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Social Security When Should You Start Taking It?

Social Security When Should You Start Taking It?

Social Security When Should You Start Taking It?

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

To try to develop the most effective retirement income strategy for the middle class, Stanford University’s Center on Longevity analyzed and compared 292 scenarios.[i]

Its conclusion is a two-prong strategy. First, delay taking social security until age 70 by working either full- or part-time. Second, withdraw annually from your IRAs or 401(k)s based on the IRS’s minimum requirement tables.

Prong 1

Every year you wait after age 66, your social security benefit goes up by 8%. For example, if you are eligible for $30,000 at 66 but are waiting until you reach age 70, that benefit increases by 32% to $39,600. (After age 70, there is no reason to wait because the 8% stops accruing.)

Future cost of living adjustments (COLAs) are then based on the higher amount, which is $39,600 in this example. If the Social Security Administration announces a 2% COLA, your amount next year will be $40,392.

The study recommends that married couples have the higher-earning spouse delay taking his or her social security until age 70 while having the lower-earning spouse begin taking social security when he or she hits the full benefit, which is usually age 66.

That way, if the higher-earning spouse dies, the lower-earning spouse’s social security jumps to the amount the higher-earning spouse was receiving.

Prong 2

The second prong is supplementing your social security by withdrawing from your IRAs or 401(k)s based on the IRS’s required minimum tables. For example, the table might require you to take out 4% of your account value at age 73. If your IRA is worth $100,000, you would withdraw $4,000.

The amount you withdraw each year will change as your account’s value changes and the percentage required to take out goes up.

They recommend keeping between 50 to 100% of your portfolio in stocks. In good years, your withdrawal amount will be higher than when the stock market is down.

Diversification and Investment Portfolio Design

The study is based on working until age 70. That way, you will not deplete your IRAs or 401(k)s as you wait. If someone fully retires at age 66, the benefits of waiting to take your social security get more complicated.

Financial Planner Michael Kitce did a study that found it takes to age 80 to break even from having to use retirement assets between ages 66 to 70.[ii]

How the New Retirement Secure Act Impacts You

What About Public Employees?

The study focused on people working for companies that no longer offer traditional pensions, so there is a need for Social Security to replace it.

Most public employees still have traditional pensions. If they retire at age 66 or younger, receiving a pension might make it easier to wait for the more significant Social Security payout at age 70.

Other public employees work in one of the fifteen states where some or all their municipal employees do not contribute to Social Security. (Some may become eligible through other jobs.) For them, because of the Windfall Elimination Law, which reduces their Social Security payment by around 55%, why wait until age 70 to get a more significant number decreased by 55%?

Massachusetts Public Employees

Married public employees in those states should be wary of their spouse waiting until age 70 to start taking Social Security, especially if the spouse fully retires at 66.

Why deplete retirement resources, especially if the public employee pension provides a lifetime income guarantee to the spouse upon the death of the public employee? A second law, the Government Pension Offset, means the public employee gets little to none of the spouse’s Social Security after that spouse dies.

[i] Vernon, Steve. How to “Pensionize” Any IRA or 401(k) Plan.” Stanford Center on Longevity. November 2017. http://longevity.stanford.edu/wp-content/uploads/2017/12/How-to-pensionize-any-IRA-401k-final.pdf

[ii] Caplinger, Dan. Social Security: Why the 8% “Return” Myth Shouldn’t Make You Wait to Retire. The Motley Fool, Jun 21, 2015. https://www.fool.com/retirement/general/2015/06/21/social-security-why-the-8-return-myth-doesnt-make.aspx

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. 

 

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Investing In an Overpriced Stock Market

Investing In an Overpriced Stock Market

Investing In an Overpriced Stock Market

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

The U.S. stock market has come a long way from its Great Recession low. That low, when the S&P 500 bottomed out at 666 on March 9, 2009, is called “the Haines’ bottom,” named after legendary CNBC anchor Mark Haines, who called the bottom of the market’s plunge on the air.(Sadly, Mark passed away in March of 2011.)[i] [ii]

Today (May 23, 2020), that index stands at 2995, an increase of some 340% from the low, almost doubling from its previous cycle high of 1576, reached on October 12, 2007.

The U.S. economy, however, is in the worst unemployment crisis since the Great Depression. Since March, the coronavirus-induced economic slump has caused 40 million Americans to lose their jobs.[iii] At one point, the U.S. stock market was down 40%.

The number of unemployed has risen, yet the stock market has recovered two-thirds of its losses and is down only 10% for the year.

How can this be?

One explanation is that the stock market is looking past the current economic troubles to better times ahead, when either a vaccine or treatments are available. Or maybe the Federal Reserve’s pumping of three trillion dollars into financial markets has, like their other attempts to boost the economy, gone more to Wall Street than Main Street.

Or maybe with interest rates at historical lows today, a 30-year treasury bond pays only 1.37% to investors, so they have no other place to invest to generate a return.

Is the U.S. stock market overpriced today?

David Tepper, famed hedge fund manager and owner of the NFL’s Carolina Panthers, thinks it is the second most overpriced stock market he has seen, just behind the tech bubble of 1999.[iv]

According to two measures of value, the answer is yes—and dangerously so. According to the CAPE ratio, the stock market is 185% overvalued. Another measure, the q ratio, has it at 80%. It has been overpriced only twice: in September 1929, right before the Great Depression, and in March 2000, at the tail-end of the dot-com bubble.[v]

However, those latter two levels of pricing were higher than they are today. Therefore, an overpriced stock market can always go higher and become more overpriced.

Diversification and Investment Portfolio Design

What are investors supposed to do?

Let’s say you received an inheritance, or you have a lump sum sitting in the bank, you are tired of earning no interest on it, and you are frustrated to see the market go up. One strategy is to do what we call dollar-cost averaging. Instead of moving all of that money into the market today, you set up a plan to move it into the market gradually, say, over a period of 18 months.

If you have $100,000 to invest, you transfer $5,555 a month, purchasing the market at 18 prices instead of today’s one. There is no guarantee this strategy will produce a profit, and, if the market keeps going up, you might lose out on short-term gains. It would help you, though, if there were a considerable drop of, say, 57%—which happened to the market during the Great Recession.

What if you cannot wait?

If the idea of waiting 18 months is not for you, make sure you conduct a risk-tolerance test before investing that lump sum. (You should do a risk-tolerance test even if you decide to do dollar-cost averaging.)

The online risk-tolerance reports, FinaMetrica and Riskalyze, will give you a score you and your advisor can use to allocate your lump sum. That way, you will end up with a mix of stocks, bonds, and cash, which will hopefully help you reach your goals, with a level of risk you will be comfortable with.

By doing this, maybe you can create the portfolio that allows you to stay invested by limiting how much it might go down while simultaneously yielding a return if the stock market continues to rise.

Diversification and Investment Portfolio Design

Beware of TV pundits and hot markets

The yang to the quiet, unassuming Mark Haines at CNBC was Jim Cramer, who remains with the network as the host of Mad Money, a nightly show on which he uses his near-photographic memory to opine on stocks.

Before Cramer became a TV host, he ran a hedge fund. In that role, he gave a speech in February of 2000: “The Winners of the New World.” In that speech, he pontificated on the changing nature of the stock market and laid out the stocks his fund was buying, most of which were high-flying technology/dot-com stocks.[vi]

Cramer discussed the ten stocks he was buying, many of which ended up not surviving when, only a month later, the tech-heavy NASDAQ peaked, and then ground down some 78% for the next 30 months. One of the stocks that did survive, which Cramer recommended, still dropped from $1,305 to $22 per share.

[i] Pisani, Bob. “Mark Haines’ Legendary 2009 Call.” CNBC, March 9, 2015. http://www.cnbc.com/2015/03/09/pisani-remembers-haines-legendary-2009-call.html

[ii] Wells, Jane. “Five Years Later, ‘Still Traumatized’ by Market.” CNBC, March 10, 2014. http://www.cnbc.com/2014/03/10/mark-haines-bottom-call-five-years-later-still-traumatized-by-market.html

[iii] Ivanova, Irina, “More Than 4 Million Americans File for Jobless Aid, Bringing Pandemic Total Above 40 Million.” CBS News, May 21, 2020. https://www.cbsnews.com/news/4-million-file-unemployment-jobless-claims/

[iv] Li, Yun. “David Tepper Says This Is the Second-Most Overvalued Stock Market He’s Ever Seen, Behind Only 99.” CNBC, May 13, 2020. https://www.cnbc.com/2020/05/13/david-tepper-says-this-is-the-second-most-overvalued-stock-market-hes-ever-seen-behind-only-99.html

[v] Smithers, Andrew. “US CAPE and q Chart.” Andrew Smithers, 2017. http://www.smithers.co.uk/page.php?id=34

[vi] Cramer, Jim. “The Winners of the New World.” The Street, Feb. 29, 2000. https://www.thestreet.com/story/891820/1/the-winners-of-the-new-world.html

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

No Cookie-Cutter Solutions

As an independent financial advisor, I have access to many financial products, including mutual funds, ETFs, stocks, bonds, and annuities. I use them to build custom portfolios, trusts, and retirement plans for people and organizations.

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Massachusetts Public Employees & Social Security Eligibility

Massachusetts Public Employees & Social Security Eligibility

Massachusetts Public Employees & Social Security Eligibility

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

Public employees in Massachusetts do not contribute to the Social Security system, but many of them contribute through other jobs. Some also have spouses who take part in the Social Security system. Both scenarios are affected by two federal laws.

403b Retirement Catch-Up Options for Public School Employees

  • The Windfall Elimination provision can reduce any Social Security benefits that a public employee earns by as much as 55%. For example, a retired teacher who receives a pension from MTRS and also qualifies for a monthly Social Security benefit of $1,000 might only receive $450 a month.
  • The Government Pension Offset provision affects the Social Security benefits of a spouse, widow, or widower. For example, if a married teacher receives a monthly pension from MTRS of $6,000, two-thirds of that amount ($4,000) will be credited against any benefit from their spouse’s Social Security.
    • Thus, if the spouse dies and the retired teacher is eligible for a $2,000 survivor benefit from Social Security, that teacher would receive none of it because the $4,000 would eat into all of it.
    • Very few married people who retire with a pension from Massachusetts Teachers’ Retirement System (MTRS) will receive anything from their spouse’s Social Security.

Social Security When Should You Start Taking It?

Are There Any Workarounds?

There is a workaround for the Windfall Elimination Provision. Any public employee in Massachusetts with 30 or more years of ‘substantial earnings’ in a job where they paid into Social Security will receive their full benefits. In fact, after 25 years of such substantial earnings, any reduction in Social Security benefits begins to shrink.

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice. 

No Cookie-Cutter Solutions

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It Is Not Your Fault You Retired When the Stock Market is High and Interest Rates are Low

It Is Not Your Fault You Retired When the Stock Market is High and Interest Rates are Low

It Is Not Your Fault You Retired When the Stock Market is High and Interest Rates Are Low

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

You just retired. Along with a great career, you have built up a substantial 401(k) balance. It took a while, but you got the hang of investing in equities, never comfortable with the ups and downs, but always focusing on long-term growth.

However, now you need income, not growth. Over the years, you owned some bonds with mixed success. Moreover, unlike your foray into equity investments, this time, you cannot afford on-the-job training. You need the income now. Plus, you have less time to recover from any mistakes.

With Interest Rates Low, Where Do You Go for Income?

The Department of Labor’s fiduciary rule might have resulted in more people keeping 401(k)s with former employers. However, on March 15, 2018, the Fifth Circuit Court of Appeals ruled that the Department of Labor overstepped its bounds in creating the so-called fiduciary rule, parts of which went into effect last year.

The 2019 retirement SECURE Act makes it easier for employers to offer annuities in their 401(k) plans. But with the economic recession brought on by the pandemic, most employers have probably yet to adjust their plans.

Sothe Question RemainsCan You Get the Income You Need From Your Plan?

Many employers still steer their employees’ 401(k) choices toward stock funds to grow their accounts, rather than bond funds or annuities to distribute the accounts.

Even if your plan offers sufficient bond funds, today, with the ten-year U.S. Treasury Bond yielding just .5%, bonds hardly seem to be the place to go for income, even though, government bonds have provided investors with an excellent total return so far this year.

For example, the Barclays Aggregate Bond Index is up 5.4% for the year. Total return combines the interest rate with the bond’s change in price: bonds go up in value when interest rates fall.

Diving Into the Stock Market

Many retirees who are frustrated by low rates have put money that was earmarked for bonds into stocks, hoping the dividends plus the growth will provide sufficient income.

Even with the coronavirus-induced recession, the stock market, as measured by CAPE or the Q Ratio, is still anywhere from 80–100% overvalued. This does not mean it cannot continue to increase; it can, and it has. (It was more overpriced during the late ’90s Internet boom and the Roaring ’20s than it is today.)

High stock prices can exacerbate the problem with a stock-centric retirement portfolio. If the market drops and you withdraw principal as income, that money is no longer in your portfolio if the market rebounds.

The Financial Services Industry Has Adapted to This LowInterestRate Environment

It has done so by building products for it, some of which provide you with income guarantees. But, they come with restrictions on withdrawing your principal, as well as somewhat confusing terms and conditions.

Other products offer a higher yield, but no guarantees of how much of your investment will be returned. Many of them also lack daily pricing, making it impossible to know the value of your account on any given day.

In This Turbulent and Unfocused MarketGoing It Alone Can Be Unnerving

Those with questions should be wary of talk-show advice, whether it be on television or the radio.

Understanding interest rates, bonds, and dividend stock investing along with other transition products can be challenging, if not confusing.

With an upcoming election, talk of a second wave of the coronavirus, and so much uncertainty worldwide, now may be the best time to take control of your financial future.

As with most things in life, the first step is often difficult, but securing sound financial advice shouldn’t be left until it’s too late.

Finding a licensed and knowledgeable resource: It’s the best financial advice you’ll ever receive.

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice.

No CookieCutter Solutions

As an independent financial advisor, I have access to many financial products, including mutual funds, ETFs, stocks, bonds, and annuities. I use them to build custom portfolios, trusts, and retirement plans for people and organizations.

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Investing In Foreign Stocks and Bonds

Investing In Foreign Stocks and Bonds

Investing In Foreign Stocks and Bonds

Tim Hayes AIF®, CRPS®, AWMA®, CFS®, APMA®, CAS®

Because different countries have different currencies, overseas travel is usually more complicated than domestic travel. Likewise, overseas investing is more complicated than domestic investing. However, just as foreign travel adds diversity to your travel experiences, so foreign assets add diversification to your portfolio.

With a gross domestic product (GDP) of over $20 trillion, the United States has, by far, the world’s largest economy. (China has the second-largest, with a GDP of $13 trillion.) Moreover, 54% of the world’s stocks and 39% of the world’s bonds are based in the U.S.

Also, the correlations between the U.S. and non-U.S. stock markets have more than doubled over the last 25 years, meaning fewer benefits from diversification, as these markets now tend to move in tandem.

Diversification and Investment Portfolio Design

Therefore, it is understandable why individuals living in the world’s most dominant country prefer to invest here, given their allegiance to the so-called home team. This bias, however, may prevent individuals from realizing the benefits international stocks and bonds would provide to their portfolios.

According to a 2014 study by Vanguard, the average investor’s portfolio contains 27% foreign stocks.[i] If the foreign stock percentage seems high, remember that the U.S. holds only half of the world’s total stock market value. This means that 50% of the world’s stock market value resides outside of the U.S.

A second 2014 Vanguard study, this one focusing on bonds, confirmed what I see in my practice: most U.S. investors have very little exposure to international bonds[ii]—even though 60% of all world bonds now reside outside of the U.S.[iii]

When individuals invest in overseas stocks or bonds, they rub up against the world’s largest market: the currency market. According to the Bank for International Settlements, foreign-exchange trading volume averages $6.6 trillion per day, while the entire U.S stock market trades about $191 billion per day.[iv]

Active vs Passive Investing

Some investors hedge their currency risk by locking in times and prices at which they sell or purchase a currency. But hedging costs money. An investor must pay a fee to a counter-party—an institutional investor, corporation, government, bank, or currency speculator—for the right to buy currency from them or sell a currency.

Investors who enjoy owning individual stocks but want the added diversification of foreign stocks can incorporate American Depositary Receipts (ADRs) into their portfolios. ADRs are international stocks that U.S. investors purchase with dollars and from which they receive their dividends in dollars. However, currency changes affect the performance of ADRs.

More than 2,000 ADRs from more than 70 countries now trade in the U.S.,[v] including ADRs from such well-known international companies as Toyota, Nestle, GlaxoSmithKline, Deutsche Bank, and Sanofi.[vi]

There are many ways for individual investors to get exposure to foreign stocks or bonds—and, if you believe the Vanguard studies, the average investor has done an excellent job diversifying into international stocks. However, those same investors have not done the same with foreign bonds.

Of course, there is no such thing as an average investor, and everyone’s asset allocation and diversification depend on that individual’s specific goals and risk tolerance. However, most investors would benefit by having a percentage of their portfolio allocated to overseas stocks and bonds.

With 40% of the profits of the firms listed in the S&P 500 stock index now coming from overseas sales, some financial professionals believe that investors get plenty of diversification by owning stocks of U.S. multinationals. However, this theory fails to explain why bond investors have most of their portfolios in U.S. bonds.

[i] Christopher B. Philips, CFA, “Global equities: Balancing home bias and diversification,” Vanguard.com, February 2014. Retrieved from http://www.vanguard.com/pdf/ISGGEB.pdf

[ii] Christopher B. Philips, CFA, et al., “Global fixed income: Considerations for U.S. investors,” Vangaurd.com, February 2014. Retrieved from http://www.vanguard.com/pdf/icrifi.pdf

[iii] QVM Group, LLC http://qvmgroup.com/invest/2012/04/02/world-capital-markets-size-of-global-stock-and-bond-markets/

[iv] Bank for International Settlements website, http://www.bis.org/

[v] U.S. Securities and Exchange Commission Office of Investor Education and Advocacy, “Investor Bulletin: American Depositary Receipts,” August 2012, www.investor.gov. Retrieved from http://www.sec.gov/investor/alerts/adr-bulletin.pdf

[vi] “Equity Investor Marketplace,” UBS, http://eqi.ibb.ubs.com/equityinvestor/en/UBS/underlyings.html

These are the opinions of Tim Hayes and not necessarily those of Cambridge. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

No Cookie-Cutter Solutions

As an independent financial advisor, I have access to many financial products, including mutual funds, ETFs, stocks, bonds, and annuities. I use them to build custom portfolios, trusts, and retirement plans for people and organizations.

Fee-Only or Commission What Standard of Care is Best for You?

Book an Appointment

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If you’re concerned about your financial future, let’s talk