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  • Bogleheads® Live with Mike Piper: Episode 23

Bogleheads® Live with Mike Piper: Episode 23

Post on: October 3, 2022 by Rick Ferri

The Bogle Center is pleased to present the 23rd episode of Bogleheads® Live. Our guest for our episode is Mike Piper. In this podcast, Mike discusses bequest allocation and bequest location.

Mike Piper

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Transcript

Mike Piper: bequest planning

Jon Luskin: Bogleheads® Live is a weekly Twitter space where the do-it-yourself investor community asks questions to financial experts live. You can ask your questions by joining us live on Twitter each week. 

Get the dates and times for the next Bogleheads® Live by following the John C. Bogle Center for Financial Literacy on Twitter. That’s @Bogleheads

For those that can’t make the live events, episodes are recorded and turned into a podcast. 

Thank you for joining us for the 23rd Bogleheads® Live, where the do-it-yourself investor community asks questions to financial experts live. My name is Jon Luskin and I’m your host. Our guest for today is Mike Piper. 

Let’s start by talking about the Bogleheads®, a community of investors who believe in keeping it simple, following a small number of tried and true investing principles.

This episode of Bogleheads® Live, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a 501(c)(3) non-profit organization dedicated to helping people make better financial decisions. Visit our newly redesigned website at boglecenter.net to find valuable information and to make a tax-deductible donation. 

The annual Bogleheads Conference is on October 12th through 14th in the Chicago area. Speakers include previous guests of Bogleheads® Live, including Rick Ferri, host of the Bogleheads® On Investing podcast. Christine Benz, Director of Personal Finance at Morningstar, today’s guest Mike Piper of Oblivious Investor fame, Dr. Jim Dahle aka The White Coat Investor, yours truly, and much more. There are just a few seats remaining. You can register boglecenter.net/2022conference

Mark your calendars for future episodes of Bogleheads® Live. Next week, we’ll have Derek Tharp discussing how to take money out of your portfolio in retirement. And then the week after that, we’ll have Dan Egan to discuss systematic investment management and behavioral design.

Before we get started on today’s show a disclaimer: This is for informational and entertainment purposes only it should not be relied upon as a basis for investment tax or other financial planning decisions. 

Let’s get started on today’s show with Mike Piper. 

Mike is a CPA in the St. Louis area. He’s written several books dealing with various tax and retirement planning concepts and has been quoted about such topics and numerous publications from the Wall Street Journal to AARP to Morningstar. He publishes regularly about tax planning, retirement planning, Social Cecurity, and the various other financial planning topics on his blog at obliviousinvestor.com. He is also the creator of the open Social Security calculator. And he was a guest on the ninth episode of Bogleheads® Live where Mike answered questions about Social Security and investing. Mike Piper, thank you for joining us once again on Bogleheads® Live. 

Mike today’s episode was inspired by a recent newsletter article you wrote entitled “Bequest Allocation and Bequest Location.” For folks who haven’t read that, can you tell us what bequest allocation and bequest location are? 

Mike Piper: The idea of bequest allocation is a spin on the concept of asset allocation and asset location. With asset allocation, it’s how much do you want in stocks and how much do you want in bonds or other fixed income. And asset location is once you’ve decided what asset allocation you want, then it’s worth spending some time thinking about which accounts those different pieces should go in.

Most specifically the least tax-efficient assets, so things like high-yield bonds and so on, they should go in retirement accounts rather than taxable accounts. Cause you’ve got some tax savings available too, if you do that. Step one is asset allocation, step two is asset location. 

Bequest allocation is when you think about who gets your money when you die, or if you’re married, when you and your spouse have both eventually died, what’s the breakdown? If you’ve got three kids, is it one third to each child? Or is it 20% to each child and 40% going to one or more charities. Are any grandkids getting any money? Things like that. That’s your request allocation. It’s what are the percentage breakdowns among the various recipients. 

Bequest location is a similar concept to asset location, where we say, “okay, now we’ve decided the allocation, but which accounts should we use?” If you’re going to be giving some to your kids and some to your grandkids and some to charities or some to your nieces and nephews or whatever, how do you decide which dollars to use for which of those purposes?

The very short answer, generally, to the extent that you are leaving any money to charity, the best assets to use for that are tax-deferred assets, because tax-exempt organizations are tax exempt. To them, a traditional IRA is every bit as good as a Roth IRA. They don’t have to pay tax on any of those dollars.

Whereas a human being would have to pay tax on those dollars. A human being would much prefer to inherit a Roth IRA than a traditional IRA of the same size whereas the charity is indifferent. 

To the extent that you have charitable intentions prioritize tax-deferred assets for those. And then if your charitable planning exceeds your total tax-deferred balances, then your taxable accounts would be the next target, basically. And then prioritize Roths for leaving to actual human beings. Non-charities is the idea. 

Jon Luskin: Jon Luskin, your Bogleheads® Live host, here jumping in for a quick podcast edit. 

The reason why this strategy works is because those tax-deferred assets, such as a traditional IRA that Mike Piper just mentioned, have an embedded tax bill.

If you look at a traditional IRA or similar tax-deferred account, you generally don’t get to enjoy the full value of the entire account balance. That’s because money coming out of that account is taxable at your marginal rate. That’s not the case with Roth accounts, where qualifying distributions are tax-free. 

So if you have both a traditional IRA and a Roth IRA, that is, if you have both tax deferred and tax-free assets, and you’re looking to give money to both a regular person and a charity, which is tax-exempt, you can give the traditional IRA that has an embedded tax bill to a tax-exempt organization, allowing that organization to enjoy that asset tax-free. And then you leave your tax-free assets to your heir that otherwise would have to pay taxes on money in a Traditional IRA. 

And now, back to the show.

Does this approach change if the bequester has a shorter or a longer life expectancy?

Mike Piper: The big thing that life expectancy is going to impact in this regard is what are the account balances going to be upon your death? How big are they?

A longer life expectancy could mean a greater chance of a very small balance because you’re going to be spending it down over time. Or it could be the opposite, a very large anticipated bequest. 

The primary ramification of that is that the tax-deferred accounts generally have to be distributed over 10 years, which is the typical rule these days when somebody inherits them. The larger the account balance is, of course the larger the implications of that will be for your heirs. Again, that’s only though for people, for charities, there’s no tax implications because they get it tax-free. 

Jon Luskin: Mike, let’s talk about some of those other tax planning strategies. With respect to bequest allocation and bequest location does anything change with tax loss harvesting? 

Tax loss harvesting is selling an investment at a loss in a taxable account to potentially reduce your tax bill. 

Mike Piper: Tax loss harvesting is still generally going to be advantageous. Of course, you don’t want to be harvesting losses, where you’re in the 0% tax bracket for long-term capital gains your losses are only going to be offsetting capital gains, which are already tax-free. But otherwise, tax loss harvesting is a generally useful thing to do and that’s still true. That’s unaffected by this concept. 

Jon Luskin: Yep. And that’s going to be, especially given the goal to leave those assets in the taxable account to your heirs, because they get that step up in basis, tax-free. 

During the live show just now I mentioned ‘step-up in basis’. Let’s break that down for those who aren’t estate planning nerds. 

Consider basis as the original amount you purchase an investment for. For example, if you bought a share of VTI, Vanguard’s Total Stock Market Index ETF, for $200, that $200 is your basis, your cost basis. If VTI increases to $210 and you sell it, you’ve got a gain of $10. That gain is determined by subtracting the purchase price from the sale price. 

  • Sale price - basis = taxable gain
  • $210 minus the basis of $200 makes for a taxable gain of $10. 
  • $210 - $200 = $10

When you tax loss harvest, you sell your investment and can then purchase a replacement investment to maintain your investment exposure. That effectively lowers your cost basis. 

Let’s go back to our $200 per share example of Vanguard’s Total Stock Market Index ETF, VTI. You buy VTI for $200. The market declines, and you sell it for $190. You now have an investment loss of $10. 

$190 - $200 = ($10)

Having sold or your investment for a loss and repurchased something, similar you’ve effectively lowered your cost basis to $190. 

While this does create some tax savings, it creates a possible tax bill in the future. Yet, you can avoid that future tax bill by dying. That’s because when heirs inherit a taxable account, their cost basis is generally increased to the value of the investment at the time of the decedent’s passing. 

If I bought my investment for $200, sold it at $190 claimed an investment loss of $10, repurchased something similar for $190, had that investment increase to $250, die, and then pass that $250 investment all to my heir. My heir can then sell that investment at their own cost basis of $250. With both a cost basis of $250 and a sale price of $250, the heir gets to sell the $250 investment tax free. 

$250 - $250 = $0

That makes tax loss harvesting a pretty appealing strategy if you plan to pass your investments in your taxable accounts to your heirs. Because that way, you can take a deduction for an investment loss and never have to pay those taxes back since you’ll never sell that investment in the future. But, your heirs will get to sell that investment tax-free. 

And now back to the show.

Related to what you just mentioned, “Hey, I’m from the 0% bracket, I don’t want to do tax loss harvesting.” At that point you’ll be tax gain, harvesting. Any other things I need to be thinking about there? 

Mike Piper: If you have charitable intentions, that can certainly change the wisdom of tax gain harvesting. It’s not the bequest allocation and bequest location concepts that throw a wrench in these plans. But, it’s just, if you are planning on giving money to charities, then rather than tax-gain harvesting one thing you should probably at least be considering, is one of the two best ways to give money during your lifetime is donating appreciated securities. When you donate securities that have gone up in value, and they are things that you’ve owned at least for longer than one year, then you get an itemized deduction for the current market value, the appreciated market value, and you don’t have to pay tax on that gain, and neither does the charities. 

So again, the bequest allocation and bequest location concepts, don’t change all this other stuff. But if you have charitable intentions, yes, that is a critical piece of information that should be considered in basically any tax planning decisions. And that definitely includes tax gain harvesting. 

Jon Luskin: Recently, I was working with a boomer client and they had a couple heirs, one in a high tax bracket, one in a low tax bracket. The idea here with bequest allocation and bequest location is “I’m going to give more of my Roth account to that heir in the higher tax bracket. I’m going to give relatively more of my tax-deferred account to that heir in the lower tax bracket”. That’s going be the more tax-efficient way to leave assets to my heirs. 

Mike Piper: Is that the more tax efficient way to do it? Yes. But there are obviously other concerns depending on who these heirs are. If it’s two siblings, for instance, then you want to make sure that everybody’s buying into this plan. Because it’s probably not going to work out exactly perfectly, because you’re making guesses about what their future tax rates are going to be and about what the account balances are going to be. Those are things that we don’t know the answers to.

Let’s say the intended goal is for each person to get half of the effective after-tax value. You can do some math and say, “okay, if we anticipate this tax rate and we anticipate these account balances, leaving the Roth to the person with a higher tax rate and the tax-deferred to the person with a lower tax rate and then adjusting accordingly can give us an anticipated outcome where they each get the same amount of each other after taxes.” 

But you’re not going to get it exactly right. There’s too many unknown factors. If both of the heirs think that, “Yes, let’s try to do this. And even though we won’t get it exactly right, one person’s going end up with somewhat more and the other person’s going to end up with somewhat less. It’s still going net us more in total.” And so they’re on board with the plan, go for it. 

But, if the nature of the relationship between the two is such that they are unlikely to take it well, when it turns out to be a somewhat uneven outcome, then you want to be careful there. You don’t want to make the tax planning the all-important thing when there are relationship considerations.

Jon Luskin: Certainly, any sort of strategy like this is going to take more work. It’s going be the opposite of simplicity. And it’s going be a little bit imprecise. 

Mike, if you are going to embark on this, spend the time to do the bequest allocation, the bequest location, how often should you be updating your calculations? Tax brackets are going to change for those heirs, if they make more or less money in a certain year. And at the very least we’re going to have tax brackets change when the Tax Cuts and Jobs Act tax holiday expires at the end of 2025. 

Mike Piper: It depends on what strategy you’re doing. If you are doing something like what you were just talking about, you would need to update that frequently. If the goal is to get it pretty close to right, you’re going to have to update it a lot, frankly.

What I see more often is a couple or a person who has kids or grandkids or other people to whom they want to leave some money. And then also one or more charities to which they want to leave money. And typically, what they’ll end up doing is something along the lines of, “Okay, let’s leave $100,000 to this charity and then $100,000 to this other charity and our tax-deferred balances are sufficient to cover both of those. So we’ll write those in as beneficiary designations, and then we’ll split everything else up to the kids.” 

It’s making sure that the charitable intentions are satisfied in the most efficient way possible, which is using tax-deferred accounts. And then all of the other stuff, just everything else, goes to the kids in the typical percentages you might see.

That doesn’t really need to be updated very often at all, as long as the account stays sufficiently large to satisfy the intended charitable bequests. And as long as you don’t have any desire to change that, you don’t really need to be updated very often at all. 

Jon Luskin: Mike, do you think it’s worth the additional work, the additional complexity, to do a sort of approach: two different heirs, two different tax brackets. 

Mike Piper: If we’re talking about people in the same generation, so you’ve got two or three kids or whatever, and you’re trying to divvy up between them, I think it’s going be a lot of work. And again, it has the potential to backfire in terms of how everybody feels about it. And that’s really important. Taxes are definitely not everything here. I would be reluctant to put that amount of work into something that might backfire like that. 

Another thing that you’ll see sometimes, you’ve got some tax-deferred assets going to charity, and then everything else is going to other family members. You might not want to split it up differently among siblings. One sibling gets Roth. The other sibling gets tax deferred. 

Instead of that, you might want to split it up differently among generations; all of the grandkids bequests are coming out of this category of tax classification. Breaking it down by generation saying, “Okay, the grandkids probably have a lower tax rate than kids at the anticipated time that they would inherit these assets, then leaving tax-deferred assets to them because they’re the party with the lower tax rate.” That would be pretty stable. You wouldn’t have to update it all the darn time.

Jon Luskin: Those grandkids versus kids. What’s the tax treatment of those assets they’re going to inherit? I think it’s going to depend upon just how old those kids and grandkids are going to be. Certainly, I’ve worked with folks who’ve had enough years under their belt where their kids are retired, and their grandkids are in their peak earning years. So in that scenario, I imagine you might want to flip it on its head.

“Hey, let’s give the grandkids the Roth dollars, since they’re still working, generating that marginal income; they’ve got that active income. Whereas the kids they’re old enough to be retired.”

Mike Piper: One thing I would note there or caution about, is that marginal tax rates are not necessarily low in retirement as people often expect because of the way Social Security is taxed; that’s the biggest one. Depending on how much the kids saved over their careers, their RMDs could be quite significant, it certainly could be flipped on its head. Absolutely. 

Just one more note. The situation you mention, I see that all the time. It’s the statistical probability. If you’ve got a couple, by the time both of them have passed away, the kids are often retired already. Not getting into tax planning, but estate planning in general. So many people default to, “Hey, let’s just break everything down.” If you’ve got four kids, 25% to each of the four kids because that’s the easiest, most obvious thing to do when you’re filling out beneficiary designation forms. 

By the time kids get these assets, it’s not going to be life-changing for them. They’re already retired. They’re often happy with their standard of living at that time.

Whereas leaving it to the grandkids, it could be a massive change in their lives. Boom, they paid off their student loans. They were able to start a business when they otherwise would not have been able. 

A lot of people, when they first do their estate planning, they’re filling out the beneficiary designation forms and creating their will, their kids are a lot younger at that time than they are at the time that the deaths occur. 

You’re thinking about a person who’s younger, and then it ends up being somebody considerably older. It’s not as impactful as it would’ve been when they were younger. That’s a compelling point in favor of leaving more to the grandkids than to the kids.

Jon Luskin: I think about a 72-year-old widow I worked with recently, her mother was still alive at age 97. 

Mike Piper: Mm-hmm yeah.

Jon Luskin: Mind-blowing. 

Mike Piper: How much would it change this client’s life when she inherits whatever she inherits from the mother? It might, depending on her circumstances. 

We talk about David Blanchett’s research on spending in retirement and how it generally declines over time. That’s the nature of aging. We don’t want to travel as much, and we don’t want to go out to eat as often. All these things that we normally spend money on in our earlier years, you can’t do them or don’t want to do them as you get older—another point in favor of prioritizing the younger beneficiaries.

Jon Luskin: To sum up a little bit of what we’ve covered, perhaps that individual level bequest allocation, bequest location within the same generation, that might be a little bit complicated. That’s going to require a lot of work to keep maintained and keep those calculations as precise as possible to be as fair as possible. 

But doing a bequest location, a bequest allocation, on a generational divide can certainly be simpler and easier. And certainly, bequest location, bequest allocation to your charities of choice, that can also be tax efficient and a simpler approach as well. 

Mike, with respect to this approach, maybe I’m going to give these younger kids more of these Traditional dollars or perhaps even the inverse scenario where “Hey, the kids are retired, possibly they’re in the lower tax bracket now.” Does that impact how I should think about partial Roth conversions? 

Mike Piper: Yes, definitely. The Roth conversion decision is overwhelmingly about what tax rate would I pay now on these dollars if I convert them. And how does that compare to the tax rate that we expect will be paid later on these dollars when they come out of the account later? 

If we’re looking at a situation where you don’t expect that you’re going to spend down the tax-deferred balances during your lifetime, then the pay-tax-later tax rate is whatever tax rate, the heirs are going to be paying. 

Like you said, it depends on who the heirs are, which generation, and what they do for a living. If it’s all going to your daughter, an anesthesiologist, that’s one thing. But, if it’s going to be split up among a whole bunch of kids and they have more modest earnings, then it’s a different thing. 

The other significant factor here is the extent to which you have charitable intentions for these dollars. Because in that case, to the extent that the dollars are going to a tax-exempt organization, the pay tax later tax rate is zero. Even if the intention is for only a portion of this tax-deferred account to go to charity, that’s still a big difference. Let’s say you’re planning to leave 20% of it to charity, then whatever you calculate as you’re projected pay-tax-later tax rate, you have to multiply by 0.8, because the dollars are coming out, tax-free.

Big difference in terms of whether conversions make sense because the pay-tax-later tax rate is not your own. It’s the tax rate that your kids or grandkids, or in some cases, the charity, will end up paying. 

Jon Luskin: Mike, you can let me know if I’m summing this up correctly. 

“Hey, I’m going to be doing bequest allocation and bequest location. Should I still be doing partial Roth conversions?” 

Well it depends. Yes, if you think those heirs will be in a higher tax bracket. No, if you’re leaving some of that money to charity. No, if you think those heirs are going to be in that lower tax bracket. 

Mike Piper: I would say, “Yes, if you expect that they’re going to be in a higher tax bracket. No, if you expect that they’re going to be a lower tax bracket. And as far as charity, then I would say maybe because it depends how much of it’s going to charity.”

Jon Luskin: Mike, let’s jump to tax-efficient spending strategies. What’s going to be the most tax-efficient way for me to spend down the dollars that I have. I’ve got the traditional tax-deferred bucket. I’ve got that tax-free Roth bucket, and I’ve got that taxable account. 

A great post by Michael Kitces, and I’ll link to this in the show notes for all our podcast listeners, shows that the most tax-efficient spending strategy is to spend from that tax-deferred account up to a certain tax bracket. And then, once you’ve hit that bracket, then you’re going to distribute further dollars from your taxable account. And you’ll keep doing that until your taxable account is run out. At that point, you’ll supplement distributions from your tax-deferred accounts with those Roth dollars. 

Does that tax-efficient spending strategy change if you’re doing any bequest location, bequest allocation.

Mike Piper: It’s not affected by the concept of bequest location, particularly. 

The first dollars that should be spent every year, without question, are checking account dollars. That includes your social security income and any RMDs that you had to take and interest and dividends from taxable holdings, whether they’re qualified or non-qualified dividends and whether it’s tax-exempt or taxable interest. Maybe you’re a married couple, and one of you is retired, the other is still working part-time, there is earned income. All of the stuff that goes into your checking account, that’s the money to spend first before spending tax-deferred dollars. 

And the reason for this. Let’s say you still haven’t used up the 0% tax bracket, the standard deduction. And so you’re thinking you should take this money out of tax-deferred because you’re going to be taking it out at a 0% tax rate, and that’s the best tax rate. An even better plan is to spend those checking account dollars and convert tax-deferred dollars instead of spending them, because in both cases you end up with no taxable income.

If you spend from the tax-deferred, what you’re left with is checking account dollars. If you spend from a checking account and convert the tax-deferred dollars, that is 0% tax rate, your left with Roth dollars and that’s more valuable. You would always rather have Roth dollars than taxable dollars. 

Before spending anything from tax-deferred in any given year, it always makes sense to spend all of the assets and taxable accounts where there’s not going to be any tax cost to spending them. Anything in your checking account, savings account, but also if you’ve got stock or bond holdings where the basis is approximately equal to the current market value, that should get spent first every year.

Jon Luskin: How does this bequest allocation, location strategy change once someone has hit that estate tax exemption amount? 

Mike Piper: There are all sorts of things that change once you hit the estate tax exemption amount. Many people look at the federal estate tax exemption, $12 million-ish and essentially twice that for a married couple, and say, “well, that’s not me.” They don’t happen to know, but they live in a state that has an estate tax also with a much lower threshold. That gets a whole lot of people. 

There are a bunch of strategies that come in once the estate tax applies, whether it’s the federal or state-level estate tax. One of them being Roth conversions become more desirable because these calculations, the estate tax calculations, look at how many dollars are there.

They don’t care whether they’re tax-deferred dollars or Roth dollars. For every $100,000 of tax-deferred dollars, if you convert it to let’s say $78,000 of Roth money, from an income tax point of view, if that’s just a break-even decision, then it’s an advantageous decision anyway because you’re estate taxes just went down, because now it’s a smaller total estate.

Trusts become more applicable for state estate taxes a lot of times, because at the federal level, there’s portability. For a married couple, the first spouse to die, the second spouse can basically use any unused portion of the exclusion amount. With state estate taxes, that’s often not true. Trusts can be useful as a way to effectively make use of the exclusion amount for both spouses. 

Gifting becomes more important during your lifetime using the annual gift tax exclusion amount. Each spouse can give up to that annual exclusion amount. And if you’re gifting to a married couple, each spouse can give to each spouse. You get four times the annual exclusion amount. So, all sorts of strategies come into play. 

Jon Luskin: Let’s jump to a social security question. Mike, for our listeners who don’t know, I’m asking you this question because you are a social security wiz. You’ve got a phenomenal calculator at opensocialsecurity.com. And you’ve written a phenomenal book on Social Security that explains the rules in very simple language. (So that’s why I’m asking you this question.) 

Married couple, they have comparable PIAs (Primary Insurance Amounts), the amount they can expect from social security at their full retirement age PIA is around $2,700-2,900. And these two are six years apart in age, 68.5 and 62.5. So, let’s talk about putting those numbers into your Social Security calculator.

Your tool says have one wait until 70 and have the other one claim the benefit as soon as possible. In doing that, that household, starting in the year 2025, is going to collect $70,000 a year. 

What happens if they both claim benefits at age 70? At that point, they’d be collecting $87,000 in household income. That’s a real difference between that $70,000 they’d get with the default approach.

What’s the best way to frame this decision? What should they be thinking about in opting for the default strategy versus trying to get that higher benefit by delaying as long as possible to get more money? 

Mike Piper: There’s three things to think about when it comes to Social Security claiming decisions. Open Social Security only looks at one of those three.

What it looks at is actuarial math. Given life expectancy, assumptions we’re using, what strategy is going to give the highest expected present value of benefits over their lifetime?

And then lets you compare. So you can say, “Okay, so this strategy is the ideal one, but this other strategy that I select, how different is it? Is it almost the same, or is it nowhere near as good?” That’s one thing that you should look at. 

The second thing is taxes, because often delaying Social Security has an advantageous effect from a tax planning point of view, because it gives you more years with a relatively lower income level to take advantage of Roth conversions. That’s reason number one.

Reason number two is that Social Security benefits are themselves tax-advantaged. So having a larger amount of those tax-advantaged types of income is beneficial. 

Thing number one to think about is actuarial math. Thing number two is taxes. And thing number three is longevity risk: the risk of outliving your money. 

From that point of view, delaying is generally better because Social Security lasts through your lifetime. It helps to offset longevity risk. For some people though, longevity risk really isn’t an issue. Their level of spending relative to their level of assets is such that they’re extremely unlikely to spend down the portfolio. So Open Social Security just looks at that actuarial math. 

What I usually do, is plug in everything and then what it tells you is the actuarially best strategy. Then what I always look at is, what if you did wait until 70? It’s exactly what you did. What if both people did wait until 70 and look and see how different is that, in terms of the expected present value. 

And sometimes you’ll see that it’s not the best strategy, but it’s really close. It’ll be 1% different in terms of total expected present value over their lifetimes.

If there’s any longevity risk concerns here, or if there’s any tax planning reason for them to wait, then yeah, the answer is “wait,” even though that’s not the strategy that the calculator spit out, because once you consider the other two things that the calculator’s not looking at, waiting makes sense.

But sometimes, you’ll see that it’s actually pretty darn different. Having both people wait until 70 strategy is not advantageous at all from an actuarial point of view and the cases in which that usually comes into play, number one, is that one spouse is in poor health. Or number two, there’s a big age difference. And that’s the one that we’re talking about in your example.

Because with Social Security the decision for the spouse with a higher primary insurance amount, the life expectancy question, it’s the couple’s second to die joint life expectancy. How long can we expect that at least one of the two people will be alive, that’s for the higher earner, that’s life expectancy we’re concerned with. 

For the lower earner, we’re concerned with the first to die joint life expectancy. How long can we expect that both people will still be alive? So, if one person, and it can be either person, if one person is in poor health, they have significantly reduced life expectancy for a specific reason, then that’s a compelling point in favor of that lower earner filing earlier. 

And then the other possibility is this difference in ages. In the example, you gave where they’re six years apart in age, by the time that lower-earning spouse, the younger spouse, by the time they’re 62 and first needing to decide, “Should I file right now or not,” the other spouse is 68. It’s not like you’re about to die when you’re 68, but it’s still a shorter joint life expectancy, a shorter first-to-die joint life expectancy, than it would be if both people were 62. The older your spouse is relative to you, the less advantageous it is to wait to file for benefits.

It might be pretty different, or it might be only a little bit different in terms of the expected present value. And if it’s only a little bit different, then it might make sense for them both to wait. 

Jon Luskin: Mike, any final thoughts before I let you go? 

Mike Piper: Speak with an estate planning attorney. They’re good at what they do. 

Estate planning is probably the neatest financial planning work that there is, in my opinion, because it’s all about taking care of your loved ones. 

Some people think that estate planning is only about estate taxes and minimizing those taxes and it’s not; it’s so much more than that. An estate planning attorney can open your eyes to a bunch of things that you probably haven’t thought about. It’s money well spent, even if your assets are well under the applicable estate tax threshold. 

And I know Bogleheads® like to be do-it-yourselfers, and I appreciate that. It’s still usually going to be money well spent.

Really, really, really meet with an estate planning attorney. If you care about these people who are going to be receiving these assets, this is a thing you can do to care for them. It’s worth doing. 

Jon Luskin: Absolutely 100% agree there. Estate attorney, they’re going to help you with those very important documents. Even those who don’t have heirs, don’t have minors to consider. Just that financial power of attorney that healthcare directive are important documents everyone needs. 

Folks, that’s going to be all the time that we have for today. Thank you to Mike Piper for joining us today. And thank you to everyone who joined us for today’s Bogleheads® Live. 

Next week, our guest will be Derek Tharp, discussing how to take money out of your portfolio in retirement. The week after that, Dan Egan returns to discuss systematic investment management and behavioral design. 

Until then you can access a wealth of information for do-it-yourself investors at the Bogleheads® Forum, Bogleheads® Wiki, Bogleheads® Reddit, Bogleheads® Facebook, Bogleheads® YouTube, Bogleheads® Twitter, Bogleheads® Local Virtual and Online Chapters, Bogleheads® on Investing Podcast and Bogleheads® books.

For our podcast listeners if you could take a moment to subscribe and rate the podcast on Apple, Spotify, Google, or wherever you get your podcasts. 

Finally, I’d love your feedback. If you have a comment or guest suggestion, tag your host @JonLuskin on Twitter

Thank you again, everyone. I look forward to seeing you all again next week, where Derek Tharp discusses how to take money out of your portfolio in retirement.

Until then, have a great week.



About the author 

Rick Ferri

Investment adviser, analyst, author and industry consultant


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