Tag Archives: Social Security

Thoughts on Investment Strategies for Seniors

Vanguard is definitely my favorite investment company – low fees, no sales pitch, good advice, solid research. Every now and then, Vanguard broadcasts an online webinar. I thought I would let you know what I got out of Thursday’s webinar entitled “What You Need to Know about Social Security, Annuities, and Pensions.”

This is just my take, not an actual summary. At some point, Vanguard will publish a link to the transcript, and when that happens, I’ll post it.

People head into retirement in two basic situations – some have Social Security, plus a pension, plus a portfolio of savings and investments. Others, and this is increasingly the case, have just Social Security and a portfolio. Some are lucky enough to find that their Social Security and their pension meet their monthly income needs. They can afford to be more aggressive in investing their portfolio. But if there is a gap between income and needs, or no pension at all, then it’s necessary to be more cautious in dealing with the portfolio.

The great thing about Social Security and pensions is that they pay for the rest of your life, no matter how long you live. This doesn’t mean that you should take excessive risks with your portfolio, however. Perhaps you would want to put just 10 percent more in stocks than you would have otherwise.

Young people who say that Social Security is not going to be there for them when they retire are being naïve. In the worst case, if Congress takes no measures to solve the system’s problems, Social Security will still pay seventy to eighty percent of promised benefits. But if young people are worried that the worst case might occur, they should save more – which is usually a good idea.

Some investors are drawing down four percent per year from their portfolios because they have heard that this is the rule and what they should be doing. But many, particularly those with Social Security and a pension, may not need to do this. They can afford to preserve their portfolio. They might need it later. Those without a pension, however, may have to start drawing down their portfolio at retirement. They need to plan carefully and work with a financial advisor.

It’s generally a good idea to defer taking Social Security benefits for as long as possible. The benefits you will receive increase about seven percent a year to age 70 if you do this. Of course, if you have knowledge that you’re not likely to live a long life, you might decide to take your benefits sooner. Moreover, there are people age 62 and over who simply need income. If they didn’t take Social Security, they would have to start taking a lot from their portfolio, which is not a good idea. Still, if you can hold out and delay taking Social Security for at least two or three years, that’s a good thing. If you can continue to work for a time, your savings will be larger and so will your Social Security benefit.

Should Social Security be means tested? That’s a policy question, of course, but it’s important to realize that ,in a sense, benefits are already means tested because the wealthy who receive Social Security are paying higher taxes. To some degree, their benefit is taxed back. (A comment from Ray – maybe this suggests that progressives shouldn’t waste time on the means-testing issue. It might be better to focus on other reforms, such as raising the amount of income subject to the Social Security tax.)

On another topic, one good reason to purchase an annuity is to assure that you have guaranteed income for as long as you live. Think of an income annuity as a hedge against longevity. This might be of interest to someone who has just Social Security and a portfolio. Purchasing an income annuity will assure that even if you exhaust your portfolio, you will still have income beyond your Social Security benefits. If you have a pension as well as Social Security, you might not need an annuity. Annuities aren’t for everyone.

If you purchase an income annuity, you are giving up control over a portion of your money. An annuity isn’t an investment, but rather a form of insurance that you buy. Purchasing a $100,000 immediate annuity might give you $7000 in annual income – although the amount will vary slightly from company to company. You should shop around. There is a slight risk that the insurer may turn out to be unsound, although the insurance industry is closely regulated.

Immediate annuities are easy to understand and can be readily purchased from well-known companies. Deferred annuities that only start to pay if you reach a certain age, such as 80 or 85, can also be purchased. Look for qualified longevity annuity contracts (QLACS). The amount you put into a QLAC is not counted when determining the Required Minimum Distribution (RMD) from your IRA or 401(k) after age 70 and a half. In other words, there are tax advantages to a QLAC.

An insurer that sells you an annuity pays you each month out of the amount you put in, the amount the insurer earns on investments, and the amount people who die early have put in. This is known as the “mortality credit.” When interest rates are high, the monthly amounts offered by insurers may be somewhat higher since they are earning more on their investments. But since this is only one component of the payout, it may not be worth waiting for higher interest rates before buying an annuity. This is particularly true if you are holding savings to make the purchase in the money market, where yields are extremely low.

Variable annuities are a different sort of animal. They allow you to keep control over your money, subject to various qualifications, and give you some play in the stock market. But they are likely to come with a strong sales pitch, and to be complicated and difficult to understand. Surrender fees and penalties can be quite high.

You can purchase all sorts of bells and whistles with annuities, such as provisions allowing them to be passed on to a spouse or inherited at your death. But the more such bells and whistles, the less the monthly benefit.

Investing for retirement is not an easy matter. What have been your experiences? Is there something you would advise others to be wary of?


Social Security Dialogue: A Model Our Politicians Ought to Follow

The public library in Penn Yan, NY, our village in the heart of the Finger Lakes, hosted a dialogue on Social Security on Tuesday evening that could serve as a model for our nation’s politicians. They still have some time to come up with solutions to assure that this vital program is there for future generations, but a serious national discussion has yet to get underway.Social Security card

The meeting at the library grew out of conversations at Civic Diversity and Dialogue, a discussion group in our community. The group pulled together a panel consisting of a representative of the county’s Office for the Aging, a college professor, and a retired Social Security employee. Also on hand was a member of the Democratic Committee who serves on the village board and has made a study of the economic impact of Social Security on our county.

Here’s my take on the information and ideas that were tossed around during Tuesday’s discussion.

For more than half of the Social Security recipients in the county, Social Security benefits represent at least half of their income. The program is vital to them, and extremely popular. By and large, seniors are claiming their retirement benefits at 62, even though the financial experts are telling them to work until they are 70. Many are physically unable to continue working, some are tired after years of low-wage labor, and some can’t find jobs that would pay enough to sustain them. When they step out of the workforce, new retirees typically don’t have a financial plan; nor do they have a great deal of savings. They need Social Security just to live. Go to the supermarket on the day Social Security checks are deposited, and you will understand that this is true.

The millennial generation, now aged 18 to 34, is also going to need Social Security. They are the first generation expected to have lifetime earnings below those of their parents. The experts are telling them to save for retirement, but that’s not easy to do because they are saddled by student debt. Some will still be paying on that debt when they retire.

Why then, some in the audience wondered, aren’t millennials more active politically? Why aren’t they demanding, in particular, that Social Security be strengthened? Perhaps, it was suggested, they don’t have time to worry about retirement when they are focused on starting careers and families. It’s just too big an issue to take on. Or perhaps when they see the influence of big money in politics, they feel disenfranchised and doubt they could have an impact.

One obstacle to an objective national discussion, an audience member pointed out, is that politicians keep referring to Social Security as an “entitlement,” when in fact it is income insurance that workers and employers have paid for. Some argued that Social Security’s financial problems would disappear if the cap on income taxed for Social Security were removed. Currently, income that exceeds $118,500 escapes Social Security taxes altogether. It seems anomalous, another audience member noted, that immigrant workers are coming in for so much criticism when they are paying into a system that helps the rest of us but can’t claim benefits themselves.

We should all be aware of the essential role Social Security plays in our county’s economy. Retirement benefits paid out in Yates County amount to nearly $5.8 million per month, and all Social Security benefits, including disability and payments to orphaned children, probably come to something like $88.5 million per year. Unless Congress takes action soon, disability benefits could be cut by 20 percent in 2016. That will hurt both the beneficiaries and the community.

And let’s not forget that our community is made more livable by the efforts of some 450 volunteers in food programs, at the hospital and hospice, and providing transportation. Most of these volunteers are Social Security recipients giving back.

That’s what I heard at last night’s discussion. It was a serious discussion that reflected the deep concerns of all present. If only our politicians could confront the issues with the same degree of seriousness!

Senior Common Sense on Social Security

Seniors have been trending Republican for decades. They played a critical role in the Republican sweep in the 2014 congressional elections.

The Republican presidential candidates are counting on senior voters in 2016. They seem to be trying to outdo one another in alienating Hispanic-American voters, and they know they won’t do well among African-Americans either. If Republicans are going to win the White House, it’s going to have to be with solid support from seniors.

That’s why it’s so surprising to see nearly all the Republican candidates attacking Social Security.  Almost as a chorus, as Paul Krugman pointed out on Monday, they are calling for raising the Social Security retirement age (which amounts to a benefit cut), reducing benefits in other ways, and privatizing the system. This usually means turning Social Security from a government-guaranteed stream of income into a system of private investment accounts — much to the joy of Wall Street, which would cash in on fees and commissions.  Seniors would suffer, since few of us have the time or the skills needed to manage an investment account so that it would yield benefits comparable to those of Social Security.

Of course, Republicans have been talking like this for years, and a majority of seniors have remained oblivious, causing frustration among Democrats, who have fought tirelessly to defend Social Security. But seniors need to pay attention to the threat they face. If the White House and Congress are controlled by Republicans after 2016, Social Security and Medicare will be in grave danger. Seniors could be seriously affected, and all those soon-to-be seniors who have inadequate retirement savings are going to have a big problem.Protect Social Security

That’s why our local Democratic committee has launched a yard-sign campaign aimed at protecting Social Security. We put one of these signs out at the end of our driveway last week, in honor of the 80th anniversary of the signing of the Social Security Act. We’ll put it out again on Labor Day weekend. As election day draws closer, it will become a permanent fixture on our lawn.

Common sense dictates that we seniors vote to protect our interests — and that includes not just our own immediate interests, but also the interests of the coming generations, our children, and our grandchildren. We should be considering a candidate like Bernie Sanders, who would raise the cap on the amount of income subject to the Social Security tax in order to fund the program far past 2033. Or Hillary Clinton, who wants to enhance Social Security benefits for women, who generally earn less than men during their working lives, and for the poor.

What are seniors doing in your community to protect Social Security? If the answer is “nothing,” maybe it’s time for you to think of getting some folks mobilized.


Why Did We Give Up On Traditional Pensions Without A Fight?

The New York Times ran a fascinating piece last week — “U.S. Seniors Prosper, Finding ‘Sweet Spot in Middle Class.” Despite all we’ve been hearing about struggling seniors having to work until they drop, it turns out that seniors aged 65-74, on average, are doing rather well, even if they’ve chosen to retire.

According to the Times, “…they are the last generation to widely enjoy a traditional pension, and are prime beneficiaries of a government safety net targeted at older Americans. They also have profited from the long rise in real estate prices that preceded the recession. As a result, more seniors now fall into the middle class — defined in this case between the 40th and 80th income percentile — than ever before.”

The Times adds “Median income for people 75 years and older has also risen, but not as much as it has for people in the 65-to-74 age group.”

The article raises important political questions. Why did Americans give up on traditional pension plans so easily? Why didn’t we demand legislation to protect our pensions?

CNN Money reports that in the 1980s, sixty per cent of workers were protected by defined benefit plans, as traditional pensions are known. Today, only ten per cent have these plans, although thirty per cent of employers are still offering a combination of traditional pensions and the 401(k) type of plan. Meanwhile, the assault on pensions continues, with employers freezing pension benefits, offering lump sum payouts, and switching workers to annuities provided by private insurers — options that are almost certain to lead to reduced incomes when it comes time to retire.

One problem is that workers have little power to resist the changes their employers force upon them. Unions are weaker than they have been for decades, and Congress is controlled by politicians who care little for worker rights.

The second problem is that 401(k) plans have a surface appeal that has tricked many into thinking they are a pretty good deal, particularly when employers offer a matching contribution. After all, workers reason, isn’t my employer putting money into an account that I control? But the reality is that few of us have the ability to manage our savings and investments so that they will stretch over twenty or thirty years of retirement. Traditional pension plans are professionally managed — so well that they continue to provide security for millions aged 65 and up. The children of that generation will never know a similar security.

It’s hard to imagine a political scenario in which the traditional pension will stage a comeback. Perhaps the best we can manage at this point is to circle the wagons and protect the remainder of the safety net — Social Security and Medicare — from politicians who would dismantle them.



Social Security: the Best “Annuity”

Social Security isn’t technically an annuity — it’s best viewed as a form of income insurance that protects the disabled and orphans, as well as retirees. But it works much like an annuity, in that it guarantees a lifetime monthly income stream for seniors. Financial advisers sometimes describe Social Security as the best annuity of all, because it’s inflation protected, and because its benefits pass along to a surviving spouse. That is, when one partner dies, the survivor receives either his or her own Social Security benefit, or the benefit of the deceased —  whichever is higher.

A key feature of Social Security is that its monthly payout increases substantially the longer a potential recipient defers claiming benefits, up to age 70. The Washington Post recently reported that benefits claimed at age 70 are at least 76 per cent higher than they would have been if claimed at age 62.  That’s why many are delaying retirement or living on other assets after retiring until they hit 70.Social Security Works

Social Security is such a good deal, it’s a wonder any politician would dare propose tampering with it. Yet Social Security is constantly under attack from those who claim the system is in trouble and that benefits must be reduced. This fear- mongering is amply refuted in an excellent new book, Social Security Works! Why Social Security Isn’t Going Broke and How Expanding It Will Help Us All, by Nancy Altman and Eric Kingson.

Seniors should be on the alert for politicians who want to undermine their financial security by weakening Social Security. The National Committee to Preserve Social Security and Medicare keeps track of them and offers strategies for countering their schemes.  Social Security Works, the website associated with Altman and Kingson’s book, is another excellent resource,