Blog post #444
Based on preliminary estimates, there may not be any increase in Social Security benefits to recipients next year, for 2021.**
Social Security benefit increases are based on annual changes in the consumer-price index (CPI) and are announced each year in October. CPI data from January – April would indicate no increase for 2021, per a policy analyst of The Senior Citizens League.**
The 2020 increase was 1.6%. Over the last decade, cost of living (COLA) increases in Social Security averaged 1.4%. These are much lower than the 3% average increases in the preceding decade, between 2000-2009.
While these increases have been minor, costs of food, housing, utilities and health care still seem to rise at a much greater pace. Since 2000, Social Security COLA benefits have increased by 53%, but prices of what a typical retiree spends grew by almost double, by 99.3%. In a report by The Senior Citizens League, this has resulted in lost buying power of Social Security benefits of 30% since 2000.
This raises the importance of maintaining your purchasing power, or of having your other assets grow at a rate that is greater than inflation, which will be discussed further below.
Social Security is still a vital benefit for most people, and we think it will continue to be for the long-term. For example, if a couple is receiving benefits of $20,000 per year, per person, that is $40,000 per year. Using what was considered a historically safe withdrawal rate of 4% from a diversified stock and fixed income portfolio (which is based on data with much higher interest rates than we have experienced for more than a decade), that $40,000 income flow would be the equivalent of having $1,000,000 of assets. If you are receiving more than $20,000 per year, or your future projection is to receive more than that, the equivalent asset base would be much greater than $1 million. That is not insignificant, especially as the benefits are risk-free and are not subject to any financial market volatility.
As interest rates have been very low since around 2008, the value of that income stream is actually now much greater. If you were to invest $1 million in an all fixed income portfolio over the past few years, you may only generate $10-20,000 per year, not the $40,000 as described above in Social Security benefits.
What are the implications of this information?
Social Security benefits are not likely to increase much next year, or in near future. However, most costs are likely to keep going up. In the near term, gas will be less, and you may spend much less on travel, but we all hope that once a vaccine is discovered, some normalcy will return.
The key is that over the long-term, you must earn more than the rate of inflation on your overall investment portfolio, so that you can maintain or increase your purchasing power. The only place to do that for most people, to earn more than inflation on an after-tax basis, is in stocks or other riskier investments.
Although stocks have declined in 2020 and there has been heightened volatility in recent years, you must focus on the long-term benefits of having a diversified portfolio. We provide and plan for a solid “fixed income foundation” to provide stability for your near-term financial needs, for your next 5-10 years of spending, if you are in or near retirement.
Though it can be difficult, patience and discipline are required to maintain your stock allocation, but it has been rewarding to do so over the long-term. And your focus must be on the long-term, not on the next few months or years, but on the rest of your life, and that of your spouse and other family members.
A globally diversified portfolio goes through ups and downs, but over the long-term, a globally diversified, balanced portfolio can provide returns that are far in excess of inflation. For illustrative purposes, the Vanguard Star Fund has returned 6.76% per year over the past 15 years, and 9.16% per year since its inception in 1985.**** This fund generally has a 60% stock and 40% fixed income allocation, with diversified holdings in the US and significant International exposure. This is not a fund that we recommend, so this is not performance data of our firm. But I think this information is relevant for illustrative and informational purposes, to reinforce the long-term benefits of staying invested in stocks and being well diversified.
Social Security planning
If you are not yet receiving Social Security benefits, or are years from receiving Social Security benefits, you should verify your projections regularly at SSA.gov. Check your earnings and projected benefits every few years.
Even if your income goes down this year, due to the Covid crisis, you should know that benefits are based on a 35-year average, which is weighted toward your later years of earnings. Also, it is important that you, and a spouse/partner, earn credits for as many years as you can. For example, for 2020, you earn one credit for each $1,410 of earnings, up to 4 credits per year. You need to earn 40 credits, or 10 years of work, to be eligible for retirement benefits.***
Even if you or your spouse only work part-time for a significant number of years, there is still a long-term benefit of earning some amount of money, to earn these credits, and the resultant years of Social Security benefits later in life.
Focus on the long-term.
Adhere to your plan. Or talk to us about your planning.
As always, we are here for you, and family members or friends who could use our guidance and assistance during this crisis.
** “Social Security recipients may be in for a rude awakening later this year,” Alessandra Malito, Marketwatch.com, published May 13, 2020. Social Security statistics in the first 4 paragraphs are from this source.
*** Data per Social Security website, SSA.gov.
****Per Morningstar.com, May 14, 2020, for Vanguard Star, VGSTX. The returns cited do not include any advisory fees, such as our firm would charge a client.