Capital Market Expectations, Asset Allocation and Safe Portfolio Withdrawal Rates

Posted on July 31, 2022 by Dr. Marcinko

By Staff Reporters

From: Munich Personal RePEc Archive [MPRA]

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Economist Wade Donald Pfau wrote an article called, “Capital Market Expectations, Asset Allocation, and Safe Withdrawal more than a decade ago. Today, is is still a vital read.

Abstract

Most retirement withdrawal rate studies are either based on historical data or use a particular assumption about portfolio returns unique to the study in question.

But, financial advisors and planners may have their own capital market expectations for future returns from stocks, bonds, and other assets they deem suitable for their clients’ portfolios. These uniquely personal expectations may or may not bear resemblance to those used for making retirement withdrawal rate guidelines. The objective here is to provide a general framework for thinking about how to estimate sustainable withdrawal rates and appropriate asset allocations for clients based on one’s capital market expectations, as well as other inputs about the client including the planning horizon, tolerance for exhausting wealth, and personal concerns about holding riskier assets.

The study also tests the sensitivity of various assumptions for the recommended withdrawal rates and asset allocations, and finds that these assumptions are very important. Another common feature of existing studies is to focus on an optimal asset allocation, which is expected either to minimize the probability of failure for a given withdrawal rate, or to maximize the withdrawal rate for a given probability of failure. Retirement withdrawal rate studies are known in this regard for lending support to stock allocations in excess of 50 percent.

Assessment

This study shows that usually there are a wide range of asset allocations which can be expected to perform nearly as well as the optimal allocation, and that lower stock allocations are indeed justifiable in many cases.

Link: MPRA_paper_32973

About MPRA: http://mpra.ub.uni-muenchen.de/information.html

NOTE: Wade Donald Pfau is an Associate Professor of Economics at the National Graduate Institute for Policy Studies (GRIPS) in Tokyo, Japan. His PhD in economics was from Princeton University.

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Social Security as an Asset Class?

Posted on July 31, 2022 by Dr. Marcinko

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A High Guaranteed Return!

By Rick Kahler CFP® http://www.KahlerFinancial.com

Rick Kahler CFPOnce you hit age 62, what’s an investment class that can give you a high guaranteed return with almost no risk; Bonds, Equities, or Commodities?

Nope; it’s social security.

There’s just one catch. You can’t actually get your hands on the money until you’re 70.

The Catch

One of the most common issues for those approaching retirement age is determining the right time to file for Social Security. If you file at age 62, you will receive benefits longer. Yet your monthly benefit for the rest of your life will only be about 75% of the monthly amount you will receive if you file at your full retirement age of 66 to 67. If you wait even longer, the benefit amount is higher still.

Those who are unable to work and don’t have sufficient retirement savings may not have a choice about filing for Social Security early. Those who don’t have a compelling need for early Social Security income may still consider early filing as an option, with the idea of investing the money for their later retirement.

Recent Thoughts

According to a recent article by Karen DeMasters in Financial Advisor magazine, this is not a good choice. She cites research done by William Meyer and William Reichenstein of Social Security Solutions Inc (www.ssanalyzer.com) in Leawood, Kansas.

One big drawback to investing your Social Security benefits is the penalty you pay if you are still working. If, between age 62 and your full retirement age, you earn more than $15,120 a year, your benefits are reduced. So you’d start with a smaller benefit amount, have it cut even further, and not be left with a whole lot to invest.

Even more important, however, is a number that Meyer and Reichenstein emphasize: 8%. This is the amount that your Social Security benefit increases every year between age 62 and 70 that you delay filing. In essence, if you leave your Social Security benefits in the government’s hands instead of investing them yourself, you are guaranteed an 8% annual return on that part of your retirement portfolio. This doesn’t include cost-of-living increases.

Taking early benefits and investing them is only a good idea if you are sure you can get more than an 8% return. Any investment likely to produce a return higher than 8% would come with risks that are unacceptably high for a retirement-age portfolio.

Mature Woman

Social Security Risks

There are only two real risks associated with letting your Social Security benefits accumulate until later than age 62.

One is the possibility that Social Security won’t be there when you do retire. Given that the delay is only a few years and that Social Security is now the retirement plan of most Americans, this is extremely unlikely.

The second risk is that you won’t live long enough to collect an amount equal to what you would get if you started benefits early. Unless you are facing a terminal illness, however, chances are that waiting until at least full retirement age is still the wisest option.

Assessment

If your health is good and you don’t need retirement cash immediately, you are far better off to delay filing. Even if you are facing circumstances that might make early retirement a necessity, it’s a good idea to look at all your options and try to find creative ways to put off filing as long as possible.

Once you reach age 62, Social Security is always an option. It gives you a doorway out of the working world any time you really need to take it. But for every year you can delay walking through that door, you gain 8%. That’s an investment return well worth waiting for.

Conclusion

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Social Security Politics and Mathematics

Posted on July 31, 2022 by Dr. Marcinko

By Staff Reporters

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Although the future of Social Security remains in doubt, some congressional lawmakers are ensuring that most Social Security recipients get their money and then some. Sen. Bernie Sanders (I-Vt.) introduced the Social Security Expansion Act (SSEA) in June. The bill would allot $200 more per month for each Social Security recipient — a 12% boost in money, according to CBS News.

The bill was introduced after the Social Security Administration said that Americans would no longer receive benefits in 13 years, if congressional lawmakers do not address the funding shortage.

So who will receive these Social Security increases?

The people who are currently eligible for Social Security or anyone who turns 62 in 2023, which is the earliest age to collect Social Security, will be eligible to receive the extra $200 a month with their benefits.

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Now, at present for Social Security, 12.4% is taken out of each paycheck for people earning up to $147,000, with half paid by the employer and half paid by the worker. So, if you make $147,000 or less, you are paying 6.2% into Social Security. If you make, say, $1.47 million, you only pay 0.6% of your income to Social Security.

If the pending new SS bill is approved, the same rate would be taxed on individuals making $250,000 or more. Those making $147,000 or less would continue to pay the same rate as well, with a do-nut hole between the $147,000 and $250,000 — although that $147,000 typically goes up each year, as it is based on average income.

The increased funding — along with a change in the cost-of-living-adjustments (COLA) to the Consumer Price Index for the Elderly (CPI-E) — would help to increase benefits by an estimated $200 per month, or $2,400 per year, which bears out, according to an analysis by the Social Security Administration (SSA).

RELATED: https://www.routledge.com/Comprehensive-Financial-Planning-Strategies-for-Doctors-and-Advisors-Best/Marcinko-Hetico/p/book/9781482240283

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Thank You

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