Akweli Parker: Hello, and welcome to Vanguard’s Investment Commentary Podcast series. I’m Akweli Parker. In this month’s episode, which we’re taping on April 21, 2016, we’ll examine a number of important strategies and considerations for maximizing one’s Social Security benefits. It’s a complicated but very important topic, so here to help us understand it a little bit better, we have Jonathan Kahler, an investment analyst with Vanguard Investment Strategy Group.

Hello, Jonathan, and thanks for joining us.

Jonathan Kahler: Thanks, Akweli. It’s great to be here.

Akweli Parker: All right, Jonathan, let’s start off with a little bit of perspective. According to the Social Security Administration, almost three-quarters of the nearly 40 million retired workers who receive Social Security benefits had to take reduced payments because they filed before they reached full retirement age.

Now I know you talk about this in some depth in a research paper that’s available on our website. But for the benefit of people listening, could you say a little bit about this? So for someone who’s nearing retirement age and thinking about filing early for Social Security benefits, what are the implications of them doing that?

Jonathan Kahler: Sure. It’s a big decision, and the impacts of that could last a long way down the road. If you look at someone who’s 65 today and getting ready for retirement, that individual can likely expect to live well into their 80s and has about a 20% likelihood of living until age 95 or beyond. So the decisions we make early in retirement can really impact what benefits that we receive for the next 30-plus years. In the case of a married couple, that decision could also impact what benefits a surviving spouse may be able to access as well.

And just to get a little bit into the mechanics of how Social Security works and what the impacts of that decision are: Depending on an individual’s birth year, taking the benefits as early as possible at age 62 could mean a reduction of benefits of up to 30% relative to what they would otherwise receive at full retirement age.

On the flip side of that, delaying benefits as long as possible until age 70 could mean an increase in benefits by as much as 32% over what they would receive at full retirement age. So it can really have quite a bit of impact, that timing decision, on how much guaranteed income someone eventually receives in retirement.

Akweli Parker: Wow, it sounds like some pretty complex calculus one has to do when weighing this type of decision.

We’ve been hearing a lot lately about some Social Security claiming strategies that are going away this year—or at least they are for some people. Can you talk a bit about what those strategies are, who they’ll affect, and just how big of a deal it is that these things are going away?

Jonathan Kahler: Yeah, we had a bit of a surprise here with some recent budget legislation that was passed toward the end of last year. And that legislation closed what was perceived to be some loopholes that were created as an unintended consequence of some earlier legislation pertaining to Social Security.

So the biggest impact of these changes was to a strategy that was available to some couples called “file and suspend” with “restricted application.” That’s a bit of a mouthful, but the general idea here is that an older spouse would file for benefits at full retirement age but then immediately suspend them.

Since they’re suspending their benefits and not receiving anything from Social Security, they would still collect those delayed retirement credits that would allow them to maximize their benefit until age 70. But since they’ve already filed, it opened the door for a younger spouse to then file for a restricted application when he or she would reach full retirement age to collect just the spousal benefit. And then they could also delay their primary benefit as well.

So it was really a bit of the best of both worlds. You’re able to collect current income while still maximizing those primary benefits. But, unfortunately, those strategies are no longer going to be available unless they’ve already been implemented by someone who was eligible prior to that legislation going into effect. So anyone in that situation has been grandfathered in, thankfully, but in general those file and suspend strategies are no longer going to be available.

Now the restricted application is still in play for a few individuals, so anyone that is age 62 or older by January 1 of this year does still have that option. So that could be beneficial, depending on the circumstances.

Akweli Parker: Got it. Now none of us likes paying more in taxes than we have to. So can you talk a little bit about what tax considerations, if any, are there for when someone decides to finally file for Social Security benefits?

Jonathan Kahler: Yeah. I think the tax treatment of Social Security is an aspect of this that’s really somewhat underappreciated. Generally speaking, Social Security income will have favorable tax treatment to other forms of income that a retiree might have. So depending on how much income someone has and what type of income someone receives in retirement, Social Security would be taxed at anywhere between 0% or 85% at the federal level. And most states treat Social Security income favorably as well.

So to the extent that someone can control how much of their income is coming from Social Security relative to other sources, there can absolutely be some opportunities to take advantage of them.

Akweli Parker: Great. So, Jonathan, this has all been incredibly informative. Are there any other points about Social Security you think would be helpful to our listeners?

Jonathan Kahler: Sure. Like we talked about, the decision about when to collect Social Security can be a really important one. And when making that decision, I think it’s really important to look at what makes Social Security unique as a planning tool for retirement.

So since it provides that inflation-adjusted, guaranteed income for life, Social Security can really effectively hedge that longevity risk and the possibility of outliving your assets in retirement. And for retirees looking to add to the amount of guaranteed income available to them in retirement, the first option that they should really consider is delaying Social Security, since that’s often the most cost effective way of getting that additional guaranteed income.

Akweli Parker: And that seems like a perfect note on which to wrap up our conversation about Social Security.

Jonathan, thanks so much for being with us today and for sharing your insights.

Jonathan Kahler: You’re welcome. Thanks for having me.

Akweli Parker: And thank you for joining us for this Vanguard Investment Commentary Podcast. You can learn more about today’s topic by checking out the Social Security resources available on our website. Be sure to check back with us each month for more insights into the markets and investing. And, remember, you can always follow us on Twitter. Thanks for listening.


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