That puts you at greatly increased risk. Social Security is a great thing to have coming in every month. The right approach is to think of Social Security as income that reduces the amount you need to take out of your portfolio in retirement. The basic formula is this: First, compute your cost of living in retirement. Next, add up the income you already have or will have from Social Security, pensions, fixed annuities and other sources. When you think about Social Security this way, you are getting it right.
And as I have pointed out many times, knowing how much income you need from your portfolio is an essential building block in getting your finances to do the most for you in retirement. Richard Buck contributed to this article. You say that, in the current low-yield environment for bonds, that's a particularly attractive strategy right now. There's been more buzz about Social Security delay over the past couple of years--which I think, in part, has to do with more baby boomers reaching retirement.
There are more of us that have to make this decision, so we're facing it more regularly. But the value of delaying Social Security truly has changed from where it was just 10 years ago. Part of that is that interest rates are lower right now.
So, if I think of the decision to delay Social Security as hinging on where I'm going to get my money, either I can draw it from a portfolio and delay Social Security or I can take Social Security now and let my portfolio stay invested. Well, Social Security is like a giant bond, but it's a bond that has this really appealing return attached to it.
You'd rather spend the bonds in your portfolio and let Social Security grow than spend Social Security first and let the fixed-income portion of your portfolio grow. And when we look at it with that kind of trade-off, it looks even better in low-rate environments because now the bond portfolio is doing worse and the Social Security asset is doing better. So, we've actually shifted the system to make it more beneficial to delay Social Security benefits. In a low-rate environment, it becomes exponentially more valuable.
So, it's literally like your asset appreciates more rapidly. Social Security, as an asset, appreciates more rapidly when you delay it.
Certainly, [it appreciates more rapidly] than the bonds in your portfolio and, frankly, I can even make the case it's got a better risk-adjusted return than equities in today's environment. Another thing worth thinking about, though, is that perhaps in a more normal interest-rate environment, for people who aren't close to retirement at this point, in fact, that decision to delay may not be the slam-dunk fit that it is today. Let's talk about that. As with any asset, as you are trying to manage the asset and figure out how to invest it or how to use it, when we get to a higher-rate environment, that delay decision may not look as compelling relative to maybe a bond portfolio or blended portfolio that might be looking a little bit better on the return side.
It will be, I think, a little bit of a dynamic formula; that's why planning around retirement and Social Security is sort of the puzzle that it is, because the efficient strategies for it really do depend on the outlook for the different assets on your balance sheet. Social Security is one of those assets, and how good or bad it is really does vary from one to the next.
And frankly, if at some point in the coming years, we change the Social Security system a little bit we know we need to make some changes--we can all see where the projections are going in 15 years , changes to the Social Security system may or may not further tinker with that formula [for deciding] whether you are delaying or not.
So, frankly, I guess it's not the most uplifting thing [to hear]. If you're in your 40s today or younger, I don't know whether you are really going to be delaying Social Security by the time you get there or not. We are going to have to see what the rules look like when we get there--not to mention interest rates and the rest of the environment.
Thank you Taylor! The hope of the pension still being there as promised at the end of dh career has impacted my AA a bit. The fear that it will. My opinion about this is unequivocal: Absolutely not. portfolios unless they count Social Security as part of their overall asset allocation. placing a “present value” on government retirement payments, Social Security is not — and Next, add up the income you already have (or will have) from Social Security, pensions .
If you're in your 50s, you probably are still going to delay, but you'll have to see exactly what things look like when you get there. If you are already in your 60s, and you compare essentially the supercharged-TIPS return that you get off of delaying Social Security versus your other assets, it becomes really compelling to delay Social Security in this environment.
The question I always get is, "But do I really want to spend my portfolio down for my Social Security to grow bigger?
Industry luminary John Bogle suggests doing so as well. Oh to be Icarus and fly over the labyrinth and, like the gods, understand it all! They were both working; they've accumulated a really healthy Social Security benefit. But there is an asset. This is because while my benefit grows, hers does not. You recently did a blog post about this topic. You know the asset-allocation drill.
The growth of your Social Security asset is giving you a better risk-adjusted return, in most cases, than what most people are getting off their portfolios--especially if they are fixed-income heavy in their portfolio at today's rates. Obviously, the caveat is life expectancy. If you know your life expectancy is short--you are in poor health--take your money while you can get it. Yes, take your money and run.
But if you have even just an average life expectancy, it becomes pretty compelling because, again, Social Security's formulas were balanced based on life expectancy in Our life expectancy has gotten better. So, merely average health today means you are actually winning the life-expectancy mortality table relative to where Social Security was priced. The big question is if I've got this investment portfolio and I've also got this Social Security asset, should I consider the Social Security piece part of my kitty and let it affect my asset allocation?
Therefore, I can afford to shoot for the moon with my portfolio, taking a lot of risk in the hope of achieving very high spending or a large inheritance for my kids. Therefore, I have no need to take risk in my portfolio at all. It is a mistake, in my view, to say that a person should necessarily take on more risk in their portfolio as a result of having a large pension or other safe source of income.
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