WHEN SHOULD YOU start drawing Social Security? If folks want to maximize their lifetime benefit, I think the answer is fairly straightforward. Maximizing lifetime Social Security income isn’t always the goal, of course. Some people need Social Security to meet basic needs. These people usually claim benefits as soon as they reach age 62, the earliest possible age. Others view Social Security as longevity insurance. They want as much monthly income as possible in the event they or their spouse live a long time. These people typically wait until 70, the latest possible age, to start Social Security. But for many people, the goal is to maximize the amount they’re likely to receive during their lifetime. Financial nerds often toss around terms like “breakeven” or “cross-over.” More sophisticated analysts consider present values and appropriate discount rates. I like simple. Want to maximize lifetime income? I believe the decision rule is fairly simple. If I am likely to die early in retirement, I should start Social Security as soon as possible. If I know I am going to die at age 65 and I don’t have a spouse who will receive survivor benefits, I had better start Social Security at 62. It makes no sense to wait. On the other hand, if I am going to live a long time—perhaps to age 90 or even 100—I want the largest monthly check possible for all those years. I achieve that by waiting until 70 to start Social Security. If I have no reason to think I will either die early or live a very long life, it makes sense to start Social Security sometime between age 62 and 70. One might choose age 66, the midpoint between 62 and 70. Others might choose their Social Security full retirement age. For those born between 1943 and 1954, full retirement age is 66. For those born between 1955 and 1959, it’s 66 and some months. For those born in 1960 or later, full retirement age is 67. When I considered Social Security, my goal was to maximize my likely lifetime income. I might die early. Although I have no significant health issues, I am overweight and, unlike Dennis Friedman, I do not exercise regularly. On the other hand, I might live a very long time. I do have some good genes. My grandmother lived to nearly 112 and my mother is still doing well at 95. I have never smoked and I drink only occasionally. My decision? My full retirement age was 66. I also liked the idea that 66 was the midpoint between 62 and 70. Although I had retired a few years earlier, I chose to start drawing Social Security at 66.

IN THE 1980s, I SPENT nearly 12 weeks in an Australian hospital. I learned that language is not always universal. I was a corporate auditor for General Electric, and the company had sent me to Australia for a three-month assignment. To Yankee ears, Australians have an accent. But at least we speak the same language. Or so I thought. Within a week of getting to Australia, I was diagnosed with subacute bacterial endocarditis (SBE), a serious bacterial infection of the blood. I was born with a slight heart defect which makes me more susceptible to SBE. Prior to about 1955, it was universally fatal. I don’t blame the Aussies for my infection. I’m pretty sure I contracted it before going to Australia. The general practitioner said I needed to go to a hospital and be hooked up to intravenous penicillin 24/7. I could go to a private hospital, which would be more like a U.S. hospital, or to a hospital for veterans. I asked which had the best equipment and doctors. He said the veterans’ hospital, so I went to Concord Repatriation General Hospital in Sydney. I had never been in the military. I have no idea why I was allowed to be treated at an Australian veterans’ hospital. Nurses are not nurses. There were no private or even semi-private rooms in the hospital. I was in a ward with 24 beds. Nurses would walk up and down between the rows. If we needed something, it was not unusual to call out for the nurse. I heard other patients call out “nurse” or “sister.”  Thinking “sister” was somewhat derogatory, I always said “nurse.” One day, the head “nurse” confronted me.  She asked why I called her a nurse; she was a sister. I learned that, in Australia, “nurse” refers to what we would call a student nurse. Once a nurse completes training, she is a sister. Because this was a teaching hospital, we did have “nurses”—meaning student nurses—but most of the nursing staff were “sisters.” Question: What do you call a male nurse in Australia? Answer: sister. The term sister is non-gender specific. At least a quarter of the sisters were male. It was completely acceptable to call a male nurse “sister.” I was insulting them by calling them “nurse.” Doctors are not always doctors. After the head sister got me straightened out about calling her sister, not nurse, she asked why I called my doctor “doctor.” “Because he’s a doctor,” I stammered. “No, he is a mister,” she replied emphatically. It took me several more minutes to understand. In Australia, a specialist is no longer a doctor. He or she is a mister or missus. Not only had I been insulting all of the nurses by calling them “nurse,” I had also been insulting my doctor by calling him “doctor.” [xyz-ihs snippet="Mobile-Subscribe"] Several years ago, I told this story to a business professor colleague, who was English and had just come to the States. He looked at me with amazement. “You mean you don’t call the best doctors mister or missus?” I assured him we did not. He explained that he had been looking for an eye specialist in St. Louis, our nearest large city, and he was frustrated that all he could find were doctors. None was a mister or missus. He assumed this meant St. Louis had no top-flight eye doctors. Theaters are not always for shows. At one point, I completely lost my appetite and began to become jaundiced. My doctor decided to inject my blood with dye and take some X-rays. Soon after, a sister came to my bedside and said the doctor wanted me to go to theater that afternoon. I told the sister that I appreciated the doctor’s concern. I was glad he was trying to cheer me up, but I really didn’t feel like going to the theater. I also silently wondered what type of movies they would show to veterans in a military hospital. All I could imagine was a movie that told soldiers not to have sex with the locals to avoid venereal diseases. The nurse emphatically told me that I would be going to theater that afternoon. Again, I graciously declined. I finally understood. “Theater” is what we would call “operating room.” In the early days of surgery, it was common for medical residents to stand on a second-floor balcony and watch the surgeon work. It was a theater in a very real sense. They had found an aneurysm in my abdomen and wanted to remove it before it ruptured. I did go to theater that afternoon. Instead of watching a show, I was the show. The operation was a success. That wasn’t the end of the idiosyncrasies I encountered. Here are four more: “Tucker” is food or appetite. If I didn’t eat much, the sister would often say, “Off your tucker today?” The first time she said this, I had absolutely no idea what she meant. “Vegemite” is a brown, thick paste made from brewers’ yeast and spread on toast. Similar to English Marmite, it tastes horrendous—unless you’re Australian or English. “Wheetabix” is the brand name of a popular cereal. Somewhat similar to our Shredded Wheat. There was one television in a common lounge for the 24 of us in that ward. An afternoon rerun was Skippy the Bush Kangaroo. It was similar to our Lassie, but instead of a dog saving the family from some catastrophe, it was a kangaroo. I should have been on intravenous penicillin for just four weeks. But for some reason, I wasn’t getting better. At the six-week point, GE paid for my wife to come to Australia. She was there for the last two weeks of May and almost all of June. While it was turning to summer in the northern hemisphere, it was getting colder in Australia and she had not packed for winter. My wife set by my bedside faithfully. I did persuade her to take one day off and visit a local zoo. Koalas sleep about 20 hours per day and always look peaceful. She learned that Koalas get enough moisture from Eucalyptus leaves that they can go for weeks without leaving a Eucalyptus tree. She was also told that Eucalyptus leaves contain a mild narcotic. Those peaceful looking Koalas are happy because they sit there happily ingesting narcotics. For what it’s worth, the Australian Koala Foundation disagrees. Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey’s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 16 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Check out Larry's earlier articles. [xyz-ihs snippet="Donate"]

WHAT HAPPENS WHEN a person dies without a will and there isn’t enough money to pay all of his or her debts? Who gets paid and who gets shorted? I’d always heard that funeral expenses were the first priority, and then unsecured creditors got everything else. I’ve recently learned from personal experience that the rules are more complex—and more generous to widows and widowers. A 60-year-old friend of mine recently died. He hadn’t written a will. I’m helping his widow sort through bills and decide who gets paid. My friend was secretive and shared no financial information with his wife. She had no idea who was owed money and how much. It turns out my friend was drowning in debt. We’ve determined that he owed at least $60,000 on various credit cards and personal loans. The couple’s income was $2,500 a month, and nearly half of that was spent servicing debts. The silver lining is that all of this debt was in his name only, so his wife isn’t responsible for repaying it. He made the minimum payments on time, so his credit score was a pristine 750. Periodically, he would find a firm that would extend him another personal loan, which he would use to help keep current on his other obligations. His few assets included four cars in various states of disrepair, all with high mileage and at least 10 years old. He also had a joint checking account with his wife with about $1,000 in it. His personal possessions, mainly clothes and a few books, have no monetary value. It was easy for his widow to close their joint bank account and transfer the money to a new account in her name only. Extracting value from the four cars is going to be harder. One car was registered in both their names, so she’s entitled to it. The Department of Motor Vehicles will issue a new title in her name only. The other three cars, because of their age and condition, are worth about $7,000 altogether. One question that haunted me was whether his widow would get anything from the disposition of the three cars. Because he owed so much money, wouldn’t it be fair to give that money to his creditors to split? On the other hand, his widow is struggling financially, so anything would help. Although she has no debts, her income is only $1,400 a month, a combination of Social Security and Veterans Affairs survivor benefits. My question was settled by state law in Illinois, where the widow lives. She gets to keep the proceeds from the sale of the three cars, thanks to a law that looks out for surviving spouses. A widow is entitled to a minimum of $20,000 before most other creditors receive anything. [xyz-ihs snippet="Mobile-Subscribe"] Illinois has defined seven classes of creditors when dividing an estate. Each higher class must be fully paid before anyone in a lower class gets a cent. Here’s how the various creditor classes are sorted: Class 1: Funeral and burial expenses. This includes estate administration expenses, such as executor, legal, CPA and filing fees. It also covers any fees owed to a live-in caregiver for the decedent. Class 2: Surviving spouse and children. They receive an amount necessary to support the surviving spouse and any minor children for nine months, with a minimum of $20,000 for the surviving spouse and $10,000 for each surviving minor child. Class 3: Debts owed to the U.S. government. Class 4: Expenses associated with the decedent’s final illness, plus amounts owed to any employees, capped at $800 per employee. Class 5: Property and money held in trust for others that’s been mixed with the decedent’s other assets and cannot be separately identified. Class 6: Debts owed to Illinois and any city or other municipality. Class 7: All other creditors. In my friend’s estate, the Class 1 creditors are owed about $3,000, all related to his funeral expenses. They will be fully paid. His widow, in Class 2, gets all the rest. The credit card and loan companies that my friend owed money to? They’re at the end of the line in Class 7, and so won’t be getting anything. I was curious as to what would have happened if my friend had left more than enough money to pay his creditors. If you die without a will in Illinois, after the debts are paid, half of any remaining money would go to the surviving spouse and half to surviving children. That’s on top of the $20,000 for his widow, and $10,000 for each minor child. If there is a surviving spouse but no children, the spouse would get all the remaining money, after all the creditors are satisfied. If there are children but no surviving spouse, the children would get the remaining money. And if there were neither a spouse nor children, then other relatives would be entitled to the remainder of the estate. Want to make things easier on your family and friends? Write a will—and try not to die with debt. Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey’s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 16 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Check out Larry's earlier articles. [xyz-ihs snippet="Donate"]

ARE WE ANY GOOD at correctly analyzing simple financial situations involving probabilities? Kenyon, my brother and fellow HumbleDollar contributor, introduced me to a 2016 study that suggests that many of us are shockingly poor at doing so. Sixty-one business students and young professionals at financial firms were presented with the following scenario: At a website, you’ll be given $25 and allowed to bet on a computer-generated coin flip. You may bet on either heads or tails. It isn’t a fair coin. With each flip, there’s a 60% chance of heads and a 40% chance of tails. If you win the bet, the amount you wagered will be added to your kitty. If you lose, it will be subtracted. With each bet, you may wager any sum up to the amount you have. You have 30 minutes. Your goal is to end with the largest amount possible, which you’ll then receive, subject to a $250 maximum. What strategy would you follow? How would you fare? If you want to find out how, don’t read beyond this paragraph until you’ve first tried an abbreviated version of this experiment. Instead of 30 minutes, you’ll be given 10 minutes. Also, you won’t receive your ending balance. Otherwise, the situation is as described above. Click on this link and try it. In the comments section below, feel free to post the strategy you followed and your ending balance. Here are three possible strategies: Bet a constant percentage of your balance. But how much? If the percentage is too low, you won’t win very much. If it’s too high, you risk getting wiped out with a few losing bets. Bet a constant dollar amount. As above, if the amount is too small, your bets won’t add much when you win. But if it’s too large, you run the risk of losing everything with a few consecutive losses. Double your bet after any loss, also known as doubling down. This method guarantees a profit when you eventually win, but there are two important qualifications. First, it assumes you don’t run out of money. In this game, you may quickly run out of money. Second, it assumes there’s no dollar limit on how much you bet each time. The investigators stated that “[w]hile we expected to observe some sub-optimal play, we were surprised by the pervasiveness of it.” That’s an understatement. A person should never bet on tails, and yet 67% of the participants bet on tails at least once. Nearly half the players (48%) bet on tails more than five times. One player in five (21%) bet on tails at least a quarter of the time. It might be rational to bet on tails if you believed the experimenters lied when they said the computer had been programmed so there’s a 60% chance of coming up heads. The only other possible reason for betting on tails: You think past performance had some value in predicting future performance. After a string of heads, some people might believe tails is bound to be next. But in this experiment, each flip had a 60% chance of coming up heads. No one should ever bet on tails. Surprisingly, 28% of participants went bust, which the experimenters defined as ending with less than $2. A person should never bet so much that they have a 40% chance of ending up with nearly nothing. The authors assumed that 95% of the participants would reach the $250 maximum. In reality, only 21% reached this goal. As shown below, following an optimal strategy, you should have about $8,973 after 30 minutes. Thus, even with a lot of sub-optimal bets, a person should still reach $250 after 30 minutes. Yet four out of five participants failed to achieve this. Based on some reasonable assumptions, the researchers suggest a bet of 20% of the current balance is the optimum bet. Why? Those who are math-phobic can skip the equations below. But for my fellow nerds, here’s the mathematical explanation: With a 20% bet, the expected value of each flip is a 4% increase in your kitty. Why? You have a 60% chance of a 20% gain, and a 40% chance of a 20% loss, which mathematically looks like this:  (0.6 x 0.2) – (0.4 x 0.2) = 0.12 – 0.08 = 0.04 The outcome is highly dependent on the number of flips. If there are 150 flips during the 30 minutes, a player should have $8,973: $25 x (1.04)150 = $25 x 358.92 = $8,973 What should we expect during 10-minute experiments? If people follow the strategy of betting 20% of the balance and they make 50 coin flips, they should have $178: $25 x (1.04)50 = $25 x 7.11 = $178 I’m not including the math, but the $250 maximum for the 30-minute experiment scales down to $54 for the 10-minute version. While the optimal betting strategy yields $178 in 10 minutes, anyone who reaches at least $54 has been somewhat successful. My brother and I independently tried the 10-minute coin flip experiment. We had absolutely no prior discussion about strategies. He and I both bet a constant percentage of the balance. He decided to use 25% and I used 20%. In 10 minutes, he had $68 and I had $134, both very respectable. I shared this game with three college professor colleagues—two business professors and one psychology professor who teaches statistics. Two of the three went bust. Those two both used a constant percentage strategy, but they chose percentages that were too high. A string of tails wiped them out. The third ended with $560. Using a modified 20% strategy, he had $280 with just seconds to go. He bet it all and won. If most well-educated people have trouble with this straight-forward proposition, it’s hardly surprising that the general population has trouble navigating the myriad choices—with so many unknowns involved—when saving and investing for retirement. Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey’s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 16 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Check out Larry's earlier articles. [xyz-ihs snippet="Donate"]

IT'S CHALLENGING TO GO from saving during our working years to spending in retirement. Our solution: Use a modified version of the 4% rule. Financial planner William Bengen was the first person to articulate the 4% rule. He wanted to know how much people could withdraw from their investments each year and still not run out of money. Through extensive back-testing, he found that if folks withdrew 4% in the first year, and thereafter increased this amount each year for inflation, in almost all cases they wouldn’t run out of money over a 30-year retirement. With Bengen’s 4% rule, the amount withdrawn is driven only by the initial portfolio value and subsequent inflation. History suggests this approach should be okay despite sequence-of-return risk—the danger that the financial markets perform poorly during the years immediately after a person retires. Still, folks who retire and keep taking out an inflation-adjusted 4% do run some risk of running out of money. I believe it’s reasonable to increase spending when the markets are doing well, while also cutting back when markets perform poorly. Bengen’s model doesn’t incorporate this. Vanguard Group developed a withdrawal method which does. I have read its guide several times and, I must confess, I still don’t understand it. What to do? For my wife and me, I had three criteria for our retirement withdrawal strategy. First, it should be simple, something I can use when I’m 90 years old. Second, the approach should be responsive to market returns. Finally, it should be financially conservative, meaning there’s reasonable certainty we won’t run out of money before we die. A withdrawal each year that’s simply 4% of the prior year-end balance—without the inflation adjustment in Bengen’s approach—meets these three objectives. With such a plan, a person would never run out of money. Each year, you always leave 96% of your portfolio invested. And it's certainly simple. But a major drawback is that the amount withdrawn each year fluctuates widely because market returns are so erratic. [xyz-ihs snippet="Mobile-Subscribe"] That’s why I nixed the idea of simply withdrawing 4% of our prior year-end balance. Instead, I’ve made two modifications, which I have found to be extremely helpful. First, rather than using last year’s Dec. 31 balance, I apply a percentage to a three-year rolling average of year-end balances. It allows for significant spending increases only if there have been sustained market gains, while cutbacks are only required if there’s a prolonged bear market. Second, because I’m financially conservative, instead of 4%, I use 3%. The upshot: We limit our annual withdrawals to no more than 3% of our average investment balance for the prior three year-ends. I believe this is a simple yet elegant solution. Because of a lifetime of frugal habits, we’re in the fortunate position that we could live on Social Security and a modest pension I receive. We use withdrawals from our nest egg primarily for gifts to individuals, contributions to charitable organizations and to fund a major overseas trip every few years. Because we’re heavily invested in stocks and limit our withdrawals to 3%, I fully expect our investments to continue to grow. When the time comes, hopefully a decade or more away, we’ll spend what we need to for assisted living or nursing care, even if it exceeds the 3%. We have just three investment accounts: a traditional IRA, a Roth IRA and a regular taxable investment account. Each January, I enter the year-end amounts for the three accounts in a simple spreadsheet. It totals the three accounts and calculates the three-year rolling average. The calculation could also be done by hand. If I pass away first, my wife can easily take over. After a lifetime of saving, we initially found it unsettling to make withdrawals from our investments. But with this plan, we sleep well at night, enjoy the fruits of our earlier saving and remain confident we won’t run out of money. Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey’s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 16 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Check out Larry's earlier articles. [xyz-ihs snippet="Donate"]

PEOPLE WHO INVEST in the stock market and people who bet on horses both hope to win. I expected the efficiency and behavioral finance factors that rule the stock market to have similar effects on horse betting. Instead, I found just the opposite. The story begins 40 years ago. A few years after we were married, I suggested to my wife that we spend a day at the fabled Saratoga Race Course in Upstate New York and watch the thoroughbreds run. At the time, we were living in nearby Schenectady. My wife was fine until I suggested we bet on each race. She was appalled, declaring, “Neither of us knows anything about horses.” There were going to be eight races that day. I said I would put $32 in my right pocket. That would be enough for each of us to place a $2 bet on all eight races. Our bets would be simple—$2 on a single horse to win. We would put any winnings in my left pocket. Racetracks keep about 20% of what is bet and pay out 80%. If we bet $32 randomly, at the end of the day we should have $25 or $26 in my left pocket. If we had a bad day, we might have $23. If we had a good day, it could be closer to $28. My wife asked how she should select a horse. Though I wasn’t able to clearly articulate it at the time, I believed horse betting was “efficient.” Therefore, I said it doesn’t matter—she might select based on a horse’s name or the color of the jockey’s garb, she might pick the horse with the best odds or she might opt for the long shot. It truly didn’t matter. Each race, we dutifully placed our $2 bets. That made for a more exciting day, as we cheered on our horses. As I recall, by the end, I had about $25 in my left pocket. We got a lot of enjoyment for the few dollars we lost. What does betting on horses have to do with finance? Actually, quite a lot. History tells us that value stocks outperform growth stocks, although this hasn’t been true recently. Behavioral finance provides a reasonable explanation for this outperformance. “Herd behavior” bias says we’re inclined to mimic what others are doing. If others like a particular stock, we tend to join the crowd and push the share price to a level beyond what’s reasonable. Conversely, if a particular sector is out of favor, we tend to shun those stocks, causing them to become undervalued. People expect both favored horses and growth stocks to do well. Thus, favored horses should be overvalued. Meanwhile, as with value stocks, people don’t expect much from long-shot horses. Long-shot horses should be undervalued. [xyz-ihs snippet="Mobile-Subscribe"] All of this came to mind recently when I was going through my study, trying to figure out what I could toss. I came across a paper I wrote in 2002 for a statistics class I was taking as part of my doctoral program. For the paper, I systematically examined the betting on horses to see if it was consistent with the efficient market hypothesis. Just as the price of a stock reflects the opinion of people who have a vested interest in the outcome, the odds on a horse reflect the opinions of those who have a vested interest in the outcome. The odds are adjusted in real time as bets are placed. If more money is placed on a particular horse, the track offers less payout if that horse wins. If few people bet on a horse, the track offers a larger payout. The track doesn’t care which horse wins—it always gets its share. I was taking my doctorate at Anderson University in Anderson, Indiana. The town is also home to a horse track, Hoosier Park. For each of the 770 races during the most recent season, I was able to find the final odds of each horse, the horse which won and the amount paid for a winning bet. My results were the exact opposite of what I expected. For betting on horses, the best results were obtained by betting on the favorite. People had a worse outcome if they bet on the least favorite horse, the long shot. Since a track pays out 80% of the amount bet, a $2 bet on each horse in each race will provide an average payoff of $1.60. If I had placed a $2 bet on the most favored horse in each race, meaning the horse with the smallest odds, I would have won an average of $1.70. A long-shot horse didn’t win very often, but—when it did—it paid a huge amount. But on average, a $2 bet on a long shot yielded just $1.38. My analysis was more than 20 years ago, and I analyzed only one track and one season. Are similar results typical today? If so, perhaps horse betting is less efficient than the stock market—though making money would still be tough, given the track’s 20% take. By the way, my wife still thinks gambling is a waste of good money. Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey’s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 16 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Check out Larry's earlier articles. [xyz-ihs snippet="Donate"]