For years I’ve been touting life insurance as a unique asset class (we own 7 policies). Now let’s explore why I believe Social Security (and pensions for those lucky few) should be considered as another asset class too.
When clients review their Social Security Planning report that I sometimes include in my fee-based planning, they are often astonished by the substantial benefits they can expect to receive over their lifetime. The total amount can exceed $1 million and even reach up to $2.5 million for married couples.
These figures remain significant even when using a 0% Cost-of-Living Adjustment (COLA), which converts Social Security’s inflation-adjusted income into present-value dollars. For some clients, Social Security becomes the most substantial asset on their balance sheet, and the report helps them understand its importance.
Considering the substantial value of Social Security, it is prudent to treat it as an “asset” and manage it alongside the other assets in your portfolio. This approach calls for attention to two key aspects: 1) maximizing the lifetime value of Social Security (including survivor benefits), like optimizing your other assets, and 2) including Social Security as part of the overall portfolio, particularly within the fixed-income portion, for proper asset allocation.
I use my expertise to assist with the first aspect in a written retirement income plan. My calculator (to put actual numbers to the usual likely obvious best filing strategy based on the client’s assumptions) is designed to demonstrate how one can maximize their Social Security benefits through optimal claiming strategies.
The purpose of this calculation is to showcase the lifetime benefits under various claiming scenarios, enabling clients to gain perspective and make informed decisions that yield the most significant long-term returns.
For married couples, I always also consider the role of spousal and survivor benefits in these strategies. When presenting the report to clients, I typically focus on the strategies themselves and compare the lifetime benefit amounts for each scenario, emphasizing their relative values.
When using a 2% (or another) COLA, the numbers can become quite substantial, leading a few clients to approach the totals with some skepticism. Those inflation-adjusted figures may not feel tangible, and some clients find it hard to believe they could actually receive over $1 or $2 million in Social Security income.
To make the benefits more relatable and to address the second aspect above, I rerun the calculator with a 0% COLA. This conversion translates their lifetime, inflation-adjusted Social Security income into present-value dollars, allowing it to be considered an integral part of their overall portfolio.
The purpose of this illustration differs; it aims to provide a realistic understanding of the value of their Social Security income stream (as a fixed-income asset like a bond or an annuity), utilizing potential life expectancies.
While I typically assume a life expectancy of around 85 for the husband and 95-100 for the wife (it’s my conservative planning nature) in my plans, adjusting these ages can calculate various present values of the Social Security income stream.
It makes sense that some clients may prefer using average life expectancies for both or consider one’s health history, family genes, and lifestyle habits to factor in longer or shorter life expectancies for either spouse.
In any case, I like to be more conservative with life expectancies. Should the spouses live longer, then the plan becomes better.
This is the most challenging aspect of valuing Social Security as an asset since the “maturity” date cannot be determined. The longer the assumed life expectancies, the greater the present value. Let me know how long each of you will live, and I’ll craft the perfect Social Security claiming strategy!
Before giving an example, may I give a shameless plug for my “Social Security Income Planning” book? CLICK the title link to read the book description and get your copy at Amazon.
Ok, let’s consider the case of Joe and Susan, who have $1,000,000 in retirement assets excluding their home equity. A conventional 60/40 portfolio allocation would suggest investing $600,000 in stocks and $400,000 in bonds or other fixed-income investments like BUFFER or guaranteed lifetime income annuities (NOT SPIAs).
Don’t even get me started on SPIAs! All things considered, you can always do better than a SPIA.
My “I Didn’t Know Annuities Could Do That!” book shares how important these products, when used appropriately (we own 4 annuities), can be in improving a retirement income plan with less risk and more predictability. It’s far and away my best seller currently.
You are on the insurance company’s dime if you live 12-18 years beyond starting the guaranteed lifetime income. The longer you expect to live, the more these products can add to your retirement. (CLICK the title link to learn more and get your copy).
Anyway, when we factor in the present value of Joe and Susan’s expected joint lifetime Social Security income—let’s round it to $1,000,000 (since precision is impossible in Social Security calculations)—the actual allocation to fixed-income becomes significantly larger.
The total “portfolio” value now amounts to $2,000,000 (including the present value of Social Security), and the $600,000 invested in stocks now only represents 30% of the entire “portfolio.” This may be perceived as overly conservative.
Considering that Social Security constitutes half of the “portfolio,” achieving a 60/40 stock/bond allocation would be impossible. Investing the entire $1,000,000 retirement portfolio in stocks would create a more balanced allocation of approximately 50/50, providing the clients with greater growth opportunities.
Now I understand that most folks cannot take (and likely should not) the high volatility and risk of having 100% of their non-Social Security portfolio in equities. My clients want to be able to sleep at night – despite what optimal planning and history may suggest.
That’s why I use equity strategies like my S&P 500 BUFFER Ladder, which can take away much of the market risk, yet offers attractive potential returns.
I also use fixed-income alternatives like our firm’s high-interest flash notes that major banks issue (May’s note is paying 12.65%) and those annuities to generate guaranteed lifetime income with better income and growth potential than bonds.
Although bond investments offer appealing yields right now, that income is fixed – there’s no inflation protection (except TIPs – whose day in the sun is ending as inflation is taming).
It’s important to emphasize the need to incorporate growth elements into the fixed-income portion of the portfolio to generate increasing income throughout retirement. Unlike bonds, this can be done through certain income annuities that have also benefited from today’s higher current bond yields. The longer you live, the more attractive these become!
How close to or early in a client’s retirement also matters, as “sequence of returns risk” is heightened during the five years before retirement and the first ten years of being “unemployed.”
Regardless of the chosen equity/fixed-income percentages allocation (notice I didn’t write “bond”), the concept here is to regard Social Security (or any pension) as part of the fixed-income portion of the retirement portfolio and make your adjustments accordingly.
When I design a retirement income plan for my clients, I holistically look at the entire picture and make my recommendations accordingly.
So what do you think? Is Social Security a distinct Asset Class?
all the best… Mark