8/19/2013 5:30 PM ET|
Social Security as part of your portfolio
Some financial advisers say retirement investors should include the value of their Social Security benefits as a piece of their fixed-income investments.
You may be counting on Social Security, but if you're not counting Social Security as a part of your overall asset allocation, you may be missing out on bigger gains in your retirement-savings portfolio.
Some financial advisers say retirement investors should consider the value of their Social Security benefits as a piece of their fixed-income investments.
Generally, adopting that strategy would mean shifting a big portion of your investible assets out of bonds and into stocks.
For example, if you've got $300,000 worth of Social Security benefits and a $700,000 investment portfolio, then your total portfolio is worth $1 million. If you wanted 50% of that portfolio, or $500,000, allocated to fixed-income investments, then just $200,000 of your investment portfolio would be in bonds, while $500,000 would be in equities.
There are different ways to gauge the present value of future benefits; one simple tactic is to add up your monthly benefit (you'll have to guess how long you'll be alive to collect benefits).
"We go through a process where we value someone's Social Security like a TIP," or Treasury Inflation Protected security, said Bill Meyer, chief executive of Social Security Solutions, which offers fee-based claiming tools and services. "Then we add it into the household's allocation."
In one scenario involving a hypothetical single person who claimed benefits at age 70, owned an investment portfolio worth $500,000, and employed a tax-efficient withdrawal strategy, Meyer said he found that this strategy led to 8 extra years of retirement income, compared with not counting Social Security in the person's investment allocation.
Famed investor Jack Bogle, founder of the Vanguard Group, seems to agree. In an interview in June with investment researcher Morningstar, Bogle suggested retirement savers should consider the value of their Social Security benefits in their asset allocation.
First Bogle cited his penchant for basing one's asset allocation on one's age. (If you're 40 years old, you have 40% of your investments in fixed income and 60% in equities. By the time you're 60, you've got 60% in fixed income, 40% in equities).
Then he talked about Social Security, citing a saver who has $300,000 saved in an investment portfolio.
"If you capitalize that stream of future payments, most people's Social Security is going to be…let's say $300,000 for an average investor," Bogle said. "If you have $300,000 all in equity funds, even equity-index funds, and $300,000 in Social Security, you are already at 50/50" fixed income versus equities, he said.
Meyer, of Social Security Solutions, acknowledged that many people "will be uncomfortable with taking on a larger stock position," he said.
In his practice, after coming up with a value for a client's Social Security benefits, the next step is a conversation with the client.
"That's where Social Security meets risk management," he said. "What does this really mean to have more stocks? How are you going to feel when the market goes up and down? A lot of people will say, 'I understand this concept but I really don't feel good when my 401k goes down $50,000,'" Meyer said.
People need to understand that "with the additional stock exposure there will be more volatility," Meyer said. "With our clients, we'll give them a target asset allocation and then we'll give them a range."
He tells clients: "Given your amount of Social Security, you could tilt your equity exposure as much as X."
Then, Meyer said, "We show them the additional money they can get by having more stock. But then we run a Monte Carlo simulation to show them the volatility. What's the most you could win, but what's the most you could lose."
Also, he warned, married couples -- who can employ a variety of Social Security claiming strategies -- might have a harder time estimating the value of their future benefits.
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If you and your spouse each collect $1250/month in SS, and you each get $750/month from an annuity/pension/401k/etc..., you've got $4k a month in income. In many parts of the country, that's not too bad if you aren't carrying any debt.
considering social security as fixed income is nonsense because although the payments last
a lifetime after you start receiving them, there is no principal left when you die....these are not
investments these should be considered only in terms of cash flow budgeting..the idea that
your stock allocations should be larger simply because you get a social security check each
months means that even though may be 75 your risk allocation would be far too high....and
losing money if there is a meltdown in stock value will not allow you to sell any part of the
so called bond allocation that these financial advisors are telling you to consider to raise cash
because there is no cash producing the income.....why these guys get paid to give this
kind of wrongheaded advice is beyond me
HAHAHA ! What a crock ! I'm not even counting on social security being around when I get ready to retire. And if it is, the pitiful amount won't even cover my monthly Sex Wax expense for my surfing. As long as you have 47% of people not working, not putting something back into social security, it can not sustain itself into the future.
If this situation changes, maybe the program can remain viable.
It's still the biggest hoax that allows a government to take a substantial portion of wages, and then says we need you to let us collect interest on the money and then also ask you to wait over fifty or sixty years to "collect" - knowing that at this age, the odds are in the government's favor that you will only recoup about 10% of what you contributed.
Any other organization allowing this would be called a scam and probably be declared illegal.
Yet, it happens every day to every person in the U.S. that holds a job.
"'I advocate including [the value of Social Security benefits] in a net-worth statement [. . .],' said Bob Klein, a certified financial planner."
I think that's foolish. I can see including equities, if the notation is made that the net worth statement includes unrealized gains and/or losses. Such a net worth statement can be made real net by liquidating all the items on the statement and having (minus assorted fees, of course) that sum of money.
But how do you have a net worth statement that includes the addition of $100K, or $200K, or $300K of Social Security annuity payments that CANNOT be made real by liquidating all the items on the statement?
This smells like more accounting tap-dancing in this becoming-chronic time of lowered economic expectations. It also reeks of one more way to move individual investor capital into the glorious casino known as Wall Street.
You should NEVER count social security as an asset of your retirement. Remember - WHAT EVER THE GOVERNMENT GIVES YOU, THEY CAN ALSO TAKE AWAY.
President Obama has already floated the proposal to limit the value of 401(k)s, employer pensions, and other tax-favored retirement accounts to about $3.4 million, which he argues is more than enough to retire comfortably. The obama Administration and democrats are already thinking about how much of your money you are allowed to keep and use for your retirement. It not a far stretch of the imagination when the federal government will "opt-out" of paying social security to those whose assets have reached a certain level. Think social programs which stop paying after you have reached a certain percentage of the poverty level.
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