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Old 03-08-2016, 07:46 AM   #21
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i don't know how many policy's cap you at 200 a day . i know none we looked at do . you take as much a day as you want . we took 400 inflation adjusted by 5% a year since homes in our area are 400-500 a day .
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Old 03-08-2016, 07:53 AM   #22
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Originally Posted by MasterBlaster View Post
Hermit:

You need to understand the difference between average tax rates, and marginal tax rates. If those quoted numbers are close to yours then you likely pay very high income taxes on a marginal dollar taken out of your IRA/401k. For fun and adventure run your tax numbers through a "good" tax calculator with and without your $20k distribution. Then look at how much of that $20k you get to keep.

It has to do with paying tax on BOTH the marginal dollars, and those extra SS dollar (once tax free) that now becomes taxable because your income is marginally higher.

It's kind of criminal, the way this works. Nonetheless it's a real, and in your case a very painful effect.

Once again, When talking about SS distributions along with other income, you don't get the big picture unless you talk about ALL of the tax effects.
Thanks. I'll play with the numbers some more. Unfortunately, I am in a position where I don't have much choice. The slightly over $50k I have as steady income is "take it or leave it" pension and the late DW's SS. The great majority of my savings is in tax deferred. My marginal tax is in the 25% range and may bump into 28% with RMDs. Not much I can do at this point. The lesson learned for younger folks is to put some of your nest egg in taxable savings and Roths so you have a more flexible approach to income when the time comes.

My point in that scenario was if $20k was taken instead of $1k, that marginal number would come down to closer to 25% and not stay at 46%. I am not paying anywhere near $9500 on the $20k withdrawal.
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Old 03-08-2016, 07:56 AM   #23
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Originally Posted by MasterBlaster View Post
Hermit:

You need to understand the difference between average tax rates, and marginal tax rates. If those quoted numbers are close to yours then you likely pay very high income taxes on a marginal dollar taken out of your IRA/401k. For fun and adventure run your tax numbers through a "good" tax calculator with and without your $20k distribution. Then look at how much of that $20k you get to keep.

It has to do with paying tax on BOTH the marginal dollars, and those extra SS dollar (once tax free) that now becomes taxable because your income is marginally higher.

It's kind of criminal, the way this works. Nonetheless it's a real, and in your case a very painful effect.

Once again, When talking about SS distributions along with other income, you don't get the big picture unless you talk about ALL of the tax effects.

this is very important . as kitces demonstrated taking an extra 1k in taxable distributions if it puts you over the limit for getting ss taxed can see as much as 47% of that extra 1k vanish in taxes .
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Old 03-08-2016, 08:46 AM   #24
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While taking SS early is great for some, delaying it is advantageous for several reasons. They are not always obvious in the math.

LTC policy. Most LTC policies only cover ~$200 a day. No COLA. Waiting on SS can get you close to that amount, and combined with LTC premium savings it will help pay the LTC for a long time. Maybe long enough.

Spousal protection. If the person who collects at 70 is the one likely to die first, and has a higher SS payment, the surviving spouse can use that amount.

Longevity Insurance. If you do not allocate your investments well, and screw it up, the SS will be a welcome addition at 70.

Of course, if you cannot live without it at 62, take it or continue to work longer.
For married couples deciding whether to delay can be complicated by the dual mortality and any differences between SS payments. However, if you are single, it's quite simple. If you believe that you will live well past your expected mortality age then defer, otherwise take the money as soon as you can. A single male would have to live into his mid 80s to see any benefit from deferring....that assumes 3% inflation adjustments and that you just spend the money. Deferring clearly becomes the better choice, if amount of lifetime benefits is the criterion, if he lives into his late 80s. But factors like need for income will also be a factor.
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Old 03-08-2016, 08:50 AM   #25
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Your case 2) and 3) are really the same thing, so why do you increase the return rate by an extra 2%.

In case 3) the person would spend less of their savings since SS is paid to them, once you get to "not needing SS" then there is no difference if it you are "Too wealthy to Care".

Now had you said case 2) is where the person only needs 1/2 their SS (a true supplement) that would be different with different numbers.
Nah, I mean you can pick the story to go with the numbers that fits... but the underlying point was that there are people who need a 0% return chart because essentially the money is in and out entirely, while not supplementing any other wealth. Then there is a more normal case (I chose 4%, but it could have been 3% also) where people will use the money to supplement another income stream, so the decision to collect frees up some amount of money to be invested as a conservative (retirement) ratio. Depends on your risk tolerance. The final scenario is (however you want to define it) a case where someone doesn't mind investing for growth with the money and don't feel at risk in any way going after a longer term average market return. They may just put all that SS into growing their business, or investing in equities. This is more rare, overall, because for almost everyone the SS check is a factor in their retirement... and if it isn't, then someone has so much money it really doesn't matter one way or another to them. But I'm still interested to see the numbers for that case (someone who could just take the SS check and invest it in the S%P 500... for example).

This is all about averages, if I didn't make that clear. Obviously market can go higher or lower (as someone above mentioned... he's gotten way more than 4% back since 2009)... but someone who started in 2000 would see the opposite. That's apples and oranges. This isn't about bootstrapping, it's about finding the median as a basis of understanding the differences in the decision to go at 62, 67 or 70. Just data... that's all. People can form their own opinions of how it impacts them. That is about risk tolerance... and which of the three a person fits.

I'm still trying to understand how inflation plays into this... I assumed that it impacted each one the same (so I assumed it was a wash, since inflation affects all dollars across all timelines indiscriminately), but maybe I'm missing something there. Does COLA lag behind inflation? If so, that would give more of an advantage to waiting... if the 70 number would be higher proportionately to the 62 number after COLA/inflation was factored in.
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Old 03-08-2016, 09:02 AM   #26
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We took SS @ age 62... in 1997. DW and I, with income based on my earnings.
Income was max at the time. We have collected $450K inflation adjusted, not too far off the numbers in chart 1.
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Old 03-08-2016, 09:13 AM   #27
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The great majority of my savings is in tax deferred. My marginal tax is in the 25% range and may bump into 28% with RMDs. Not much I can do at this point. The lesson learned for younger folks is to put some of your nest egg in taxable savings and Roths so you have a more flexible approach to income when the time comes.
This is a valid concern here and on Bogleheads. I doubt majority of Americans will be saving enough to make RMDs a problem.

Personally, I choose account type (mostly traditional vs Roth) based on the consequences.

Option 1: Prioritize traditional over Roth
Good Returns: Large RMDs and higher tax bracket due to too much money.
Bad/Low Returns: IRS shares some of the pain by way of lower taxes.
Thoughts: If working while in high income tax state (e.g. CA), can move to no income tax state (e.g. FL) to help reduce tax burden upon retirement. Can also use IRA Qualified Charitable Distributions for RMDs in excess of necessary expenditures.

Option 2: Prioritize Roth over traditional
Good Returns: No taxes on growth.
Bad/Low Returns: Might not have enough money to live on or might need to cut spending because of prepaying taxes at possibly higher marginal tax rate.
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Old 03-08-2016, 10:09 AM   #28
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What about the potential ACA factors in taking SS at 62 instead of 65-66? If your income without SS gives you an ACA tax credit taking an SS payment might nullify the credit completely. I have health insurance for myself at 62 through our business, but we might be changing to an ACA plan for 2017 at age 63 for me. Our small business just can't afford the cost of employee insurance anymore. MY DH is 67 and we won't claim any SS money until we figure out how this is going to affect our ACA enrollment.
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Old 03-08-2016, 10:34 AM   #29
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For married couples deciding whether to delay can be complicated by the dual mortality and any differences between SS payments. However, if you are single, it's quite simple. If you believe that you will live well past your expected mortality age then defer, otherwise take the money as soon as you can. A single male would have to live into his mid 80s to see any benefit from deferring....that assumes 3% inflation adjustments and that you just spend the money. Deferring clearly becomes the better choice, if amount of lifetime benefits is the criterion, if he lives into his late 80s. But factors like need for income will also be a factor.
Even if you are single it can be complicated by your circumstances. If I take my SS before 70, I would get more now, but I would give up the smaller income stream I currently have from the late DWs SS account. It makes more sense in my case to treat my SS as longevity insurance. I withdraw $20k - $24k per year to help smooth the bump I will get when my SS starts at 70.
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Old 03-08-2016, 11:54 AM   #30
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this is very important . as kitces demonstrated taking an extra 1k in taxable distributions if it puts you over the limit for getting ss taxed can see as much as 47% of that extra 1k vanish in taxes .
I agree that it is important but only if your circumstances meet the criteria. If you have non-taxable funds you can draw on to meet your spending needs, and any fixed income puts you below the bands for limiting the amount of SS benefits that are taxed, then you can limit withdrawals from tax deferred accounts to minimize taxes on your SS.

Again, my point is that once you move past that break point, all additional taxable income is not taxed at 47%. I looked into my numbers again and in my case, my non-discretionary income puts me just above the 85% taxable threshold before I even start thinking about the impact of discretionary withdrawals from tax deferred accounts.
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Old 03-08-2016, 01:34 PM   #31
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it is not a given you will get a steady 6% real....

Couldn't agree with that more! Sounds like your coming on board with OP's initial observation, followed by mine, that 6% real is one of the possible outcomes that could result from investing early SS dollars in the equity market.
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Old 03-08-2016, 01:54 PM   #32
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While taking SS early is great for some, delaying it is advantageous for several reasons. They are not always obvious in the math.
Actually, I think you mean these issues would make delaying SS advantageous for you. Others, with their own circumstances, might find these issues to be a huge disadvantage.
Quote:

LTC policy. Most LTC policies only cover ~$200 a day. No COLA. Waiting on SS can get you close to that amount, and combined with LTC premium savings it will help pay the LTC for a long time. Maybe long enough.
Depending on your investment success with your early SS dollars, you may wind up in better shape to be able to afford LTC by taking SS early instead of delaying since you'd have more resources.
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Spousal protection. If the person who collects at 70 is the one likely to die first, and has a higher SS payment, the surviving spouse can use that amount.
This definitely isn't always true. For example, when a spouse is impacted by GPO which is the case at our house.
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Longevity Insurance. If you do not allocate your investments well, and screw it up, the SS will be a welcome addition at 70.
Of course, if you do allocate your investments well and don't screw it up, you'll have more at 70 by starting early. There's no sure fire way to predict this. If you're really afraid of poor market conditions and screwing your investments up, you should probably withdraw from the market altogether.
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Of course, if you cannot live without it at 62, take it or continue to work longer.
Obviously.

For those who have a choice due to not needing to start SS at 62 and who have basic investment common sense, the decision to start or delay is interesting and the final outcome can't be predicted ahead of time. To me, that's just another one of the facinating aspects of FIRE and why I'm not a likely candidate to purchase annuities.
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Old 03-08-2016, 02:04 PM   #33
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It looks like you didn't take into account that SS payments will rise with inflation.
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I'm still trying to understand how inflation plays into this... I assumed that it impacted each one the same (so I assumed it was a wash, since inflation affects all dollars across all timelines indiscriminately), but maybe I'm missing something there. Does COLA lag behind inflation? If so, that would give more of an advantage to waiting... if the 70 number would be higher proportionately to the 62 number after COLA/inflation was factored in.
I think you did it about as right as you could do it (all with today's dollars and real investment return rates). What you can buy with your money should be matched to the CPI that inflates SS checks. Some will argue (me included), that they're going to weasel a few tenths per year, which doesn't sound like much, but adds-up when it compounds on itself.

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I'm only 33 (well turning 34 this week), so long way out for me. I'm just curious to run these numbers as an abstract scenario. I'm sure the rules and game will change significantly in the next three decades, for me...
You are so far ahead of where I was. I never even LOOKED at post earning phase until a few years before pulling the plug. 20 years ahead of you, I still don't fret over these SS things because the smallish differences in these scenarios with their pile of assumptions could be changed significantly by the stroke of a pen. Kind of reminds me of the Roth conversion thing...I could save 10 times what that would do for me if I moved a few miles south. But that's not to say I didn't appreciate your analysis. I recall making the point in some other thread that everybody thinks 70 is best because, of course, they'll live a very, very long time
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Old 03-08-2016, 03:43 PM   #34
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I think you did it about as right as you could do it (all with today's dollars and real investment return rates). What you can buy with your money should be matched to the CPI that inflates SS checks. Some will argue (me included), that they're going to weasel a few tenths per year, which doesn't sound like much, but adds-up when it compounds on itself.
My point is that the inflation indexing affects the larger, delayed SS check more than the smaller check that comes at 62. It's not a simple match that you can call a wash.

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You are so far ahead of where I was. I never even LOOKED at post earning phase until a few years before pulling the plug. 20 years ahead of you, I still don't fret over these SS things because the smallish differences in these scenarios with their pile of assumptions could be changed significantly by the stroke of a pen. Kind of reminds me of the Roth conversion thing...I could save 10 times what that would do for me if I moved a few miles south. But that's not to say I didn't appreciate your analysis. I recall making the point in some other thread that everybody thinks 70 is best because, of course, they'll live a very, very long time
Not because I'll live a very, very, long time, but in case I do.

If I die before the break even point, I'm certain I'll have not been short of money to live how I expect to. So even though I would've been better off taking SS at 62 because I died early, it wasn't an issue for me. I'll leave a little less for my heirs, which does mean something to me. It may mean a lot for some, and nothing to others.

But if I do happen to live a lot longer, I run a greater risk of not having enough to live how I'd like to. Maybe I'll be spending less in my advanced age, or maybe I'll have needs where extra money would be nice, like, maybe a private nurse will keep me out of a nursing home longer, if that's what I want.

The point is, I want to insure against longevity, rather than just trying to beat the system based on when I might die, early or late.

I like these discussions because it does show that taking SS at 70 isn't necessarily the best plan even if I do live long. Good returns, especially while I'm taking less from my investments if I start SS early, could move the breakeven point beyond any realistic life expectation. Obviously you have to make estimates on inflation and returns, but I think you have to accurately show the uneven impact of inflation adjustments to the various SS payments based on start age. Ignoring that as a wash is wrong as I believe it moves the line a number of years. If I'm wrong about that, show me where.

My current plan, barring any health issues or changes to the system, is that starting at age 62 I'll consider taking SS if the market is down and seems poised for a good recovery (market timing, I know). If not, I'll delay, and revisit that decision after any market drops. My challenge will be in deciding what constitutes enough of a down market for me to take it.
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Old 03-08-2016, 04:19 PM   #35
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For those who have a choice due to not needing to start SS at 62 and who have basic investment common sense, the decision to start or delay is interesting and the final outcome can't be predicted ahead of time. To me, that's just another one of the facinating aspects of FIRE and why I'm not a likely candidate to purchase annuities.
100% true. Delaying it gives the advantage of having more guaranteed income later - if you make it that far.

The one thing you have in your favor is knowing your health situation. It's insider information that the SS actuaries do not have.
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Old 03-08-2016, 04:46 PM   #36
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100% true. Delaying it gives the advantage of having more guaranteed income later - if you make it that far.
Not necessarily. If you start SS early, it's dependent on how your investments work out between age 62 and 70. You may (or may not) have accumulated enough to more than cover the difference between early and late SS at 70. Roll those dice!
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The one thing you have in your favor is knowing your health situation. It's insider information that the SS actuaries do not have.
Yes, healthy folks with good longevity genes frequently live longer.......... unless they don't.

Every strategy has its pros and cons and none are guaranteed. The healthy guy with good longevity genes can die early in an accident. The well informed and knowledgeable investor can lose his ass in a market crash. The spouse you were trying to protect by delaying your SS can die before you. Etc., etc.

There seem to be few or no "rules of thumb" about the "when to take SS" decision that apply to everyone.

We all pay our money and take our chances........ The important thing is to pick a strategy that you're comfortable with even if plans go against you.
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Does Expanding the Scope Pull Toward a Bird in the Hand?
Old 03-09-2016, 08:57 AM   #37
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Does Expanding the Scope Pull Toward a Bird in the Hand?

When it comes to modeling when to take SS, one must make some assumptions and simplifications. This usually leaves out the possibility of the rules changing at all. One option for making the model more realistic would be to do the calculation, as normal, with nothing changing from the expected payouts using today's rules. Then do another calculation with payouts under an alternate scenario, such as reduced benefits cutting in at a certain point (or with multiple models, points). So you might think the "today's rules" value of SS is 85% likely, "rules B" is 10% likely and "rules C" is 5% likely. So the expected result is .85*A + .1*B + .05*C. The more weight taken away from today's rules, the less delaying taking SS makes sense (because nobody thinks they'll be enhancing benefits in the future).

Also, one part of today's rules that usually gets simplified out of a model is the effect of locking-in Medicare premiums. For those who could take social security but have delayed it might be opening themselves up to spending more on Medicare premiums. I'm no expert in this, but apparently, for most retirees currently collecting SS, they are shielded from larger increases in Medicare premiums. In other words, increases in Medicare part B premiums can't result in a "pay cut". By ignoring this protection, I believe you are modeling that Medicare premiums will rise no faster than inflation. Hmmm.

I've got over 1800 days to think about it, so, like I said, by the time I get there, things will be different. But when the time comes, I'll be modeling A, B, C, and more, assigning probabilities, and I have a feeling that a bird in the hand will win.
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Old 03-09-2016, 12:28 PM   #38
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I am going in with the assumption that my 'required' contribution towards the solvency of the system will be to watch the rules (mean testing) lead to smaller checks for me; the fact that I used IRA and my 401K to secure my financial future, an order of magnitude above that SSA will provide. If I do actually get the benefits projected, I'll consider it a bonus

Still I'm fascinated by this whole thing. I can't help but think... what I'd be able to do with all those (6.2% + employer 6.2%) payments had I been given the opportunity to invest it into a board index fund. Sigh...

Appreciate everyone comments and thoughts expressed in this thread.
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Old 03-09-2016, 03:06 PM   #39
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Every strategy has its pros and cons and none are guaranteed. The healthy guy with good longevity genes can die early in an accident. The well informed and knowledgeable investor can lose his ass in a market crash. The spouse you were trying to protect by delaying your SS can die before you. Etc., etc.

There seem to be few or no "rules of thumb" about the "when to take SS" decision that apply to everyone.

We all pay our money and take our chances........ The important thing is to pick a strategy that you're comfortable with even if plans go against you.

All true. SS is actuarially neutral, no matter when you collect. It is based on a traditional life expectancy. I am not sure if it is based on a child born today, or a 62 year old person. It does not take gender, smoking or drinking habits, blood pressure or heart disease, or any condition a life insurance policy would have you declined.

A person should know their gender, at a minimum. Or at least a close guess. If you are female, you can add a few bonus points. Non-smoker, a few more. A crazy guy that smarts off to the cops, deduct a few.

People go to casinos all the time and, with some schemes, can get a 51% chance of winning. They think that is a huge advantage. Card counters being one type. Blackjack strategy players, etc. Having a good health puts you in the 51% chance of success category.

Most people at 62, tend to gravitate to lower risk investments. To get the same match as SS, with 100% guaranteed return, you are looking at Bond funds, not the stock market. I am not sure what return you need, but to find an inflation protected investment equivalent to SS, might be hard to find. Of course, at the end, your unused money is generally 'lost'.

Of course, most people want security, and take SS at 62...
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Old 03-09-2016, 03:19 PM   #40
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i don't know how many policy's cap you at 200 a day . i know none we looked at do . you take as much a day as you want . we took 400 inflation adjusted by 5% a year since homes in our area are 400-500 a day .
What is your monthly premium for a $400 per day inflation-protected policy?

I know you can buy as much insurance as you want. Some policies are $100 a day, some higher. All typically have a maximum amount you can collect.

If you go into a nursing home early, you will likely get better. Your health insurance, or Medicare, will likely cover it as long as you are showing improvement.

If you are 100% incapacitated, it doesn't mater where you stay. You do not need a private room, or a real nice place. Some people even go to a place like Costa Rica to get cheaper care.

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The Odds of a Long Nursing Facility Stay
Most people will not spend years and years in a nursing facility.
  • Two-thirds of all men, and one-third of all women, age 65 and older will never spend a day in a nursing facility.
  • Most nursing facility stays are brief -- only about 10% of men and 25% of women age 65 and older spend more than a year in a nursing facility.
  • Only 10% of all nursing facility residents will stay longer than three years.
  • More than half of all nursing facility stays last six months or less. The average stay of those who enter a custodial care facility is about 18 to 20 months.

Long-Term Care Insurance: The Risks and Benefits | Nolo.com
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