Social Security is one of the most complicated topics in America right now. On one hand, those drawing benefits are very skeptical of any claims to “reform” the program via privatization or changes to payouts. On the other, the Social Security Administration admits that it’s only a matter of time before the fund goes bust — with the latest forecast showing Social Security becomes unsustainable in its current form by 2033.
Understandably, many investors and future retirees have big questions about Social Security and their future benefits. So, I caught up with an expert on the topic to get some answers.
William Meyer is the founder of Social Security Solutions and is committed to helping baby boomers make the most of their retirement savings. Bill held jobs at Charles Schwab and H&R Block, with an MBA from the Anderson School at UCLA, and is intimately acquainted with the needs of investors, whether they have $1,000 or $1 million in the bank.
I posed some tough questions for Bill recently, and his answers should shed a lot of light on how you should view Social Security — and how you should plan for retirement accordingly.
Q: How “solvent” is Social Security, based on current retirement ages and payout rates?
A: There is no doubt that the system will have to change in the future. The key is predicting when changes will be implemented and who will be impacted.
The 2012 Trustees Report revealed that Social Security is solvent until about 2033, but the system will face a shortfall if no changes are implemented. Social Security had a surplus of almost $70 billion in 2011, and reserves are projected to grow to $3 trillion by 2020. But if no action is taken by Congress, reserves would have to be drawn down to pay benefits.
In the unlikely event that Congress does not act, the reserves will continue to be depleted, and revenue from workers and employers would cover only about 75% of scheduled benefit payouts. The last two changes were in 1977 and 1983, which took 7 and 17 years, respectfully, to implement. In our book Social Security Strategies, we tell people approaching retirement and those over 55 years old to use the existing rules to figure out a claiming strategy.
This view is also shared by other experts like the Center of Retirement Research at Boston College. The good news is that moderate changes to Social Security can mean a long-term fix for the system.
Q: What do you think the likelihood is of some change to that metric in the near future, if not for all retirees, at least for those who are not yet eligible?
A: There are a number of proposals on the table to “fix” Social Security — somewhere around 100 of them have been issued by the SSA Chief Actuary. These proposals range from raising the earnings cap to implementing a means test.
It is our opinion that most of the proposals are not likely to come to fruition — such as the implementation of a means test. With that said, it’s clear that some changes must occur to keep the future of Social Security strong beyond the mid-2030s. We believe the most likely changes will not impact Americans who are within a few years of retirement age — in other words, they’ll be grandfathered into the current rules.
Changes that have been made in the past have either not impacted those approaching retirement, or they provided a number of years before the effective date so that consumers had ample time to prepare.
Q: What are some common misconceptions folks have about Social Security, and what can prospective retirees do to maximize benefits — delaying retirement until 67 for instance.
A: We talk about this regularly. The misconceptions about Social Security lead to what we term “behavioral biases” that cause Americans to make poor choices.
- The first is that Social Security will disappear. The media has stirred a lot of misconceptions about the viability of the Social Security Trust and the perception that it’s a “Ponzi scheme.” History and leading experts show coverage of SS benefits and easy resolutions to fix the system. The misconception is that retirees should claim early before changes are made. But as I stated earlier, the likelihood that imposed changes will impact those near retirement is slim. Most people, especially those who are retiring near-term, should not be worried.
- Another is that I’ll get more if I claim early. Over 70% of Americans claim early when they can garner significantly more by crafting a strategy that leverages the rules. Many of the optimal claiming strategies involve a delay of starting benefits. An optimal strategy for a married couple typically pays about $100,000 more in cumulative benefits than starting early. But so many Americans believe that taking less for more years means a larger cumulative benefit — and that is not the case.
- A third is that I can invest benefits by starting early to get more. Most strategies that maximize benefits involve some component of “delaying.” For every year past your full retirement age you receive 8% more per year. I don’t know many Americans who will be able to find 8% guaranteed over this four-year period. Remember these added benefits go on over the person’s lifetime. Social Security becomes a hedge on the risk that you live longer than you expect to live. Your benefits continue for as long as you are alive.
Q: Is Social Security alone enough? If no, what other forms of retirement income/investing do you recommend most often to clients?
A: The average Social Security monthly payment for Americans in 2012 is about $1,230. That’s not much to live on. The maximum benefit one can receive at full retirement age — and this is for someone who has earned at or above the maximum taxed earnings every year of their career — is only about $2,500. So, no, Social Security is not enough for most consumers. As a result, a key element is figuring out how you maximize your benefits and then integrate a Social Security strategy into your overall retirement income plan.
Q: What are some retirement investments that you think are too risky or downright bad for investors — annuities, for instance, or super-low yield CDs or high-risk small caps?
A: We would warn impending retirees to be careful of three potholes: investments with high cost, income and investment scams, and going long on the yield curve.
First, there are a lot of very high-cost investments that kill you over time. For example, many annuities have egregious mortality and internal expenses. Simple low-cost ETFs built into a diversified portfolio can take you far. Even laddering CDs can beat many “loaded” annuities. If you do consider an annuity, make sure you find a low-cost product from a highly rated insurance company.
Second, if someone is offering a crazy high yield or something that is significantly better than anything else you have seen, it is most likely a scam. We are shocked by the number of seniors that are taken advantage of and bamboozled.
Finally, be careful about investing in long-term bonds. Interest rates are at an all-time low and have nowhere to go but up over time. We think it’s prudent to have shorter-term fixed income married with a managed tax-efficient withdrawal strategy over time.
Q: Anything else you think Americans should know about planning for retirement? Any resources you recommend?
A: We have a service that helps Americans maximize their Social Security based on four years of research published in leading academic journals at www.socialsecuritysolutions.com. Deciding on a claiming strategy is a huge decision that it is too complex. You need help and software to run your numbers and evaluate claiming strategies that are best for you.
The key is that consumers need to understand that maximizing their Social Security will significantly increase the longevity of their portfolio. Per our article in the April 2012 issue of the Journal of Financial Planning, maximizing Social Security can add two to 10 years to the spend-down of the portfolio. The takeaway is that maximizing Social Security and then coordinating a claiming strategy with how you draw down on your money over time can have a huge impact on making your money last longer.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via@JeffReevesIP.