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How Do Child’s Benefits Affect Social Security Claiming Strategies?

A reader writes in, asking:

“If I have a young child, how does that affect the age at which I should be filing for my Social Security?”

Before getting into how claiming strategies are different for people with qualifying children than for people without qualifying children, we must first discuss who is a qualifying child.

How Does Somebody Qualify for Child’s Benefits?

While you’re still alive, in order for your child to qualify for a Social Security benefit based on your work record, your child must be:

  • Under 18,
  • 18 or older and disabled (with the disability having begun before age 22), or
  • 18 or older and a full-time student in grade 12 or below.

In addition:

  • Your child must be “dependent” on you (though in the case of a natural child, that requirement is automatically considered to be met unless the child has been legally adopted by somebody else), and
  • You must have filed for your retirement benefit.

How Do Child’s Benefits Affect Claiming Strategies?

There are three key points to understand about the interaction of child’s benefits and Social Security claiming strategies.

First: Waiting to claim your retirement benefit does not increase your child’s benefit amount. While you are alive, your child’s benefit amount is simply 50% of your primary insurance amount — your PIA being the monthly retirement benefit you would receive if you claimed that benefit at your full retirement age. (After you die, your child’s benefit is 75% of your PIA.)

Second: Because you must have filed for your retirement benefit in order for your child to be able to qualify for a child’s benefit, the cost of each year that you wait to file is greater than it would be for a person without a qualifying child (because you’re giving up a year of child’s benefits as well as a year of retirement benefits).

Third: If you have a qualifying child, your spouse may be able to qualify for spousal benefits based on your work record, even if your spouse has not yet reached the normal qualifying age of 62.

As a result of these three facts, having a qualifying child is a point in favor of claiming early. It isn’t necessarily a conclusive reason that you should file early, but it’s certainly a point weighing in that direction.

For example, for an unmarried person, currently age 62, who is considering:

  1. Starting retirement benefits now at 62, as opposed to
  2. Starting at 70 (after filing and suspending at 66, in order to allow the child to start receiving benefits)

…having a qualifying child pushes the break-even point from age 80.5 to age 84.** That is, rather than having to live beyond age 80.5 in order for waiting to be advantageous, you’d have to live beyond age 84 (which is, of course, less likely).

For a married couple, there’s no way to give a generalized break-even point, because it depends on the difference in the spouses’ ages, as well as the difference in primary insurance amounts.

Possible Claiming Strategies

With the additional moving piece that comes into play when child’s benefits are involved, the complexity of assessing one strategy against another goes through the roof. As a result, while using a Social Security claiming calculator is likely a good idea for anybody, it’s even more likely to be beneficial for people who have a qualifying child. Unfortunately, to the best of my knowledge, only one of the online calculators ( includes child’s benefits in the analysis.

Having said that, the following two strategies may serve as a (very rough) starting point for analysis.

Strategy one:

The low-PIA spouse claims retirement benefits as early as possible, thereby allowing the child to start taking benefits based on that spouse’s work record. Then, upon reaching FRA, the high-PIA spouse files a restricted application (thereby receiving spousal benefits based on the low-PIA spouse’s work record). Then, at 70, the high-PIA spouse files for his/her own retirement benefit, and the child begins receiving benefits based on the high-PIA spouse’s work record.

Strategy two (which may be preferable when the difference between the two spouses’ PIAs is quite large):

The low-PIA spouse still files for retirement benefits at 62, allowing the child to start receiving benefits. Then, at his/her FRA, the high-PIA spouse files and suspends, thereby allowing the low-PIA spouse to start receiving a spousal benefit, and thereby allowing the child to start receiving a higher child’s benefit. Then, at his/her age 70, the high-PIA spouse actually starts receiving retirement benefits by asking to have them unsuspended.

**We’re keeping things simple in this analysis by ignoring investment returns. If we assume that early-taken benefits are invested and outpace inflation, that would push the break-even point back even further.

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Investing Blog Roundup: Learning about Estate Planning

Estate planning is not one of my primary areas of expertise, which is why I don’t discuss it on the blog very often. In the hope of being able to be more helpful to you folks though, I’ve been starting to develop my knowledge of estate planning topics (via continuing education courses and otherwise). If you have any related topics you’d like to see addressed in a future article, please let me know, as it will help me to direct my research.

On a related note, this week, Michelle Perry Higgins gives an excellent reminder for investors with trusts: Don’t forget to fund them!

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Should Financial Advisors Be Fiduciaries?

A reader writes, asking:

“Do you think that a financial advisor should be a fiduciary? I’ve seen that discussed elsewhere, but never on your blog.”

Well, that depends on exactly what you mean.

If you’re in the market for a financial advisor, and you’re wondering whether you should use one who is a fiduciary (i.e., one who has a legal duty to put his/her client’s interests first) or one who is not, my answer would be, “Yes, use an advisory who has a fiduciary duty to you.”

This is a bit of an oversimplification, but in general:

  • Registered investment advisers (RIAs) and representatives thereof do owe a fiduciary duty to clients.
  • Insurance agents and stockbrokers do not owe a fiduciary duty to clients.

In the case of insurance agents and stockbrokers, they earn their pay by selling you specific products, which tends to result in biased advice. (This is not to say that RIAs are without their biases. Even fee-only RIAs have conflicts of interest, but I think they are at least somewhat less significant than the conflicts of interest faced by brokers and insurance agents.)

On the other hand, if you’re asking whether I think all financial advisors should be fiduciaries — a question which has been the subject of a great deal of debate within the industry over the last several years — I don’t have any strong opinions. I think it’s probably a good idea. (After all, why shouldn’t somebody who calls himself/herself a financial advisor be legally required to put clients’ interests first?) But, frankly, I’m not optimistic that such a change would have a large positive impact on the industry.

As it is, there are countless RIAs (who do have a fiduciary duty) who do all sorts of things that, in my opinion, clearly show they’re putting their own interests ahead of their clients’ interests. Yet, regulators don’t seem to have any problem with it.

For instance, many RIAs charge in excess of 1% per year to do nothing but passive portfolio management. At the same time, at Vanguard, you can get similar portfolio management, plus a basic financial plan, plus access to a CFP for 0.3% per year. The idea that the advisor charging more than three times as much for a lower level of service is somehow putting his/her clients’ interest first is laughable, given that there is such an obviously-better option for the investor. And yet, industry regulators have no problem with this — it is apparently not considered a breach of fiduciary duty.

And that’s not even remotely the worst of it. There are RIAs who charge high annual fees while also using expensive actively managed funds. There are RIAs who charge high annual fees while rapidly trading concentrated portfolios of individual stocks — or engaging in any number of other poorly-researched investment strategies. And, in the overwhelming majority of cases, such activities are not considered to be a breach of fiduciary duty.

In other words, if you’re going to use an advisor, yes, you should probably use one who has a fiduciary duty to you. But the sole fact that an advisor has a fiduciary duty does not ensure that he/she will always do what’s best for clients.

Investing Blog Roundup: Missing Out on Subsidized Insurance

This week, the Kaiser Family Foundation released the results of a survey showing that, of the approximately 30 million adults in the U.S. who remain without health insurance, 48% would qualify for assistance purchasing such insurance (either tax credits or Medicaid). If you (or somebody you care about) doesn’t have health insurance, it’s worth taking the time to learn how such subsidies work, so that you don’t miss out.

You can read more about the survey and its other findings here:

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Moving Beyond Sound-Bite Investing Wisdom

The following questions — and others of a similar nature — are some of the most common in my email inbox:

  • Does buying an S&P 500 fund count as stock picking, given that there’s a committee of people choosing which stocks are included in the index?
  • Does overweighting U.S. stocks (or value stocks, or REITs, or whatever) count as active investing?
  • Does rebalancing count as market timing?
  • Does basing my spending rate in retirement on market valuations (and/or interest rates) count as market timing?
  • Does Social Security count as a bond?

Typically, the person is asking the question because they’ve latched on to a sound bite-style piece of investing wisdom (e.g., stock picking is bad, market timing is bad, passive investing is better than active investing, your bond allocation should be equal to your age, etc.) and they’re trying to figure out how to apply it.

Sound bites are helpful when you’re first getting started investing, because they allow you to put a decent plan into place without being completely overwhelmed with information. But as you might imagine, they tend to be oversimplifications. And, eventually, rather than trying to base every decision on such simplified advice, you’re better off taking the time to understand the reasoning behind the sound bite, so you can make critical decisions on your own.

For example, why do we often say that stock picking is bad? The answer:

  • It results in less-diversified portfolios,
  • It often results in higher costs (i.e., brokerage commissions and sometimes taxes) as the investor rapidly buys and sells various stocks, and
  • There’s quite a bit of research showing that it’s unlikely that you’ll consistently pick above-average stocks anyway.

Once you understand that, you don’t have to ask whether something counts as stock picking. You can simply determine for yourself whether the activity in question has the same drawbacks — because, ultimately, that’s what you really care about.

So for example, if you’re considering using an S&P 500 index fund in your 401(k), rather than wondering whether or not that would count as stock picking, you can instead try to directly address the important questions:

  • Would using that fund allow you to be sufficiently diversified? (And, is there a way to be better diversified?)
  • Would using that fund result in high costs? (And, is there a way to achieve lower costs?)
  • Is there any reason to think that the stocks included in the index (and therefore the fund) are in some way systematically chosen to be poor performers?

In summary, when it comes to investing, when you find yourself asking, “Does _____ count as _____?” there’s a good chance you’re asking the wrong question.

Investing Blog Roundup: Taking Winnings Off the Table

There’s no reliable way to know when the next market downturn is coming. For those of us who are still many years from retirement, that shouldn’t be a scary thought, given that a market downturn simply allows us to buy shares at lower prices. But, as Bill Bernstein reminds us this week, a market downturn can be a big problem if you’ve just retired, if your portfolio isn’t prepared for such an event.

Investing Articles

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