Advertisement
U.S. markets close in 4 hours 11 minutes
  • S&P 500

    5,253.86
    +5.37 (+0.10%)
     
  • Dow 30

    39,778.00
    +17.92 (+0.05%)
     
  • Nasdaq

    16,399.08
    -0.44 (-0.00%)
     
  • Russell 2000

    2,131.71
    +17.36 (+0.82%)
     
  • Crude Oil

    82.52
    +1.17 (+1.44%)
     
  • Gold

    2,234.20
    +21.50 (+0.97%)
     
  • Silver

    24.91
    +0.16 (+0.64%)
     
  • EUR/USD

    1.0804
    -0.0026 (-0.24%)
     
  • 10-Yr Bond

    4.1910
    -0.0050 (-0.12%)
     
  • GBP/USD

    1.2629
    -0.0009 (-0.07%)
     
  • USD/JPY

    151.2070
    -0.0390 (-0.03%)
     
  • Bitcoin USD

    71,265.02
    +2,248.53 (+3.26%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,967.33
    +35.35 (+0.45%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Is Social Security a 'Bond' in Your Portfolio?

Social Security payments sap our take-home pay with every check. Though many financial advisors overlook the importance of this government-assured source of retirement income, a rising chorus of experts are urging investors to think strategically about the role Social Security income will play in their portfolios.

Many advisors underestimate the importance of Social Security because they are aiming for affluent clients whom they assume don't need Social Security, says Frank Horath, principal of ClientFirst Financial, a firm in Aptos, California, that coaches financial advisors in the nuances of incorporating Social Security into clients' plans. "It's very important for the mass affluent," he says. "If you have investable assets of $200,000, Social Security is very important."

It's important not just because you want to recoup all the money the system has drained from your paychecks, but because you'll probably get back more than you put in, says Michael Finke, a professor in the department of personal financial planning at Texas Tech University. "The wealth equivalent of Social Security is enormous," he says. "If you tried to replace a $35,000 annual income from Social Security through saving, you'd have to buy a $1 million annuity."

To understand the actual value of your Social Security account, ask yourself how much money you would have to invest in bonds to replace Social Security income, Finke says.

While it's a guaranteed income ( politicians notwithstanding), Social Security is not an investable asset. It is a guaranteed source of income, like a pension. You can't add more to it by contributing more, as you can with retirement savings accounts. But experts say you can add to your potential Social Security income by making strategic decisions, and you can make decisions about the rest of your savings by taking the nature of Social Security into account.

Squeezing more from Social Security is a hot topic these days, with many advisors and even the Social Security Administration urging consumers to postpone taking benefits until age 70. Doing so significantly increases the monthly payout. "It's like buying a more valuable annuity every year you wait," Finke says. "If you tried to replace that longevity income in the private market, it would be way more expense than doing it by deferring Social Security."

Social Security is hardly a no-maintenance asset. Unlike more straightforward income streams, Social Security is embedded with so many exceptions, carve-outs and time-sensitive decisions that you have to manage it closely to get the most from it. "It is a moving target in terms of allocation and taxes," Horath says.

One way to think about managing your Social Security account is to spend the same time, attention and expertise on it as you spend on investigating fees and costs of funds, Horath says.

If Social Security covers your basic cost of living, or nearly so, does that mean you can put the rest of your portfolio in funds?

Not so fast. First, it depends on how much of your basic cost of living is covered by Social Security and other types of guaranteed income stream. "The bigger the safety net, the more risk you can take," Finke says.

No matter what investment strategy you choose, orient your thinking to consider "your portfolio as a sequent of spending over retirement," Finke says.

Another strategy that pivots on Social Security is to calculate and track your expected living standard and plan accordingly, says Laurence Kotlikoff, professor of economics at Boston University, co-author of "Get What's Yours: The Secrets to Maxing Out Your Social Security" and president of Economic Security Planning, which offers consumers and advisors a Social Security planning tool.

The software has the ability to run simulations based on a guaranteed Social Security income supplemented with investment income, depending on the variables you enter.

"For most middle-class people, this is how they should be investing," Kotlikoff says. "They should not be risking their living standard. If you don't want your living standard to drop, think not about what you need to invest, but what you need to spend."

But it's important to remember, Kotlikoff says, "an income floor is not the same as a standard-of-living floor. If you are spending out of stock income, and the stocks do poorly, your living standard will drop," he says.

With Social Security and other guaranteed income streams as a floor, adopt the view that you will adjust your discretionary spending according to how well your equity and fund investments do. "Expect to be flexible short-term, depending on income," Finke says.



More From US News & World Report

Advertisement