Social Security

[Zek, The Grand Nagus]

What do you people do with SSA benefits at retirement or death?

Do you let the planning software estimate for you, or do you download a copy of the SSA calculator, and try to get as close as possible?

I'm leaning towards doing the calculations myself. I feel weird about not knowing how long someone has worked, and letting the software assume it's longer than it could be.

ROn

[eroth322]

Get annual SSA statement from client. It provides estimated benefits based on Client's earnings and retirement age. Then, assume at least 1% less than inflation for a growth factor for planning purposes during retirement. Also, if Client is long way from retirement(say 20 years), sometimes I assume much less or none, because it may not be there down the road.

[bss]

Good advice---other than the none part. Social security will be around-even for today's 20 year olds. The age may go up and/or the benefits may decrease-but it will be around in some fashion.

The public at large cannot save on their own-everybody knows it, including the legislators. You want to see a welfare state-get rid of forced savings and fast forward 30 years.

[tpondel]

My social security might not be there?? Don't tell me that !!!!


I actually recommend to a lot of the high-end clients that we zero out the SS benefit. If they receive anything (which they do believe they'll get something) then its "extra."

Amber

[eroth322]

I realize "none" is extreme, but I've had some younger clients request planning on such an assumption. Personally, I believe a combo of 1) lower benefits, higher payroll taxes, and higher retirement age will be the "tradeoff" political solution becasue it effects young and old -- let the balancing act begin - in 10 years or less this will be happening

[bss]

NJ,
If you had a client that wanted to plan based on an assumed 15% return, would you go forward with that?

Those clients that say they want to plan with no social security are saying that because they lack an understanding of the system. It's not their fault though---when the media says social security will be bankrupt by 20xx, I can understand why people draw that conclusion.

As planners, if we can be so bold as to extrapolate historical market performance for 40+ years and stand behind that, then how can we as planners go along with the idea that there will be no social security???

Calling is a conservative approach to planning, or calling it "extra" does not cut it.
Zero-ing out social security in any sense is poor planning in my opinion.

[eroth322]

BSS,

First of all how many major comanies have frozen or elminated their pension plans / benefits in the last 5+ years. SS is nothing more than a poorly desinged, under funded pension plan, changes are coming.

In most cases, I attempt to provide and explain multiple scenarios for client retirement planning. In essence, best case, vs median vs. low outcome. Clients often do not get the impact that different returns have over time on their retirement income goals.

Early on, I emphasize to clients that I can not predict the future and invesmtent returns are not guaranteed.

Do I assume 15% returns - no, however, I might very well assume investment returns of 9% 7% and 5%. If a Client needs $60k in today's dollars (after-tax) -- dramatically different outcomes on $1MM of investments result. In other words, social security becomes more important the lower the returns on investments over time even without considering real returns over time. Soem clients are risk adverse - period. Some clients do not want their principal touched. You can layout all the historical info and investment theory you want and they will not accept the risk for "potential" equity returns.

So I don't see it as conservative planning nor assuming SS will be gone - it's working with a Client, knowing their risk tolerance, considering multiple variables when planning and explaining potential outcomes.

Not doing so, is poor planning in my opinion.

[bss]

NJ,

Of course, it makes perfect sense to illustrate the impact of various investment returns.

However, it makes no sense to include in any illustration the impact of NO social security payments at retirement due to the system going completely defunct. If you illustrate that scenario, then you should also illustrate a 0% return and/or 15% inflation rate over the same time period.

The bottom line is that we as planners must educate our clients on what is/is not possible and make educated guesses as to what the future may hold. If your clients, or even you, believe that social security will not be around in some form, then there is some education needed there; and if anyone does planning on that assumption-the plan is flawed.

[eroth322]

"If your clients, or even you, believe that social security will not be around in some form then there is some education needed there; and if anyone does planning on that assumption-the plan is flawed."


"In some form" - what does that mean? Is it possible benefits might be frozen? not increase at inflation less 1% (remember when it used to increase with CPI)? retirement age might increase again (already happened once) more SS subject to income taxes (this has already happened) payroll taxes going up (how many times has this happened?

Let me be clear, I'm not saying SS will be gone, but I am saying it's value as a source of retirement income has diminished will continue to diminish in the future - to the degree planning does not account for this, that plan is flawed

[Tad Borek]

NJ wrote:
> First of all how many major comanies have frozen or elminated
> their pension plans / benefits in the last 5+ years. SS is
> nothing more than a poorly desinged, under funded pension plan,
> changes are coming.

Well there is a very big difference -- SS is funded with payroll taxes, while a corporate pension is funded from its profits, and depend on its continued solvency to provide promised benefits. Equating SS with a private pension is a bit like comparing the risk of a Treasury Bond (which eternally will be considered the "risk-free rate") to a corporate bond (where any corporation's debt can become junk, given enough time).

I agree that SS isn't going away in our lifetimes, but that benefits are likely to be reduced (or rather, will continue to be reduced) for those less reliant on the benefit. But it's a very valuable asset that must be considered alongside other retirement savings -- price an inflation-indexed annuity for a recent retiree and it may look like a $400k "floor" on the balance sheet. In planning, ignoring it would lead to an over-allocation to fixed annuities for every retiree...

-Tad

[eroth322]

Tad

Your point is well taken re: SS vs Company pension. I was trying to express the idea that SS is a "fixed income" type of retirement benefit. U.S. Gov't will back what it decides to support, wherein, my points reside. I believe the commitment will be less in the future re: lower payouts, increased age etc..

You mentioned another point though, the $400K "floor" balance sheet item. When couples are involved, when one passes away SS can be significantly reduced - more risk than other fixed income investments. This is not the case with bond funds or CDs, that is if soemone dies income still comes in based on investment. The point is that for the surviving retiree living expenses may not go down by a corresponding amount. So, I'm saying it's imperative to consider SS in retirement planning, but assuming "as is" or no change of benefit amounts / eligibility is also an inadequate way to plan - "Depending" on SS can be cause an over allocation to equities.

[bss]

Tad,
You got it. Good analogy.

Totally eliminating social security will lead to a higher savings rate need-which means the person is being forced to give up the use of that money TODAY for the ability to use it 20-30 years from now.

Move forward 20-30 years, the person is rolling in cash because social security is still with us, and the person is kicking himself because he is looking back at how much easier his life would have been all those years if he could have had some of that money to use back then.

NJ,
I am in total agreement with your last post--there is a huge difference in illustrating no benefit and a reduced benefit. Illustrating a full benefit for younger people is just as wrong as illustrating no benefit in my opinion.

The only reason that I chimed in on this thread at all is that in your first two posts in this thread, you said twice that you often illustrate NO BENEFIT what so ever. In my opinion, there should not be a planner out there doing that because it is simply wrong--you could be doing more harm than good with that.

When I do retirement planning for younger folks(anyone under 50 or so), I estimate that the future benefit they will see will be 72% of the expected benefit. It is an educated guess.

I use that number because soc sec is now a pay as you go system, meaning that when a dollar comes in it goes right back out the door to pay a benefit. Based on projections, in the next 20 years, due to an aging population, decrease in birth rates, and immigration statistics, there will be enough money coming in to pay only 72% of benefits, unless of course something is done to fix it.

One man's opinion. Take it or leave it. This horse is dead.

[williejukebox]

Client goals can be reached without factoring in social security (if they are realistic). Regardless of clients' risk tolerance, you want to formulate a plan to reach thier goals Safe&Efficiently (assuming as little risk as possible). If they are Sky-Divers or Rock-Climbers you can shoot for the fences with thier discretionary investments (those that they can afford to waste), if such investments exist.

My best opinion all day,

William H. Williams

[williejukebox]

O! Yes calculate it yourself. You can present it to them to show "how it will effect them if", but I wouldn't ride thier security on it.

Alrighty,

William H. Williams

[Zek, The Grand Nagus]

William, your opinion has been noted and dismissed. Thanks.

Ron

[Advocate]

After reading this thread I can see why Socialist Security is so important.

Y'all are gonna need it.