People frequently ask us if we know any “hot tips” for the stock market. They pretty quickly realize that our philosophy is the opposite of a hot pick. Ironically, nobody has ever asked us if we have a hot tip regarding social security. In fact, we do. However, it is not really hot; it is just a combination of analytical rigor along with knowledge of the system.
The vast majority of individuals only consider two options when deciding when to take Social Security benefits – they either take it when they are first eligible (generally 62) or when they reach their full retirement age (65 to 67). However, there are several other strategies to consider, each of which can impact total payouts to you in the tens of thousands of dollars.
The most common alternative strategy is to wait to claim benefits. Depending on several factors, most importantly life expectancy, delaying social security until age 70 can yield a significantly higher payout over a lifetime. This is true even if it means taking distributions from your investment portfolio between retirement and age 70. Another strategy is to “file and suspend”. While there are several benefits, the primary reason to do this is to allow a spouse to collect up to ½ of your social security benefits. Because you have suspended benefits, both you and your spouse will earn extra future income by waiting. During this time, your spouse is still earning spousal benefits and can switch to his/her own higher benefits by age 70.
These rules are complex and need to be customized to the specific individual and family. The above examples are simplifications. In addition to these two strategies, several other options and nuances exist. To learn more, read up on the very good Social Security website (www.ssa.gov) and elsewhere. Consider talking to a financial advisor who understands both the rules and your particular situation. Even though it is not a stock, bond, or mutual fund, your social security strategy should be approached with the same rigor of any investment.
Everyone is acutely aware of the risks that lay in front of us. With two devastating bear markets, many investors are just waiting for the next shoe to drop. Just for a moment, I wanted to bring your attention to an alternative scenario. What if things went right? What if all of the things we are worrying about today, just don’t materialize like we think they will? This isn’t just wishful thinking. History is filled with examples of innovation overcoming seemingly insurmountable obstacles. The automobile solved the issue of manure from horses infecting our cities. New technologies for finding oil solved the peak oil crisis we were supposed to hit 20 years ago.
So, I’ve listed the major obstacles we face today, and I’ve taken the liberty to think about what could go right:
- Government debt- conventional wisdom shows that our government debt is going to continue to climb to astronomical levels, eventually causing massive inflation. The reality is the debt has been shrinking with growing tax revenue and cost controls. With small changes to Social Security (raise retirement age, means testing, etc) and healthcare innovation (see below) to drive down costs, we could eventually see a surplus.
- Healthcare- one of the main drivers of government debt has been healthcare. The US spends more than any other country on healthcare per citizen, by almost double. Medicare is the leading cause of future deficits, so this is both a healthcare and budget issue. Technology will most likely be the answer to this problem. As I write this, there is tremendous advances being made in the biotechnology and healthcare technology. Where do most healthcare costs come from in the US come from? Testing. The US performs twice as many tests on patients than other countries. Nanotechnology and smart phones applications are being developed to perform these tests at a fraction of the cost. Technologies that will diagnose and prescribe medicine for you without seeing a doctor are also being developed. The point is that the costs associated with healthcare today could be drastically different in the future due to new technology.
- Natural Resources- there is a finite supply of natural resources in this world and eventually we will run out. This has been discussed for decades. In 1974 Jimmy Carter said we could use up all of the proven reserves of oil within the next decade. Why haven’t we run out? New technology has found millions of barrels of oil over the last several decades that could never be extracted before. In addition, natural gas, solar, wind and nuclear technology have come on line and it is hard to even predict where this will even take us in the next few decades.
- Education- the cost to educate a child is becoming absurd and the market for college loans is finally showing signs of cracking. Universities are now offering free online courses. I just took an MBA level course from the University of Virginia for free. Other sites like Khan Academy lets anyone watch online courses about nearly anything. Becoming educated will no longer require a $50,000 per year price tag. While no one knows how the educational system will change, there is a good chance that college will look a whole lot different in 20 years.
Innovation is not only the key to solving our problems, but will also be the key to growth over the coming decades ahead. When you bet against the economy and the market, you are betting against human ingenuity, which has almost always been a losing proposition. I am excited to see where that ingenuity takes us.
President Obama made some big waves with both Republicans and Democrats with his budget proposal. One of the big points of contention is his plan to limit the growth of Social Security. His plan is to change the method by which Social Security is indexed for inflation, by changing from the CPI (Consumer Price Index) to the Chained CPI. This small change is expected to slow the benefit growth rate and save the government approximately $130 billion over the next 10 years. Here is a look at the last 14 years of the two methods of calculating inflation (CPI is blue, Chained CPI is red):
By the tone from groups like AARP you would think that benefit payments are going to get cut in half and seniors will be left out of the street. Just a quick back of the envelope calculation shows that a 65 year old retiring in 1999, receiving $1,000 in monthly Social Security benefits would be receiving approximately $1,379 today (using current CPI crediting). If a Chained CPI was used, that same retiree would be receiving $1,332 per month. A $47 difference is real, but it is not the devastating impact that many groups would have you believe.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.