By now I’m sure you’ve heard how important it is to try and wait on starting your Social Security benefits. You’re leaving money on the table if you don’t, etc, etc. While the reasons for this make good intuitive sense, lots of people seem to be going in the other direction.

I mention this because of a survey from Schroders, a global investment firm. Survey respondents report planning to start their benefits before their full retirement age, even as they report recognizing how this will cost them money in the long-term.

The survey was covered in USA Today recently, but I’ll share sections of the article here so we can discuss some of the issues. My notes are italicized for clarity and a link to the full story is below…

Only 10% of nonretired Americans say they will wait until 70 to receive their maximum Social Security benefit payments, according to the 2023 Schroders U.S. Retirement Survey of 2,000 U.S. investors nationwide ages 27-79 between Feb. 13 to March 3.

Overall, 40% of nonretired respondents plan to take their Social Security benefits between ages 62-65, leaving them short of qualifying for their full retirement benefits. 

How much is full Social Security now?

Social Security Income (SSI) benefits are based, in part, on a Full Retirement Age (FRA) that depends on your birth year. For example, those born in 1954 or earlier have an FRA of 66 and this tapers up by month to those born in 1960 or later who have an FRA of 67. Your FRA is like a line in the sand, or perhaps a pivot point. You can start taking your benefits at 62, but it gets reduced a bit for each month that you take it early, at about an 8% annual rate. Conversely, your benefit base grows by the same amount every month you wait beyond your FRA and keeps growing until age 70, assuming you can hold off for that long.

For example, if you retire in 2023 at full retirement age, your maximum benefit would be $3,627… However, if you retire at age 62, your maximum benefit would be $2,572. At age 70, your maximum benefit would be $4,555. 

That you get more for waiting seems straightforward, but the real impact shows up in cumulative household cash flow over time. If we assume longevity will be on our side the total additional money after waiting until 70 to start SSI would be sizeable. For example, a random sample from the variety of financial plans I’ve done over the past 10+ years shows about $100,000 of extra income over a longer life expectancy by waiting until age 70. Contrast this with starting SSI early, and household income is reduced by roughly $174,000, on average, over a retirement period. The breakeven age is often in the late-70’s, so you’re coming out ahead automatically if you think you’ll be receiving payments for at least that long.

“The choice to forgo larger Social Security payments is a deliberate one, as 72% of non-retired investors – and 95% of non-retired ages 60-65 – are aware that waiting longer earns higher payments,” Schroders said in a statement. 

Why are Americans choosing to take Social Security earlier? 

Mostly fear.  

Forty-four percent said they were concerned that Social Security may run out of money and stop making payments, and 36% expect they’ll need the money, the survey said. 

Social Security is expected to be depleted in 2033, a year earlier than prior forecasts, the Congressional Budget Office said in June. 

“We have a crisis of confidence in the Social Security system and it’s costing American workers real money,” said a rep from Schroders.

Fear can be helpful when it makes us skeptical and forces us to ask questions. But fear gets irrational pretty quick and can lead us to make poor choices. That said, it’s understandable that many, if not most, Americans are afraid that their SSI won’t be there when they need it. The issue is discussed frequently in the press and asking Google will only lead you down the rabbit hole.

The latest news is that SSI benefits will have to be cut by 23% starting in 2033 because that’s when the program is projected to become insolvent. If so, this would mean a reduction in cash flow for a typical household of about $14,000 per year, according to the Committee for a Responsible Federal Budget. That sounds huge, and it is, but how likely is that to actually happen?

Frankly, I don’t know which is more cynical, that our elected officials are so inept (or collectively uncaring) as to let this happen to Social Security, or that they’ll probably wait until the last possible moment to kick the can down the road again. Either way, “fixing Social Security” has long been known as the third rail of American politics for good reason: nobody wants to touch it.

Personally, I’m in the “kick the can down the road” camp. My reasoning has to do with how our elected officials know how to fix the problem because the recipe is reported to them annually by the folks who run the program. Taxes will need to be raised on higher earners, the FRA will need to go up to 70 or 72 for younger workers, and yes, benefits could be trimmed but other tweaks could be made prior to that. Take any one or all three and you can see why “delay and catch-up” seems like the most workable solution from a political perspective. Nobody wants to stick their neck out far enough before there’s a real crisis to solve.

Okay, so where does that leave us? I think a pragmatic approach is best. What I mean is that instead of potentially hamstringing yourself by starting benefits too soon, try to wait as long as possible. You can start your benefits in any month once you’re 62, so just hold off as long as you can. Ideally you’d at least wait until your FRA to get your “full” benefit, but every month you wait means a high benefit base than it would otherwise be, and that lasts the rest of your life.

But how are you supposed to get by without your SSI? Spend from cash savings. Spend from your bond investments, maybe your stock investments too. That’s what you’ve been saving for, right? Work with me (or another fee-only planner) to strategize about how best to do this. You might have more room to wait than you realize.

https://www.usatoday.com/story/money/personalfinance/2023/08/08/social-security-fears-spur-early-retirement-plans/70551333007/

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It's sometimes said that good friends are those who stretch and test you, help broaden your sense of what's possible. Assuming that’s true I have a friend to thank for missing this week’s blog post.

Instead of my usual routine, as you read this note I’ll be part of a team paddling nearly 400 miles down the Missouri river in a dragon boat. These boats were first developed in ancient China and are primarily used for sprints. The boat we’ll be using has been set up for distance as the team is attempting to break the world record for miles travelled by dragon boat. Why? Because it's there, I guess. 

I’ve never seen a dragon boat in person and my paddling experience is, well, let’s just say it’s under development. This journey is expected to take roughly 50 or so hours pretty much nonstop. It will be an interesting experience, to say the least, and with any luck I’ll soon be thanking my friend for this invitation into the unknown.  

I'll be back with another post next Tuesday. In the meantime, I wish you a good week and hope that you take an opportunity sometime soon to embrace the spirit of adventure.

- Brandon

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How much is enough? How do we begin to answer that sort of question? Some days I think I’m close, while other days I’m miles away, adrift in the countercurrent and watching “enough” chase the horizon. Is enough a static goal in and of itself, or a constantly shifting target? These questions can quickly transcend the realm of personal finance, but let’s spend a few minutes considering the questions from the financial planning angle.

I’m wondering about this after reading some articles referring to a report from Schwab suggesting that Americans think it takes about $2.2 million of net worth to feel wealthy and $774,000 to feel comfortable. These numbers are higher than 2021 but lower than pre-pandemic levels and seem to move around a lot.

Here’s a link to the information if you’d like to read more.

https://www.aboutschwab.com/modern-wealth-survey-2022

How do people come up with these numbers? Is it someone’s best guess about how much money it takes to retire, since retiring from full-time work is usually the stated goal in surveys like this? Those numbers are averaged over the country as well, so your San Fran nest egg needs to be bigger than if you were in Denver or Houston, for example. Home equity is included, so regional economic differences impact the numbers in that way too. Additionally, who’s to say that one person’s goals and expectations are even remotely close to someone else’s, regardless of where they live. Depending on one’s situation, $500,000 can go pretty far toward funding retirement while millions in the hands of a spendthrift might never be enough.

Whatever the dollar amount, we need a better way to determine if what we have is enough, or if we’re on the right track to get there. Otherwise we end up saving blindly, hoping that we’re doing enough to get enough, so to speak. Unfortunately, this leaves the average American in their 40’s, for example, woefully behind the curve with about $106,000 in their 401(k) as of earlier this year, according to tracking updated annually by Fidelity. Maybe they’re close to Schwab’s “comfortable” number if they own a house with lots of equity, but I doubt it, at least on average.

And making this more challenging is how elusive the definition of enough is. It is a moving target. People reevaluate their goals and life interrupts best laid plans. Accidents, even serendipitous events, happen that can cost large amounts of money.

That said, here’s a basic framework for figuring out if you’ve arrived at enough:

You have no debt, or at least very manageable debt. (Debt with a fixed interest rate on principal low enough that your payments are easily covered by dependable income.)

You have sufficient cash flow to cover your recurring expenses.

You have other savings to cover unexpected costs without derailing your cash flow. But since by definition these costs are unexpected, how do we plan for them?

Peeling back the layers soon makes a simple exercise into something complicated and nerve-wracking. The first parts about debt and cash flow are relatively simple. But how can you know if you have enough when there are so many other unknown variables to consider?

This is where financial planning software comes in. We plug in the basic stuff like your assets and liabilities and known sources of cash flow. We make realistic assumptions about how much your money can grow and how much inflation we’ll have to deal with. On top of these basic inputs we add a variety of future one-off or periodic expenses. This can be replacing cars every X years, or paying for that new roof you know you’ll need but don’t know exactly when. We’ll add layers of expense for self-funding long-term care or money for helping the kids buy a first home. In short, we attempt to replicate what your actual spending pattern might look like in retirement: smooth with periods of lumpiness.

The result is a complicated set of variables that can be tweaked in a variety of ways but that can also show if you’re on the right track to being able to afford all this or, even better, if you’re already there = enough.

What’s been surprising to me during years of doing this work is just how wide the spectrum of enough seems to be. Different people have different goals, their financial situations are unique, and what’s possible can be more than they imagined. Part of this has to do with how people tend to think of having enough as hitting a particular number, as discussed above. It’s easy to fixate on that and forget that a stream of future cash flows could also be thought of as a lump sum today, even though you can’t access it in that way. Take Social Security as an example. The average benefit is currently about $1,800 per month. Assuming you get your benefits for 20 years and cost of living adjustments average out to, say, 2.5% per year, those future cash flows are worth about $345,000 today. Could you add this present value of future cash flows to your thought process about having enough?

Here’s an online calculator if you want to plug in numbers for your pension, rental income, and so forth, to gauge present value. While not technically part of your net worth, it’s a different and maybe more expansive way to consider the resources you’ll have for retirement.

https://www.calculator.net/present-value-calculator.html

A few notes on the calculator: “Periods” could be months or years and the “Periodic Deposit” could be your monthly or annualized cash flow. Keep the interest rate reasonable but you can play with it to see how higher and lower rates impact present value.

So, having enough is really about your total combined resources and how they match up with your goals over time. The balance of your savings and investment accounts at any particular point is a big part of this but won’t by itself answer the question of whether you have enough.

Have questions? Ask us. We can help.

Happy Tuesday. If you’ll indulge me I’ll share a bit about my paddling race last week.

At this time a week ago I was paddling down the Missouri River from Kansas City to the town of St. Charles, near St. Louis. The journey was part of the MR340, a storied paddling race of that mileage. References to the Lewis and Clark expedition were all round, so it was easy to sink into history while enjoying the scenic river. In addition to being part of the 500+ boats in the race, we were attempting to set two world records for dragon boats, one for distance in 24 hours on moving water (our goal was 200 miles) and one for total distance (a lofty 380-mile goal) regardless of time.

I had to Google what dragon boats were when I was first invited to be part of this adventure. If you’re unfamiliar, ours was a typical sort at about 41 feet long and carries up to 20 paddlers, including one steersperson and one drummer who beats out time. Fortunately for any potential drummer we skipped that part. Dragon boats are designed for short sprints while our total time paddling was expected to be over 50 hours.

So 17 of us set out and paddled hard for the first 24hrs through flat water and waves created by barges. We paddled through headwinds that tossed waves and various floating debris into our laps. And after only a couple of very short breaks, we paddled straight through the evening, the night, and into the next morning before going right into a prolonged (and painful) sprint toward that first record goal.

We got the record, so that’s great. However, we immediately pressed on to our longer distance goal and paddled all that second day before getting pulled off the river when the race was stopped due to a large storm coming in. The river was expected to rise at least several feet throughout the night and would generate large amounts of debris (fallen trees, broken limbs, etc). That, coupled with a moonless night and a lot of lightning made continuing seem too risky for the race director and the decision was made to get everyone off the water. So our journey ended at about 38 hours and around 280 miles.

From my perspective, the whole experience was worthwhile even though I had to sit on a 1 x 6 piece of deck board the whole time. I still feel it in my glutes and hamstrings, and it took a few days to get past the sleep deprivation. That’s what espresso is for, right?

All that said, I enjoyed having a common goal and shared suffering with 16 other people, 15 of which I’d never met before. We all came to the boat with different backgrounds, endurance capabilities, and different paddle strokes in most cases. But we adapted, meshed, and ultimately were able to push as hard as was possible under the circumstances to achieve a world record.

Would we have accomplished our second, longer goal? We lost four team members as the storm approached, but I feel the rest of us would have made it, although it would have been a tough slog.

Would I do it again? I’m inclined toward endurance sports and, as some of you know, have spent time running races from marathon distance and longer, often in mountainous terrain. All my years of running inspired a sense of adventure but, admittedly, I was turning into a one trick pony. I enjoy paddling and participating in this event kindled a similar desire to expand the range of what’s possible in the watery realm. And paddling creates the potential for teamwork that’s simply impossible while running. Okay, but maybe not on a dragon boat for that long again. Ouch!

You can look up pictures of dragon boats on the internet if you’re interested, but here are a couple pics of our boat. As you might imagine, my seat (and thin foam pad) grew to have an outsized significance even as it seemed to shrink. I’m used to running and standing up on a paddleboard, so sitting down for that long had me dreaming of ways to somehow squeeze a hot tub and massage chair into a dragon boat. Maybe next time.

Here's a picture of our boat prior to heading out.

And here’s a picture of my seat, the second row from the front. It’s literally a Trex-type board like you’d buy at a home improvement store. I’ll never look at my deck the same way again. The tire and cooler didn't come with us, fortunately. 

We’ll return to our regularly scheduled programming next week.

Have questions? Ask us. We can help.

I hope your week is going well so far. It’s a busy one on my side of things with big companies reporting earnings and the Fed meeting again tomorrow. Bond investors are pricing in a 99% chance the Fed will raise interest rates yet again, so no midsummer slowdown anytime soon.

Additionally, we keep edging closer to the date when Schwab fully absorbs the custodian I’ve been using for nearly ten years, TD Ameritrade. Some of my clients have been asking good questions about this so I thought I’d broaden my responses to include all of you. Maybe it’s too much inside baseball, but this information could provide some understanding of how my industry is structured and how that applies to you even if we’re not managing your investments.

As you may recall, Schwab announced its deal to buy TD Ameritrade way back in 2019. They got the required regulatory approval and planned to start absorbing TD the following year. Then the pandemic hit. Markets and investors went crazy for a while and that blended with myriad other issues to make Schwab push the pause button on merging the two companies and didn’t press play until earlier this year. The final push to integrate the two companies is set for this coming Labor Day weekend, and then what’s been ruefully referred to as Schwabitrade will move forward and TD Ameritrade will be no more.

Let’s look at the current custodial landscape a bit. TD Ameritrade, Schwab, and other firms like Fidelity and Vanguard are good examples of large custodians that serve a fundamental role in my industry and in your financial future as well. They’re custodians of your cash and investments. They’re responsible for keeping your assets safe from theft and fraudulent activity. They process your transactions while keeping track of everything so they (and you) can report that activity to the IRS. They also maintain the structure that lets firms like mine access your accounts, place trade orders, move money to your checking account, and so forth. In short, you couldn’t invest like you do today without a good custodian operating largely in the background. It would be too expensive and risky, as the victims of privately-held investment fraud and Ponzi schemes would grudgingly attest.

The role of custodian has become highly commoditized following Schwab and its main competitors “going to zero” in 2019, which meant they would no longer charge trade fees on the bulk of transactions they processed. This reshuffled the industry and helped fuel a wave of consolidation that we’re dealing with even today. Now the large custodians look very similar to each other and the differences between them are deep in the weeds. As with the big banks and other industries, personal and expert service has given way to impersonal subpar service and a reliance on automation.

So how do you know if you’re at the “right” custodian and how did I, as a fiduciary and “decider” on behalf of my clients, make the choice to merge into Schwab?

As I just mentioned, the big custodians are very similar in the fundamental services they offer. Where they differ has more to do with how you’ll be interacting with them and if you require special services, such as with advanced trading strategies or perhaps holding illiquid investments. There are smaller and boutique custodians that specialize in these areas, but I argue that they’re not for the typical retail investor.

Assuming you’re not interested in these sorts of special use cases, it’s almost a coin flip as to which of the major custodians is best. Here are some of the high points for comparison as they will all offer:

Structural security. Each of your accounts is owned by you even though the account is held by the custodian. Your accounts aren’t comingled and, even if the custodian failed, your accounts wouldn’t be directly impacted. This is an important distinction that I’m asked about frequently, especially in the context of recent bank failures.

Insurance coverage on deposits. Each custodian provides coverage against bankruptcy and fraud or theft at the firm itself up to $500,000 through the Securities Investor Protection Corp and excess coverage through Lloyds of London. These custodians also offer FDIC coverage on cash deposits with their bank or perhaps with an affiliate bank. And for clarity, none of this coverage protects you from losing money on your investments – it’s just about risk of the custodian running into trouble.

A modern website and app. These are table stakes and the large custodians each do this well. Who has a better website or iPhone app? It’s entirely personal preference since you’ll be able to do the same essential things on whichever platform you choose.

Generally poor service with a reliance on digital and automation. Like with the big banks, the service quality you receive depends on who picks up the phone. But how often do you need to interact with them via phone or even in person anyway? Most of the time you’ll rely on their technology and how easy it is to use. Again, I think who is best here is all about personal preference. No large custodians consistently demonstrate great service – it’s the unfortunate reality of the time. Maybe AI helps with this but otherwise they’re all in the same boat for the foreseeable future.

Transferability of your data. I’ve mentioned how the custodians track and store your account data. A positive offshoot of this is being able to move all of that data electronically to another custodian. This is usually handled through the ACAT system, a regulated electronic transfer process that frees you to move between custodians without having to worry about adverse tax consequences or losing your historical data.

A few things the custodians don’t do:

They store your historical data but don’t provide detailed performance reporting. I have to pay a third party to verify client data from the custodian and then independently calculate performance. The custodians could do this themselves and perhaps charge for it, but none do.

They don’t provide investment advice or management services unless you pay for it separately. “Freemium” services abound but none are actually free.

They don’t operate as a non-profit organization. These companies absolutely have a profit motive and squeeze you in multiple ways, even while not charging you for most transactions. They push your cash into their own bank and proprietary funds, or both. They often sell your trade orders to the highest bidder. They consistently try upselling you to expensive products and services. And yes, they do all this while breathlessly telling you how they’re looking out for your best interests.

So again, your choice between the large custodians is all about personal preference since in most ways they’re nearly identical. Take your pick and you can move to another if necessary. You always need to be wary of cost, direct and indirect, but that’s true pretty much everywhere.

How did I choose to allow the upcoming move from TD to Schwab? In short, the other large custodians aren’t different enough from Schwab to justify the move and, among smaller or boutique custodians that cater to firms like mine, there wasn’t enough of a difference either. And in some cases the smaller firms are too new and would indirectly cost my clients money by limiting choice. That’s unacceptable for all the reasons you can imagine. And one solid prospect was bought by an upstart earlier this year as part of the industry consolidation already mentioned. C’est la vie, right?

Am I entirely happy about the move to Schwab? No, because I used to work there and don’t particularly like the culture, but that doesn’t directly impact how well they do their fundamental job of custodian. Maybe the ideal custodian will materialize out of all this someday, but that’s not likely anytime soon. Until then, Schwab presents the best combination of options in an environment that I feel I can successfully navigate on behalf of my clients.

Have questions? Ask us. We can help.

The second quarter (Q2) of 2023 was great for stocks at home and abroad, with much of the positive performance coming from a small group of stocks within a few sectors. Bonds struggled to maintain positive performance so far this year amid fears of higher interest rates and consternation about the federal government potentially defaulting on its debt. In short, it was another eventful quarter for investors that ended well, all things considered.

Here’s a roundup of how major markets performed during the quarter and year-to-date, respectively:

• US Large Cap Stocks: up 8.7%, up 16.8%
• US Small Cap Stocks: up 5.7%, up 8%
• US Core Bonds: down nearly 1%, up 2.4%
• Developed Foreign Markets: up 3.3%, up 12.5%
• Emerging Markets: up 1%, up 5.2%

Clear winners during the first half of 2023 and Q2 were stocks that did poorly last year. Stocks in sectors like Technology, Communication Services, and Consumer Discretionary were up 40%, 36%, and 32% this year, respectively, as the quarter closed. The largest stocks beat the smallest handily, with the large-cap tech-heavy NASDAQ 100 index up 39% this year versus various small company indexes up in the mid-single digits. This large-cap bias helped the S&P 500, the typical US stock benchmark, rise 6.5% during June to finish the first half of the year up nearly 17%. This was quite the turnaround after these market indexes declined from 18% to nearly 40% last year!

The primary drivers of this uptick for stocks were declining inflation and our resilient economy, rising interest in artificial intelligence, and a relief rally after government officials avoided a debt default early in June.

Inflation peaked last summer at 9% and has been declining steadily since, dropping to 4% in May. The Federal Reserve has a stated goal of 2% inflation and has raised interest rates ten times since March of last year to slow the economy down. Among other things, this has increased short-term borrowing costs in the economy by about 5%. The Fed held off raising rates at its June meeting while suggesting that more rate increases could come later this year. Only time will tell if and how much more the Fed raises rates, but we’re marching closer to their 2% objective and more rate increases are getting harder to justify. This soothed investor concerns a bit during Q2, but lingering pessimism about Fed policy still took some wind out of the bond market’s sails as the quarter closed.

Also at play was the surging popularity of AI. Hyperbolic notions about the technology’s risk to humanity notwithstanding, investors caught the AI bug during Q2. This helped drive stocks like Apple, Microsoft, Alphabet (Google) to each rise 30+%, and chip maker NVIDIA to rise almost 190%! These companies help make up the top 25 list of the benchmark S&P 500 and this group’s total publicly traded share value has grown by nearly $4.5 trillion so far this year. The entire index grew by $5 trillion, according to Bespoke Investment Group, so it’s easy to see how one-sided this rally has been so far.

Also helping stocks was the eleventh-hour resolution of the drama around our nation’s debt ceiling and potential debt default. While nothing new per se, this time around the debt ceiling “crisis” took a toll on investor sentiment, helping various metrics reach some of the lowest points on record. Once the issue was resolved (or merely delayed, depending on your perspective) investors got back on the stocks bandwagon and drove indicators like CNN’s “Fear & Greed Index” to “Extreme Greed” after being at “Extreme Fear” barely a year prior. The popular AAII Bullish Sentiment index also jumped to its highest level in two years. Generally speaking, large upward moves in investor sentiment tend to linger and can help drive stock prices further in the short-term.

All of that sounds pretty good while being in stark contrast to where we felt we were a handful of months ago. But the outlook is mixed. We continue to see surprisingly good consumption, housing, and jobs numbers in the economy, but the impact of higher interest rates should eventually slow the wealth effect. Student loan repayments will restart soon, and analysts disagree on how much that will impact consumption. The commercial real estate picture in some major metros looks dire and the financial impact of that also takes a while to play out. Stocks were up while commodities were down nearly 9% last quarter as global manufacturing demand slowed. All this should eventually slow our economy in a meaningful way, we just don’t know by how much. Analyst opinions differ on near-term recession risk and potential severity while investors seem keen to shrug off recession risk in the short-term. Whose right is anyone’s guess.

One takeaway from Q2 juxtaposed with the market’s poor performance last year is how hard it is to forecast the future in a consistently accurate way. Stock market analysts get paid to do this and the good ones are right just a bit more than they’re wrong when averaged over, say, a ten-year period. That math works if you can hold on when the news gets scary and markets get volatile. But many people can’t. The rest of us try to focus on controlling what we can control and let time work for us. We don’t chase market trends – we diversify and rebalance as needed. And we don’t try to guess the “right” time to buy or sell, even though that’s what the media pushes every day. This approach isn’t always popular or even one that feels good all the time, but it’s one that works if you let it.

Have questions? Ask us. We can help.