Month: October 2022

In the pension and Social Security law infancy of the 1930s, normal retirement was age 67 and life expectancy was age 62. It simply wasn’t expected that most were ever going to collect on either. 

With the advancement of modern medicine, life expectancy has been extended closer to age 84. Yet corporate America has a pension system that would allow the employees the ability to retire as early as age 55, with an unreduced pension, based on an 85-point system (combination of age and years of service). 

Today, with extended life expectancy and an early retirement feature, the actual years spent in retirement has been extended well beyond what pension actuaries were prepared for. Traditional defined benefit pension plans guarantee a retiree an income for life. If married, it is possible to guarantee an income for the lives of both spouses. Over time, this has become a crippling financial obligation for corporate America. With the approval of the IRS and ERISA, corporate America decided to start unwinding traditional defined benefit pension plans and convert them to cash balance plans. They were obligated to use a certain formula tied to current interest rates and an actuarial life expectancy. It is somewhat counterintuitive that a rising interest rate environment would actually lower a potential lump sum pension payout. The reason the direction interest rates moving have an inverse effect on lump sum pension values lies within how the conversion calculation is done. First, the original traditional pension benefit obligation is calculated based on the employees earned credits. This results in an amount the employee is to receive monthly. Then, that monthly income amount is converted into a lump sum present value of what the total future payout would be over the participants lifetime. The participant’s lifetime is determined by actuarial life tables. 

For example, if you’re trying to calculate for an income replacement, the higher the interest rate the lower the actual lump sum needed. So if I need $5,000 per year of income and can earn 5% on my money, I need $100,000 invested. If I could earn 8% on my money I only need approximately $62,500 invested to replace that same $5,000 of income. The higher the interest rate at the time of retirement the lower the lump sum. The US government has been raising interest rates in an attempt to slow inflation. 

All this is quite confusing and complex. Most people just want to retire worry free, but today they feel as though they are required to become pension actuaries and investment professionals before doing so. It is fair to say most are just trying to make their best informed retirement decision. This is where it becomes invaluable to seek the advice of a trained professional. These types of decisions are typically irreversible and will impact you for life. 

Please reach out to one of our financial advisors before trying to make this life-altering decision on your own. We are here for you and your friends and co-workers. Let us help!

The most common question I hear regarding social security is simply, “When should I take it?” To find a blanket answer would be like trying to answer the question, “What car should I buy?” The answer will always be “it depends.” What is your commute? How large is your family? Should you consider electric? Do you haul heavy items regularly? Simply put, one cannot recommend a car without more information. Answering when to take Social security is no different, it depends. 

Below are some items to consider when speaking with your financial professional. 

Earned Income: How long do you plan to earn income through wages and when is your full retirement age? If you earn income through wages or a business, it can affect your social security amount if you have taken benefits prior to your full social security retirement age. Benefits are withheld after a specified amount, and your benefits are then recalculated after full retirement age. 

Cashflow: What is your cashflow picture now, after retirement, and after starting social security? Everyone may have different resources to consider, and income is taxed in various ways. A retiree may have substantial passive income from real estate or farm cash rent that meets current living expenses. As a result, delaying social security may be a wise decision because additional cashflow is not necessary. Understanding your cashflow picture and integrating all financial resources can help make the social security picture clearer.  

Pension: Do you have a pension that interacts with social security? A social security component often exists and corresponds with traditional pension plans. It must be considered when deciding which pension option is right for you.  

Wages: Who is the higher wage earner for a married couple? Is an ex-spouse to be considered? Because social security rules depend on marriage status, spouses and ex-spouses must be considered. For example, if one spouse passes then the widow will receive the higher benefit of the two.  If delaying social security to increase the benefit is the decision, it may make sense to apply the strategy only to the higher wage earner knowing that the higher benefit will carry forward should one spouse pass prematurely.

These are just a few examples to consider in making your decision. Many other factors may exist for your situation, but a comprehensive understanding of your entire financial picture will help guide you to the right decision. 

Reach out to your financial advisor to review your situation and don’t forget to join us on Tuesday, October 25, for an Education Session on Social Security at SBC Wealth Management. RSVP today. 

We hear you. You, like most investors today, are very concerned about market volatility and falling account values. Should I be selling to protect my retirement,  you may ask?

You are not alone. Turbulent markets and geopolitical uncertainty can be stressful, and we can’t exactly predict when all this volatility will begin to moderate.

What I can say with some certainty is that it won’t last forever and that markets will begin to recover before the economy is flashing “all clear.” This is because stock markets tend to be “leading indicators” and move directionally anywhere between 6 to 12 months ahead of the overall economy.

The most recent example of this phenomenon was in early 2020, when, as the world economy was shutting down due to Covid-19, the S&P 500 began a bull run that erased the 34% year-to-date decline and even finished the year positive almost 20%. Markets do funny things.

Below is a chart from J.P. Morgan that I’ve shared before, but it is worth showing again:

Declines in the market are a part of long-term investing and not an indication that markets are broken. The red dots indicate the intra-year percent decline going back to 1980 and the gray bars indicate where the calendar year ended.

Here is another graphic from First Trust that shows the historical length of bull and bear markets:

Going back to 1942, there have been 15 bear markets lasting an average of 11.1 months. We are currently heading into month 9 of the current decline and could be at 11 months by Christmas.

Could it last another 11 months? Sure. Could we have already hit the bottom given the first few positive days of trading in October? Sure.

But here’s the thing about investing for a time horizon longer than 11 months. You don’t need to time these bear markets to be successful at investing for the long term. Bull markets have historically lasted 4 times as long as the typical bear market.

So, if you’re considering selling today and investing in something “safer,” the odds are against you that you will perform better than a diversified portfolio over the intermediate to long term.

And if you say to yourself that I will get back into the market when the economy feels like it’s on better footing, the odds are that the market has already anticipated that well in advance.

In my opinion there is a bright silver lining to all that we’ve been through in the markets in 2022.

First, while bonds have taken it on the chin this year because of higher interest rates, the yields that bonds pay are now higher as a result. The best predictor of future bond returns is the starting yield so our outlook for bond returns hasn’t been this bright in over a decade.

And for stocks, we can’t change what has happened year-to-date but right now is unequivocally a better time to be buying and owning stocks than any other time in 2022. As stock prices go down, future expected returns go up. Are we at the bottom? Maybe so or maybe not. But are the chances good that we will be happy that we were invested in the markets 3, 5, or 10 years down the road? I like those odds.

Looking for more commentary about 2022 markets? Check out these other posts: