Author Archives: William Dowd

On Social Security, Birds, Bushes, and Hands: The Time Value of Money

Many people we encounter are dead set on claiming their Social Security retirement benefits immediately when it becomes available. They often use some variation of the well-known proverb: a bird in hand is worth two in the bush. In citing this proverb, these individuals are expressing a rational preference for money now over money later. A quick web search suggests that the bird in hand phrase dates to the 13th century, so its originator certainly never had to worry about when to claim Social Security benefits. It’s worth thinking about how this proverb applies to the Social Security claiming decision.

Taken literally, the statement suggests an exchange rate of one bird in hand for every two birds in the bush. We can think of this exchange rate between bird in hand and birds in the bush in terms of the “discount rate.”

Instead of birds, let’s talk about something we’d rather have in our hands: $100 bills. Furthermore, let’s assume that $100 bills currently in the bush will be in our hands one year from today. With these assumptions, our proverb becomes: $100 today is worth $200 next year. This represents a 100% discount rate, because it implies that a 100% return on the initial $100 is needed for one to break even. Needless to say, this is a very high rate, and most people would be willing to accept far less than $200 next year for $100 today. So, the bird in hand proverb may not provide the best guidance, at least when taken literally.

When taken figuratively, though, the proverb illustrates the reasonable preference for money now rather than money later. To most people, money received today is indeed worth more than money received next year, because they may wish to spend it now, or if not, they can invest it for a positive return. While almost everyone would give up $100 this year for $200 next year, almost no one would give up $100 this year to receive only $100 next year. The question of how much money one demands next year in order to give up $100 today will elicit different responses from different individuals, even if we ignore inflation, and there is absolutely no risk of next year’s payment not being made on time. Some people might be willing to trade $100 today for $101 next year, while others might demand $110 or more. For our Social Security reports, we settled on $103 as the amount that the typical person would demand next year in return for $100 today, which represents a 3% discount rate. We chose 3% because it is the approximate return on long term U.S. treasury bonds, which are considered to be an extremely safe investment (like Social Security). In our analyses, our 3% annual discount rate accounts for a moderate preference for receiving money in the present.

The discussion gets more complex when one is dealing with multi-year trade-offs. For example, a single person claiming at 70 instead of 62 gives up benefits for years 1 – 8, and then gets a larger payment in each subsequent year. A married couple might have to decide between claiming at 62 or implementing one of many special strategies, which would result in them giving up all benefits for a few years, getting smaller benefit payments for a few years, and then getting larger benefit payments in each subsequent year. Invoking our proverb, we’re now trying to determine whether two birds in hand is worth more than a bird in a nearby bush and a four birds in a slightly more distant bush!

The relative values and proximities of these “birds” will vary from situation to situation, but the takeaway point is that the birds in the bushes are sometimes considerably more desirable than the bird in hand under standard discount rates. By implementing special strategies, it is often possible to get considerably more from Social Security, even after incorporating the discount rate. Some may choose the bird in hand in spite of considerable returns on strategies that involve delayed claiming, but no one should make this choice blindly. Everyone has their tipping point. For example, what those two birds in the bush are geese that lay golden eggs? Do you still prefer that seagull in your hand?

Getting the Most Out of Social Security while Meeting your Needs

For many retirees, Social Security benefits make up a large portion of retirement savings. Often, these people can only follow a limited set of strategies to optimize their benefits because they may not have the financial resources to wait as long as the mathematics of their situation would suggest. This is why our custom reports provide more than just the “optimal strategy.” Rather, we show you the optimal strategy, as well as a wide range of alternative strategies, how to implement them, and how they compare in dollar terms to the optimal strategy. In many cases, one can find a strategy that, while not quite the best from a mathematical standpoint, is far superior to the default (claiming immediately) and better meets financial goals in retirement.

Sometimes, situations even change after a Social Security plan has been partially implemented. In the case of a married couple, sometimes steps can be taken to alter the strategy to get larger SS checks sooner than planned, such as by having one spouse claim earlier than expected. However, beneficiaries and advisors should be aware of the repercussions of changing plans, especially when complex strategies are involved.

Recently, a client wrote to ask the following: “I’m over 66 and still working. Can I apply for my full benefits for a few months to temporarily increase my current income for some bills and then go back to the ‘free spousal’ benefit later on?” In this case, as recommended by our report, the client had filed a restricted application for a “free spousal” benefit on his wife’s record while allowing his own retirement benefit to grow. His financial situation changed, and he was hoping to temporarily increase his benefit by switching to his own benefit and then switching back (by suspending his benefit and going back to the spousal benefit) when he had paid his bills. Unfortunately, this option isn’t available.

When a beneficiary files a restricted application, he can end the restriction by filing for his own benefit at any time. Additionally, a beneficiary can suspend his benefit at any time (as long as he is at or above full retirement age). However, for calculating spousal benefits, a suspended benefit is treated differently than one for which an application was never filed. When my client originally claimed his free spousal benefit, he had never filed for his own benefit, so the spousal benefit is not reduced by the amount of his own benefit. However, if he were to file and then suspend later, he is still “entitled” to his own benefit even after suspending. The spousal benefit he was receiving would be lower, at best, or completely eliminated, at worse, depending on the size of his benefit relative to his wife’s.

Fortunately, our client wrote to ask about his proposed plan. Had he implemented it, he would’ve been stuck with his early claim and may have given up thousands of dollars over his lifetime. His strategy makes intuitive sense, but the way the SSA defines entitlement to benefits is one of the many nuances that claimants need to account for. Our software takes these nuances into account, and if you have questions that our software doesn’t answer, we’re always happy to help our customers.

Social Security COLA Watch: October 2012

The CPI-W for September 2012 was released this morning by the Bureau of Labor Statistics, and, just as in August, the index increased considerably from last month, moving up from 227.056 to 228.184. The average of the July, August, and September CPI-Ws is 226.936 which is 1.65% higher than the third quarter 2011 average (the baseline for COLA calculations). In fact, the SSA has announced that beneficiaries will see in increase in their benefits of 1.7% starting in January of 2013.

As has been the case for the past few months, the increase in the CPI-W was mainly due to energy prices, but food prices, as well as the prices of all goods excluding food and energy ticked up slightly as well.

On this blog, we’ll keep an eye out for issues that may impact COLAs going forward. As we get closer to the third quarter of 2013, we’ll resume regular posts on the topic.

Social Security COLA Watch: September 2012

New data have been released. Check here for more!

The CPI-W for August 2012 was released this morning by the Bureau of Labor Statistics, and, as we predicted in our last post, the index increased considerably from last month, moving up from 225.568 to 227.056. The average of the July and August CPI-Ws is 226.312 which is 1.4% higher than the third quarter 2011 average (the baseline for COLA calculations). The September index, which will be released on October 16, is the last piece to the COLA puzzle. If the September number exceeds 226.312, the COLA will be greater than 1.4, if it is less than 226.312, the COLA will be less than 1.4. It is all but certain that SS recipients will receive a COLA this year.

Let’s look at a few scenarios:

  • If the increase in CPI-W is wiped out, and the index returns to its July value for September, the COLA will be just under 1.3%.
  • If the CPI-W is unchanged between August and September, the COLA will be about 1.5%
  • If the CPI-W increases at the same rate as it did between July and August, the COLA will be about 1.7%

I think it’s likely that the COLA will be somewhere in the range of 1.4 to 1.6 percent next year. The CPI-W increased at a very high rate in August, and I don’t expect the change in September to be as great. The biggest driver in the August increase was energy prices, so they will likely dictate the final COLA. Check back on October 16 for a look at the September numbers!

Social Security COLA Watch: August 2012

New data have been released. Check here for more!

The CPI-W for July 2012 was released this morning by the Bureau of Labor Statistics, and the index continued its decline from last month. The CPI-W index fell from 226.036 to 225.568, which is only 1% higher than the third quarter 2011 average (the baseline for COLA calculations). Once again, energy prices appear to be the culprit, as food prices and other prices increased slightly or were unchanged.

The July report is the first one that factors into the 2012 COLA calculation (recall that the COLA is based on the 3rd quarter only). If the CPI-W doesn’t change over the next two months, Social Security beneficiaries will receive a COLA of approximately 1%. If the downward trend in CPI-W continues, the COLA will be smaller. However, I would expect the CPI-W to actually increase, rather than decrease over the next few months. First, one very transparent element of energy prices – gasoline prices – have been increasing rapidly since the end of July. Gasoline prices have been a big contributor to the decline in CPI-W in recent months, so a reverse in that trend should contribute to an increase in CPI-W. Second, the impact of the drought in the midwestern US has been putting pressure on food prices.

Increases in food and energy prices are certainly not beneficial to US consumers. However, if they occur during the third quarter of the year, they may result in a higher COLA for SS recipients. The analysis in this post is far from conclusive, but the beauty of a blog is the ability to speculate a bit (our custom reports are comprised of much more careful analysis). The August CPI report will be released on September 14, so check back then for an updated analysis.

Social Security COLA Watch: July 2012

New data have been released. Check here for more!

The CPI-W for June 2012 was released this morning by the Bureau of Labor Statistics, and unfortunately, the index continued its decline from last month. The CPI-W index fell from 226.600 to 226.036, which is 1.3% higher than the third quarter 2011 average (the baseline for COLA calculations). Once again, energy prices appear to be the culprit, as food prices and other prices increased slightly or were unchanged.

The June report is the last one that doesn’t “count” toward the COLA calculation (recall that the COLA is based on the 3rd quarter only). It seems likely that the size of the 2012 COLA will depend on what happens to energy prices over the coming months. The July CPI report will be released on August 15, so check back then for an updated analysis.

Social Security Nonsense Watch: Beware the Uninformed Expert

Statistics show that delaying Social Security benefits, as opposed to claiming immediately at 62, is becoming more popular. People realize the impact that a well thought out strategy can have on their bottom line, and they seek guidance from experts on how to implement such a strategy. More and more, people have stepped in to try to fill this information vacuum – some more qualified than others. Simply put, Social Security is a complex program. It is perfectly reasonable to expect that an expert on personal finance in general may not have a good understanding of Social Security, which is the main reason why we were able to step in and provide custom analysis to individuals and couples looking to maximize their Social Security benefits.

Recently, the BAM Advisor Network released an article titled ‘Strategies for Optimizing Social Security Benefits.’ The author did a decent job of presenting the basics, but made some key errors on the more complex issues surrounding the Social Security system. First, when discussing spousal benefits, she said:

Consider the case of a couple in which one spouse has not earned enough to qualify for Social Security independently. Under current laws, that spouse may be able to claim 35 to 50 percent of the other spouse’s full benefit when he reaches 62.

Unfortunately, the author left out the important condition that the main beneficiary must file (or file and suspend) for benefits before his spouse can get a benefit on his record. Divorcees are not subject to that condition, and can claim spousal benefits once their ex-spouse turns 62, regardless of whether or not that spouse has filed. This gives them an advantage over married couples in that regard.

However, the major error that the author made came in her discussion of what she called “double dipping” (we usually refer to this as free spousal benefits or a restricted application strategy). She said:

If both spouses worked and had Social Security benefits, couples may be able to take advantage of “double dipping.” Assume a wife is the primary earner, but the husband also earns an income. The wife could claim a spouse’s benefit as early as age 62,  but leave her own (higher) benefit alone until 70, which means she could claim a higher amount because she delayed filing for benefits.

The strategy of a spouse claiming a spousal benefit while delaying his or her own benefit until later is viable, but only once that spouse reaches full retirement age (currently 66). The assertion that this can be done as early as 62 is incorrect, and frankly, could wind up costing a Social Security claimant that attempts to implement that strategy a significant amount of money if the misunderstanding isn’t caught by the SSA. As our married persons’ reports show, the difference between following an optimal strategy and a suboptimal one can be quite large, often exceeding $100,000.

It is absolutely vital that you educate yourself about your Social Security claiming options. In addition to our reports, we offer a great deal of free, easy to understand information on our main website. This article is particularly unfortunate because of its target audience – financial professionals. If you work with a financial advisor, encourage him or her to learn about the intricacies of the Social Security system, or use a resource like, so that misinformation does not get disseminated. After all, the Social Security benefit claiming decision has been described as the most important financial decision one makes, so it’s worth getting it right.

Social Security COLA Watch: June 2012

New data have been released. Check here for more!

The CPI-W for May 2012 was released this morning by the Bureau of Labor Statistics, and the news is not good for Social Security recipients hoping for a raise leading into next year. The CPI-W index fell from 227.012 to 226.600, which is 1.5% higher than the third quarter 2011 average (the baseline for COLA calculations). The decline is due entirely to falling energy prices (food prices were unchanged in May, and all items excluding food and energy increased slightly.

The May decline illustrates the uncertainty in trying to project the Social Security COLA. Nevertheless, we’ll keep a sharp eye on the numbers and update you as new data become available. CPI-W for June will be available in mid-July. Stay tuned!

COLA Watch: May 2012

When we first talked about the Social Security COLA in February, the basis of the COLA, the CPI-W, had not risen considerably since the third quarter of 2011. To recap, the 2012 COLA, if there is one, will be equal to the percentage increase of the third quarter average in 2012 over that in 2011 (the third quarter 2011 average CPI-W was 223.23). Through April, the CPI-W has experienced five straight increases, dating back to December of 2011.

If the third quarter average in 2012 ends up equal to the current value, 227.01, a COLA of 1.7% would take effect in December 2012. Alternatively, if the CPI-W continues to increase at the trajectory of the past 5 months, a COLA of 3.9% would take effect in December 2012 (recall that the December 2011 COLA was 3.6%).

A COLA of 3.9% would lead to a $39 per month increase in benefits for someone currently receiving $1000 per month. However, any increase in Social Security may be partially offset by potential increases in Medicare premiums. Of course, no COLA is possible too, if the third quarter average CPI-W is less than or equal to that from 2011. But, no matter how much the CPI-W were to drop, a negative COLA is not possible under current law.

We can’t know for sure how the CPI-W will change as we get closer to the third quarter of 2012. However, we’ll keep you updated on this blog as the numbers come out.



Nonsense Watch: Misinformation about Social Security is Rampant

A recent AARP survey makes clear that the public is unaware of many important aspects of the Social Security system. There are resources available to help individuals with their Social Security claiming decision, such as our custom reports, but the information deficit is not helped by errors made in news stories intended for public consumption.

On this blog, I’ll keep an eye out for stories that misrepresent the Social Security system or make assertions that are be unclear or misleading. I am certainly not implying that these writers are purposefully misleading their readers – they have no incentive to do so. Instead, I’m hoping to make the point that oversimplification often leads to misunderstanding and has the potential to lead people to making costly errors. The rules surrounding Social Security benefits are complex. One simply cannot say what needs to be said in a few bullet points.

CNBC recently published a slide show on ten things you must know about Social Security. Shortly after, published a summary of the slide show. In both stories, there were a number of errors and misleading statements. These errors are more prevalent in the in the InvestorPlace piece, so we’ll examine that below.

3. Start later for bigger benefits. You can claim benefits as early as 62, but if you wait until 65, you will get higher benefits. Waiting even a single year beyond 62 will increase what you get.
4. Waiting past 65. If you can delay claiming benefits until after 65, you will get even more money, up to 8% more annually.

For some reason, both CNBC and InvestorPlace viewed 65 as a watershed year. Since 2002, age 65 has had no significance with respect to Social Security benefits (2002 is the last time age 65 was the full retirement age). Even full retirement age is fairly arbitrary in terms of individual benefits. Delaying benefits past age 62 results in benefit increases to full retirement age and beyond, up until age 70. Full retirement age has important implications for married couples (see file and suspend and free spousal/restricted application) and widows, but in the context of individual benefits it is meaningless.

5. There’s a benefit ceiling. No matter how long you wait, the maximum monthly payment is currently $2,513 per month.

There is a benefit ceiling, but it’s not $2,513. This number is listed by the SSA as the maximum benefit available to individuals claiming at full retirement age (66) in 2012. Individuals who waited to claim until 70 and are claiming now may be entitled to larger monthly benefits than $2,513. My back of the envelope calculations suggest that the largest possible monthly SS check is currently $3,161, based on the maximum full retirement age benefit in 2008 ($2,185) increased by 32% due to delaying retirement and cost of living adjustments between 2008 and today.

9. Marriage has benefits. You can collect half of your spouse’s benefits, if higher than yours, even if you wouldn’t qualify for that level based on your own lifetime earnings.

To CNBC’s credit, they say a little bit more about this issue than InvestorPlace, although they too leave out any mention of the file and suspend strategy and restrictions on spousal benefits. The sentence above from InvestorPlace doesn’t even scratch the surface of the options available to married couples. What’s worse, it suggests that spousal benefits are always half of the spouse’s benefit, and that spousal benefits are unavailable to those with a higher base benefit, both of which are incorrect.

The fact of the matter is that a prudent individual should be devoting a considerable amount of time to building up an understanding of Social Security before they decide to claim benefits. Stories such as these imply that the Social Security claiming decision is a simple one and that little thought is necessary.  In reality, there are numerous paths an individual can take (hundreds for married couples) and the difference between the best and the worst is often over $100,000 in lifetime benefits. We are committed to helping people find the right path, which is why we offer a great deal of free Social Security information as well as custom reports tailored to your individual situation.