It is day four of Continuing Financial Education week. Today we're going to discuss two exceedingly boring books. I'm very sorry. They're both extremely well done and written by talented authors, but the subject matter is worse than nephrology and pulmonology combined. Imagine nephrons in your alveoli. That's what I'm talking about. What is this utterly dry, overpoweringly boring subject? Why, Social Security of course. There are not a lot of books on the market on Social Security. That's because the authors who attempted to write them fell asleep every time they wrote a paragraph.
Social Security Made Simple by Mike Piper
Seriously though, you should read at least one of these two books at some point in your life. The ideal time is probably in your early sixties, but if you're curious, you could muddle through one or both of them before then. The first book is Mike Piper's Social Security Made Simple. Mike is a genius, by the way. He has managed to take this complicated, boring subject and make it very easy to understand, and tolerably interesting. It is best if you pick up the book with a specific question in mind. The ideal question is “When should I (and my spouse) claim our Social Security benefits?”
Mike wisely kept the book short, just 129 pages (including the appendices) in a 5 inch by 8-inch book. Despite the brevity, it is quite comprehensive (despite Mike's claim that it “is not intended to serve as a 100% comprehensive guide to every aspect of Social Security.”) It begins with four chapters that explain how Social Security works. As you read it, you get the sense that this is all really important for you to understand. But if you're not reading with a specific question, you never quite get the sense that you will remember all of the little rules, and even if you did, they'll probably be changed before it comes time for you to make any important Social Security decisions. So why is it so important to read? Mike explains in the introduction:
It's common for retirees to make decisions regarding their Social Security benefits that cause them to miss out on tens of thousands of dollars (or sometimes even hundreds of thousands of dollars) over the course of their retirement.
So it is obviously really important stuff. Reading it helps me to understand how you guys all feel reading personal finance books. But trust me, as I've told you before, it's worth it to read this stuff.
Chapter one is two pages on my Kindle. It shows you how to qualify for Social Security benefits (hit age 62 and earn 40 credits.) Chapter two is seven pages. It explains how retirement benefits are calculated. If you ever wondered, Mike can tell you how. But most importantly, he gives you the takeaways, and this is where the books excels. For example, the takeaways in chapter 2 are:
Social Security replaces a higher portion of wages for lower earning workers than for higher-earning workers and
There's a maximum possible Social Security retirement benefit (Few people reach that maximum though, because doing so would require that you earn the maximum earnings subject to Social Security tax for 35 different years.)
Chapter 3 is 6 Kindle pages and explains the spousal retirement benefits and chapter 4 is six more pages and explains widow/widower benefits. That brings you on to part 2, “Rules for Less Common Situations.” This includes the rules if you're divorced (6 pages), child benefits (4 pages), the rules if you have a pension from a job that didn't require you to pay Social Security taxes (4 pages), and 6 pages about what happens if you keep working after taking Social security early (earn too much and your benefits are reduced.)
Part 3 is the meat of the book- when to claim your benefits. Chapter 9 discusses the decision for single people and chapter 10 for married couples. Then he discusses the restricted application strategy in chapter 11. Thankfully, Mike updated this book in November 2015 when changes were made to this strategy. But if you're not already 62, forget it. Chapter 12 discusses how to account for an age difference between spouses. Chapter 13 discusses a strategy I've heard Dave Ramsey recommend- taking your benefits at 62 and investing it. I agree with Mike that the fact that you need a 4-5% real return to come out ahead with this strategy makes it a bit unwise for most.
The final part of the book, Part 4, has some other miscellaneous topics such as how to check your earnings records (4 page chapter 14), how Social Security is taxed (4 page chapter 15), how Social Security should affect your asset allocation (3 page chapter 16), and a few “do-over options” (4 page chapter 18) like withdrawing an application and suspending benefits. I enjoyed Mike's idea of splitting your portfolio into two parts- one to get you until you claim Social Security, and the other to be used throughout retirement. Brilliant!
The conclusion is really useful, where Mike gives Six Social Security Rules of Thumb. They're worth reproducing here (not a direct quote as a few of the comments are my summary of his rule.)
Rule # 1 The longer you expect to live (or the more worried you are about running out of money if you do live to have a long retirement), the better it is to hold off on taking benefits.
Rule # 2 For an unmarried person trying to decide between claiming early and late, the break even is age 80.5. Once you know the life expectancy of a 62 year old is age 83, you will probably realize you should wait to claim.
Rule # 3 In a married couple, having the person with the higher primary insurance amount delay benefits increases the amount the couple will receive per month as long as either spouse is alive.
Rule # 4 In a married couple, having the spouse with the lower primary insurance amount delay benefits only increases the amount the couple will receive per month while both spouses are still alive.
Rule # 5 The restricted application rule can give you a few years of “free” benefits, but not if you're not already 62!
Rule # 6 The higher the after-inflation rate of return you can earn on your investments, the better it becomes to take Social Security early and invest the money. As a result, if inflation-adjusted interest rates are very high (they're not right now) or if you have a very high risk tolerance…you may be better off taking the money early.
Kudos to Mike for tackling this important, although boring subject. I confess I didn't read the entire book. I don't think you should either. But I do think you should read the chapters applicable to you. With any luck, you can make the correct decision on claiming your Social Security benefits without having to read any more than about half the book!
The Little Black Book of Social Security Secrets by James Lange
Our second book today, The Little Black Book of Social Security Secrets, is by another of my favorite authors, James Lange, author of Retire Secure, and is subtitled “Couples aged 62-70 Take Action Now, Retire Secure Later.” This book is even shorter than Mike's (61 pages of a 5 x 3-inch book) and is aimed squarely at those who can still do the File and Suspend/Restricted Application strategies. He rushed it out this Spring to get it into the hands of those who needed it, but if you weren't already 62 when 2015 turned into 2016, you can skip chapters 4, 5, and 6. The rest of the book is short enough and cheap enough that is still probably worth your while, but this was definitely the meat of the book. However, Lange adds some detail not found in Piper's book, specifically when looking at how your Social Security benefits can work together with Roth conversions. The bottom line is it can often be worth delaying Social Security and making Roth conversions in the meantime.
Mr. Lange's conclusions are worth reproducing here:
If you apply at age 62, or as soon as you are eligible, your benefits starts lower and stays lower for the rest of your life.
COLAs magnify the impact of early or delayed claiming.
Delaying taking benefits becomes more advantageous the longer you live, but it is frequently a game changer for the surviving spouse.
The Apply and Suspend (also called File and Suspend) strategy adds significant value for married couples.
The Apply and Suspend technique is being phased out and qualified couples must apply by April 29, 2016 to take advantage of this strategy.
The Restricted Application or the Claim Now, Claim More Later strategy is another way married couples can get more from Social Security.
Since the survivor gets the higher of the two Social Security benefits, a good strategy is to plan for at least one benefit to be as high as possible.
A series of Roth IRA conversions combined with the best Social Security strategies is a powerful combination….
Please review all of your options with a qualified professional (not your local Social Security office) before signing on the dotted line, because your financial future depends on it.
Although Mr. Lange's book is now a bit outdated, it is so short and cheap I'd probably read it along with Mike's if I was facing this decision any time soon.
What do you think? When do you anticipate claiming Social Security? Why? Have you read one or both of these books? What did you think? If you're older, did you learn about File and Suspend and Restricted Application before it was too late? Comment below!