Archives for August 19, 2019

Seniors will make a lot of important decisions, but few, if any, have as much bearing as deciding when to begin taking their Social Security retirement benefit.

Every month, over 63 million people receive a benefit from the most successful social program in our nation’s history — and 70% of those recipients (and climbing) are retired workers. Of these retirees, more than 3 out of 5 lean on their monthly payout to account for at least half of their monthly income. Therefore, these claiming decisions can have a huge impact on how much retirees will be receiving monthly, as well as over their lifetime.

Your claiming age has a big impact on how much you’ll receive from Social Security

As you may be aware, there are a handful of factors that go into determining what you’ll be paid on a monthly basis by Social Security, assuming you’re eligible to receive a retired worker benefit and have reached the eligible claiming age.

The first two factors — work history and earnings history — go hand in hand. The Social Security Administration (SSA) takes your 35 highest-earning inflation-adjusted years into account when determining your payout. This is why working a minimum of 35 years is so important, otherwise you’ll have $0’s averaged in for each year less of 35 worked.

A third important factor is your birth year, which determines your full retirement age (also known as “normal retirement age” by the SSA). Your full retirement age is the age at which you become eligible to receive 100% of your monthly payout, with most upcoming retirees likely having a full retirement age of 67. If you begin taking your benefit prior to reaching your full retirement age, you’ll be accepting a permanent reduction to your monthly payout. Likewise, waiting until after your full retirement age can actually boost your payout above 100%.

That leads to the fourth — and arguably most important — factor that determines what you’ll receive each month: your claiming age. You can begin taking your payout as early as age 62, however, the SSA incentivizes seniors to wait. For each year you hold off on taking your benefit, your payout will grow by approximately 8%, up until age 70. All things being equal, an individual claiming at age 70 could net as much as 76% more per month than an individual claiming at age 62, with the trade-off being that the person claiming at age 62 would receive a payout for eight years before the 70-year-old would net their first check.

Given that everyone’s financial and personal situations differ, and that we (thankfully) don’t know our expiration date, there is no perfect game plan on when to take benefits, which can make it tricky for folks to decide on their optimal claiming age.

This is the worst possible age to claim Social Security benefits

With this in mind, money management solutions company United Income set out to explore how much retirees would gain if they improved their Social Security claiming decisions.

In a recently released report, “The Retirement Solution Hiding in Plain Sight,” United Income analyzed data from approximately 2,000 households via the University of Michigan Health and Retirement Study (HRS). The authors at United Income examined the real-world Social Security claiming decisions of these households over a long period of time, and then compared them to what the optimal claiming decision would have been (i.e., at what age would these individuals or couples netted the most lifetime income from Social Security).

Interestingly, the actual claiming curve and the optimal claiming curve were almost perfect inversions of one another. Whereas close to 80% of the seniors in the HRS began taking their payout before age 65, the authors found that the optimal claiming age for these individuals was usually after their full retirement age. The data showed that 57% of individuals had an optimal claiming age of 70, which compares to the 4% of seniors today who are actually waiting until age 70 to take their benefits.

On the other end of the spectrum, claiming early proved to be nonoptimal for a lot of folks, with age 64 being, statistically, the worst age to take Social Security benefits. Although the authors didn’t provide a breakdown for each age (aside from age 70), they do mention that just 6.5% of beneficiaries would have made an optimal claim between ages 62 and 64. Simply eyeballing the chart provided, it looks as if around 1% of all retirees would have made their best possible claiming choice at age 64. 

Waiting works for most people, but there’s still no perfect claiming guideline

According to the data provided, a majority of seniors would be more financially secure, in terms of boosting their lifetime earning potential from Social Security, by waiting to take their benefit.

Unfortunately, no one knows if they’re going to be in the majority. Sure, 57% of seniors should net more from the program by claiming at age 70, but this also suggests that an earlier claim would work for 43% of analyzed workers in the HRS. We’ll never know with any certainty if we’ve made the best possible choice until many years after the fact.

So, what can you do to ensure you get the most out of Social Security? The best suggestion I can pass along is take the time to decipher what variables matter to you. Though none of us knows our expiration date, we can use our health history, and that of our immediate family members, to formulate ideas on our longevity that can aid our claiming strategy.

Likewise, examine your financial situation. If you’re nearing retirement age but don’t have much saved for retirement, then consider working longer and allowing your payout to grow over time.

Also, take your marital status into account. If you’re a single individual, then your claiming decision will affect you and you alone. However, if you’re married, your claiming decision could impact your spouse’s ability to collect a larger survivor benefit if you were to pass away first. This is especially important if you’re the household earnings breadwinner.

Without a time machine, we’ll never know our optimal claiming age. But, at least based on the data provided by United Income, we know that age 64 is most likely not it.

Here is what matters if you’ve made it and want to keep it.

Do the financial markets have your attention? I assume so. After all, Wednesday’s 800-point drop in the Dow was the worst day in the U.S. stock market this year. And while many investors missed it, the December 2018 plunge in stock prices capped off a 20% decline which started in October. That could have put a big divot in the plans of folks recently retired or in the late stages of their careers.

Stumbling at the finish line?

Demographics tell us that there is massive group of people who are between 55 and 70 years old. They are the majority of the “Baby Boomer” generation. Many of them have built very nice nest eggs, thanks to a robust U.S. economy over the last 40 years. That period of technological innovation and globalization of the economy also produced four decades of generally falling interest rates. That’s provided a historic opportunity to build wealth, if you saved well and invested patiently.

But now here we are, with a stock market near all-time highs and interest rates crashing toward zero. The tailwind that lifted Baby Boomers in their “accumulation” years may flip to a headwind, just in time for them to start using the money.

Focus on what matters

At this stage of their investment life, Baby Boomers are tempted from all directions. They are told to bank on index funds, 60/40 portfolios, structured products and private partnerships. And, while there are merits to each, I am telling you what I see as someone who has been hanging around investment markets since this Baby Boomer was a Wall Street rookie in the beloved World Trade Center in NYC: much of it is bunk. It’s a distraction. It’s a sales pitch.

Take these over-hyped attempts by wealth management firms to boost their bottom line and scale their businesses, and bring your attention to your own priorities. Today, as much as any time in the past 10 years, your focus should be on true risk-management.

That does not necessarily mean running to cash. That is an outright timing move, and it borders on speculation. But it does mean that the intended use of your accumulated assets (when you need it, how much you need, and how you will navigate the markets of the future) should be

inward-looking. It should not be based on trying to guess what the stock market is going to do.

Rate cut? Check. Inversion? Check. Giant stock market drop? We’ll see.

The big news on Wednesday was the “inversion” of a closely-watched part of the U.S. Treasury yield curve. Translated to English, that means for the first time since 2007, U.S. Bonds maturing in 10 years yielded less than those due in 2 years. This is far from the first inversion we have seen between different areas of the Treasury market. However, it is the one that is most widely-followed as a recession warning signal.

The chart above shows 3 things that were essentially in sync around the time the last 2 stock bear markets began. The 10-2 spread inverted, but then quickly reverted to normal. The Fed cut interest rates for the first time in a while. And, the S&P 500 peaked in value, and fell over 40% from that peak.

Let that sink in, given what we have witnessed in just the past 2 weeks. Then, fast-forward to today, where we find ourselves in a very similar situation regarding inversion and the Fed. See this chart below:

SOURCE:YCHARTS.COM

What stands out the most to me in that chart is how the spread between the 10-year and 2-year yields is almost perfectly opposite that of the S&P 500’s price movement. That is, when the 10-2 spread is dropping, the S&P 500 is usually moving higher. But when that spread starts to rise, at it is likely to soon, the S&P 500 falls…hard. As a career chartist, I just can’t ignore that.

I have been writing about the threat of an eventual “10-2 inversion” in Forbes.com since April, 2017. It finally happened this week, 19 months into what increasingly looks like a period of muted returns for investors. That is, if they follow rules identical to those they followed for the past 10 years.

Recessions are bad, but this is worse

We saw on display this week what I have been talking about since early last year: that it will not take the declaration of a recession to tip the global stock market into a panic-driven selloff that rips through retirement efforts. All that is needed is for stock prices to follow through to the downside is to actually see the market react to the preponderance of evidence that has been building for a while now.

In other words, it is the market’s fear of the future (recession) and not the actual event that is most important. By the time a recession is officially declared, you won’t need to react. The damage will already be done.

Specifically, a slowing global economy, excessive “easy money” policies by the Fed and its global counterparts, and a frenzied U.S. political environment. This has shaken investor confidence, and now the only thing that ultimately matters in your retirement portfolio: the prices/values of the securities you own, is under pressure.

What to do about it

First, don’t fall prey to the hoards of market commentators whose livelihood depends on progressively higher stock prices. Corrections are not always healthy, diversification is often a ruse, and long-term investing is for 25 year-olds!

For those who have “fought the good fight” to get to the precipice of a retirement they have darn well earned, the last thing they want is to have this inanimate object (the financial markets) knock them back toward a more compromised retirement plan.

The best news about today’s investment climate is that the tools we have to navigate through them are as plentiful as ever. Even in a period of discouragingly low interest rates for folks who figured on 4-6% CDs paying their bills in retirement, bear markets in stocks and bonds can be dealt with, and even exploited for your benefit.

Bull or bear? You should not care!

Maybe this is not “the big one” that bearish pundit have been warning about. Perhaps it is just another bump in the road of a historically long bull market for both stocks and bonds. But again, market timing and headline events like 10-2 spreads, recessions and the like are not your priority.

What your priority is, if you want to improve your chances of success toward and through retirement, is something different. Namely, to get away from the jargon and hype of financial media, simplify your approach, and take a straightforward path toward preserving capital in a time of uncommon threats to your wealth. I look forward to sharing insight on that in the coming days.

Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors