As with most things that are related to personal finance, what seems like a good deal upfront, often (very often actually) is not.
Social Security benefits are an integral part of any retirement plan for anyone. To some degree, we all count on Social Security to provide us with at least a modest amount of retirement income and with it, some retirement comforts as well.
Guaranteed Income Sources
To one degree or another, current retirement planning research suggests that having "higher" amounts of guaranteed income during retirement is a factor that can ultimately impact the success or failure of retirement plan. Annuity payments, fixed or inflation adjusted pension payments, Social Security, etc. are all items of guaranteed income that may well have an influence on your retirement plan. Why? Well the reasons are as varied as the authors, but in summary it amounts to a few key value added factors;
- Having more rather than less guaranteed income covers more rather than less, non-discretionary spending. Think items like real estate taxes, food, health care, etc.
- Having more of these items "offset" by guaranteed income sources, means that the bulk of post retirement spending that needs to be covered by a distribution strategy; falls into the camp of discretionary spending.
- Discretionary spending is entered into at the choosing of the spender, so "timing" becomes a critical value added. Think of it this way, had you had that $15,000 European world-wind trip planned for 2008 when markets crashed, you could have rethought that whole trip and pushed it to year when markets made funding it a bit more tenable.
- Since discretionary spending can be somewhat "timed" to match with the performance of your portfolio and other factors, you can then take a more "aggressive" approach to how your money is managed and what type of portfolio you are invested in post-retirement. This may mean a more robust portion of your assets in stocks rather than bonds. You can then time your spending to the markets and the impact on your portfolio. While 2008 might not have been a year to take Europe by storm, the near 30% return on the S&P 500 in 2013 might have made a 2014 European trip feel just right
So, the notion of "more" is better than "less" seems prescient.
Social Security Claiming Strategies
Most of us are aware that when it comes time to take Social Security Benefits, we have options. And, those options extend well beyond "do I take my benefits at 62, 66 or 70?
There are a host of options beyond those which can and should be analyzed.
The graphic above depicts an actual analysis we recently completed for a Client. You'll no doubt note that "maximized" strategy vs. the "what if" strategy. The "what if" is a prototypical "we both take our benefits at our normal retirement age" strategy. The maximized strategy here appears to be the big winner, generating $1,207,388 in life time dollars vs. $1,084,427 using the "normal" retirement scenario.
But, Can You Afford It?
Looking at the totality of retirement issues, the amount of personal vs. retirement assets, pensions, lifestyle expenses, etc. you might be surprised to see that the "maximized actually reduces the probability of retirement success by quite a bit. Lower than we'd ideally like to see it going into retirement. But why? How does nearly $200,000 of Social Security income over a lifetime result in less successful outcomes?
Because, in postponing taking benefits (at least in this situation, and all situations are unique to themselves) we forget that the cash flow that would have been there had we taken benefits at a "normal" pace have to replaced by something else and that something else is your current assets. Like Elvis "leaving the building" the value of the additional withdrawals taken by a retiree to cover a four or five year period of spending has an impact. In personal finance, there are really very few "stand alone" items. Everything financial tends to be somehow inexorably connected to each other. While someone might gain on the aggregate amount of Social Security benefits, then by design, they have to sacrifice that value somewhere else in most cases.
In this context, (as it relates to Social Security benefits in this particular example) more is not better than less. Is it in your situation?
And, the same context would hold true if we were talking about annuity payment options, or pension payment options as well.
The Death of Absolutes
As you can imagine, we can think of a host of reasons to work with a financial planner on a comprehensive wealth management plan, but none more important than the death of absolutes. There are very, very, few givens in personal finance. And, what "givens" there are doesn't take a Wealth Manager, or financial planner, or CFP® to figure out.
You'll need money, that's a given, you'll need to eat, own a car, have health care, etc. We all know those.
But extending that thinking to other areas fails on it's face. As you can see here, "more" in this case, is actually "less."
Figuring all this out, creating the plan, designing the strategies, we believe, extends beyond the realm of what most individual can "effectively" do for themselves. While consumers have and will continue to have, biases, preferences, history and other "things" to fall back on, we need to be reminded that our vision of what should be isn't even a waving acquaintance to what will be. And, there aren't many second chances to get it right.