New Social Security Law Changes: How Advisors Add Value with P.J. DiNuzzo, CPA, PFS®, AIF®, MBA, MSTx

New Social Security Law Changes: How Advisors Add Value with P.J. DiNuzzo, CPA, PFS®, AIF®, MBA, MSTx

Episode 160
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The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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TOPICS COVERED:

  1. Guest Introduction:  P.J. DiNuzzo
  2. The DiNuzzo Money Bucket Stack Analysis
  3. Apply and Suspend for Social Security
  4. Claim Now, Claim More Later
  5. What can an Advisor add above and beyond Investment Returns?

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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.


1. Guest Introduction:  P.J. DiNuzzo

Dan Weinberg:  And welcome to The Lange Money Hour.  I’m Dan Weinberg along with CPA and attorney Jim Lange.  Tonight, we welcome back to the program P.J. DiNuzzo.  He’s a nationally-recognized expert in investment management.  P.J. was approved as one of the first one hundred Dimensional Fund Advisors and rated a five-star advisor by Paladin Registry Investor Watchdog.  His Pittsburgh-area firm, DiNuzzo Index Advisors, Inc., consistently ranks among the country’s top five hundred investment companies.  Now as for what we’ll be talking about tonight, you may have heard Jim talk previously about the concept of Gamma, or how an advisor can add value to your portfolio.  Well, tonight, Jim and P.J. are going to talk about the looming massive change in Social Security law that we first told you about last week, and how that will make your advisor’s role a lot more important.  The change gives you less than six months to take advantage of key strategies that can add thousands to your retirement income, and if you or your spouse are between the ages of sixty-two and seventy, you simply cannot afford to turn your radio off during this next hour.  Now, I know that we’ve already received three e-mailed questions for tonight, and many of you listening live will have questions of your own.  So, please give us a call at (412) 333-9385 and join right into our conversation.  Now, let’s say good evening to Jim Lange and P.J. DiNuzzo.

Jim Lange:  Welcome, P.J.

P.J. DiNuzzo:  Good evening.

Jim Lange:  So, before we even start, I have a full disclosure to make.  Usually when I have guests on, I try to get the best, most articulate, well-spoken and true authorities, whether it be John Bogle at Vanguard or Ed Slott or Jane Bryant Quinn, people who are really on top of their game, and usually, other than a, let’s say, healthy exchange of information, I gain nothing.  So, for example, John Bogle’s been on my radio show a couple times.  I’ve done many articles for Jane Bryant Quinn, and the same for Jonathan Clements, and I could go on and on, and usually, most of these experts have written books, and I usually read the books, and I usually recommend them.  But other than that, I really don’t have any financial stake in whether you buy the book, whether you don’t buy the book, whether you do business with them, whether you hire them as a speaker.  I just try to get the best talent with the best information for you, the listener, and they are typically happy to present their information because they are content providers, and, like myself, want to get that content out to the world.  But ultimately, I don’t have any financial motivation to have them on in a way that I would benefit from you using their services or purchasing their products. 

By full disclosure, I do not have that same circumstance with P.J. DiNuzzo.  P.J. DiNuzzo and I have a financial arrangement, and I’ll describe that because I think it’s only fair for full disclosure.  So, let’s say that you were to come into my office, and let’s assume that you are very typical of many of the people that we see, and typically, I would say that most people have two basic different needs or areas that we could provide value.  The first would be in the area of what I would call strategy.  It might be things like how much of a Roth IRA conversion should you make and when should you make it?  How much money could you afford to spend?  What’s the best way to set up your estate plan?  What’s the best tax planning strategies for your situation?  What should you be thinking about in terms of education for your grandchildren?  And then, of course, the big one that we’ll talk about a lot tonight is Social Security.  What are the best Social Security strategies?  And our firm really loves to do that type of work.  It’s my favorite work, and in addition to me, we actually have two CPAs who love to, what we call, ‘crunch the numbers,’ and it is my opinion that you can actually mathematically come to a best solution regarding such issues as Roth IRA conversion, Social Security optimization, etc., and then also setting up wills, trusts and estate plans.  So, that’s something that is usually on our side of the equation that we like to do.  But the other side that is probably equally, or, in some ways, more important, is actually investing the assets ourselves.  Both P.J. and I are big believers in index investing, and we both believe that a particular set of index funds called Dimensional Fund Advisors is the best set of index funds in the world.  P.J. has worked as an index advisor, using Dimensional Fund Advisor funds for many years, even before I knew him.  Our value proposition is that our office actually does all of the strategy work that I talked about before and P.J. and his team, they actually invest the money, and they use something called the ‘bucket analysis,’ which maybe he can elaborate on, and he would be the person who actually invests the money. 

Now, one of the ideas of getting the highest value for you, the consumer, is to have reasonable fees for these combined services.  So, rather than our office charging a fee for our services, P.J.’s office charging a fee for his services, we actually have a combined fee, and the fee is a very competitive, depending on how much money is invested, to oversimplify, it would be at one percent of the money that we manage on the high side, and maybe about fifty basis points or half of one percent on the low side.  Again, the lower the investment, the higher the fee.  The higher the investment, the lower the fee.  But anyway, we have been doing this for a number of years.  This year, we are on track to pick up, I believe it’s over $80 million of assets under management, which is just a huge number, much better than I’ve ever done before.  I used to have years of $10, $20, $30 million.  And we believe it is a win-win-win, meaning that we think that everybody wins.  Our office gets to do what we love, which is the strategies, the Roth, and by the way, not just a big deal upfront running numbers, but then updates every year.  P.J. and his office get to do what they love, and are excellent at, which is actually managing the money.  But we think that the real winner is the client, who is getting the benefit of our offices and our strategies, the benefit of what we think is the best set of index funds on the planet, and P.J. and his team and all the strategies, bucket analysis, etc.  And I should also mention that the team of me and P.J. have a 99% retention rate, meaning that once people come aboard, 99% of them stay on.  So, that is the arrangement that I felt was only fair to disclose because usually I do not have that arrangement obviously with anybody else.  Is that a fair arrangement, P.J.?  What else do you tell people about our value proposition? 

P.J. DiNuzzo:  Yeah, Jim.  That was very accurate.  I think, just if I can add a little bit on to that to further expand it, would be that we often tell folks whenever we first meet with them, whether they know it or not, that everybody has a personal financial house, and if the listeners can imagine a beautiful, very nice ranch house, no attic, no basement, just one single floor, and if you were above the house at the treetop level looking down on the roof, if you can envision lifting the roof off of the house and you would see in your own personal financial house four large rooms, one room would be the estate planning corner with every and all things legal. Of course, Jim’s an extraordinary estate planning attorney, has a wonderful team of estate planning attorneys in his office, and there are wills, trusts, custom beneficiary designations, a myriad of ways that Jim and his team are able to help their clients in all things legal from estate planning.  The next room that’s adjacent to the estate planning would be the tax planning room.  Of course, Jim’s been a CPA for decades and decades and has a CPA firm, as well, and this is just not the rudimentary tax preparation, but really, the tax consulting, tax strategies, tax advice in Roth IRA conversions, capital gain harvesting, tax lost harvesting, income smoothing, income arbitrage, and I often mention to anyone that I meet, it’s always amazed me with Jim, over the years, over the decades, that 90% to 95% of all the clients we meet have a CPA who’s doing their work, but Jim’s the only one who’s coming up with these observations on ways to save thousands, if not tens of thousands, of dollars in taxes through the tax planning strategies, like Roth conversions, I had mentioned earlier.  If you can envision a bright line down the middle of the room, that’s really where our strategic partnership or synergy that we have with Jim and his two companies comes into play.  His estate planning firm and his CPA firm and on our side, through our registered investment advisory practice at DiNuzzo Index Advisors, the third room would be a financial planning corner: retirement planning, retirement income planning.  And as Jim mentioned, really it’s in the planning that seems boring to a lot of people, but really, that’s where the magic happens.  That’s what we really like to do.  That’s what’s customized for each individual household, to help you maximize and leverage the thirty to forty years of hard work that you put in.  The final room, of course, would be the investment planning and investment management.  As Jim mentioned, we’re the largest, oldest pure index manager in the city of Pittsburgh.  I started the practice in 1989.  So, we know a little bit about that and that’s worked out very well for our clients.

Jim Lange:  P.J., one of the things that I think provides tremendous value to clients, that I actually didn’t even really know about (maybe I did a little bit, instinctively), but you not only put a vocabulary to it, but you actually do it in practice.  Could you tell our listeners a little bit about the bucket analysis, or, perhaps, I should more accurately say the DiNuzzo bucket analysis?


2. The DiNuzzo Money Bucket Stack Analysis

P.J. DiNuzzo:  Yeah, Jim’s real happy we trademarked that, the DiNuzzo Money Bucket Stack Analysis.  I’ve been really blessed that we were one of the first one hundred registered investment advisory firms that was approved with Dimensional Fund Advisors, DFA, in the early 1990s and during that period of time, they’ve averaged two, sometimes three, Nobel Prize winners on their board of directors, more specifically on their investment committee, and I’ve known Prof. Gene Fama from the University of Chicago Graduate Business School for over twenty years now.  I’ve been talking to him on a regular basis, again, for over a couple of decades, and I’m really blessed to know him, and I tell folks when we first meet them for the initial discovery consultation that it’s wonderful that we know him and all the research that he and the school have done, but if one of them were to sit with us and join us for the first hour and fifty minutes of the initial two-hour discovery consultation, and if they left ten minutes before the meeting was over, the average Pittsburgher would say, “Hey P.J., that’s nice and all, but, I mean, how are they going to help me?  How does this help me and my wife, or me and my partner, me and my significant other succeed throughout our next thirty years of retirement?”  And really, what the key is that we’ve been able to bring together, we started this over a couple of decades ago, is the bucket approach Jim had mentioned, and I’ve often said individuals and households in Pittsburgh certainly don’t have a PhD in finance or investments, but they do have a PhD in common sense, and they like the idea of different buckets for different monies.  A bucket for your cash reserves.  This is the money that’s going to be at your local bank account.  It’s going to be at least twelve months times your monthly living expenses in retirement.  Usually, you put a ceiling on that of thirty-six months times your monthly living expenses, and that’s what your “sleep at night” number, you can sleep at night.  You know you’ve got money in the bank.  It’s at least for the next year to maybe three years to cover all of your expenses so you can sleep well.  Your next bucket we would call the “needs” bucket.  This is for food, clothing, shelter, healthcare and transportation.  Instead of getting into a long conversation, just think of this as being a conservative strategy that has to pay, again, for food, clothing, shelter, healthcare and transportation, what we commonly refer to as your “need” expenses.  The next bucket would be for your wants.  That, of course, would be your non-core or discretionary expenses, your non-essentials.  That portfolio can have a little bit more in stock with it being more of a balanced strategy, a balanced approach.  And finally, the top bucket would be what we call your dreams and wishes.  If you are fortunate enough that if you stack up your money from the floor to the ceiling, and we identify, put a sort of a red piece of paper, maybe, between each stack that says cash reserves, needs, wants and then your dreams and wishes, your dreams, again, are for while you’re alive, doing everything that you like to do, taking an extra vacation, going to Europe for a month, whatever it may be, and then your wishes, of course, for after the last spouse or last partner is deceased, with the legacy sensitivity of the remaining assets.

Jim Lange:  All right, and is it also true that you would put different tax types of investments in different buckets?  So, for example, let’s say that we had recommended that a client, one of our mutual clients, do a $100,000 Roth IRA conversion, although we might typically recommend a smaller amount over a period of years.  But let’s just say, for discussion’s sake, that on a $2 million total portfolio that there’s $100,000 in a Roth.  Do you have a particular area?  Would that be the long-term money that you would invest, and then let’s say the short-term money would be cash and CDs and maturing bond ladders and that type of thing?

P.J. DiNuzzo:  Yeah, Jim, exactly.  The withdrawal, what we refer to as the withdrawal hierarchy that we follow, typically would be the taxable accounts first, whether it’s individual or joint.  Of course, these can be assets that are even in the local bank.  So, it’s the after-tax taxable accounts first, followed by the IRAs, followed by the Roth IRAs.  So, the Roth IRAs typically fall at the top of that dreams and wishes bucket, and that allows us to develop them.  If we can leave one account type (account type being Roth IRA versus IRA versus taxable account) to our beneficiaries, we’d love to leave them a Roth IRA: tax free growth, tax free distributions.  It’s the best investment we have available.  Maximize the growth in that portfolio, placed at the very top of the money bucket stack, and it’s going to work out phenomenally well for the family over the decades to come.

Jim Lange:  Well, what I really like about that is that you can think about the asset classes that perform very well over time.  So, for example, the small cap value funds that you use since 1927 have performed over fifteen percent, and you might say, “Well gee, Jim, if it’s done fifteen percent, why shouldn’t we put all our money in small cap value?”  Well, first, obviously, you want a well-diversified portfolio.  Second, one of the disadvantages of a small cap portfolio (particularly small cap value) is that it will have ups and downs, and if you need that money next year and it just suffered a downturn and you have to sell when it’s low, you’re going to get hurt.  On the other hand, if that money is planning to be used well down the road, maybe even after you’re gone, you don’t mind having it go up and down a little bit.  You’re more interested in long-term returns.  Is that kind of your strategy on that?

P.J. DiNuzzo:  Yes, it’s a perfect fit.

Jim Lange:  All right.  Well, we did promise a discussion of Social Security.  So, we actually have a number of questions.  Why don’t we take at least one question before the break?  Maybe we’ll have Dan read the question, and then maybe P.J. and I can chime in.


3. Apply and Suspend for Social Security

Dan Weinberg:  Sure.  We’ll start off with Deborah.  The question is, “I think we may have gotten lucky, given that the effective date of the new Social Security law is May 1st.  Husband will be sixty-six, at full retirement age in March, 2016.  Wife is sixty-three-and-a-half in March, 2016.  We had planned for husband to file and suspend at full retirement age, and for wife to start collecting on husband’s account when wife turns sixty-six.”  So, Deborah’s asking will this strategy still work, what is the mechanism for putting it into place and what documents or “magic language” does she need when going to the Social Security office?

P.J. DiNuzzo:  Do you want me to…?

Jim Lange:  Well, sure, go ahead.  Why don’t you take a shot and then I will too?

P.J. DiNuzzo:  Yeah, sure.  Yeah, we’ll both work on that because there’s so much new information.  Congress, the White House, had signed this and passed it through Congress about three o’clock in the morning a couple of Mondays ago!  So, everybody’s still digesting the information.  The main thing for the listeners to think of is, the real bright line here is, if any of the listeners are turning age sixty-six before May 1st, 2016.  So, if you turn sixty-six on April 30th or earlier, you’re going to want to do what is referred to as a “file and suspend.”  So, basically, you think of it that you go into the Social Security administrative office and you file for your benefits on one document, and then you ask them for the second document and you are suspending your benefits on the second document.  And what that allows is, as we refer to it, that basically opens the door for your spouse to be able to file what’s called a “restricted application” when they turn full retirement age, let’s say, for example, age sixty-six in months or a year or two or three years.  So, really, any listener who has not already filed their standard application would absolutely want to file and suspend if they turn age sixty-six before May 1st, 2016 to be able to have that window available to maximize, as we refer to it, as Social Security maximization for the household.

Jim Lange:  Yeah, I would agree with everything there.  Apply and suspend has been one of my favorite strategies for years.  What you’re ultimately doing…so, let’s just say that you had…now, in this case, by the way, and the questioners name was Deborah?  Is that right?

Dan Weinberg:  Correct.

Jim Lange:  All right.  Deborah, your husband was born at the right time!  Literally one month to spare!  Because if he was one month older, he would not have fallen in, because as P.J. was talking about, he would need to be ful0l retirement age by April 30th, 2016.  The other way to look at it is if you were born before April 30th, 1950, then you will qualify to file and suspend, but here’s the big thing that P.J. mentioned, and I want to emphasize it again: you must do the file and suspend on or before April 30th, 2016.  So, let’s say that, you know, you guys are sleeping.  Under the old law, you could’ve done it later.  You didn’t have to do it the age you turned sixty-six.  But let’s say that you wake up and you’re sixty-seven and you’re sixty-eight and you say, “Oh gee!  I get to file and suspend.  This’ll be a great strategy.”  No, if you do that after April 30th, 2016, it’s too late and you could be giving up tens if not (and if you’re really going to take the strategy to the extreme) hundreds of thousands of dollars.  The beauty of the apply and suspend technique is the options.  If you think of two sixty-six year olds, and let’s say one has a higher earnings record and the other spouse does not, you can choose for the lesser earning spouse to collect on the higher earning spouse’s record.  And by the way, these changes only apply to married taxpayers.  So, what would happen is the one with the higher earnings record, under the apply and suspend, he would apply for Social Security, but he would suspend collection, meaning that he wouldn’t get any money.  Well, what’s the difference between doing that and doing nothing?  Well, under the existing law, then his wife, or his husband, could file for a spousal benefit that would be half of his, all right?  He wouldn’t be collecting Social Security, but he would be getting an eight percent raise for every year that he’s waiting.  His spouse, under the existing law, would be getting half of his benefit, and then here’s the really cool thing: the spouse’s benefit, based on his or her own record, would also continue to grow at eight percent.  So, both of their records are growing at eight percent, and then when they are seventy, the original person who filed and suspended, he would just start collecting his own benefit with the additions of that eight percent every year, and then the spouse would see which one is higher: their own benefit with the eight percent raises every year, or half of their spouses when they were sixty-six.  So, this was a fantastically powerful technique.  We did it all the time.  I did workshops on it.  This is going to go away, but, like P.J. said, if you were born before April 30th, 1950, you can squeak under the wire and be grandfathered for this very powerful technique.


4. Claim Now, Claim More Later

Dan Weinberg:  Here’s our second question.  From Helen, out in the South Hills: “Regarding the restricted application strategy, or filing as a spouse first, I understand there is a grandfathering clause if you were sixty-two before the end of 2015.  Must you still wait until full retirement age (in my case, sixty-six) to file for spousal benefits only?  If so, is there anything I must do before next May (the cutoff date), or will the grandfathering provision for the restricted application be there for me in three years when I reach age sixty-six?  There’s no way I can file for spousal benefits only now at age sixty-three and still save my own benefit for when I reach seventy, correct?”

Jim Lange:  Okay, I’ll take that one.  All right, so why don’t we go back to the basics a little bit and talk about the basic strategy that Helen is referring to.  Some people call it “claim now, claim more later,” and some people call it “filing a restricted application,” and this works differently than apply and suspend, but I’ll give you an example.  Let’s say, going back to the married couple, that they are both sixty-six.  Let’s say that one has the stronger earnings record.  This strategy would have the person with the stronger earnings record apply for a spousal benefit, and they would get half of the weaker earning spouse’s record benefit.  That would continue until they are age seventy, they would continue to get the eight percent raises, and this is a very popular strategy.  Now, typically, we would do this when the person with the stronger earnings record tended to be a little bit younger.  Now, we did it other times too.  Our big thing…and by the way, I should say our big thing in general is, these strategies can be quantified.  It’s not easy, and Elaine Floyd said it’s going to get really tricky with the new laws, but we believe that you can literally quantify and compare the long-term results of one strategy versus another, and now there’s going to be even more options, and then the other thing that we also do at the same time, typically, is we look at Roth IRA conversions. 

I don’t want to spend too much time on Roth IRA conversions tonight, but I will tell you that is also an area where we believe that we add a lot of value to our clients by, what we call, running the numbers, where we actually take a look at, “Okay, well, what if you don’t make any Roth IRA conversion?”  We might do a projection for thirty years using certain assumptions.  Well, what if we do a Roth IRA conversion to the top of the fifteen percent bracket, for example?  Well, what about the twenty-five percent bracket?  How’s that going to impact Social Security?  And we actually think it is a synergistic calculation that combines the best Social Security strategies and the best Roth IRA conversion strategies.  But anyway, my point is that this is not magic, and what we like to do is rather than us doing it, you know, in a hidden room behind the green curtain like the Wizard of Oz, we actually invite our clients in while we are crunching those numbers, and that way, the client gets to see.  They’re literally in the same room with the CPA, whether it’s Cheryl or Steve, crunching those numbers, and then they can ask their own what-ifs.  What if the market, you know, you use six percent, and what if it was four percent?  What if the market goes up?  What if the market goes down?  What if we decide to buy a house in the south?  What if, what if, what if?  And rather than getting a blank stare, we actually do that. 

All right.  So, going back to the question, all right.  So, the technique, again, whether it’s called a restricted application or claim now, claim more later, is what Helen (she didn’t…oh, she actually did call it a restricted application) was talking about.  So here, unlike the apply and suspend technique where you have to proactively do something before April 30th, 2016, with the restricted application, it is really just a matter of when you were born, and you don’t even have to do anything.  So, here’s the cutoff: if you were born before December 31st, 1953, which means that you will be sixty-two by the end of this year, or December 31st, 2015, you will be allowed to file a restricted application when you reach age sixty-six.  And here’s something that is very nice: let’s say that you’re not even listening to this.  You’re not paying attention, and you’re just out there doing whatever you’re doing, and then you wake up when you are sixty-six, and maybe even past the April 30th rule, which is the effective date of the new legislation, you can still take advantage of the legislation, but if apply and suspend is more appropriate for you and you don’t do anything before April 30th, 2016, then you are out of luck.  So, there is a significant difference between those two strategies.  I don’t know if that is a fair characterization.  Maybe you have a comment on that, P.J.?

P.J. DiNuzzo:  Yeah, Jim, very fair.  As you said, the two main points that were made with the recent legislation, when it was changed, is, again, as Jim said, it’s a matter of a statement, you were born at some point in time.  If you turn sixty-six before maybe the first of next year, or you have to be, in the example that Jim’s discussing, the age sixty-two by December 31st of 2015, then that would allow you, at full retirement age, if your spouse has filed the standard application, then you would be able to file the restricted application at age sixty-six to allow your credits to grow in the background, as Jim had stated, at eight percent.

Jim Lange:  Right.  Just a couple basic notes.  You’re still going to be able to file for a spousal benefit.  So, let’s just say, for discussion’s sake, that you’re both sixty-six years old, or let’s say you miss it and you’re both sixty-five years old before, and then you turn sixty-six after the effective date.  You could still file a spousal benefit, but if and only if the spouse on which you are filing the spousal benefit for is actually collecting their Social Security.  So, you’re not going to be able to say, “Well, I have the best earnings record.  I’m going to let the earnings record and the amount that I collect grow by eight percent between sixty-six and seventy, and while I am waiting, have my spouse collect a spousal benefit.”  That’s existing law, and that’s what we have been doing.

Let me tell you, P.J., that I anticipate a problem.  People want to get their Social Security early, and I get it.  It’s guaranteed, it’s in the bank, and if you’re holding off, maybe you can die early, maybe the system goes bankrupt, etc.  But I am a big believer in in most cases, waiting, even after the new law, and it’s going to be a tougher sell, very frankly, because after the new law takes effect, there is no apply and suspend.  So, let’s say you don’t reach sixty-six by April 30th, 2016 and you can’t take advantage of the existing law, and let’s say that somebody comes in and you explain to them, “Well, if the higher earner at age sixty-six files for Social Security, then you could get a spousal benefit, and that would be good because then you’d be getting, in effect, one-and-a-half benefits.”  And what I would likely say is, “Yeah, but if you wait until seventy, then what’s going to happen is, you’re going to get the extra thirty-two percent,” and we have run peer-review calculations on the “breakeven” years, and depending on what assumptions you use, it might be somewhere around age eighty-two for somebody who’s single, actually in the high seventies for apply and suspend, if it qualifies.  But my big thing is, you want to protect yourselves for the rest of both of your and your spouse’s life, no matter what happens. 

P.J. was talking about, you know, the first bucket, the needs bucket.  I sometimes call it the food on the table, roof over head, gas in the car bucket, and one way to guarantee that, and guarantee it for a long time, is by holding off on Social Security because you’re getting this, in effect, guaranteed raise for the rest of your life.  And remember, the survivor benefit (and this is very important for the strategy) is the higher of the two benefits.  So, let’s just say, for discussion’s sake, that the wife’s benefit is $35,000 and the husband’s is $25,000, and one of them dies (and for our purposes, it doesn’t matter), the survivor (and I’m assuming both over sixty-six) will actually get the higher of the two.  So, by holding off, you are actually not only protecting yourself in terms of protecting the higher income, but you are also protecting your surviving spouse, and, to me, at the end of the day, you know, we can talk about asset allocation and Roth IRA conversions and Social Security maximization and everything else, but the one thing that I insist on is food on the table, gas in the car, roof over head, a little money for Saturday night, and one of the best ways that you can guarantee this for the rest of both the husband’s and wife’s life is to hold off on Social Security.  The times that I think are tough are when somebody comes in and they want to collect Social Security at sixty-two.  I won’t say I’ve never advised that, but I’d say maybe 98 out of 100, I’ve recommended against it, and sometimes, somebody will say, “But gee, if I can’t collect at age sixty-two, I literally don’t have money in my portfolio to meet my basic expenses, and when I hear that (and I hate these conversations, but it has come up), my answer is, “Well, I’m sorry.  If you need your Social Security at age sixty-two, and there’s no other sources of income, you can’t afford to retire.”  I don’t know if you feel that way, P.J., and whether you’ve had some of these very difficult conversations when somebody has always assumed that they could retire at sixty-two, and we crunch numbers and say, “Well, yeah, if want to live on half of what you’re used to living on now.”

P.J. DiNuzzo:  Yeah, exactly.  Those are very tough, and I think, you know, Jim, the one point that struck me was, you know, you and I have done hundreds and hundreds, if not over a thousand, of these calculations over the last number of years for Social Security maximization.  I just want to remind the audience, one of the things that Jim says is a tough conversation that I have with clients and prospective clients at times is if you could just think that the Social Security administrative office is going to take your thirty-five best years that you’ve paid into the system…so, let’s think you graduated from high school, maybe you start in the work force at eighteen or nineteen or in your early twenties, even if you start out of college and you’re twenty-two, you work until sixty-five, it’s an extraordinarily long work history that you have, and they’re going to take the thirty-five best years.  So, I tell folks that if you elect Social Security benefits at age sixty-two, you’re only getting seventy-five cents on the dollar that you’ve paid into for thirty-five to forty years of your work history.  If you wait just those four short additional years, at least you’re getting a hundred percent of what you’re owed.  So, that’s the first point that we always try to make to clients or prospective clients.  Your full retirement age, currently age sixty-six, you get one hundred percent of what you’re owed from what you’ve paid in.  You’ve busted your butt for thirty-five to forty years. 

The other point from the big picture would be that if you are the type of individual, and this is a contrarian viewpoint for a lot of individuals, but if you think about it, if you are more sensitive than the average person to the capital markets, to the equity markets, stocks, having a diversified portfolio, having exposure to equities, you absolutely would want to wait longer for Social Security.  Social Security is the best guarantee that you have for the rest of your life, regarding funding your retirement.  It is, we don’t want to sound wonkish here, but if you have a guaranteed stream of income coming in, and you have at least some type of cost of living increase on an annual basis, if there’s inflation, you’re going to get a raise, in plain English, on your monthly income.  That is as good as it gets.  That is wonderful beyond comprehension.  So, we just want the average listener to remember, you want to maximize this, wait until full retirement age and understand how powerful the benefit is for you and your family. 

Jim Lange:  And at the risk of repeating myself, but I do believe in full disclosure…by the way, that goes along with everything that we do.  We are fiduciary advisors and believe that you should know to the penny how much money we are making and how we are making it, etc.  But anyway, I am not independent with P.J.  We have an arrangement whereby our office does strategies like Social Security, Roth IRA conversion, how much money you could spend, tax planning, estate planning, etc.  P.J. and his office actually does the investing, using the DiNuzzo Stack Money Analysis that we have talked a little bit about today, and together, we charge one low rate of anywhere between fifty basis points, which would be, if you are investing a lot of money with us, up to one percent, which would be at the $500,000 level, which is, subject to exceptions, the low end of what we are accepting. 

Before the break, P.J. was talking about not reducing your benefits by twenty-five percent by taking them at sixty-two.  I just wanted to elaborate for one minute on that, P.J.  If you think of the amount that you would be entitled to at sixty-six (let’s call that your full retirement age), if you took it at sixty-two, instead of getting the full retirement account, you would actually get, as P.J. said, seventy-five percent.  If you waited until you were seventy, you would actually get a hundred and thirty-two percent.  So, you’re comparing seventy-five percent of the benefit versus a hundred and thirty-two percent.  Now, yes, you would be getting it early, and let’s say that you were collecting it and you were reinvesting that money, yes, and I will even concede that if both you and your spouse both die early, that you would have had more money had you collected early, as opposed to the techniques that we encourage, which is waiting, or if the timing and the dates are right, either using apply and suspend or claim now, claim more later.  But here’s the thing about financial planning, in general.  And I don’t know how to say this without sounding glib, and I’ll maybe take a little heat off myself and also give credit where it’s due, and this idea came from Larry Kotlikoff, who is one of the top experts in Social Security, and by the way, we will be having him as a guest later in December.  But what Larry talked about when I was kind of going through the math of the breakeven points for Social Security, Larry, and he did this live, right on the radio, said, “No, no, no, Jim.  You have it completely wrong!”  And I was like, “Well, what do you mean, Larry?  I can’t be that wrong.  This is peer-reviewed analysis.  You know, Trusts and Estates magazine says all my numbers are right.”  And he said, “No, you can’t think of this like an actuary or an accountant.  You have to think of this like an economist.  If you both die early, you’re dead!  You don’t have any financial problems if you’re dead.  For financial planning purposes, you don’t fear dying early.  What you fear is living a long time and not having sufficient resources to pay for your expenses.”  So, therefore, what you’re, in effect, doing when you are holding off on Social Security and using these techniques that we’re recommending is you’re getting the best longevity insurance that you can possibly buy at far reduced rates than any insurance company would give you, and isn’t that part of the goal to make sure that no matter what, no matter how long either you or your husband, or preferably both, live, that you’re going to be way better off, and that there’s always going to be a certain base income? 

P.J. DiNuzzo:  Great point, yeah.

Jim Lange:  So, is that fair?

P.J. DiNuzzo:  Yeah, that’s great.


5. What can an Advisor add above and beyond Investment Returns?

Jim Lange:  All right.  Well, one of the things that we had promised that we have not gotten to today (and I do like to at least attempt to talk about everything that we promised) is we didn’t talk about what a good advisor can add to the table over and above investment returns.  So, you know, we’ve had many, many calls and radio shows on investment returns, and frankly, we’re delighted to talk about investment returns because we think ours is very, very good, and P.J. mentioned the index funds with the best set of index funds on the planet, with the three Nobel Prize winners, etc. etc., and we’re delighted to have this conversation.  But we promised something about what the advisor can add over and above investment returns, and, you know, I love that quote from John Bogle that here he is, the cheapest…well, that’s not fair.  He’s my hero, but let’s say one of the thriftiest men around saying that a financial advisor can really add a lot to the party.  But maybe, P.J., you can be a little bit more specific.

P.J. DiNuzzo:  Yeah, sure, Jim.  What we refer to, and again, the phrase that Jack Bogle and his team at Vanguard had coined was “advisor alpha,” how advisors can add additional value to a client’s total return and lifestyle.  Morningstar had coined the term “gamma” as their definition of how leading wealth advisors can add value for their clients.  And one thing we’ve really focused on today is Social Security, due to the time sensitivity, and that has been one of our top dozen topics, Jim, that we’ve always talked about regarding how we can help clients.  Social Security maximization has been a huge element.  But just to maybe do a quick rundown for the listeners, just as a reminder, what we would consider to be the top dozen.  The first one would be behavior coaching.  You could think of this maybe in layman’s terms as handholding.  When you take a look at the long-term returns over the last ten, twenty, thirty years, you look at organizations such as Dalbar from Boston, MA that track what do the indexes do, what does the market do, in plain English, and what our individual investors recognize in returns.  Over the last, I think, twenty-five or thirty year period, it’s been about one-half of the market return that individual investors have enjoyed.  We talk about the investment roller coaster.  Unfortunately, when your gut is telling you do to something such as you should buy more in stock, or you should sell some or most or all of your stock positions, your “intuition” is wrong about two out of three times.  So, staying in your seat is hugely important.  We talked earlier, Jim, when you had mentioned the bucket analysis, regarding withdrawal hierarchy, so there’s what we refer to as “dynamic withdrawal strategies.”  Of course, it would be more unique when the average age for both spouses, let’s say, for example, is at sixty-three versus seventy-three versus eighty-three, and there are those ongoing customized dynamics in the portfolio, the spending strategies we had touched on.  Cost effective portfolios, as Jim had mentioned earlier, our highest fee that we charge is one percent for the assets under management.  On our entire book of business, the average is about .75, about three quarters of one percent, and I’m continually amazed that the individuals, the new clients that we come in contact with, that just the difference between the investments that they own when we meet them versus our all DFA index portfolio, that it is very often .75 or higher, just as savings right up front, and I don’t want to say they’re getting us for free, but really, they’re saving our entire annual fee, in a lot of cases, right upfront just for how low our expenses are in investments.  They may have a lot of expenses, and forget about front end loads and back end loads and commissions, just the expenses in a mutual fund that you own, 1.3, maybe 1.2, maybe one-and-a-half, maybe 1.0, .8, .9, our average portfolio is around .3, .31, in that range.  Matching up the liabilities in your portfolio is what Jim had mentioned earlier, having money for your, we call it, food, clothing, shelter, healthcare and transportation.  You had thrown in a new one, the Saturday night money, so I liked that!  You know, we all want to go out and have fun on Saturday night.  You know, for that peace of mind, where does that money come from?  We refer to that as the needs bucket, and that takes a lot of pressure off of individuals when they know every dollar that they have. 

We explain to them, between our strategic partnership with ourselves and Jim’s companies, we have a purpose for every dollar that you have.  We have a strategy for it.  We have a withdrawal strategy.  We have a tax strategy.  And when the average individual understands all of these facets of how much in control they are, there’s a lot higher comfort level that they have.  Tax management of portfolios, really, that’s a synergy between our investment management and the synergy that we have with Jim and his tax team.  Regarding what we had mentioned earlier, the capital gain harvesting, tax loss harvesting, income smoothing, etc.  The epicenter of tonight’s topic, Social Security maximization, if we had a couple more hours, we could’ve continued for a couple of more hours. 

The next one, I don’t want to belabor the point.  Of course, Jim’s talked about this.  He’s a nationally-recognized expert over the last couple of decades on Roth IRA conversions.  Another one, the final two, not to be overlooked, would be customized beneficiary designations.  The listeners want to remember that it is one basic that on your IRA, any qualified account that you have, that is a controlling legal document, whoever you list as the primary contingent beneficiary on your IRA, rollover IRA, 401(k) and 403(b).  And the last one would be total return, income and investing, not looking at individual positions in your portfolio, but what is the total return expectations for your overall asset allocation, your overall portfolio.

Jim Lange:  Well, I think that that’s a good summary, and it is hard to quantify, although actually, Morningstar…was this in Morningstar?  Where was this?

P.J. DiNuzzo:  Yeah, Morningstar and Vanguard had both quantified it as in excess of three percent per year.  Those are their numbers.

Jim Lange:  Yeah, and frankly, sometimes, we can save people literally hundreds of thousands of dollars to pay our fee for the next ten, twenty, thirty years, just on Roth IRA conversion advice.  But anyway, that is the synergy of having us on the strategic side doing some of the things that P.J. had talked about, P.J. and his team doing the investing, the stack analysis, on his side, all for a combined fee of one percent or less.

Dan Weinberg:  And a reminder, to read a free report on all these Social Security changes we talked about earlier in the program and to sign up to get more information on that topic as it develops, go to PayTaxesLater.com/SocialSecurity.

END

 

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James Lange, CPA

Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.

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