3 Things 8-10-26

 Thing One

The Social Security and Medicare Issue

Most people are aware of the ticking time bombs that are the Social Security and Medicare trust funds.  The former is projected to be insolvent by 2035 and the latter by 2036.  We believe that all options for addressing the impending crises should be on the table, including means testing, which would essentially reduce benefits for well-off “older people”.  With that in mind, we share what WSJ writer, Marc Siegel said on the topic a few years ago:

“One commonly held belief about the Social Security system is that baby boomers and the generation that preceded them are making out like bandits, draining both the Social Security and Medicare trust funds and leaving little for younger generations.It is also widely believed—fervently so in some quarters—that the rich don’t pay their “fair share” of Social Security, since the earnings subject to the program’s taxes are capped each year.

Do these notions—particularly the latter—stand up? Last month I turned 70 and, thanks to my earnings, became entitled to Social Security’s maximum benefit, currently $3,500 a month, or $42,000 a year. And so, if I live to 90, I will receive $840,000 worth of (inflation-adjusted) benefits.Over the past 50 years, according to the Social Security Administration, the combined taxes paid into the system by me and my employers equaled $329,640.This sounds like a good deal—the benefits I would collect over the next 20 years are more than twice what I put in. But the benefits are only about one-third the $2.27 million I would have accumulated had the taxes instead been invested, over time, in a stock index fund.Moreover, the benefits I would collect are even less than the $1.28 million I would have accumulated if my “contributions,” as Social Security taxes are euphemistically called, had been placed in U.S. Treasury bonds. This number is particularly important, because the Social Security Administration bought government bonds with my (and others’) taxes to build up its trust funds. In effect, the government made almost one-half million dollars more on my Social Security taxes than they will pay me if I live another 20 years.What about Medicare? Over the past half century, my Medicare taxes exceeded $1 million, more than three times my Social Security taxes. That’s because since 1994 there has been no cap on the income subject to Medicare taxes. I have calculated that these taxes, invested in Treasury bonds, would now have accumulated to almost $1.75 million…”

Along with the various solutions for recalculating the benefits to be paid out that are currently being contemplated, Congress (prompted by the rest of us) should also put the idea of privatization that Mr. Siegel alludes to back on the table.  If citizens were allowed to control the accounts their contributions were put into, many would take advantage of the opportunity and, over time, they could accumulate the kind of money Mr. Siegel described.  Those people wouldn’t “burden” the government at all for monthly retirement checks or healthcare benefits.  Again, there is no single solution, so not everyone would opt in.  But that doesn’t mean all options shouldn’t be on the table. 

Thing Two  

Ten Investing Rules

The following is taken from an article written on rbcgam.com by Sara Ripoelle, a portfolio manager at RBC Global Asset Management. As it relates to her investing synopsis, we’ve taken her ten bullet points verbatim but removed her lengthy explanations and replaced them with our own simplified versions.  See the opening paragraph and modified bullet points below:

“A few months ago, I was in Vancouver having coffee with a colleague, Jayelene Catala. She reminded me of the visual below (yes, that is my handwriting!) which I have used in past presentations. It is a subset of a list that I came across while preparing a presentation in early 2019, not long after the significant market volatility that we experienced at the end of 2018.

At that time, I thought these points were great for all investors to keep in mind. They are no less relevant today given continued volatility. The list is a good reminder of some of the key principles that I have written about in previous posts: the power of diversification; try your best to ignore the noise; and stick to your long-term investment plan..."

1.        Your asset allocation explains most of your returns -Stocks, bonds, and other asset classes have different risk profiles, so they also have different potential return profiles.

2.        Diversification is your most important investment strategy – Don’t put all your eggs (assets) in one basket.

3.        Broaden your investment universe to find opportunities – Where it makes sense, seek out new baskets.

4.        Market uncertainty never goes away – There are no “sure things” when it comes to what markets will do (especially in the short term).

5.        Higher returns come with higher risks – You can’t have your cake and eat it too in investing.  If you bet big, you can also lose big.

6.        It’s time in the market, not timing the market – The best time to invest is whenever you have the money to do so.  So the question isn’t should I invest, it’s where should I invest and when?

7.        Markets are made of up and down cycles – To get to the good, you have to be willing to endure the bad and the ugly.

8.        No strategy outperforms all the time – Markets are volatile and even well-reasoned strategies will fall short of the expected results sometimes.

9.        You need to keep your emotions in check – This is one of the best reasons to have a fiduciary on your team (to keep you from getting irrationally exuberant or terrified).

10.  A down market does not equal a personal financial crisis – Remember, you shouldn't have money in the market if you're afraid to put it at risk and you’re in it for the long term anyway, not the current news cycle.

Thing Three

Just A Thought  

 “The individual has always had to struggle to keep from being overwhelmed by the tribe.” - — Friedrich Nietzsche