), an aggressive allocation could be quite reasonable, should they desire to use one.

And even if investors are told to pick a target date fund based on the fund’s underlying allocation rather than the date in the fund’s name, there’s still going to be an anchoring effect involved. In other words, investors will probably not adjust as much as they should in order to account for their personal risk tolerance. For example, a conservative investor planning to retire in 2040 might be best served by the allocation of the 2015 fund. Yet because he’s been told that the 2040 fund is typical for somebody his age, he only adjusts slightly — by using the 2035 fund for instance, despite the fact that it’s still much too risky for his needs.

With regard to why I personally am using the LifeStrategy Growth Fund rather than a Target Retirement fund, the answer is that my wife and I don’t, as of right now, plan to shift our allocation toward bonds over time. Rather, as we near (and enter) retirement, we expect to simply put money into inflation-adjusted lifetime annuities (including Social Security) until we’ve reached the point where our basic needs are satisfied via very safe sources of lifetime income. With money that’s left over, the plan is to continue using a stock-oriented allocation.

All of that said, I’m still a big fan of Vanguard’s Target Retirement funds. I don’t like them quite as much as the LifeStrategy funds, but I still think they’re fantastic in that they can provide a diversified, hands-off portfolio at a very modest price.

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Investing Blog Roundup: Tips from the Bogleheads http://www.obliviousinvestor.com/investing-blog-roundup-tips-from-the-bogleheads/ http://www.obliviousinvestor.com/investing-blog-roundup-tips-from-the-bogleheads/#comments Fri, 22 Aug 2014 12:00:03 +0000 http://www.obliviousinvestor.com/?p=7274 This week Penelope Wang of Money has a great write-up about the Bogleheads community, as well as the new edition of The Bogleheads Guide to Investing that was released this week. Wang writes:

“Wouldn’t it be great to get advice on managing your money from a knowledgeable friend—one who isn’t trying to rake in a commission or push a bad investment? That’s what the Bogleheads are all about.”

Investing Articles

Other Money-Related Articles

Thanks for reading!

Interested in economics? Pick up a copy of my latest book:

Microeconomics Made Simple: Basic Microeconomic Principles Explained in 100 Pages or Less

Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

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Helpful Social Security References http://www.obliviousinvestor.com/helpful-social-security-references/ http://www.obliviousinvestor.com/helpful-social-security-references/#comments Mon, 18 Aug 2014 12:00:00 +0000 http://www.obliviousinvestor.com/?p=7272 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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