Social Security as an Asset Class?

Posted on July 31, 2022 by Dr. David Edward Marcinko MBA MEd CMP™

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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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Posted on July 5, 2015 by Dr. David Edward Marcinko MBA MEd CMP™

Is Medical Practice a New Asset Class Under MPT?

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Valuing the Private Practice Physician’s Quintessential Alternative Financial Investment

Dr. DEM

By Dr. David Edward Marcinko MBA CMP™

As we know, the investment industry and Modern Portfolio Theory [MPT] strives to make optimal ‘allocations’ into different ‘asset classes’; according to some defined risk tolerance level or efficient frontier.

Equities, fixed income, property, private equity, emerging markets and so, are all ‘asset classes’, into which physician investors and mutual fund or portfolio managers will make an allocation of their total funds under management. It is quite proper for them to do this as they seek to balance the risk and potential returns for their own; ME, Inc., or other clients’ money.

And, by creating a “new” asset class, this concept opens the door to significant capital flows; advisory and management fees. Hence; the unrelenting innovation of Wall Street, and its’ commission driven and fee-seeking mavens, is unending.

The Social Security Example:

This concept may be illustrated using Social Security as an example.

Wall Street opines, if you’re not counting on Social Security benefits as a part of an overall asset allocation strategy, you may be missing out on bigger gains in a retirement portfolio. Those of this ilk say that retirement investors should consider the value of their Social Security as a portion of their fixed-income investments …. Others believe it may be too risky.

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Empty Retired Doctor's Lounge

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The Portfolio Shift

Generally, adopting this strategy would mean shifting a big portion of investible assets out of bonds and into stocks and into the hands of money managers, stock brokers and wealth managers for a fee; of course. This is akin to those financial advisors who rightly or wrongly goaded clients to not pay off a home mortgage and instead reposition the free cash flow into a rising; and then falling; market. Of course, there are detractors, as well as proponents of this emerging financial planning philosophy.

For example, Jack Bogle, founder of the Vanguard Group, often cites his penchant for basing one’s asset allocation on age. (If you’re 40 years old, you have 40% of your investments in fixed income and 60% in equities. By the time you’re 60, you’ve got 60% in fixed income, 40% in equities).

Now, let’s again consider Social Security, citing a physician with $300,000 in an investment portfolio, and capitalizing the stream of future payments. If the $300,000 is all in equity funds, even equity-index funds, and $300,000 in Social Security, you are already at 50/50″ fixed income versus equities.

The next step is a conversation as this the nexus of where Social Security meets risk management. So, how will the doctor feel when market goes up and down? Some may believe the concept, but not enjoy the inevitable more fluctuating self-directed 401-k, or 403-b plan. One must be comfortable with taking on a larger stock position.

Sources:

  • Andrea Coombes; MarketWatch, September, 2013.

Others experts, like Paul Merriman, opine that Social Security is not an asset class and the idea is fundamentally flawed and should not be a part of anyone’s portfolio.

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Physician SGR Critics and the Doctor Fix

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Why?

As classically defined, a portfolio is composed of financial assets. A financial asset is something that can be sold. Social Security cannot be bought and sold. Because of that, it has a market value of zero.

Therefore, since a medical practice can be bought or sold, the definitional decision is left up to the informed reader, modern physician or financially enlightened financial advisor; or Certified Medical Planner™.

Source:

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