The Patient and Disciplined Investor…
Ruminations on long-term wealth building and retirement income strategies
written by Todd M. Kirsch | Volume 7 | Issue 1 January 2016
“Growth is an erratic forward movement: two steps forward, one step back. Remember that, and be very gentle with yourself.” – Julia Cameron, American author
Investment Markets Remain Volatile
At times, it can be very difficult to stay the course as an investor, because we must periodically endure retreating and sideways securities prices. U.S. stock prices “corrected” about 12% from May to August-September, and – as of this writing – are retreating again. Stocks have struggled this year, and there are many areas that look like they will finish substantially down for 2015. Those areas include emerging markets, “value” and dividend-paying stocks (especially utilities and transportation), certain areas of the bond market, gold mining stocks, and the energy sector, which has really been hit hard. While corrections are painful when they are happening, we should be thankful that they do, in fact, occur because if investment prices did not periodically correct, then you could not reasonably expect to earn a higher return over time versus holding investments (or savings) that have little or no volatility.
Remember that the financial media is not your friend when stocks are correcting. The media is always eager to stir up your emotions. Given the “collective car crash” that markets endured in 2008, you can be excused if your emotions have been pulling at you lately to lose sight of your long-term goals and satiate the short-term need “do something” with your investments. The media likes to use terms like “soar” and “plunge” when referring to stock prices – and lately, oil prices. Stocks on any given day might move 1-2%, sometimes more, but do they really “soar” and “plunge”? I could perhaps understand the use of the term “plunge” if stock prices dropped, say, 30% in a day…but 1-2%?? Can you imagine getting on an elevator, and your button choices are “plunge” and “soar”?
The financial media doesn’t know you, isn’t familiar with your financial goals, and certainly doesn’t care about you. You will be a better investor if you tune out the media and stay focused on matching your investments to your goals in a financial plan. What they care about is selling you more media by keeping you addicted to the next news “event” that they believe is moving markets. Have you ever wondered why they always provide a reason why stock prices go up or down each day? Maybe there were simply more sellers than buyers that day. Maybe more college tuition bills came due that day, or more cars and homes were purchased, or retirees needed a little more money to fund their retirement lifestyle. Why is it that “investors” would be “dumping” shares of American companies because of “growth concerns” in China or the Federal Reserve raising the short-term interest rate, gulp, a whopping ¼ of 1 percent? Some traders undoubtedly are doing this, but investors tune out this garbage.
Despite the media hyperbole, the correction to U.S. stocks prices last summer was tame by historical standards. Peak to trough from May 21st to August 25th, the S&P 500 was down 12.4%. The average intra-year decline since 1981 in the S&P 500 is 14.2%. If you are still saving for retirement, then periodic stock price declines work to your advantage because you are buying more shares for the same amount of money when they “go on sale”. On the other hand, if you have retired, more caution must be exercised. But there are retirement strategies to protect against such difficult periods…a topic for another time.
Stock prices are up about three times where they were in March of 2009 – a very steep increase. It’s hard to know when a bull market like this will end, but in general, bull markets typically end when investors feel euphoric and lose sight of risk. This isn’t happening. The week of August 25th (when stocks were correcting the most), we saw the greatest one-week outflow of funds from equity investments on record. That is clearly not an indication of euphoria – investors still feel plenty of fear, most likely from 2008. Surprises happen, and I could be wrong in the short-term. But interest rates remain low, energy is cheap, the labor force continues to expand, S&P 500 dividends have increased 10.6% January through September this year versus 2014, and investors appear to be fairly risk averse. As such, by historical metrics it seems this bull market should have more room to run.
In the meantime, consider what opportunities might arise the next time stocks prices go down. What additional funds or cash might you contribute to your long-term financial goals? Would it make sense to convert a traditional IRA to a Roth IRA? – remember you will pay less tax on a lower valuation when converting. Thereafter, as markets recover, stock prices recover inside a tax-free vehicle. Lastly, don’t forget to consider taking losses inside taxable accounts this year on areas that have performed poorly – and rebalance inside your IRAs.
Bottom Line: Stay invested, my friends – but we might continue to see difficult markets into 2016.
Social Security Claiming Strategies – and Congress Just Changed the Rules
When to claim your Social Security benefits has become a popular topic the last few years, and for good reason – too many people leave money on the table and/or file for benefits too soon. Social Security plays a surprisingly big role in lessening the risk of running out of money – and thereby whether retirees will enjoy a more tranquil retirement. Unfortunately, Congress recently amended the law terminating a couple of advantageous options. Despite these changes, however, when and how to claim will remain very important within the context of a financial plan. The rules are more complex for married couples, but singles should pay attention, too. I will go over the basics, but please call the office if you would like us to take a closer look at your individual situation.
Let’s review the Social Security basics:
- Your Social Security old-age benefits (i.e., retirement benefits) are based on your earnings record. In general, you need 40 quarters or 10 years of work subject to Social Security withholding to file for old-age benefits. Social Security uses the highest 35 years of wages, indexed to a wage inflation formula.
- You can collect Social Security retirement benefits as early as age 62 and as late as age 70. You also have an age known as your “full retirement age” (FRA). Your FRA depends on your date of birth, but people born from 1943 to 1954 have a FRA of age 66. Your “primary insurance amount” (PIA) is the amount you can expect to receive from Social Security at your FRA. Claim prior to FRA, your benefit is reduced. Claim later than your FRA, your benefit is increased.
- Once you begin receiving benefits, they are increased each year based on the consumer price index (cost of living adjustment – or COLA).
- Social Security pays you to wait. Your individual benefits will increase 8% per year that you delay claiming. For example, if you wait four years, then you will receive a 32% higher benefit.
- You can claim your benefits on your own record (assuming you have the required credits) or claim on a spouse’s record. You can even claim on an ex-spouse’s record (assuming you were married at least ten years and are not currently remarried).
- Social Security is “use it or lose it”. You must be alive to collect either your own benefit, your spouse’s benefit, or a survivor benefit.
Social Security is Longevity Insurance
One of my roles is to represent the elderly version of you when financial planning decisions are being made, and Social Security is a good way to reduce the risk of running out of money late in retirement. It is an annuity that will pay you for as long as you live. Moreover, your benefits increase with inflation (i.e., cost-of-living adjustment). As such, you cannot outlive Social Security, and your benefits maintain their purchasing power. Assuming inflation averages the long-term rate of 3% per year going forward, then your Social Security benefits will double in approximately 24 years. Annuities paid from private-employer pension plans generally do not increase with inflation – that is what we call a “fixed income”. People underestimate Social Security, but it is a very valuable retirement income source for the overwhelming majority of Americans.
When Should I Claim?
In general, if you don’t need the money AND you’re in good health…then you should consider waiting to claim your benefits. The government will pay you 8% per year to wait. As noted above, if you wait just four years, then your benefits will increase 32%, plus cost-of-living adjustments.
Unfortunately, most people claim their benefits early. I understand the emotional tug towards claiming: you’ve been paying into the system for decades, and now you want your money. Plus, people have heard that the system is underfunded, and they are concerned that the system will not be there in later years to pay benefits. While the system has its challenges, it’s still relatively solvent, and it’s hard to see the government changing the rules for people who are either in or near retirement. Lastly, there is this misguided idea that you can collect Social Security, invest the proceeds and earn a better return than the government. With today’s low interest rates, you cannot do this without taking outsized investment risk.
If you are single – and many women are single due to longer life expectancies – then the general rules apply: it’s best to wait to collect as long as you don’t need the money and are in good health.
There are a couple of additional considerations. Even if you decide to wait until age 70, you should file and suspend your benefit at your FRA. That way if, for example, you are diagnosed with a terminal disease just prior to age 70, you can collect your benefit back to your FRA. Also, you can collect a spousal benefit (50% of your ex-spouse’s “PIA” – primary insurance amount) on your ex-spouse’s record if you were married over 10 years and have not remarried. It can make sense to collect a spousal benefit while you delay filing a claim on your own record.
If your ex-spouse passes away while you are collecting a 50% spousal benefit, you can increase the benefit to 100% survivor benefit. (Interestingly, this would seem to create a bit of “moral hazard” if you have a financial incentive for your ex-spouse to pass away, but I digress.) If you are widowed, you can collect a survivor benefit as early as age 60. Neither survivor nor spousal benefits increase after FRA. If it otherwise makes sense, then it’s best to claim them at that time.
John and Jane were married for 18 years but recently divorced. John is 68, and Jane is 66. Jane has not remarried. John’s PIA is $2,200/month, and Jane’s PIA is $2,000/month. If she waits until age 70, she can collect $2,640, plus COLAs. In the meantime, Jane can claim a 50% spousal benefit on John’s record for $1,100/month. When she turns 70, she can then collect her own benefit of $2,640. Let’s assume John then passes away shortly thereafter while Jane is collecting $1,100. Jane would then be able to collect $2,200/month (a 100% survivor benefit) until she turns age 70 – and then claim on her own record and increase her benefit to $2,640.
Married couples have more to consider, and the recent legislation will substantially affect some couples’ options. The correct claiming strategy can get complicated, so it’s important to take the time to get it right. Let’s review the married-couple basics.
- Because Social Security is terrific “longevity insurance”, it’s generally best to maximize at least one Social Security benefit in case one spouse lives a very long time….women are generally more at risk due to longer life expectancies. A joint life expectancy is the average date of death for the second spouse to pass away. When you are in your mid-60s, your individual life expectancy is your 80s, but the joint life expectancy for a couple in their mid-60s is in their 90s. In other words, there is a 50% chance that one of you will live into your 90s, so maximizing at least one Social Security check is generally smart.
- Upon the death of a spouse, the surviving spouse will continue to receive the higher of the two Social Security amounts that were being paid to the couple – (please note: and surviving spouse will end up in a single-filer tax bracket – a tax consideration).
- You can claim on your spouse’s record as long as the other spouse has filed for benefits. By doing this, you can claim income now (i.e., the spousal benefit) while delaying your own benefit and growing it to a larger amount that you can claim later. (This, too, is going away under the new legislation unless you are turning 62 by the end of 2015).
- At FRA, you can “file and suspend” your own retirement benefits (under the new legislation, this terminates April 30, 2016). This means that you have technically filed, but you wish to delay collecting your benefits. It’s a legal fiction, but it’s been important and allows your spouse to file a claim for spousal benefits on your record.
- Social Security is “tax-friendly” – it’s not tax-free (tax-free status went away in 1983), but for couples claiming income from $60,000 to $120,000, the tax savings can be significant if they wait until age 70 to claim their benefits.
- Spousal benefits do NOT receive delayed retirement credits after FRA. In other words, if you have reached FRA and plan on filing for a spousal benefit later, don’t do this…because you will NOT be rewarded for waiting.
For couples who are in their late to mid-60s, you have until April 30, 2016 to work under the old rules that allow you to collect a spousal benefit on another spouse who has filed-and-suspended his or her benefits.
Bob and Ann both turned age 62 four years ago at the same time (in 2011). Unlike their neighbors who filed for benefits at age 62, Bob and Ann met with their really sharp financial planner four years ago, who told them about the different Social Security claiming strategies. Bob’s PIA is $2,200/month and Ann’s PIA is $2,000/month. After careful consideration, they decided to wait until age 66 to file for benefits. At age 66, Ann will file for spousal benefits on Bob’s record (i.e., 50% of $2,200/month = $1,100/month spousal benefit). By doing this, Ann’s individual benefit will continue to grow to $2,640, plus COLAs. In order for Ann to file for spousal benefits, however, Bob will have to file, too. But they want him to delay his benefit to age 70. Instead of filing and collecting his benefit, Bob can “file and suspend” his benefit. He has technically filed – therefore, Ann can claim a spousal benefit of $1,100/month for four years until she turns age 70. (Again, this favorable provision terminates late April of 2016.)
The new law will add some twists into financial planning. Let’s assume the same example above. In the future, Bob will have to file and receive his benefits before Ann can collect a spousal benefit. If Ann was a low-income earner, then the 50% spousal benefit will provide her more money than claiming on her own record. However, Bob must file first before Ann can claim that spousal benefit. The choice could be difficult – do they wait for four years for Bob’s relatively larger benefit to increase 32% and then file? This would certainly protect the longer-living spouse. Or do they file now because Ann’s spousal benefit will not increase past age 66 (but Bob’s will). These are difficult decisions that should be made carefully with the help of a Certified Financial Planner®.
Bottom Line: Call us today to schedule some time to review your situation and help you get the most from Social Security.
Todd M. Kirsch, CFP®, JD, CHFC®, CLU®
Kirsch Wealth Advisors, an independent firm
8191 Southpark Lane, Suite 110
Littleton, CO 80120
Securities offered through Raymond James Financial Services, Inc.
Member FINRA & SIPC
Todd has been serving clients since 1993. Prior to that time, he attended Boston University School of Law and obtained his law degree in 1989. He practiced law with a large international law firm in the areas of taxation, securities, and corporations. He graduated from Kansas State University in 1986. He obtained the prestigious Certified Financial Planner® (CFP®) designation in 2002 and also holds the well-respected Chartered Life Underwriter and Chartered Financial Consultant designations from the American College
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material and does not constitute a recommendation. Any opinions are those of Todd M. Kirsch and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk. You can lose your principal. There is no assurance any strategy will be successful. Please consult your financial advisor before implementing any investment strategy. Past performance is not a guarantee of future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index.
 More noteworthy news is that earnings of U.S. companies – the most important driver of stock prices – are under pressure and most likely will be for the next 6-12 months. The energy sector is arguably in depression given that the price for oil has dropped about 60% over the last 18 months. But capital markets have a wonderful way of healing – if the government stays out of the way. One concern is that banks continue to lend to oil producing companies at a surprisingly robust rate thereby keeping some otherwise moribund companies afloat. The sector probably needs some “creative destruction” by washing out the inefficient and leveraged producers. But excessive lending tends to happen when money is cheap and easy – dictated by the Federal Reserve’s monetary policies. Readers of this newsletter know that I consistently argue that distorting the price of money in an economy (i.e., the interest rate) has hard-to-predict and unintended consequences, and it appears this has happened in certain areas of the energy market.
 https://ycharts.com/indicators/sp_500_dividends_per_share. Moreover, they have increased
 It appears that the new legislation passed November 2, 2015 will be taking this away on April 30, 2016.
 You might be wondering if John can then do the same thing and claim a spousal benefit on her record….sorry, the law does not permit filing for two spousal benefits when you’re married.