Social Security and Longevity

Posted on July 12th, 2009 in Newsletter Articles, Retirement Planning by wayne


Let’s explore some little known tips on Social Security benefits that could provide thousands of additional retirement dollars to you or your parents. 

Did you know that If two spouses are 64 years old, there is a 40% probability that at least one spouse will live to be over 90 and an 80% probability that at least on spouse will live past age 82?  If both spouses are in good physical shape, these percentages go even higher.

Let’s assume that both spouses are 66, their full retirement age (FRA). If one spouse has earned more than double the Social Security benefit of the other spouse, the lower earning spouse may claim a Social Security benefits that is 50% of the higher earning spouse’s benefit. 

When the higher earning spouse waits until age 70 to begin taking benefits, the combined lifetime Social Security benefits may be significantly greater.  At age 70, the higher earning spouse will receive 132% of the benefit they would receive at age 66 plus four years of cost of living adjustments (COLA).  For the lower earning spouse to begin receiving benefits, the higher earner can “file and suspend” their Social Security benefits until they reach age 70.  At the FRA age of 66, the lower earner will receive 50% of the higher earner’s full FRA benefits. 

If the higher earning spouse dies first, the survivor can claim the full Social Security benefit of their spouse.  Thus, for the rest of the survivor’s life, they will get 132% of their spouse’s FRA Social Security benefits, plus annual cost of living (COLA) increases.  Let’s look at how the “file and suspend” strategy can increase the total Social Security benefits over the two lifetimes.

Assume that the higher earning spouse will receive $2500/ month at their FRA age of 66.  Let’s also assume that one spouse will die at age 80 and the other will live to age 90.  Remember, there is at least a 40% probability of one souse living past age 90.

With a 3% annual inflation rate, if both spouses begin taking Social Security benefits at age 66, their total income with the previous assumptions will be approximately $1,373K.  If the higher earning spouse files and suspends payments until age 70, the total income that the couple would receive over the same period is approximately $1,577K. 

By the higher earner waiting until age 70 to begin receiving benefits, the couple’s combined income is increased by $184K, with the surviving spouse receiving $171K more over their final 10 years of life.  Obviously, this scenario provides the highest possibility of working if both spouses are in good health at age 66. 

While the above approach may not be suitable for you, it demonstrates the importance of understanding the complex rules of Social Security.  It is important to know the rules so you can decide how to maximize your Social Security benefits. 

What if you have already begun taking Social Security and now realize that you should have waited.  If you are under age 70, Social Security provides a “do over” capability.  Next month, we will explain this “mulligan” approach in more detail.

When you are ready to start your Social Security planning, I recommend that you read Getting Started in a Financially Secure Retirement, written by my friend and colleague, Henry (“Bud”) Hebeler.  If you still need help in deciding your Social Security strategy, give me a call and I will be happy to provide complimentary Social Security planning support.  Proper Social Security planning is an important piece of maintaining an abundant retirement.

Human Capital: A Portfolio Asset

Posted on July 12th, 2009 in Financial Abundance, Investments, Newsletter Articles by wayne


Your largest single asset is likely to be your ability to generate earned income.  This asset is commonly call “human capital.”  When developing appropriate asset allocations for investment portfolios, it is important to include the human capital asset.  Let’s look at some ways that including human capital could change your approach to allocating assets in your investment portfolio.

There are three major components of human capital.  These include: 1) your annual income from work,  2) the number of years remaining to work, and  3) the variability of your annual earned income.   Variability can be fairly large if your income is based on commissions.  It also can be large if you have a job in which you may be furloughed or laid off when economic conditions deteriorate.

There are studies that correlate various occupations with stocks, bonds and treasuries/cash.  We will look at only three occupations to demonstrate how human capital can be included in asset allocation decisions.

Tenured Professors – There are few professions more secure than that of a tenured professor.  Their annual income has historically been very predictable, with the main variance being additional income generated by consulting, research or publishing.  Thus, a tenured professor’s income is very similar to the yield from a high quality bond. 

Since there is little variance of annual income, younger professors should typically have higher asset allocations in riskier assets, such as equities and alternative investments.  As a professor approaches retirement, with a decreasing number of remaining work years, the amount of riskier assets should also decrease.

Real Estate Brokers – Real estate brokers receive most, if not all of their income from commissions.  While established brokers have some expectations about annual income, their income is highly variable, depending housing market conditions, interest rates etc.  While a realtor can often work for as long as they wish,  the variability of income makes their human capital asset very similar to equities (stock). 

If you are a realtor, you might be better served by having a greater portion of your investible assets in fixed income (bond) investments.  This will make your investment portfolio more stable as your income varies.  Stable investment income can be very beneficial in lower earning years, which often occur when the stock market is also in decline.

Entrepreneurs –  If you work for an entrepreneurial company, both your income and the number of years that your income will continue are variable.  In down years, entrepreneurial companies are typically the first to cut salaries and benefits as well as to have layoffs.  Having worked most of my life as a “high tech” entrepreneur, I am very familiar with the “bipolar” nature of many entrepreneurial companies.  As an entrepreneur, your human capital is similar to microcap stocks and commodities, either going up dramatically or dropping to $0. 

Not only should an entrepreneur have higher than normal fixed income positions in their investment portfolio, they should only buy equities in relatively risk free companies.  Entrepreneurs have their human capital linked to the success of their companies, which are typically small and highly vulnerable.  It is important that they take less risk in their investment portfolios to offset the high risk of their human capital.

While you may not work in one of these three occupations, your human capital will likely have characteristics of one these.  When you and/or your financial adviser are developing your asset allocations, be sure to consider your human capital as an asset that can compliment your other financial assets.

Regardless of your type of human capital, it can always be terminated by death or disability.  Life and disability insurance need to be a central component of any financial plan.  Properly constructed, they will provide the funds required for you and your family, if you are no longer able to contribute the expected human capital.

Human capital is an asset that should not be ignored.  Including your human capital when allocating your investments portfolio can help you choose the amount of risk that is most appropriate for you and your family.