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.
I recently had the privilege of writing an opinion piece for the April issue of PLANSPONSOR Magazine. This month’s issue is dedicated to improving participant outcomes and has some fantastic, actionable ideas for companies who truly want to make retirement security a priority for their people.
The thrust of the article was to challenge both companies and the retirement industry – what I call the “retirement collective” – to stop accepting mediocrity with how we design and manage retirement programs and to do everything we can to help employees retire successfully.
If you take an honest look at the data and people’s own perceptions of being able to retire it’s not a pretty sight. And yet, many of us in the collective still resist taking aggressive action to help those who count on us do the things they struggle to do on their own (e.g. participate, save enough, invest wisely, etc.).
The good news is that it’s not too late if we have the courage to take a stand and rethink how we can make our retirement programs achieve success for our people and their families.
You can read the full article here: “A Call to Action”
If you are a client of an advisor at a major wall street firm like Merrill Lynch, Morgan Stanley, Wells Fargo or UBS, please be careful. Many of us at Greenspring started at one of these firms and while there are some great advisors there, the game has been set up against you in many ways. Reuters published an article about a new recognition club that Merrill Lynch is offering to its brokers that are it’s highest level producers. Those who sell the most products and earn the highest levels of fees are rewarded with trips, rewards and choice picks of clients that are left behind after a broker is fired or leaves the firm.
These are juicy incentives that are all earned by earning more money off of their client’s investments. That’s why you have to be so careful. They set up the game so that advisors at these firms are enticed to sell you products (often high commissions ones), not help you grow your assets or achieve your goals. Besides the commissions and focus on product sales, there is one other factor that should be discussed. From my personal experience, when you put a group of highly competitive and aggressive individuals into a sales contest, many let their competitive side take over, even at the cost of the client. These big firms actively look to hire these personality traits because they know it can translate into higher sales for the firm.
I don’t want to paint all of these advisors with this broad of a brush, but as I mentioned the game is set up against the client. We believe investors who are looking for an advisory relationship should spend a good amount of time understanding the incentives of their advisor. While everyone needs to earn a living, we believe a much better alternative is an environment where what the client buys has no bearing on the advisor or firm’s compensation. In this type of setting advisors are free to recommend the best possible products to clients since it won’t impact their paycheck.
When it comes to investing, our worst enemy is without question ourselves. Our brains just aren’t hardwired to do it well. We are overconfident, tend to extrapolate the current situation well out into the future, become greedy after prices rise, and fearful after they fall. I almost fell over when I read this Gallup poll about what Americans think are the best long-term investments:
Real Estate? Does anyone bother to look and see how much real estate has gone up in value over the last couple hundred years. On average home prices have only kept pace with inflation according to Robert Shiller (the Yale professor who measures these prices). In addition, there is a major carrying cost associated with real estate (taxes, insurance, repairs, etc). If you want to take a look a little deeper at the data, I wrote about this here. Worst of all, according to Americans the second best long-term investment is gold. Up until a couple years ago, about 2 times as many people thought gold was a better long-term investment than stocks. Again, look at the data. Gold barely keeps up with inflation. Stocks have generated a return approximately 6% over inflation over time. Here is a graphic of how much $1 in different investments grew over a 100 year period:
It’s confirmed. We are our own worst enemies. How do we overcome this hurdle? Stop making emotional decisions and let logic and data drive our decision making process.
Last year the US stock market vastly outperformed their peers in the international and emerging markets. With US markets up over 30% and emerging stocks negative for the year, some people were questioning whether they should maintain exposure to emerging markets at all. As we came into 2014 this thought process was exacerbated with the events happening over in Ukraine. Our response has been that those that maintain diversification across markets would be very happy they didn’t put everything in US stocks at some point in the future. Well that time we were speaking of came quicker than many thought. Here is a chart of the US markets (blue) vs. emerging markets (green) over the past month:
Emerging markets are up nearly 5% in the last month while US markets are down close to 2% during that same period. Now, we don’t know if this trend will last, but that is the whole point. No one knows what the future will bring. Rather than betting the farm on one area of the market, it is much more prudent to spread your capital to other markets in order to avoid the inevitable volatility you experience when you concentrate your assets.
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.