Planning Matters (October 2017) – Financial Planning in the World of Headlines and Tweets
If you only look at the headlines these days, you might be compelled to think that the best of all plans, financial and otherwise, is to dig a really big hole and hide.
Unfortunately, good planning requires that we look to the facts and avoid the noise. It’s a truism that “bad news sells newspapers.” However, in spite of the headlines, it is important for us to be making our financial and retirement decisions with data based on facts, and not the headline of the day.
Take Social Security for example. Earlier this year the Trustees of the Social Security and Medicare trust funds released their annual report on the two programs’ current and projected financial status. Soon after the spring release, the headlines broke forth with the following: “Social Security trust fund projected to tap out in 17 years,” “Social Security is running out fast — and no one is going to like the solution,” and “Social Security trust fund will be depleted in 17 years, according to trustees report.”
If you were a pre-retiree just skimming the headlines, you’d be inclined to claim your benefit now to get your share, right? Or are you the type of person that will dig for the truth and find a story like Chris Farrell’s “The Truth About Social Security’s Solvency and You,” in which he wrote in response to the 2016 doom and gloom headlines: “The bottom-line message from the 2016 Trustees report for current and future Social Security beneficiaries: Social Security isn’t running out of money.” And even then, that’s a mixed message — it’s running out of money, but not really.
So, what is the full story?
The projections of insolvency make sense — when distributions from the fund exceed contributions to the fund, there’s a deficit. But calling the fund “tapped out” is probably a bit of an exaggeration. As news outlets reported, the full picture is this: if there are no changes to the Social Security system of taxation and payments before 2034, then there will still be enough money in the system to pay 74% of the scheduled benefits through 2090. That’s not quite the same as the headline messages of “trust fund to be empty in 17 years.”
This issue is of great importance to me as I just had my 66th birthday. Even though I am still working, I could claim my benefits and bank those checks. After the release of the report, I took a look at my own optimized claiming strategy, which calls for delayed claiming for our dual-income family. So here is the bottom-line question that I face every month that I delay payments: would it better to delay and take a 32% increase in delayed retirement credits, or to claim early and then take a 26% decrease on a reduced amount at a time in the future when I probably will need the money the most?
Here is how the math works. If a worker has a full retirement benefit of $2,600 at full retirement age (FRA), he or she would have a delayed benefit of $3,432 at age 70 assuming no cost-of-living-adjustment (COLA) increases. Now look into the future and consider the reduced amounts that I would receive if benefits were cut by 26%. In 17 years I will be 83 years old and my benefit check could be reduced by 26%. If I claimed my benefit at age 66 it could be cut to $1,924 a month. If I delayed to age 70, my benefit would be cut to $2,540 per month.
By delaying claiming, at the time I am most probably going to need the money the most, I will have over $600 a month in additional funds.
Recent survey results indicate that more than 50% of today’s baby boomers have no money set aside for retirement. The remaining do not have significant balances in their retirement accounts. The choices seem obvious, even in the light of potential reductions to benefits, which are “looming” 17 years in the future. Given the ability to delay claiming, claimants are probably going to be better off in the long run with the highest possible foundation of Social Security benefits. Assuming Congress does nothing in the next 17 years about the funding of Social Security benefits, I would rather have 74% of the largest number possible rather than 74% of the smallest number possible.
It is especially important that we as financial advisors know the facts and are able to communicate the meaning of those facts to individuals who are seeking our advice. Be aware of headlines that only tell part of the story. We feel that the people who look to us at REDW Stanley Financial Advisors, LLC for advice deserve much better than half the truth.
Copyright 2017 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.