Quarterly Commentary: Q3 2019

In the third quarter, the US economy remained on track despite ongoing weakness in manufacturing and uncertainty surrounding US-China trade negotiations. Healthy job creation, rising wages, and positive consumer sentiment helped move the economy and the markets forward, albeit at a slower pace. Strong housing numbers also contributed to overall strength for the quarter.

Beyond our shores, circumstances have proven to be a bit more challenging, especially in Europe, where a Brexit resolution has been perennially postponed, and the German economy teeters on the brink of recession. China, the world’s second largest economy, surprised markets with a slower-than-expected 6% quarterly growth rate, the weakest in over 27 1/2 years, while persistent political unrest in Hong Kong is creating additional economic tensions.

Perhaps the most prominent geopolitical event in the 3rd Quarter was the announcement by House Democrats that they have begun an impeachment probe stemming from a whistleblower claiming the Trump administration had been pressuring the Ukraine government for information about former Vice President Joe Biden and his family in return for continued aid to the country.

For the quarter, the S&P 500 rose a modest 1.7%, while U.S. small cap equities (Russell 2000) slipped by 2.4%.  Developed international stocks (MSCI EAFE) fell 1.1% and emerging markets (MSCI EM) struggled down 4.3%. Real estate (REITS) provided a noted bright spot finishing the quarter up an impressive 6.8%.

Fed policy continued to favor fixed income investors, with the BarCap Aggregate having another excellent quarter, up 2.3%, and money markets (Fidelity Money Market Fund Premium Class-FZDXX), currently yielding 1.9%.

As we head into the end of the year, we are optimistic that current conditions will persist, with possible tailwinds from a viable trade agreement with China and a robust holiday spending season. Now that markets have endured what have historically been the year’s two most volatile months, September and October, intact, some anticipate we could have a Santa Claus rally to punctuate a successful 2019!

We are all keenly aware of the role participating in the markets will play in planning for a successful retirement. Yet, there’s another cornerstone of most retiree’s plan: Income derived from the Social Security system. Whether young or old, understanding how this system works, as well as the various options offered to you under a myriad of personal circumstances, can significantly impact on your retirement future. To this end, we would like to explore the topic of Social Security with you.

 

“We must begin by insuring that the Social Security system is beyond challenge. [It is] a vital obligation each generation has to those who have worked hard and contributed to it all their lives.” — Gerald R. Ford, February 1976

 

The Social Security Act passed in 1935 established Social Security for the purpose of providing a financial safety net for retirees. The program is based on contributions that workers make into the system established by the Federal Insurance Contributions Act (FICA). Taxes are withheld from the paychecks of those in the system.

Contrary to popular belief, Social Security is an income-transfer program, not a funded retirement plan. This means the money paid into the Social Security system does not accrue to a particular individual, nor are you entitled to any of it. That said, this system represents a critical social contract with retired Americans, and past attempts to change have been met with intense political resistance.

 

A summary of how Social Security benefits are calculated

There are a number of steps that go into the calculation for benefits.

As you can see, the formula provides a declining benefit for each additional tier as income rises, with high-income earners receiving only a 15% benefit on their last $67,000 in earnings.

 

Considerations to determine when to start collecting benefits

While you are eligible to begin receiving benefits between ages 62-70, the ideal time to do so depends on individual circumstances.

Here are some issues to consider in making this decision:

To receive your full benefit, you must reach Full Retirement Age. Depending on your birthdate, this is between age 65 and age 67. If you start up to 36 months before Full Retirement Age, then your benefits will be reduced by .55% for each month. If you start earlier than 36 months, the benefit is further reduced by .42% for the rest of retirement.

If you delay benefits after Full Retirement Age, you will receive an 8% higher payout for every year you delay up to age 70. If you choose this route, you must consider the money lost by not taking the benefit in return for a higher future benefit. The crossover for this to be successful is typically 13-14 years.

Earned income can reduce your benefit temporarily if you receive a benefit prior to Full Retirement Age. If you’re still working and haven’t reached your Full Retirement Age, then $1 in benefits will be deducted for every $2 you earn above the annual limit ($17,640 in 2019).  The reduction falls to $1 in benefits deducted for every $3 you earn above a higher limit ($46,920 in 2019). This is deducted only for income earned up until the month before you reach your Full Retirement Age.

Once you reach Full Retirement Age, your benefits are no longer reduced no matter how much you earn.

Social Security benefits may be taxable if your Modified Adjusted Gross Income is above a certain threshold, up to a maximum tax of 85% of your benefit.

If you elect to receive early benefits, but change your mind, you have the option of withdrawing your application and paying back what you have already received, after which you can restart benefits later.

If you have a spouse covered by Social Security, there are a number of additional strategies to maximize the benefits you receive between the two of you. For couples married more than 10 years, spouses are entitled to the greater of their own benefit or ½ of spouse’s benefit, if it’s higher than their own.

 

The mortal enemies of Social Security and Medicare are those who, in contempt of the plain arithmetic, continue to mislead Americans that we should change nothing. 
—Mitch Daniels, American politician

 

How healthy is the Social Security System?

According to the 2019 annual report of the Social Security Board of Trustees, monies in the trust fund available to support Social Security benefits are projected to run out by 2035. The trust fund had $2.8 trillion in reserves at the end of 2018, but benefit payments going out are increasingly outpacing income, due to demographic and actuarial trends.

Currently, over 10,000 baby boomers are retiring daily (living and collecting benefits longer); while younger generations are experiencing lower birth rates. The combination of these circumstances means fewer workers are supporting a growing number of retirees. This is depleting the trust fund.

If the trust fund is exhausted, it does not mean Social Security benefits will stop. Instead it means the system will exhaust its reserves and will only be able to pay out what it takes in annually in Social Security taxes. Even without the trust fund, Social Security would be able to pay roughly 80 percent of the scheduled benefits.

 

Possible solutions

This is a politically charged issue because one of the largest and the fastest growing voter segments is receiving, or soon-to-be-receiving, Social Security benefits. Despite this, tough changes are necessary for the Social Security system to remain solvent. Some changes are already in place. For instance, effective May 1, 2016, two common claiming tactics (“File and Suspend” and “Restricting an Application”) were eliminated.

Other possible future changes include:

In short, fixing Social Security is not complicated. However, it will take a political will that politicians on both sides of the aisle have not yet demonstrated.

 

How this factors into your retirement income strategy

Properly addressing Social Security issues tailored to your individual circumstances is one important piece of the financial planning puzzle. Even if you are not dependent on this income, it is important to work with us well before reaching Full Retirement Age to discuss how you might claim and plan for your Social Security benefits.

Our financial planning process integrates all aspects of your financial circumstances in order to provide insights and clarity on the ways for you to achieve success as you manage your retirement years.  At Wealth Dimensions, we are committed to helping you craft this plan. Further, we remain vigilant in monitoring and assessing the markets, the economy, and programs like Social Security for any changes that could impact your future.

 

For informational purposes only. Not intended as legal or investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000.

Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.