3 Things 10-24
Thing One COLAs Magnify The Disparity Between Early And Late Claiming The title of this post is also the crux of an assertion made by Elaine Floyd, a certified financial planner and author of Savvy Social Security Planning for Boomers. She made the argument in an article published in Financial Advisor Magazine. The author of that article was prompting its readers to carefully consider the impact of the recent cost of living (COLA) increase of 8.7% announced by the Social Security Administration. It is already well known that postponing the collection of social security benefits from the age that one is first eligible (62) causes the monthly benefit amount to increase in a compounded way up to age 70 where the benefit maxes out (see chart). But what is less well known is that the COLA increases provide a compounded benefit as well. See a brief explanation below: “…Any COLA adjustment gets added onto that primary insurance amount each year and compounds. And every month beyond the full retirement age up until 70 a retiree waits to collect translates to an additional credit applied to that higher primary insurance amount. Let's say a 64-year-old retiree is eligible for a primary insurance amount of $3,000 per month at full retirement age. If she didn't collect last year, when the COLA was 5.9%, her benefits would have been adjusted to $3,177. The amount will get bumped up to $3,453 next year (with the latest COLA increase being applied to the higher inflation-adjusted amount). COLAs keep getting added the more years she waits; any delayed credits for not collecting benefits from full retirement age until age 70 are then applied on top of that amount. If she delays her benefits until age 70, then her monthly benefit (excluding any COLAs beyond next year) will be $4,374…” In the example above, postponing from age 62 to age 70 resulted in almost a 50% increase in the monthly benefit amount, permanently. While that is definitely worth considering, the author concedes that postponing doesn’t necessarily make sense for everyone. Aside from the obvious non-starter of not being financially able to forgo collecting until age 70, she points out that the break even age for making postponing “worth it” is 82.5 so individuals who aren’t likely to reach that age due to questionable health should probably consider taking the benefit as soon as they are eligible.
Thing Two Time In The Market vs. Timing The Market Most of us have been told of the folly of trying to time the market but given the volatile times we find ourselves in (once again) it’s worth revisiting the topic. To do so this time we offer up the conclusions from two similar studies - one in the form of a written summary and the other in chart form. First, the written summary from financebuzz.com. “...One study looked at the cost of a hypothetical investor missing the 10, 20, 30, and 40 best-performing days in the market. The study covered the period between Jan. 1, 2009 to Dec. 31, 2018. In the study, the hypothetical investor invested $1,000 in the S&P 500 index at the start of the period. The results are eye-opening:
If the investor left the money invested for the entire period, their initial $1,000 investment would have grown to a value of $2,775.
If the investor had missed only the 10 best days of the 10-year period, their initial investment would increase to $1,722 at the end of the 10-year period. This is only 62% of what their investment would have been valued at if they had not missed these 10 best days.
If the investor had missed only the 20 best days of the 10-year period, their initial investment would increase to $1,228 at the end of the 10-year period. This is only 44% of what their investment would have been valued at if they had not missed these 20 best days.
If the investor had missed only the 30 best days of the 10-year period, their initial investment would decrease to $918 at the end of the 10-year period. This represents a decline of 8% in the value of their initial investment after missing the 30 best days of this 10-year period.
If the investor had missed only the 40 best days of the 10-year period, their initial investment would drop to $712 at the end of the 10-year period. This represents a decline of almost 29% in the value of their initial investment after they miss the 40 best days of this 10-year period.”
Now see the chart below which covers the period from 1999 through 2018 and rather dramatically illustrates the negative impact of being out of the market. Missing the best 10 days (out of almost 7,000 days) cut the return in half and missing the best 20 was catastrophic. This doesn’t mean you should necessarily be all in at all times. Circumstances will certainly vary by individual. But if you are in and are thinking of getting out, or you are out and thinking of getting in, be clear about why and remind yourself that neither you nor whomever you might have helping you is prescient enough to pick the best handful of days to be in the market in advance.
Thing Three Just A Thought "Getting something done is an accomplishment; getting something done right is an achievement." - Anonymous