The End of File and Suspend for Social Security

(Congress Plans to Close Social Security “Loopholes”)

This week, budget legislation (Bipartisan Budget Act of 2015) passed in Congress to remove the ability for spouses to take advantage of the Social Security strategy commonly known as file and suspend. Previously, the file and suspend strategy allowed Spouse A, at full retirement age, to file and suspend their own retirement benefits to earn delayed retirement credits. This also allowed Spouse B to begin receiving a spousal Social Security benefit at that time (while earning delayed retirement credits on Spouse B’s benefits as well). The new law prevents a spouse from claiming a spousal benefit and later switching to their own benefit.

This strategy, often debated as a “loophole” by some, became possible in 2000, when Congress passed the Senior Citizens Freedom to Work Act. This allowed voluntary suspension of Social Security benefits for people who had already claimed, and then changed their mind and wanted to suspend them later.

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Beginning Retirement During Declining Markets

Retirement portfolios are generally intended to have withdrawals made regularly. These withdrawals provide the regular income necessary for a retiree’s living (and other) needs. However, when a multi-year downturn in the markets is combined with regular withdrawals, a retirement portfolio can deplete at a rapid pace.

The S&P 500 (a broad measure of large American business stocks) averaged a compound annual return over the last century of more than 9% (made up of the change in stock prices plus dividends). This long-term average has been remarkably consistent over long periods of time, but it is a poor predictor of returns over shorter periods of time. Let’s look at some examples to see why. Read the rest of this entry »

An Odysseus Agreement To Earn Buffett-Like Returns

In the Greek poem, The Odyssey, Homer illustrates an age old flaw in human nature. Odysseus, the hero, is warned by goddess Circe that when his ship is sailing by the island of the Sirens, the irresistible songs of the Sirens will lure him towards the island and destroy his ship.

The sirens are symbolic of the flaws and biases that seem to be a natural part of our brain’s chemistry. Homer suggests a solution to keep these flaws in check. To counter the allure of the Sirens, Odysseus orders his crew to tie him to the mast of the ship and to ignore his future pleas for release until they have passed the dangerous islands. Odysseus commits himself to a rational course of action at a neutral time to ensure that he does not get swayed by emotions during the time of distress. Read the rest of this entry »

Will an Aging America Cause Lower Stock Returns?

The relationship between supply and demand is widely understood in economics. But does an aging America mean future stock returns will be lower as older Americans sell stocks for day-to-day needs in retirement?

Most economists I’ve spoken with on the matter in recent years have expressed concern about this very dynamic. It’s also a rational, simple explanation for several things. But while supply and demand are still present forces, this thesis makes a number of implied assumptions. The foremost being that baby boomers will be the only supplier of savings (capital) to the productive businesses that need it (in the form of stock purchases in the primary/secondary markets).  Read the rest of this entry »

Advice On Managing Your 401(K) Retirement Plan

The employer retirement plan (commonly known as a 401k/403b) is an essential savings and investment vehicle available to many individuals today. These plans provide significant benefits to employees, such as tax deferral on employee contributions, employer matching contributions, Roth contribution and greater annual deferral limits than an Individual Retirement Account (IRA).

However, a 401(k)’s features, investment choices and service providers are determined by the employer and offer employees little flexibility. Investors must choose among the investment vehicles offered and work within established rules and limits within their respective plan(s). Choosing the right investments within your plan can be difficult as plan data is not always readily available, and many HR departments often do not understand their own plans well enough to provide guidance to plan participants regarding their investment decisions.

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What is Annuitization? What is an Immediate Annuity?

One of the most confusing and least understood terms for the investing public is annuitization. Unlike stocks, bonds, mutual funds and exchange traded funds (“ETF’s”), annuitization does not come up in cocktail party or water cooler conversation very often. What does it mean?

Many investors have money saved and invested in a fixed or variable annuity – two types of contracts issued by insurance companies. Annuitization is the process of converting annuity funds into a stream of income, usually paid on a monthly basis. Choosing whether to annuitize or not is very important because often you can’t change your mind once payouts begin.

There are several ways to “annuitize an annuity” including but not limited to: Read the rest of this entry »

How Are My Investments Doing? Methods For Measuring Investment Performance

 

This is a common question we receive. Over the years, a frequent method I’ve observed investors use to answer this question is a simple rate of return, generally known as a holding period return. But there are two other methods available, and for various reasons I’ll show below, they are usually more appropriate to use.

Holding Period Return (HPR)

Also referred to as your cumulative return, this value does not take into account the impact of time (did it take 1 year or 9 to earn the return?), and does not adjust for the impact of what dollars were invested, and when. It is generally reported as a single return percentage.

Internal Rate of Return (IRR) Read the rest of this entry »

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