The Risks Hiding in the Social Security Claiming Decision

All right. Welcome, everyone. Give everybody a little bit of time to get in the webinar today before we get going. All right. Just a little bit of housekeeping before we get going. If you have questions, I'll try to leave some time at the end to take those. If you could put them in the Q&A, which if you don't see it there, you go to the more menu, the Q&A. Put them in there. If you see any that somebody else asked that you want to make sure or at least put your vote in that I take it, please go ahead and give it a thumbs up, and I'll do my very best to do that. And I believe there is also a questionnaire at the end of the webinar. So after we close out the webinar, if you wouldn't mind filling that out. We always love hearing from people, making sure we're getting your feedback on what sorts of topics you like to hear from us on. A big part of what we do at Income Lab is this kind of thing, education, thought leadership. Hopefully providing you with some new ideas, different ways to look at things, and so on, and things that you can take back to your practice to help your clients. So, that's definitely the goal of all this. Which takes us to our topic for today, which is Social Security. Social Security planning is probably the area that if you do any marketing of your practice you've seen this. It is a massive area of interest for clients. Probably the big reason for that is it is a pension where you actually do have some options, so there's a decision to be made. It can feel a little bit complex when you start looking at your own benefits, spouse benefits, survivor benefits, taxation, earnings offsets. It's an area where people feel they need a lot of guidance, and they are right. And it's also an area of a lot of interest in terms of policy, and kind of government solvency and things like that. So just kind of a perfect storm of places where there's a lot of interest. And so what we're doing today is giving you some tools to address that interest with your clients or prospects. And we'll house that inside of this major debate, which is really how should we think about, weigh, and evaluate Social Security benefits? Another way to put it is when is the right time to claim? Today's message is I think it's best viewed in the frame of how we often talk about financial planning at Income Lab, which is what's the point of all of this, right? What's the point of doing financial planning for clients, providing those kinds of services? And we always come down to it's to help people live better lives. To help people live, given their resources, given what they have access to, help them live the best life they can in the world they happen to live through. And I think if you view the Social Security claiming decision in that lens, it becomes clearer that there's no one size fits all kind of solution. Even though, if your clients Google this topic, they will certainly see pretty extreme claims about that everybody should claim at 70, things like that. What you'll have probably noticed is that many clients don't want to claim at 70. They want to claim earlier than that, maybe as early as possible, maybe at full retirement age, maybe sometime before that. And if you, again, if your clients or you have kind of Googled these things or used very simplistic tools around Social Security claiming, it can seem like somebody who wants to claim earlier is being irrational or foolish. And the message for today is if we take into account everything we mean by live a better life, they may not be. They may not be being irrational. They may not be being foolish. They might just be keyed into real risks that are worth taking seriously, but that often are hard to surface with kind of standard tools or framing that we see out there. So I'm going to go through a lot of that today, and I'm also going to share some tools at Income Lab that help you have those conversations. And some actually that really bring into view an aspect of Social Security claiming, namely its impact on the client portfolio, that I think are often not talked about at all. And we have ways for you to bring those out and show them how a Social Security claiming decision affects their portfolio. All right. So before we get there, for those of you who are not steeped in Social Security claiming, just some basics. So assuming that you are eligible for benefits because you've worked and paid in a certain number of quarters, you actually have a variety of times when you can start taking benefits. Let's say, and that's between age 62 and age 70. If your benefit at age 62 was going to be $1,000, your benefit at age 70 would be $1,771. So huge difference between claiming as early as possible and claiming as late as possible. And then, there's some things in between it. So this is a classic time preference question. Is it worth it to forgo a benefit at 62 or 63, or 62 in six months, or whatever, in exchange for a higher benefit starting later? So can I give up something now in exchange for something higher starting later? So just classic preference question. One way that people have often taken that question is to say, well, let's just look at a breakeven age. Let's say, okay, how much would I get from Social Security if I started at 62 cumulatively as time goes on? How much would I get if I started at 63, 64? Or again, you can actually do any number of months in between. And when would those cumulative lines cross each other? And so if I just did a very simplistic total today's dollars look at that breakeven, this is the kind of thing you'll see. So you'll say, okay, if I gave up, if I didn't claim at 62, and instead I claimed at 63, and I'm that person again with a $1,000 benefit at 62, I would have to make it to 77 and a third before the total amount I've received is the same. So that's a long time, right? It's 15 years. And you can see based on how Social Security benefit amounts grow, that this is not a linear thing. It kind of moves around. Incidentally, this is a place where sometimes the language around how Social Security benefits grow with time, it's easy to get a little sloppy with it. So you'll hear people say things like, "Well, if I wait past full retirement age, I get an 8% return or 8% growth." Well, that's very easy to hear as if it's an 8%, I don't know, CD or something like that, but it's not. It's an 8% simple interest increase on your benefit, of your future benefit amount, which is not the same as a return amount. It's much more like an annuity living benefit growing or something like that. So that's just an aside, but you will sometimes kind of in the- in the camp that's very strident about waiting till 70, you'll sometimes hear that kind of language, and it's misleading. That's not the way things work. But that's the basics of how this is usually talked about. And we can even back up and just say, okay, there are sort of two camps. There's the delay camp, and I would say this is typically what the economists out there say. Some practitioners and this tends to focus on things like this. Sort of saying, well, look, the break-even point if I wait till 70 is 80, a little over 80. Most people are going to make it to 80. Why not? Right. And after that, it's all gravy, right? It's got longevity protection and so on. There's another faction, which is the claim now faction. And of course, I'm being a little extreme here. The delay people are not always going to insist every single person needs to wait till 70. They will allow for exceptional situations. And claim now doesn't usually actually mean claim as soon as possible. It might just mean, hey, claiming early isn't crazy. But I'm going to kind of caricature them and say, okay, there's delay, there's claim now. Claim now is the preference of many or most clients. And it tends to focus on the broader picture. It tends to focus on utility, which it is a mathematical concept, but it's in practice, a little bit more about sort of feelings and things like that. And it's based on how people treat money differently. Somebody did have a question, is there a break-even chart available somewhere in Income Lab? There is, and I'm going to show that to you in a second for sure. And then somebody's asking about bridging till claiming. We are going to talk a little bit, not so much about strategies, but about the effects of that. Okay. So one of the things that comes into this whole concept of break-even point, and that I already alluded to, is a lot of times those in the delay camp are not applying any extra discount rate to the break even. They're saying a dollar that I receive at 80 is the same as a dollar I receive at 62 in terms of its utility to me. It's not worth anything more or less. And clearly you could disagree with that. And so the question about when's best to claim often comes down to what you think the right discount rate is. And this does matter. You can see, for example, that if I apply no discount rate to someone who would get $3,000 at 67 or $3720 at 70, then I believe this has them living through 90. They would get more if they claimed at age 70 with no discount rate. You can see $714,000 and change versus $684,000. But if I apply a 5% discount rate, that flips, and now claiming at 67 provides more in terms of net present value than claiming at 70. It's also worth noting here that the differences here are not huge. So regardless of which direction. In the no discount rate side, we're talking about maybe $30,000 over a lifetime. In the discount rate side, similar, a little less than that. And we'll come back to this, but this is a very important takeaway from all of Social Security claiming, which is that a lot of times we can be very tempted to be very strident about this, but it can be much ado about nothing. And that viewing the claiming choice within the broader plan can make a lot of sense, and we don't always have to get sort of hung up on getting the precision and the exact right claiming date. A lot of this is more about finding a plan that works for the client so that they can live a better life, meaning things beyond what looking back at the end of their life with perfect hindsight or looking forward with perfect foresight would look like it might give them 100 bucks more here or there. There are kind of two worldviews here on valuing Social Security. The economists tend to view Social Security, I would put it, it's as if they are a hedge fund that would like to buy your Social Security from you. And they're saying, "Well, what discount rate would I use to value that thing?" Now, that can't be done as far as I know. But it would be like buying your annuity from you, buying a structured settlement from you, that kind of thing is sort of the way it's looked at. The opportunity cost view, the side that tends to be more toward claiming early is okay, is looking more at real-world opportunity costs for an actual person who's an actual beneficiary of Social Security. So they're asking how do decisions about Social Security timing affect the wealth and wellbeing of that person in the real world. They're not asking a kind of more disconnected question about, well, how would I value this if it were an asset that could be purchased? So this other view is a little more like the personal finance option, and you can obviously tell that I'm more in the second camp. I'm 100% in the second camp here. But it is striking that economists, people much smarter than me in math, are often on the other side, and I just think that they're missing a lot. My take on this is going to be on the question of discount rate, is going to be that starting with the expected return of the portfolio of the displaced asset is a reasonable place to start. We'll talk about what exactly this means, but I'm basically saying if you're retiring at 62 and choosing to delay Social Security, let's take that person with $1,000 at 62. Well, I'm not going to just spend $1,000 less until I turn 70 or $1,700 less until I turn 70 if I delay. No, instead I'm going to take more from my portfolio, and then when my delayed benefit starts at 70, I'll take less from my portfolio. So I'll have some time where I'm replacing Social Security with my portfolio, and so I need to take into account those possible returns. Okay. But let's get to the considerations that should be in the conversation but are not in many cases. So [attendee], very good point. Isn't longevity the key issue? It is certainly one of the key issues, and so that's the one we're going to start with in fact. So here are the four I'm going to talk about today. This should not be taken to mean there are no other considerations for Social Security, but we're going to do the top ones here. So mortality risk is the first one. We often in financial planning like to think and talk about longevity risk, which is the risk that I live longer than expected and I'm not able to fund my lifestyle. That's a perfectly reasonable risk to consider. You should consider it. It should be part of the plan. There's also mortality risk, which is the risk that you die sooner than you thought you would, and all the negatives that come from that. There's one obvious negative, you're dead, but there's other negatives for the people who are still around. And so this is just an example of how if you died earlier than you thought you might. So James, in this case, let's say he's 61. He could claim at 62. And let's say he passes away at 70 or 71 or something like that. You could think of it a couple ways, right? You could think of it as the amount that he had to take out of his portfolio to make up for not claiming Social Security. You could think of it as the total value at that time of his accumulated benefits. Whatever it is, it's almost $400,000. And so clients will look at the claiming decision and consider mortality very strongly and say, "Yeah, I know, I get it. If I live past You know, 80, 85, whatever that "break-even point" is. Okay, at that point, finally, I'm going to let out my breath. You know, "Oh, I made it." But because humans are risk averse and loss averse, the idea of giving up something and then it turning out to have been a bad decision weighs very heavily on them. And this is the way that I would look at this. With mortality risk, there's two ways of getting Social Security wrong. One is deciding to claim late and it turns out you had a short life. The other is deciding to claim early, and it turns out you live a long life. There is a framework for thinking about risk that Peter Sandman developed in his book, "Responding to Community Outrage: Strategies for Effective Risk Communication," where he talks about how humans perceive risk. And that it's not just about the numbers, it's also about sort of the context, the characteristics of the risk. And he has this list of things that are perceived as more and less risky. He calls that aspect of it outrage. So risk is, this is his famous equation, risk equals hazard plus outrage. And hazard is sort of the objective risk. I guess you could think of it as an outrageous kind of the subjective side. That doesn't mean it's not real. But things that are catastrophic are more outrageous. Things that are chronic are less outrageous. So think of this as a plane crash versus, I don't know, heart disease or a market crash versus inflation is a really good example in the financial world of catastrophic versus chronic. And you can see here that of these two sets of mismatches, the kind of wrong choice, the first one, deciding to claim late, pushing it off and then having a short life, maybe you get a terminal diagnosis at 70 or something, is perceived as much more outrageous. It's catastrophic, it's dreaded, it's memorable, it feels unfair. Versus the other one, which imagine yourself at 90, continuing to be healthy and looking back and saying, "Oh, I guess I could've waited till 70 to take Social Security. I'd be getting a bigger check today." Right? That's the negative. And so clearly those are very different in the minds of clients. So I'm going to take a second here and share with you in Income Lab. This is the Social Security optimizer. I'll show you how to get here. So if I'm in Income Lab and I'm at a just a normal plan, and I go to Decision Lab, the Social Security optimizer. If I haven't entered Social Security information yet in a plan, I could hit get started, or if I want to tweak it a bit. If I just say skip to results, it'll take what I already put into the plan and drive me right there. So if I want to see what I've put in, okay. I've used primary insurance amount, and it's 3,000 for John, 1,000 for Mary. I've done math so that I can have some spousal benefits and things. And then I'm going to explore. And then the first thing it gives me is a heat map. If there's two people, it's a two-dimensional heat map, I guess three-dimensional in a sense, because the darker it is, the higher the projected lifetime benefits are. But we build this in a way that we're trying to help you not have a conversation where there's one right answer. So yes, age 70 and 67, that's the max of lifetime benefits for these folks if they live as long as their plan lives. But already we're going to give you some ways to work with life expectancy and longevity, but already I like to, by default, put this target highlighting on. I put it at 3%. You could, whatever you like, 5%, 2%. And what that does is it shows you all of the claiming decisions that are within 3% of the max, right? So here's one. I could claim at 70 and 67, and the total difference over my lifetime is not even $50,000. So it's within 3% of the max. And so again, this is a way for, I mentioned earlier that sometimes when you're looking at Social Security, the differences aren't all that big, right? So if I snap back to the optimal, right? I claim a month earlier. Okay, I gave up $1,000 over my lifetime if we live to 95 and 94. It's a lot of ifs, right? And so you can see these tiny differences over a full lifetime. But what's more interesting is starting to play with, all right, look, we obviously want a plan that does last to 95 and longer if you make it that far. But let's face it, that's not entirely likely. Maybe let's put us a little bit more of an average. And you can view this as like a little Game Boy controller and immediately just update the numbers, and you'll already notice that, yeah, the optimal, the max, I guess, is the way to view it. It did move down a little bit. Now instead of 70 and 67, it's 69 and 67. But notice how the area that is close, this kind of cloud of similar experiences got a lot bigger. So now I can go as early as 67 and 62 and only give up 3%. 3% in this case is only $29,000 over your lifetime. And you can do a lot of playing with this, right? So then you can say, "Well, okay. What if we have a really... Before the break-even age, what happens?" Right? And this is typically what happens. As you start exploring some earlier break-even points. It's not pushing you to claim at 62 and 62, but it is certainly making it clear that there's kind of a quarter to a third of your claiming options are reasonable. So, this is a place where definitely clients are thinking about it, so it's a great place to have a conversation saying, "Yeah. We don't know exactly how long you're going to live. Let's play with a couple different options and see how that picture changes and how the reasonable claiming ages change." Great questions here. [attendee], yes, they are included, and we'll talk about that in a second. That's number three, policy risk. I'm going to hit sequence of return risk first. So sequence of return risk is a concept that probably you're very familiar with. It has to do with how the longevity of a portfolio or the size of a portfolio depends on the order in which returns arrive, good returns and bad returns, if you're taking money out of the portfolio. That's just a matter of how math works, right? For those of you who remember, I don't know, fourth grade math or something, it's about subtraction and multiplication. And here's just a very simple example where we have the same annual return series, but I have good returns first in the first case, bad returns first in the second case. And you can see that by the end of this sequence, during which we took $250,000 out of a million dollar portfolio, they're not the same. There's $72,000 more in the good sequence than in the bad. The reason this matters is that delaying Social Security increases withdrawals in the early parts of retirement. So Derek Tharp and I wrote a paper quite a few years ago now where we call this the retirement distribution hatchet. Because anytime you delay a non-portfolio income, Social Security, pensions, you have to make up for it with retirement withdrawals. It's a very common situation. And so the withdrawal period part, which is the dark blue here, starts to look a little bit like a hatchet. We even put the retirement smile here, so you have a nice ergonomic handle. And that means that the effect on the portfolio is pretty stark when you look at claiming at 62 versus claiming at 70. So for example, and I'll show you in a second how to do this in the software If I have a basic situation where the only thing I'm comparing is should I claim today or should I claim at 62, which let's say that is today, versus 70, I have, in this particular example, about a $400,000 difference in today's balance if I lived through the global financial crisis. So now at the end of this period, yeah, I'm getting a higher social security check in the blue line than I am in the gold line. And eventually, that could lead to these lines coming back together or at least closer together. But you can see that in the meantime, the experience, this started with $500,000, was quite starkly different. So you have to think through if this is about helping people live better lives, the blue experience was not a good one. This felt pretty bad during this period, just holding our breath, waiting for those benefits at age 70. Derek Tharp, my co-author on that article, well, many times, but on that article I just mentioned, also published an article on this same concept in "The Wall Street Journal." I think it was earlier this year. No, it must've been last year. And Larry Kotlikoff, who's an economist, I think, at Boston University, wrote an attempt to take down of this in his blog. And I thought this one was particularly interesting because it really shows where an obsession with a very narrow look at the numbers can lead to kind of crazy statements. So Derek says, "Hey, delaying benefits exacerbates sequence of return risk," like I just showed you. "If markets tumble early in retirement, the extra withdrawals they might need can magnify losses and permanently damage the nest egg." We just saw an example of that. So Professor Kotlikoff says, "Well, but households have other means to avoid stock redemptions to avoid the permanent damaging of the nest egg other than taking social security too early," which for him you can't take it early. That's why he even says too early rather than just early. After all, they could just keep working. They could not retire. They could borrow from their siblings. They could limit their spending, so just spend less, downsize your home, or move in with your kids. So if a very smart guy says these are your only options to, or at least these are the ones that [unclear] mentioned, I think we can all say, "Okay, clearly this is a problem because those are much worse outcomes than taking social security early in most people's minds." So I find this a pretty good example of how economist brain can really lead you to some pretty silly arguments. All right. The next one is... Well, actually, no, let me show you policy risk here, or sorry, sequence of return risk. In the Social Security Optimizer, there's a couple spots I want to point out. One is, let's see here. There's a scenario details option, which is for whatever claiming decision you've put in, so in this case, 69 and 66, you're going to see how the benefits would work. And so here you can see a partial year of Mary's benefits and then some fuller benefits. And then when John claims, we've got her spousal benefit as well. So very nice. And then in this plan, we actually have John passing away in 2043, and so you see the shift to survivor benefits as well. And this is also where you can see that breakeven. So somebody was asking about the breakeven point. If I switch this to monthly, I imagine it'll get a little bit finer tuned. Yeah, here we go. And this is also a place where we'll talk in a second about how to include an extra discount rate, but the discount rate would also show here. So the breakeven can change depending on your discount rate, whereas the benefits themselves, we show either today's dollars or future dollar benefits, depending on how you choose to show it. So you can show these real or nominal. Real is today's dollar, so we just strip out the inflation adjustments. Not that you wouldn't get them, you would get them, but just show it or not show it. And then you can also show every single month like this, including that weird month that happens right at the month after death. Or you can view it as annual. And the breakeven is available there. The other thing that can be really helpful is the stress test. So here, what this is doing is saying, all right, let's take a look a little bit outside of just the benefits themselves and build a picture of what these things could look like at different claiming ages. And I usually might say maybe we'll do 60. I forget exactly what this was. Actually, just to make it really easy for us, we'll reset it to have a full kind of full-length plan. That's usually best practice here. So then we'll do a stress test of the "highest," so the lifetime benefits of 1.6 million. Once this loads. Then I'm going to add a comparison. Here, let me... There we go. For whatever reason, when you are sharing your screen on Zoom, it'll sometimes limit screen loading. So here I might want to compare it to 62 and 62. Right? So now I'm comparing 70 and 67, 1.6 million, versus 62 and 62, 1.2 million. So on the face of it, from a total lifetime benefits, it looks obvious that we should not give up $400,000. But we can quickly then build a way to see, okay, well, how would the potential income differ? Because this plan has guardrails in it, right? So you're still getting... And then we can also see how the benefits change. So you can see here that the... Sorry, not the benefits, the balance. You can see how the gold line, which is the claiming early, has a higher balance. So this is a great way to look at how the claiming decision has an effect on the portfolio. One final point on this. I know I've couched this as, well, if you are taking higher withdrawals because you're moving into the global financial crisis or something, well, you wouldn't want to be taking money out because you're about to go into bad returns. But actually, the same is true if you're going into good returns. So you'll still see a gap if you're going into a good return scenario. So here I began in 2009 instead of 2007. And because you're still not taking as much in withdrawals on the gold line, now instead of it cushioning your portfolio, it's allowing more to stay in the portfolio to grow. So sequence of returns is not just about bad sequences of returns, it's about all sequences of returns. All right. Going back to policy risk Let's use a reference on best practices when using Income Lab. [team member], looks like you're going to hit that one. So policy risk, somebody did just ask the question, what about cuts in benefits? And this is top of people's mind. A lot of people don't really know how Social Security is funded. It is largely, and there were times when it was entirely funded by the payroll taxes of people today. So basically, the payroll taxes that are gathered today, or in this case in 2023, were used to pay benefits. And so people do not have a Social Security account somewhere with money in it. That's often how clients think, but that is not the case. It is simply a tax that is then paid out as a benefit. There were times where actually the taxes were higher than the benefits paid out. As we'll see in a second, that's no longer true. And so when they were higher, the excess was invested, quote unquote, "in treasuries." Now, benefits are paid based on taxes, on tax on benefits as well, which came in in 1983, and then again later than that. And now it is on interest and redemption of trust fund reserves. And so what people are worried about is that the green and light blue here will disappear someday, and then what's going to happen? The program has gone through periods of surplus and shortfall. So there were deficits from 1957 to 1983. And then there was a major overhaul in 1983. And so this is another thing. I think we all learn how Social Security works. Maybe you did your CFP or you're doing CE, and you know how deferral benefits work and so on. Well, the program has changed a ton over the years. So it would be nonsensical to say the program could not change again. It's changed lots in the past, so it certainly can change again in the future. We then ran surpluses until 2009, at which point the current set of deficits began. And they are projecting that benefits will be reduced in 2033 if no other changes are done because that is all that payroll taxes will be able to fund. So these, if we look back at the warnings about policy changes or about benefit changes starting in about 1990, the blue line here is the date that the projected shortfall would come. So you can see it's kind of always been in the 2030s or 2040s. It fell from 2040s to 2030s. It's been pretty steady since then. I think there are a few projections that put it in 2032 now. But that 2033 has been a pretty constant over the last several years. And then the orange bars are the projected cut in benefits if it's just everybody's benefit were cut equally. And it's always, again, kind of been in that 20% to 25% range. Just because, again, that point that things have changed so much. Sorry about the... Looks like maybe some of the formatting here got a little strange. This is helpful just to see the history of the program from 1940 when the first benefits were made to early retirement coming in '56 only for women. Then in '61 for men as well. COLAs didn't come, regular COLAs at least, until 1972. And then changes in '77 where there were some crazy things that were happening that really helped beneficiaries but did not help the program. '83, this is kind of where Alan Greenspan made a name for himself, the Greenspan Commission to fix Social Security. Then you can see even the changes in taxability as recent as '94, and then again in 2000 on some of the earnings reduction. So there's been a lot of changes over the years. And if I sort of look at a few of these, the question is often, okay, if there are changes, would they apply to everybody? Would there be some grandfathering and so on? And obviously, no one knows this, right? But we can look at the past and say, okay, what sorts of phase-ins or grandfathering was there in the past? And what we typically see is that there have been some phase-ins. The longest was certainly the delay credits and the change in full retirement age, which took 20 years to fully get implemented. However, most have been either immediate or applied within a couple of years. And even more so, I would say tax changes have generally been immediate, basically meaning in the next tax year. Whereas other changes have been grandfathered at least a little bit, or in the case of full retirement age and things, much longer. So take that for what you will. In order to talk with clients about this, so one, I would just acknowledge that, yeah, this is a worry for people. That it's not a crazy thing to think about. We don't know if changes will be made. But if you want to explore, for example, maybe I've already implemented a little bit of some earlier life expectancy, but I can just turn on benefit cuts. I can choose what year I want those to hit, and I can state my reduction. It'll default to 2033 and 23%. And again, what happens, this is very typical, is that we will see, maybe you won't see the max point change, but you will see this cloud of similar options get bigger, and the differences get smaller. So now, if I'm down here 3% away from the max, I'm giving up 25,000 instead of 50,000. I don't know if you remember earlier. So the stakes are getting smaller. Another thing, I went over how you can use the stress test to talk about sequence of return risk, but you can also, without even going to the stress test and taking into account things like which historical period you're stress testing and so on, you can even just add an opportunity cost, which is a way to either show the effect of lost returns or simply say, "Hey, I prefer income now to income later." So even if I put just a 3% opportunity cost, and this, by the way, is a real rate. So everything in the Social Security optimizer, it accounts for inflation, but it's not giving you credit for... Having inflation doesn't mean really you have a higher benefit later. It's the same as today. And you can see that now brings us down to 62 and change, not exactly 62 for each of them. But crucially, look at this. Over half of the options are now within 3% of the max. So as soon as we start taking opportunity cost into play, reductions in benefits, more realistic life expectancies, the decision in terms of projected lifetime benefits becomes much less of a thing, right? So even out here, let me put you 3% away. Okay, $16,000 over your lifetime in today's dollars. How is opportunity cost different than discount rate? It is not. This is the key point. We chose to call it opportunity cost because it felt like something you could explain to a client without sort of a mathematical concept, but it is literally a discount rate. That is what it is. And so now if I went to scenario details and did a break even, I will see the discounted cumulative benefit Sure. And so this actually brings us back, this one. Oh, I think did I have somebody dying early in this one? I think I might have. So this brings us back to that question, though, in the beginning of this presentation about what's the right discount rate. And I said, well, a place I would begin is looking at what's a reasonable average expected real return. Okay. So the last thing here, which actually is related to discount rate because I think discount rate is well thought of as a average rate of return that you might expect in your investments, but there are other things that come into play. So, not only are people more capable of using an extra $10,000 at age 62 because they're younger, they are more likely to be alive, more likely to be healthy and so on. So an extra $10,000 is just worth more to them. But, if they live a long time, they actually still get a longer time to sort of live those experiences and memory dividends, as the book "Die with Zero" likes to call them. So there is kind of a less mathematical, more psychological aspect to claiming early as well, which is that it takes more advantage of your health span, spending optionality, and so on. So I kind of grouped all these together. They are slightly different concepts, but one is what I just said, which is maybe you're younger, you're healthier, you're more active, you're more able to spend a lot of money or more money. If you're in your 80s or 90s, you might be relatively healthy, but you probably will have slowed down and that marginal $10,000 might be less useful to you. There's also the effect earlier in life where preserving portfolio value preserves optionality. So you could tap a portfolio for $50,000 or $100,000, but you can't get an advance on your Social Security for the next couple years. And so truly a portfolio is a more useful asset. It is an asset where Social Security is not, than Social Security. And then along with that, there's research that shows that things like Social Security and annuities are more easily spent. So you can reduce the risk of underspending, increase the feeling of permission to spend by taking Social Security earlier. So I put all of these things kind of together in this harder to quantify, but important set of considerations that I could see you putting into the opportunity cost piece of this tool. So if I'm back in explore scenarios here, I might start with a real rate of return, and then tweak it depending on these other kind of a little more harder pin down concepts. All right. Yes, the slides will be available. I'm going to hit some questions. I do have a few more slides, but I think the concepts are just to illustrate these concepts some more, and to give examples of how I might tweak this opportunity cost or the life expectancy. But you can see those. Maybe we'll get a chance to have a look at them. But I see a bunch of questions here. All right. As we already said, opportunity cost basically is discount rate. Just a term we've hoped maybe you could use with clients without explaining time value of money to them. How do we reflect the client will be spending these funds versus investing the Social Security benefit when taken early? So if you are using the stress test, the plan will automatically do that. So if you have them retiring at 62, it would be showing you spending the Social Security instead of your portfolio through those periods of time. If you have a plan where you're taking Social Security, but you're not yet retired, which to be honest, I don't normally see, but if you wanted to do that and save the Social Security, you absolutely could. You could build a plan that does that, and then you would see the effect certainly in the portfolio. You'd also see it in how much you could spend at retirement. So I think that'd be an interesting thing to look at. I've not heard from a lot of advisors that they're looking at that as an option, but you can absolutely do it in Income Lab and look at the examples or look at the outcomes. Yeah, really good question, [attendee]. So if you're saying, hey, I think I just had an example where I was saying $10,000 more in your 60s sort of buys you more life, you're more able to do some things. I think presumably, [attendee], what you were suggesting is that, yeah, but later in life, maybe that extra 10,000 could buy you more of long-term care or something like that. Absolutely true. So if you wanted to build a plan that included long-term care, you might see an effect of having a higher benefit at those times. Well, that's absolutely right. All right. So [attendee], good point about the effect on spouses. So what we did see here, and I'm just going to reset this so that I'll get a nice long life for one of them at least. There's several places where there's an argument for delay. One of them involves survivor benefits. So spousal benefits are not really affected by when the other person takes their benefit. These days, you can't get a spousal benefit unless the other person is taking their benefit. But otherwise, it's based on the other spouse's primary insurance amount. It's not based on their actual benefit amount. Oh, it looks like I... Let me find that example where I had a death. Let me find one where there's a survivor benefit. So that is not true, however, in the case of a survivor benefit. So a survivor benefit is affected by the amount of the deceased's actual benefit amount. It's not based on their primary insurance amount. Primary insurance amount is the amount somebody would have received if they had claimed at full retirement age. So without any reductions for claiming early, without any increases for claiming late, or for delaying. So for most people, that's age 67. I think actually very soon it will be for everyone at age 67 because everybody else will have already reached full retirement age. And so that is one place now that I have John dying before Mary, I should see the survivor benefit in purple. And so this amount, the amount that Mary receives, is affected by whether or not John delayed his claiming. And so if there is the worry or the projection that one of the spouses might live quite a while after the first spouse dies, that can definitely be an argument in favor of claiming later. And that, in this case, is probably a lot of what's behind the fact that moving... Here, I'll move Mary a little bit younger. So now we're not going to see quite as many years where Mary would be receiving. And you can see now it moves a little bit to left and down, right? So if I extend Mary's survivor period, then we're going to move up and to the right. So it absolutely is taken into account here. It's not completely determinative. It doesn't mean that, oh, therefore, now John should wait till 70. But you can definitely see the effect. The longer the survivor period, the more argument that the person dying first should delay, especially if they're the person... Well, only if they're the person with the higher benefit amount, because that's how the survivor benefit comes in. So I think I mentioned this at the beginning, there are lots of other considerations with Social Security. Survivorship is one of them, divorce, remarriage, earning before full retirement age. There are a lot of things we haven't talked today about. And some of those can push you toward later claiming strategies. But a lot of that is already handled in this tool and just kind of rolled up into this picture of the heat map. Let's see. Yeah. So that's essentially what I was just saying, I think, [attendee]. Let's see here. Oh yeah, the target highlighting. So it's up here. Whenever you see this little thing that looks like a stereo equalizer, that's all about what you see on the screen. So am I rounding things? And in this case, am I doing target highlighting? You can actually hit save if you've done that, and it'll always appear here by default, so you won't have to turn it on anymore. So mine is turned on by default. If I hit save, it will be turned off by default, but I can reset back to my default settings here. So that's where you do that. And you can also type in the plus or minus that you want included. All right. Best practices on your retirement paycheck. Okay. Yeah. This is a great way to finish up for today. So what I focused on so far are all these tools within the, right here, the total lifetime benefits section. There is a retirement paycheck section though too, where again, it's stepping away from the looking at benefits just on their own and saying, "Well, what's the effect overall on the plan, and in particular on how much can I spend?" Because Social Security is probably just one of many resources that they have. They might have a pension, might have IRAs, 401(k)s, taxable accounts, all sorts of things, rental income. And so you want to see, well, does the change in benefit amount and timing of benefits, how does that affect what I can spend, kind of keeping all else equal? And so up here, you have this toggle between total lifetime benefits and retirement paycheck. Retirement paycheck is going to, first of all, it's going to reset everything back to what the plan is, so it's not going to carry over those, anything that I've... Oh, maybe it doesn't. I guess I said that wrong. It does take these into account. By the way, you can put benefit cuts in a plan itself if you want. And what it's doing now is it's filling up this heat map, not with total lifetime benefits, but with retirement paychecks. And it's a nine by nine, so it's got to do 81 different plans. So this is a much better... It does take a second here, and I think probably I need to let it load without having Zoom on. But it's basically creating 81 plans for you and showing you how differences in when you take Social Security affect the retirement paycheck. Which is how much you can spend overall taking all resources into account and the timing of those resources, and the inflation effect of those resources, and the mortality adjustments of those resources, and so on. So I don't know why, but it's taking a second to load here. Anyway, we're about done, so I won't delay you on this, but you can see it's still loading. It normally loads a little faster than this. But what you would then see is it'll show you the low end and the high end, and the heat map for where the highest retirement paycheck is. One takeaway I often see from this is that the differences in retirement paycheck are not that big. There are differences, but they will often be in the hundreds of dollars. Which again, I think gives you permission to focus more on other considerations like there are worries about mortality risk, there are worries about benefit cuts, maybe sequence of return risk and portfolio size. So yeah, one of the things that all of these tools show once you take into account all these other risks is that you can, in many cases, sort of give your client permission to make some choices that maybe the economists out there doesn't say is perfectly optimal. But when viewed in the context of the overall plan and all the risks actually does seem pretty reasonable. Okay, so with that, I think we're at the hour, and thank you everybody. Justin, we have one super quick one. I just thought maybe it was in the chat that I thought maybe we could address- Okay. Sure ... if it feels still here. They want to know a bit about the tax effect. So since the taxable amount of Social Security typically... Yeah. So in order to handle taxes, we really do, it's one of these things where there's so many parts of financial planning, you typically have to hold some things constant or not look at them much, and focus on something else. So you absolutely can do the Social Security taxation. But you're going to have to go to Tax Lab to see more of that. Because it's sort of across the whole plan that's in effect. So for example, if you are doing Roth conversions early in the plan, that might lead you to do a little bit later claiming because you want to limit taxability of Social Security during those Roth conversion years. But that's not really something that we're highlighting in the Social Security optimizer. But you definitely can do it in Income Lab. All right. With that, thank you everybody. If you're interested in seeing more, please reach out. Check us out online, book a meeting and we'll see you all next time. Thank you.