Viewing entries tagged
Social Security

American Hustle?

No, we're not talking about craps, roulette or poker, either in person or online.  Those activities will remain for the foreseeable future. 

What we are talking about is the realization by the Federal Government that some of the more "advantageous" and "provocative" Social Security claiming strategies, which appear to benefit the recipient, have to be stopped because they have the potential to cost the "system" an extra ordinary amount of money estimated by some to be as much as $9.5 billon annually. 

Strategies such as "claim and suspend" and "claim now, claim more later" are not all that uncommon though most retirees fail to even consider such strategies. 

Upon closer examination of the "problem" the real issue might lie in the fact that many of the more provocative strategies are ideal for two wage-earner households with the caveat that the additional benefits earned through accumulating retirement credits that build future payouts even while you're collecting on a smaller one, tend to favor households with higher more balanced earnings records between the spouses, which would of course, tilt the playing field in favor of higher income households. 

It should be noted that strategies such as "claim now, claim more later" spread benefits fairly evenly across most income levels yet nearly 50% of the total additional benefits received under this claiming strategy are allocated to the top two quintiles of wealth distribution.  

If the President's fiscal-year 2015 budget passes as proposed, many of these strategies would fall by the wayside. 

How much does it matter?

This is a key question.  On their face, the appeal of these more subtly nuanced strategies lies mostly in the "interest" of the parties to game the system or to be lured by the higher dollar amount of future benefits. Over the course of a recent three month period, our firm looked at differing claiming strategies for a handful of Clients. We concluded that upon closer observation, when measured by the ability of a different claiming strategy to increase real wealth, there was almost no pick up in utility by employing a more subtly nuanced strategy. (Albeit that a case can be made for the fact that increasing levels of "guaranteed" income during retirement does potentially provide for more utility in managing "investment assets" across the retirement time horizon.)

Remember the Roth Conversion?

We witnessed first hand a similar affect during the period when Roth IRA Conversions were all the rage. 

While the draw of the conversion was clearly positioned on two pivotal issues [a] taking what would have been taxable Regular IRA income and converting it to "tax free" Roth IRA income and [b] the ability to spread the tax bill over two years on the conversion; the actual pick up in wealth when measured by using Monte Carlo Simulation and looking at retirement with and without the conversion; there was for many, virtually no increased level of estimated retirement success probability. That is to say that Clients who may have scored Monte Carlo Simulation probabilities of 93% with the conversion, still scored 93% without the conversion. This was due mainly to the fact that what got lost in the allure of converting taxable to non-taxable income was the future value of the tax bill that the Client paid on the conversion, which absent the conversion, they'd have still had in their pocket.  Like Elvis, those dollars summarily "left the building" never to return.  A conversion of let's say $400,000 for a wage earner in the 30% tax bracket resulted in the loss of $120,000 of "other money" that was taken from savings or other investments to pay the tax bill on the conversion. 

Conclusions

Surely, pre-retirees should do much more than default to either taking benefits as soon as possible or deferring them till 65.  Perhaps a combination strategy as suggested by many research papers that the optimal strategy would be for one spouse to take the benefit at the earliest age and one to take it at the latest age is ideal?  We're not sure and we're not sure because every situation is different because every situation is impacted by other factors such as; 

  • The level of cash assets on hand
  • The level of "investment assets" on hand
  • Projected tax rates and inflation rates
  • The projected level of household spending and; 
  • Other sources of income such as pension and IRA Required Minimum Distributions

Bottom line is that "all that glitters is not gold" and simply getting a higher benefit amount does not necessarily portend greater probabilities of retirement success. 

In golf, there are a lot of golfers that can hit the ball a mile, but can't keep it within the confines of the golf course itself. Yet, if you asked most golfers if they'd like to add another 50 to 75 yards to their drives off the tee, you'd be hard pressed to not find any non-takers. (Just ask club manufacturers like Taylor and Nike who sell millions of new clubs each year based on this very premise.)

But driving the ball is one and only one (yet an important one) component of succsesful rounds of golf.  But if you can't hit any other club in your bag or putt, you're long off the tee and still shooting 105.

And, as it relates to the potential to see a closing of the provocative Social Security claiming strategies; having them guaranteed in reality very little. 

Unless we can fundamentally change the nature of "retirement" in American, either through sheer will or political change, it's likely better to not add nearly $10 billion in costs that benefit such as small minority of people if in reality, they real ever benefited at all. 

Bottom line is that "planning" your Social Security strategy will almost always trump not planning one and even if there's a repeal of the more subtle strategies, there's still strategies to plan for and with. 

Best to focus on the options that will make a real difference. 



Fixing Social Security

In a recent article in the Sun Sentinel, the author proposes how to "adjust" Social Security by bolstering it, not cutting it as some might find more desirable. 

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Our country has undergone substantive change since the enactment of Social Security, and frankly, the program itself has done little to keep up with the changes.  The addition of retirement "ages" of 62 and 70 were instituted to address the needs of women and minor mortality adjustments but there's really been little else. 

With American households dramatically under-funded for retirement, and with the advent of the end of defined benefit pensions in favor of 401(k) plans, it's not hard to see how little even the general population has done to adjust to prepare for retirement. 

While the cries of insolvency are always a concern, the fact remains that insolvency is hardly a reality either in actual or political terms. 

Nearly all but a few workers contribute 6.2% of pay to Social Security yet someone earning $400,000 a year pays 1.71% and a CEO earning $2,000,000 pays just .003%. The difference in rates is inexcusable. 

The fix then lies then not in if we index benefits, or by cutting benefits or allowing individuals to invest in the stock market, or gold or other investments. The answer lies where it has always been; funding. 

As this article portends, were we to gradually phase out the rate cap over a period of time, requiring more contributions from wealthier individuals, for the most part, the problems would be solved. 

I know, this speaks to the very heart of our shared commitment to the preservation of our economic structure.  But to my way of thinking, that's a large part of what democracy and the American way of life is about, isn't it?

The way I see it, if we can count on the greatest segment of our population to build our buildings, fix our roads and fight our wars for us, it might be nice to thank them by doing what we can to ensure that they don't live in a cardboard box during their later years. 

While to some's way of thinking, the abyss between the "haves" and "have nots" may seem like a natural order of "finance" it remains true that our "founding fathers" built a democracy based not on ramping up inequality but by doing what was necessary to prevent it. 

Here's a fix that can and should work. Which we all know means it likely won't. 

Sad as that may be. 

Entitlement Reform

One of the things that gets overlooked every time the conversation comes up about reworking the Nation's metrics for entitlement programs, is an important and seemingly ever present factor;  

"Until people actually start saving so that dependency on entitlements as a primary means of support declines, changing the programs remains all but impossible." 

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As much as we may not care to admit it, one of the "stop you dead in your legislative tracks" will always remain, "my constituents can't afford that to happen..." 

There are a myriad of reasons to plan for your future, not the least of which is that as the demand for social programs grows, and along with it, the cost of funding them, we're on a headlong journey into the realm of "it can't be stopped because we need it too bad but we can't afford to keep it going."   

At some point, someone will have to pay for it beyond what a popular notion of affordability is and it will then either come crashing to a halt, or at least an abrupt and unforeseen slamming on of the brakes. 

Let's help ourselves out this time and stop depending on politicians.  

Save for your future. The likelihood that someone else will want to pay your freight is growing painfully less likely.