Hugh F. Wynn
Forget the Rumors. Social Security is a Good Asset
Can your Social Security stream of income (let’s call it SSSI) be viewed as a bond in your asset allocation? One camp argues no because it cannot be sold. The other camp argues yes because it provides a predictable “bond-like” income stream.
The way I see it, your SSSI is a valued asset regardless of its salability... with caveats, of course. Its fixed-income feature does in fact give it a very bond-like shine despite its inflation-adjusted attributes. Point is, why argue the point? What the hell difference does it make? Social Security is what it is – and admittedly, a rather valuable and unique asset. Many investors do, in fact, stick it on their balance sheet at some calculated present value as if it was a bond. But such a calculation has validity only so long as the individual is alive and is only as valid as the “rate of interest” applied to its income stream. You might conclude that it’s an individual sort of thing.
The Good. The Bad.
It is an individual thing because its meaningfulness to you depends a great deal upon what other assets you have in your retirement portfolio. A huge plus-factor is that your Social Security income stream is inflation-adjusted, meaning it will hold its value… its purchasing power… as long as you live. Another relevant – but in this case, negative – factor is that when you and your spouse depart this life, it, too, disappears, making it an inconsequential asset to heirs. And another negative is its susceptibility to political uncertainties, meaning that the Social Security Trust Fund is nearing depletion. But intense political pressure by the AARP crowd will likely resolve that issue. In my mind, to most SSSI recipients, these negatives are offset by some significant positives – that this stream of income is not subject to market risk, nor is it influenced by what is happening in the interest rate world – or by the quality of the issuer of bonds an investor might otherwise choose to own.
SSSI as a Bond
If you’re terribly concerned about viewing SSSI as a bond – or not – then set it aside when determining your “proper” asset allocation and net portfolio annual spending requirement. This will enable you to make portfolio-related decisions without cluttering up the “net required spending” (3%?… 4%?... 5%? per annum) from your portfolio. No doubt, there is a lot of difference between a stream of income with a calculated present value of say… $350,000… as opposed to having bonds with a collective redeemable value of $350,000 in your retirement account. If you should need to raise a large sum of money quickly, bonds would no doubt better fit that dilemma than your Social Security stream of income. Alternatively, if you need the comfort of knowing that a portion of your retirement portfolio is not being eroded by Izzy The Inflation Monster, your SSSI should provide a certain measure of such solace.
Peace of Mind
In the real world, SSSI is an inflation-adjusted, guaranteed stream of income that will continue throughout your life – but not beyond the life of you and your spouse (child benefits notwithstanding). Except for the most recent government check in hand, SSSI’s guaranteed revenue stream is essentially illiquid. It cannot be sold, and it is subject to political risk. Facts, all. But by viewing SSSI as simply a “bond” in your portfolio, you’re overlooking some of its unique and very comforting characteristics. In a nasty bear market like the current COVID-19 mess, families in retirement with one… often two… social security checks in their portfolio are much less exposed to the stock portion of their portfolio than those without inflation-adjusted income streams. Being reminded of this fact might bring you some peace of mind that, heretofore, you haven’t bothered to enjoy.
COVID-19: Delaying Social Security…Good Advice???
Folks nearing retirement are often advised to delay taking Social Security in an effort to enhance future benefits. Some calculate that this delay can increase benefits by an estimated 8% for each year a retiree waits past full retirement age(the age at which a person may first become entitled to full or unreduced retirement benefits) to take them. Such credits accumulated by waiting no longer accrue beyond age 70. In normal times, this well-intended advice will, in fact, result in a guaranteed balance-of-life benefit – one that can even carry over to a surviving spouse if that spouse isn't claiming benefits on his or her own work record.
Compared to today's anemic returns on cash and investment-grade bonds, that 8% is a tough yield to beat. But is the advice to delay taking Social Security is still sound amid the chaos of the current COVID-19 crisis and the accompanying market drop that has so devastated investor portfolios. Face it, most portfolios aren't as robust as they were three months ago (despite recent recoveries). Not surprisingly, investors on the verge of retirement likely find themselves with slimmer retirement assets. Those caught holding inadequate “rainy day” funds to meet current cash needs might wish not to delay taking Social Security, thus buying time for their portfolios to “heal”.
Just a thought.