Q: Responding to an inquiry on whether deferring Social Security was wise or not, you wrote that given the current life expectancy, deferral is a good idea. Does your answer take into consideration that by 2033, the payroll taxes collected may be enough to pay only about 77 cents for each dollar of scheduled benefits? If not, does this fact change your view on deferring?
A: I’m not alone in suggesting that people defer taking Social Security benefits. Economists, financial planners and financial journalists have supported the idea because the math works for anyone who is reasonably healthy. It works particularly well for married men who have earned more than their spouses, because the benefit increase is also passed on to his surviving spouse. In a sense, delaying Social Security benefits also works as a form of life insurance, providing a lifetime benefit to a spouse at death.
That said, every one of these calculations I’ve used is based on receiving Social Security according to the current formula, with no provision for a future reduction in benefits. If benefits were reduced sometime in the future to reflect actual employment tax revenues, the value of deferral would go down. But it could decline quite a bit before it would be a bad deal compared to alternatives.
You can understand this by considering the price of privately available inflation-indexed immediate annuities. While the actual figures vary with age, these annuities have typically been priced about 50 percent higher than the benefits you would forgo for the same increase in your Social Security benefits. For instance, if you defer taking $20,000 of benefits in order to get a lifetime benefit increase of $1,600 a year, inflation-adjusted for life, a private company would sell the same increase in lifetime benefit for about $30,000. So even if your future benefits are reduced by 23 percent, deferral is a good deal compared to private alternatives.
The biggest caution about deferring Social Security benefits is more about race and gender than the financing of Social Security. While the life expectancy of all Americans at age 65 is 18.5 years, the same figure for a white female is 19.8 years. A black male, however, has an expectancy of only 15.1 years, a full two years shorter than a white male. Those differences make benefit deferral a very good bet for white females, but a poor bet for black males.
Q: I am looking for some suggestions on where to invest money during a downturn in the economy. I am in my mid-40s. I usually invest in index funds such as the Vanguard 500 Index, but feel a downturn may be headed our way. I want to move most of my retirement money into a low-risk investment where the effects of a poor market would be diminished. In addition to index funds, I usually keep 20 to 25 percent of my investments in the MainStay High Yield Corporate Bond fund, which I consider lower risk. Would it be good to move 75 to 100 percent into this type of fund prior to a downturn?
A: Many people predict market turns, but few are successful, particularly if you consider that you also have to pick a good time to get back in after you have, perhaps, successfully predicted the time to get out. So I’m in the Jack Bogle school of investing: Pick a level of risk you can stand and hold it. Add regular rebalancing, and you’ve got a pretty good formula for buying more of what’s down and less of what’s up.
You might also give some consideration to the amount of risk you are taking by having your fixed-income investment in a junk bond fund. Let me illustrate. If we use price volatility as a measure of risk, the standard deviation of the Vanguard 500 Index Fund over the last five years (according to Morningstar) is 18.58 percent. The MainStay fund is lower at 10.44 percent, but broader fixed-income funds with less credit risk are much lower. The Vanguard Total Bond Market ETF, for instance, has a standard deviation of 3.8 percent.
Equally important, junk bonds are viewed by many as an equity-like investment, subject to risks very similar to common stocks. So having junk bonds as a balance for equities is pretty aggressive. That’s OK for you since you are 40 and adding to your savings regularly. Indeed, you’re likely to benefit from the continuous reinvestment of the high interest rate on your fund. The same strategy would be hard on the tummies of retired investors.
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