Born in 1960 or Later – Your Social Security is At Risk

Worth $233,000?

Look at this image:

What jumps out at you there?

Hopefully, you can see the two numbers in the blue box. The one on the left is $1,070,000. The one on the right is $837,000.

In  running a financial plan for a couple, Lanny and Maggie, I am showing them the TRUE cost of paying a 1% per year investment management fee on their $487,000 portfolio.  NOTHING else in the plan changed, mind you. I simply clicked on 1 button and added a 1% management fee.

And, as you can see, the cost is $233,000. This is $233,000 they will NOT have in which to leave to their heirs, their church, or even better yet, to enjoy in their retirement together.

Ultimately, this is what the REAL cost of paying someone to manage your money comes to; YOU have less.

Now, some will argue you are actually receiving MORE of a benefit from the professional advice than the cost you’re paying. They’ll try to quantify this with such studies as from Vanguard, “Advisor’s Alpha.”

According to Vanguard, paying that 1% fee may be worth it if an advisor can help you by “focusing on behavioral coaching”. i.e., keeping your emotions in check during bear markets.

I ALWAYS chuckle at this idea that the average investor is ready to throw in the towel at the first evidence of a bear market.  I’m sure some are.  But in my experience it’s the PROS, not the clients themselves, who are nervous Nellies.  See my video here on a recent example of this exact thing.

Now, to Vanguard’s credit, they don’t make an argument that superior investment selection is something advisors can do in order to earn their 1% fee.  The days of that even being debated are LONG gone thanks to folks like the founder of Vanguard himself, John Bogle, and others such as Burton Malkiel.

“A Random Walk Down Wall Street” by Malkiel remains a classic to this day.

Of course, I’d be remiss not to mention my all time classic favorite investment book from John Bogle, “Common Sense on Mutual Funds.”

So, if superior investment performance is not to be obtained by hiring a professional and you aren’t jumping off a bridge when the Dow drops 100 points, tell me again the reason for paying someone an annual investment management fee?

Oh, right, tax, estate planning, diversification and asset LOCATION. Those are ALSO benefits a professional advisor brings to the table for which he/she needs to be compensated for. Indeed, indeed.

Then why don’t they simply charge for those services as opposed to the 1% management fee which costs $233.000 in total?   Seems a steep price to pay, no?

Of course it is!  And EVERYONE knows this.

In fact, in late March a VERY prominent guy in my business posted on LinkedIN that he’d never seen as many advisors reach out to him to discuss pay-for-service fees instead of the typical 1%.

The reason?

The 35% drop in assets were killing the advisors income stream!  The advisors wanted to find a better way to bill clients to avoid such a dramatic hit.

Notice though, these purported “fiduciaries” weren’t reaching out to this guy when the money was flowing in.  And they certainly weren’t asking how they could reduce the expense to their CLIENTS during these trying times….

NO!  They were reaching out to inquire how they could bill a higher fee!  (Side note: That’s why I could care less about a “fiduciary” standard.  It’s a meaningless sales pitch.)

Ultimately, advisor’s compensation should be disclosed similar to when you go close on a home for a mortgage.  You see very clearly your amortization schedule and thus the amount of interest you’ll pay over the course of that loan.  YIKES!!!

I guarantee you, if advisors and had to say to the Lanny’s and Maggie’s of the world, “my services are going to cost you $233,000 over the course of our relationship”, there’d be a heck of a lot less fees paid out to advisors.  And THAT, my friend, IS a fiduciary standard I could live with.

I Wish This Were Clickbait…

But it’s not.

The economic damage done by the over-reaction to Covid-1984 has impacted millions. And unfortunately, for many, the pain will be felt for years to come, via a potentially HUGE reduction in Social Security benefits.

This pains me to write this. As I’m a HUGE proponent of Social Security and, in fact, even wrote an entire book proving that you can actually retire on Social Security alone.  You can buy the book by clicking on the link below if you’re so inclined.

However if you were born in 1960, and potentially any year after that, this may no longer be true due to how Social Security calculates your benefit.

Let’s start with the basics.  Social Security indexes your wages to what’s called an Average Wage Index(AWI). Essentially they inflate the money you made in previous years to give you a benefit that pays out in current dollars.

For instance, in 1991 I was an E-4 in the Army. I made around $11,000.  If Social Security were to give me a benefit based on that amount alone, I might be able to buy a bag of Ramen noodles and that’s it.

Instead what they do is they INDEX that $11,000 to the increase in average wages over the years. Click this link to see exactly how this works.

Because I was born in 1970 my earliest year of eligibility (when I turn 62) is 2032.  So, I type 2032 in the box hit enter and VOILA! I get my indexing numbers.

I see my indexing amount for 1991 is 3.7398426.  So, I take the $11,000 I made in 1991 times by that indexing amount to get $41,138.  That is the dollar amount that Social Security uses to calculate my wage base for the year 1991.

Social Security does that for each and every year you paid payroll taxes.  They then add up your top 35 years, divide that number by 420 and you get your AIME.

Your AIME is the number the Social Security Administration uses to calculate your PIA, which is your benefit you’ll receive at FRA.  I know, a LOT of acronyms going on here.  And I’m not going to take the time to explain all this here.  Buy my book down below or simply watch my Youtube channel as I’ve discussed these formulas a million times to Sunday.

The kicker here though is your INDEX NUMBERS.  That is what determines your INDEXED AMOUNTS that ultimately determine what your benefit is.

What I did not know was that your index numbers are not permanent. They can actually change, retroactively, depending on the economy for the year in which you turn 60!   Read this article NOW!  It’s from Andrew Biggs, who I’ve interviewed twice, here and here.

In summary:
“Assuming a 15 percent decline in the Social Security Administration’s measure of economywide average wages in 2020, a middle-income worker born in 1960 could have his annual Social Security benefits in retirement reduced by around 13 percent, with losses over the retirement period in excess of $70,000.”

“(W)hen the Average Wage Index in (the year you turn 60) falls below projected levels by a given amount, earnings in all past years are also reduced by a similar percentage.”(emphasis mine.)

So, a decline in the GDP in the year you turn 60 means a decline in your Social Security benefit…and that decline in your benefit could be HUGE – hundreds of dollars a month!

To prove the point, I did a series of videos on this exact thing showing what happened to people who turned 60 during the last economic downturn in 2009.  Now the economy dropped that year by all of .4%, not 4% but .4%!

And even with that tiny decline the folks who were born in 1949 received thousands less in benefits than those born 1 year before or after them. See here and then here.

What does this all mean? Simple, the folks advocating for the economic shut down, and CONTINUED shut down, are going to impact YOUR retirement plans!  And that is not acceptable.

Just because of the year in which you were born you could lose $10.000s of benefit.  Did the amount of taxes you paid into the system change? Nope.

Did the extra years you worked to solidify your retirement change? Nope.

You did what you were supposed to do. You played by the rules and JUST LIKE THAT the rules are going to bite you by no fault of your own.

Oh, don’t think if you were born, say in 1970 like me, this may not affect you either.  Do you not know the economic decline from 1927-1939?   Think you’ll be exempt if we follow a similar path that our leaders took us down during that time period?

If we go into a massive regulatory environment, ala the 30s, rest assured, your Social Security benefit, and mine, will be reduced too.

We need to hope for quick economic downturn similar to what transpired in 1921 as written about by James Grant in his book, “The Forgotten Depression”.

Hopefully our leaders will read Murray Rothbard’s account of the reason why the Depression of the 30’s became “Great” and not in a good way.

However, given it’s our leaders who put us in this mess with their incessant desire to “follow the science”, whatever the h**l that means, I’m not holding my breath.

Eisenhower warned us about our credentialed elites dominating society:

“Today, the solitary inventor, tinkering in his shop, has been over shadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers.

The prospect of domination of the nation’s scholars by Federal employment, project allocations, and the power of money is ever present and is gravely to be regarded.

Yet, in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific-technological elite.”

It appears we’ve arrived at such a place and sadly the regular person is being shut out from the debate.

Forget all that! The one area YOU do have power is by your ability to raise a ruckus with your representatives.  Trust me, the last thing your elected officials want is a bee in their bonnets.  Politicians are like electricity and they will ALWAYS go the path of least resistance.

Nassim Nicholas Taleb calls this the Dictatorship of the Small Minority because those tend to be the loudest voices…all the while the rest of us just about our lives trying to put food on the table.

Well, sorry to wake you from your comfortable slumber, but if our leaders can get away with THIS to reduce your Social Security benefits, what comes next?  Doubling of Medicare premiums?

You need to use your voice to say this needs to be fixed! You did what you were supposed to do.  You “social distanced”, you “sheltered at home”, heck many of you lost your flippin jobs or businesses!

And now you’re potentially going to lose thousands in the one thing that is supposed to stand solid for you?

Do not stay silent.

Raise a ruckus until they change this.

© Copyright 2018 Heritage Wealth Planning