How Secure is Social Security?

Posted on March 27th, 2009 in Newsletter Articles, Retirement Planning by wayne

With recent market declines, many people have had their retirement savings substantially reduced. With less retirement savings, the viability of Social Security has become more important than ever for both younger and older employees.

Will Social Security be around when you retire? In is my opinion that Social Security will survive and be available, even for employees that are just entering the workplace. Social Security is a “sacred cow” for all politicians that wish to be re-elected. Because of this, it will survive, regardless of the future costs and its associated debt. However, at some point, the cost of maintaining the present Social Security benefits will be overwhelming.

To offset the increasing costs of Social Security, the “Full Retirement Age” for younger workers will likely be extended beyond the current maximum of age 67. The maximum level of earning taxed will continue to increase beyond the current $106,800 and the combined Social Security tax rate of 12.4% will likely increase. There may also be “privatization” of a portion of Social Security taxes. “Privatization” would allow for government transference of some of the Social Security investment risk, as well as allow for inflation adjustments to be discontinued on the “privatized” benefits.

With Social Security changes likely, what should you do to maximize your retirement income? If you are under age 50, plan for your retirement as if Social Security benefits will not be available. While this scenario is highly unlikely, increasing your retirement saving will provide for a more abundant retirement, regardless of what happens to Social Security.

If you are over age 50, your Social Security benefits will likely be unaffected by any future changes. However, since the Social Security rules are so complex, be sure you understand all of the variables before you begin taking benefits. As an example, many people believe that, if they are fully retired, they should automatically begin taking Social Security benefits at age 62. However, this decision could cost them thousands of dollars in reduced benefits.

Let’s look at a few strategies on when to take Social Security benefits.

Strategy 1 – If you will have any meaningful employment between age 62 and your Full Retirement Age (FRA), wait until your FRA to begin your Social Security benefits. Any income above $14,160 annually will reduce your Social Security benefits by one dollar for every two dollars that you earn above that limit.

The next two Strategies assume that you are in good health and that you do not require early Social Security benefits for your financial survival.

Strategy 2 – Even if you are fully retired, start taking your Social Security benefits at your FRA instead of age 62. By doing this: 1) You receive annual Inflation adjustments based on benefits that are 33% higher; 2) You receive more total benefits if you live beyond age 77; 3) If your benefits are greater than your spouse’s and you predecease your spouse, your spouse can receive a 33+% larger payment.

Strategy 3 – If your spouse is younger and will receive a significantly lower benefit, consider waiting until age 70 to collect your benefits. This will provide you with a benefit that is 32% greater than your FRA benefit and at least 76% higher than your age 62 benefit. More importantly, if you predecease your spouse, he/she will receive this increased benefit for the remainder of their lifetime, if they wait until their FRA to begin taking Social Security benefits.

These three simple strategies demonstrate the importance of making an informed decision concerning Social Security benefits. The approach that is best for you will depend upon your health as well as any spousal age and income differences. As part of your abundant retirement planning, get professional advice on the vagaries of Social Security before making your decision on when to begin taking benefits. Doing this may provide thousands of extra retirement dollars for you and your spouse.

Are Any Investments Safe? Part 2

Posted on March 27th, 2009 in Investments, Newsletter Articles by wayne

Last month we examined how the first step in structuring a safe investment portfolio is to develop a personal investment policy that is consistent with your investment goals and the current investment markets.

When you develop an investment policy, you define the asset classes you will consider for investments as well as the minimum and maximum portfolio percentages which may be allocated to each asset class. The asset classes you chose and their allocation ranges depend upon your age, risk tolerance and your total financial resources.

In the previous article, we considered two of the most common investment classes, equities (stocks) and fixed income (bond) investments. This month we will consider three additional asset classes.

Real Estate – The most common methods of investing in real estate are rental properties or Real Estate Investment Trusts (REITs). Owning rental real estate requires active management of the investment properties. Rental real estate is also illiquid, often requiring several months to sell at an acceptable price. If these two drawbacks are acceptable, the next step is to accurately evaluate the rental property’s total investment return.

With the current high foreclosure rate, you may find well priced rental properties. However, before you purchase, do a thorough financial analysis of your expected investment return. A simple way of doing this is to compare rental real estate “yields” to the yields of fixed income investments.

For rental property, annual “yield” is net income divided by your net property value. Net income is the expected annual rental income less all expenses, including mortgage payments, property taxes, insurance, property management fees and a reasonable property repair allowance. Net property value is the appraised property value less mortgage balances and all costs required to sell the property, such as realtor fees, closing costs, etc. Because of the previously described drawbacks, annual rental property “yield” should always exceed the yields available from fairly safe fixed income investments.

REITs can be excellent investments during economic prosperity. From 2003 – 2006, REITs provided high yields and excellent total returns. Currently, REIT funds, such as the Ishares Cohen and Steer ETF (ICF) are at historic lows. While they yield approximately 10%, REIT prices will likely remain depressed until a sustained economic recovery begins.

When considering real estate, always examine your investment policy. Rental properties can require significant capital investments which could exceed your investment policy guidelines for real estate investments.

Commodities – Commodities are typically too risky to be included in a moderately conservative investment portfolio. However, there are times when a small investment in a specific commodity is prudent. Gold is considered a safe haven investment as well as a hedge against inflation. A small gold investment may prove worthwhile, especially if gold prices retreat. Many experts also believe that oil prices will continue to rise when the worldwide economy stabilizes.

If you wish to invest in commodities, I recommend using Exchange Trades Funds. Gold can be purchased with GLD (SPDR Gold Shares) and oil with USO (United States Oil). Commodity investments are extremely speculative and should not exceed 5%-10% of your investment portfolio.

Cash Investments – Cash investments include saving accounts, money market mutual funds and CDs that mature in one year or less. The principal is safe, but the yield is usually low or even negative, when offset by inflation.

Currently, most money market funds are yielding under 0.5% and 1 year CDs are yielding approximately 1%. With these low yields, only funds that may be required in the next 12-24 months should be kept in cash investments.

The key to investment success is a well-balanced portfolio, reflecting current economic and financial conditions. Until economic conditions improve, a conservative investment approach will likely serve you well.