Motley Fool Money - A Free Social Security Analysis Tool, and the Yield on the S&P 500 Hits an All-Time Low

Starting point is 00:00:01 A free tool to help you decide when to claim Social Security, and the S&P 500 dividend yield hits an all-time low. That and more on this Saturday personal finance edition of the Motley Fool of Hidden Gems Investing podcast. I'm Robert Brok-Aver. This week I speak with Mike Piper about open social security.com, a website he created to help retirees choose the optimal age to claim Social Security. But first up, some news from the week. On our May 2nd episode, my colleague Amanda Kish and I discussed ways to evaluate mutual funds at ETS. In that episode, Amanda said that a fund that outperforms over one period often has difficulty maintaining that outperformance. Well, Standard & Poor's just provided some proof in its recently

Starting point is 00:00:44 updated U.S. persistence scorecard, which measures how long a fund could keep a good thing going. This year's version, which includes data through the end of 2025, begins by pointing out what most of us know. It's hard to beat an index fund. Last year, 79% of actively managed U.S. large-cap funds underperformed the S&P 500. That was a little. fourth worst year for active large-cap managers of the last quarter century. And it's even harder to find a manager that consistently outperforms. According to the report of the U.S. stock funds that performed in the top 25% of their categories for the five years ending in December of 2020, only about one in 10 stayed in the top 25% over the subsequent five years. For our next item,

Starting point is 00:01:28 we turned to housing. The K-Shillard National Home Price Index posted a gain of 0.7% in February, down from 0.8% in January, and it was the ninth consecutive month that inflation outpaced home price appreciation. But below the surface, different parts of the country are experiencing very different price movements. According to a recent article from EPB research, eight major U.S. cities are making new all-time highs with Chicago, New York, and Cleveland, experiencing the biggest gains over the past year. Meanwhile, seven major cities have been stuck below their 2022 peaks for almost four years. And half the country had a real house. housing correction with declines up to 13% with San Francisco, Seattle, and Las Vegas being the

Starting point is 00:02:08 cities down the most from their 22 highs. One of the reasons for the disparity, according to EPB, construction. Some of the cities with declining prices in recent years experienced large price increases up to 2022, which spurred construction, which increased supply and put downward pressure on prices. The cities currently hitting all-time highs have, on average, seen much less construction. So the lesson for cities where there's a lack of affordable housing, build more houses. And now for the number of the week, which is 1.08%. That is the dividend yield of the S&P 500, an all-time low, according to a post from Meb Faber and below the previous record of 1.1% set in 2000 at the height of the dot-com bubble. That points out that there are now

Starting point is 00:02:53 some mutual funds with dividend in their names that actually have a negative yield because their expense ratios exceed their payouts. Part of this is a valuation story since yield is calculated by dividing the dividends paid by the price of the stock or the index, so as prices rise, yields fall, and the price of the index has definitely gone up. The S&P 500 reached new all-time highs this past week, and has gained a remarkable 13% since April 1st. But this is also because many of the biggest companies in the index hold on to their cash to reinvest it or buyback shares. Of the 10 biggest companies in the S. FB 500, three don't pay a dividend, and the average yield of the other seven is just 0.6%. Next up, crunching the numbers on claiming Social Security when Motley Fool Hidden

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Starting point is 00:04:21 The age of which you file for Social Security will be one of the most important retirement-related decisions you'll make. Generally speaking, you can claim as early as age 62, but for every month you delay, you get a bigger benefit. Whenever I write or talk about this topic, I often suggest that people use online tools to help quantify the trade-offs and maybe suggest the best strategy. And the first tool I always mention is open social security.com. Created by Mike Piper, Mike is a CPA, financial planner, the author of the Oblivious Investor blog, Innovate Books, including Social Security Made Simple and Can I Retire? Mike, welcome to the show. Thank you for the invitation.

Starting point is 00:05:01 So let's start with you talking about the inspiration for creating open social social security.com. Sure. It's firstly, I just wanted there to be a free tool that I was confident in because just like you said, it is an important decision. But to get a little bit into the nerdy side of things, every other social security tool that I'm aware of requires you to tell it when you are going to die.

Starting point is 00:05:23 and then it will tell you what is the best social security filing age, which is a little bit like a calculator for playing blackjack at a casino that requires you to tell it what the next card's going to be, and then it tells you what you should do. It just, it doesn't make sense in my head. That's a useful tool to play with a lot of different assumptions, right? What if I die at this age? What if I die at that age? But I think it's important to also have a tool where you can say,

Starting point is 00:05:51 I don't know when I'm going to die. So let's use a mortality table from insurance companies or from the Social Security Administration, for instance, and do the math that way that takes into account the uncertainty, essentially. So first of all, I want to point out that this is really a labor of love for you. In another interviewer, you said that you worked on this for 20 hours a week for two and a half years. And this is free. So I'd like to say thank you on behalf of everyone who has used your tool. It's outstanding. And so tell us a little bit more about the mortality, right? So if you're in a situation where

Starting point is 00:06:26 you expect to have an above average life expectancy versus maybe you have health issues where you expect to die sooner, how does that affect the decision? Yeah, with Social Security, the longer you end up living, the better it will turn out to have been to have waited to file for your benefit, because your benefit will last the rest of your life. And so if that life turns out to be a very long time, then it would be a good thing to have been to have have a high benefit. So the longer you expect to live, the more advantageous it is to delay filing for benefits, although it gets more complicated once we talk about married couples, because now we're thinking about both people's life expectancies and so on. Yeah, and I think that's an important

Starting point is 00:07:04 point that a lot of people don't think about, right? When if you are a married couple, especially if you are or someone who earned significantly more than the other spouse, it's not really just a question of what maximizes your benefit, but what maximizes what your spouse will get if you pre-deceease her or him. Yes, exactly. So I'm sure over the years you've seen a lot of misconceptions about Social Security, and maybe that was part of the inspiration for the tool too, because you could put a lot of this stuff in numbers and people can see the actual figures. But what are some of the misconceptions that you've come across that you think lead to people

Starting point is 00:07:37 making suboptimal decisions about when to claim Social Security? The most common misconception I see is people thinking about it backwards from a risk point of view. This is super, super common. And it's an understandable mistake. You'll hear people say things along the lines of, I don't know how long I'm going to live. Of course, that's true for all of us. I don't know how long I'm going to live.

Starting point is 00:08:02 And therefore, I'm going to file for my benefit as soon as I can to make sure that I get at least something. And at first glance, like, that sounds like it makes perfect sense. Intuitively, that sounds like a pretty good plan. But just like we were saying a second ago, the longer you live, the better it will be to have waited to file for Social Security. And in retirement planning, unlike in the rest of life, in most of life, the scenarios where you die earlier, of course, the scary scenarios, right?

Starting point is 00:08:30 Like, those are the things we don't want to have happen. But in retirement planning, that gets flipped on its head. It's the long life scenarios that are scary. If somebody dies just a couple of years after they retire, they probably did not run out of money during retirement. but if somebody lives for 40 years after they retire and a significant chunk of that time was in a nursing home, for instance, that's the financially scary scenario. That's the person who's at risk of running out of money. And so delaying Social Security makes those financially scary scenarios less scary. So delaying Social Security reduces risk. And that mindset shift, it takes some work. You have to be intentional about it because intuitively we are just so you. to think about the short life scenario is scary, but here it's the exact opposite. And so the things that you intuitively think make sense can in some cases be precisely the opposite of what makes

Starting point is 00:09:23 sense. There have been plenty of studies over the years that ask, you know, retirees or near retirees, what are you most afraid of? And a lot of these have supposedly found that people are more afraid of running out of money than dying. But obviously, I've heard that too. As long as, you know, you have Social Security and the system is still in place, you can't run out of money. So if you are really worried about running out of money, that's another reason to maybe delay it, because even if your portfolio runs dry, you've got a good benefit. Yes, that's exactly right. It works in two ways. It both, A, reduces the likelihood of depleting your portfolio, and B, makes it so that if you do deplete the portfolio, you're in a better situation because you still

Starting point is 00:10:01 have a higher level than kept leftover. I don't know if you've done any kind of sort of meta-analysis of your tools outputs, but generally speaking and acknowledging that everyone's different, what tend to be the most common recommendations in terms of when to claim benefits? For a single person, the answer is it usually makes sense to delay, not necessarily all the way until age 70. That will depend on the person's health and, you know, predicted longevity. Of course, we don't know how long they live, but we can identify is this person a good health or poor health.

Starting point is 00:10:33 And it depends on interest rates, right? The higher that inflation adjusted interest rates are, the more appealing to take the money and invest it strategy becomes. So those are the two factors. But most of the time for an unmarried person, the answer is that they should delay and often all the way until 70 or close to 70. And then when we talk about a married couple,

Starting point is 00:10:56 it gets more complicated because just like you said, there's now survivor benefits. And the way that that usually plays out is that for the person with the higher earnings record, when that person waits to file for their benefit, it increases the household income for as long as either of the two people is still living because it increases that person's own retirement benefit and it increases the other person's benefit as a survivor if the other person lives longer.

Starting point is 00:11:21 And so now it's an especially good deal for this person with a higher earnings record to delay benefits because it's increasing this household income for either of these two people's lifetimes. And so that person should almost always wait until age 70. There are some specific exceptions, but in most cases we want to see that person late. And then it's the opposite for the person with the lower earnings record. When they wait to file for benefits, it only increases the household income as long as both people are still alive, which is a shorter length of time. So now it's less advantageous for that person to wait. It doesn't necessarily mean it's a bad idea for that person to wait because we still have a point that from a risk point of view, delaying benefits reduces risk.

Starting point is 00:12:01 But from the point of view of just doing the math and maximizing the expected total amount of dollars received over a couple's lifetimes, it makes sense for the lower earner to file early in many cases. That was the instance for my situation. Of course, I used it for me and my wife. I've been working, you know, since we've been married, she stayed home a lot, raising the kids and then became a professor, which is a noble job, but not a high paying job. So it has her claiming early and me delaying to age 70, which I like and I will do because she's most likely going to outlive me. And I want to make sure she has that higher benefit, because if I claim earlier, she'll get a lower survivor benefit, right? Yes, that's exactly right. So we have a lot of people here at the Motley Fool who are at investors, they've been doing it for a long time, and I hear over and over again, they will say things like, ah, I'm going to take it early and invest that money because I can earn more than the delayed credits, and sometimes they'll throw out 8%, because that's not much the delayed credit is after full retirement age. What's your response to that argument? It is important that we account for investment returns when we're doing this analysis. For reference, the Open Social Security calculator does do that. But the important thing to know here,

Starting point is 00:13:13 is that most of the time when we're talking about delaying social security, we're talking about social security as compared to bonds. And there's a few different ways you can come to that conclusion. One is just the traditional textbook finance point of view, that when we're choosing the discount rate for present value calculation, you want to choose something that has a similar level of risk. So the thing that has the most similar level of risk to social security is TIPS, Treasury, Inflation Protected Securities,

Starting point is 00:13:40 because they're both backed by the federal government. they're both inflation adjusted. So there's that point of view, or just the pragmatic real-life point of view, which is when people file for Social Security early, they don't actually usually invest the money. They spend the money. But that means that they now will let a greater portion of their portfolio

Starting point is 00:14:01 remain invested. And so there's some investment returns that they are going to get that they would not have gotten if they had chose to delay social security. So the question is, then, if you do choose to do that, delay Social Security, and in so doing, you have to spend down your portfolio somewhat faster. Which dollars from the portfolio would you choose to spend down while you're delaying Social Security?

Starting point is 00:14:25 And there has come to be a generally regarded best practice here of what's called creating a social security bridge, which is where you carve out a portion of the portfolio, specifically to bridge your way until your social security kicks in. So whatever your social security benefit would have been if you're delaying it eight years, we take eight times that amount and we carve it out from the portfolio and we put it in something very safe. The ideal choice would be an eight year tips ladder, but a CD ladder would be fine or even just a short-term tips fund would be reasonable. That's an estimate. And so what we're doing is we're literally spending down bonds to delay social security. So when we're thinking about

Starting point is 00:15:09 the investment returns, the investment returns we want to be looking at are the investment returns from bonds because even if you decided I would prefer to have more stocks rather than more Social Security. Well, that's fine. Then that means you should not spend down the stock side of your portfolio to delay Social Security. And that's an important analysis to do. That's worth doing. But then we still need to ask, but would you be better off if you spent down some of your bonds in order to delay Social Security? And in many, many cases, the answer to that will be, yes, you would be better off doing that. The way I think about it, you can tell me whether you agree is you're basically spending down your bonds in order to increase the value of something that's sort of like a bond equivalent, right?

Starting point is 00:15:51 Social Security provides income. It's a bit of a diversifier to your household balance sheet, right? If that check's going to come in the mail, regardless of what happens in the stock market. So you're trading one for the other, except that with Social Security, not only you're getting this bond equivalent, it will last as long as you do, and it's inflation adjusted. Right, exactly. Social Security, it's not technically a bond. It's technically an annuity, but those are both on the fixed income side of, you know, the overall household balance sheet. And right. It's much closer to a bond than it is to stocks. And that's exactly right. In many cases, it makes sense to give up some normal bonds to get Social Security, which just like you said will last the rest of your life. It will be adjusted for inflation. We mentioned in the inflation here. And a few years ago, you know, that was 2023, Social Security received at 18. 8.7% cost of living adjustment. And some people thought, you know, I better claim now to get that adjustment. But that's not really accurate, right? Like everyone gets the adjustment, even if you haven't claimed yet, right? Right. Yes, that was a super common misconception. Or it's, it still

Starting point is 00:16:57 is a common misconception, but it became more important when the cost of living adjustment was very high that year. The cost of living adjustment kicks in at age 62 for everybody, regardless of whether they have filed or not. It's completely independent of that decision. So everyone gets the benefit of that. I'll also point out that both in your tool and when you use My Social Security to look at your benefit, that's all stated in today's dollars. So it already has the, I know, the flage that is built in there. So understand if it says you're going to get $3,000 a month, you're actually going to get more, but it's going to have the purchasing power of $3,000 today. Right. That's correct. So you're a CPA. So you do look at the tax side of this as well.

Starting point is 00:17:38 and you've written that in many cases, tax considerations actually strengthened the case for delaying. What's the reasoning behind that? There's two reasons for that. And of course, tax planning is always case by case. So do your own analysis, talk to your tax professional and so on. But there are two reasons why delaying social security usually is advantageous from a tax point of view. The first reason is that when we delay social security, that often gives us a window of years with lower income. because we've retired, Social Security hasn't kicked in yet.

Starting point is 00:18:12 RMDs from retirement accounts have not kicked in yet, so we just have a lower level of income, and that allows in many cases for Roth conversions at lower tax rates. And so it just gives us this opportunity for advantageous Roth conversions. Again, varies by case, but that's often going to be applicable. The other tax point in favor of delaying Social Security is simply that Social Security income is itself, tax advantageous. It's never fully taxable. At the federal level, only 85% of it can be included in your taxable income. And for many people, it will be less than that. And at the state tax level,

Starting point is 00:18:50 in many states, social security is completely tax-free. So when we can give up some form of fully taxable income, and that's often what we would be doing if we're spending down our traditional IRA dollars, for instance, we'd be giving up future traditional IRA dollars, which would have been fully taxable, and we are instead getting more Social Security income, which is not fully taxable. Another aspect of this is for people who are concerned about required minimum distributions from traditional IRAs at age 73 or 75 or if you're born in 1960 year later, if you're delaying Social Security and you're spending down those traditional accounts, you're kind of reducing those future RMDs. Yes, exactly. So whenever we talk about Social

Starting point is 00:19:34 security, there's always the question of, well, okay, fine, but we don't know what's going to happen, right? It's not going to go bankrupt. Let's dispel that misconception, because most of the benefits are paid from payroll taxes, so as long as people are working, there will be Social Security. But there is a trust fund that makes up a good part of it, and it will most likely be depleted within a decade. And at that point, there'll be enough money to pay maybe 75% to 80% of benefits. So you, as a financial planner, how do you think people should factor that into their retirement plans? I think it depends on your age. The closer you are to receiving social security already, I think the less likely you are to be somebody who is on the receiving end of any cuts and benefits,

Starting point is 00:20:17 just because politically speaking for someone already on social security and in many cases, people who are already on social security are very much dependent on their social security for a significant portion of their income. Cuts to those people's income is not going to be very popular. I do think for people who are younger, it makes a lot of sense to, you know, if you go to ssa.gov and sign in and get your statement of estimated benefits, rather than planning on that full amount, planning on 77% of that amount, which is what the trustees of the Social Security Trust Fund currently project as what the program would be able to pay if there were no changes to the program, if we didn't see any increase in Social Security tax rates, for instance.

Starting point is 00:20:59 So that builds in a bit of a margin of safety. they'll come up with some solution before then, but at least you know if you would make that assumption, your retirement's going to be fine because you assumed you're going to have less, which means you have to contribute more to your 401ks and IRAs. You've built in that margin of safety. Plus, you know, you may get to your six seasons and realize, okay, I saved a lot, but now I can retire a little sooner. Yes, exactly. Let's move on to retirement planning in general. One of your books is entitled, More Than Enough, a Brief Guide to Questions that Arise after realizing you have more than you need. So let's start with how people should figure out whether they have enough to retire.

Starting point is 00:21:35 That's a great question. And there's never a way to put a precise dollar amount on it. I'm sure many or all of your listeners are familiar with the 4% rule, which is the assumption that in the first year of retirement, you could spend 4% of the portfolio and then increase that with inflation every year. And then there's an accompanying tremendous volume of discussion on whether 4% is too high or too low and separately, whether that's even the right. approach to spending from a portfolio. But no matter how we look at it, there's a couple of things that are true. Number one is that it's never going to be a precise dollar amount because there's too much uncertainty involved in investment returns in lifespan and so on. And number two,

Starting point is 00:22:16 the younger you are when you first start spending from your portfolio, the lower the percentage that you need to be spending. If you retire early at age 50, as opposed to somebody retiring at age 70, the person who retires at age 70 can safely spend a greater percentage of their portfolio every year just because it won't have to last as long. But I think those are the broad things to keep in mind that you should do some analysis on this topic. It should definitely account for your age. But no matter how much analysis and research you do, you're never going to have a definitive answer. Yeah. And we had Bill Began, the father of the 4% rule as a guest on the show in August. He came out with a new book. And he's moved it up to 4.7% and said if you retire earlier and

Starting point is 00:22:56 have a potential retirement span of 40 years or more, it's down to 4.1%. But I think really what it emphasizes it's important to be flexible because you don't know what's going to happen. So, you know, if the market goes down, the thing to do is to cut back on your spending, try to live off your interest in dividends, maybe some cash. That's probably the most important thing because so much of this is just unknowable. Yes. And that is what most people do anyway. Even without a financial planner and, you know, any sort of professional advice, that's what most people would naturally do. If they're portfolio tanks, they're probably going to start spending less. So let's continue with this book here because it's interesting. I think most people,

Starting point is 00:23:31 when they read about retirement, they will often hear about, oh, there's a retirement crisis, and people haven't saved enough. This book is about people who maybe have saved more than they need. What was the inspiration for writing that book? The inspiration for the book was seeing people in real life who ended up in those circumstances without having anticipated it. And the reason that that happens is actually the exact topic we were just talking about. It's all of the uncertainty. Essentially, early in retirement, you have to pick a spending rate that assumes that your investment returns won't be very good, right? That's where the 4% rule or 4.7 or whatever number you use. It's always based on the worst historical scenarios. And probably you won't have a scenario that is

Starting point is 00:24:15 in line with the worst historical scenarios. Also, with respect to longevity, we don't know how long you're going to live, we can look at what your life expectancy might be, but then we always have to assume you'll live beyond your life expectancy because you might. But we have to do that all the way through retirement. No matter how old you get, we always have to assume that you will live longer than however long you are statistically likely to live. And so both of those things, as well as the third factor here is medical and long-term care costs, we basically have to assume you're going to have really high costs later in life. But not everyone does. And so we have to build in all of this conservatism, all of this wiggle room, essentially.

Starting point is 00:24:57 And then what ends up happening for most people at some point is they don't get unlucky in all of those various ways. And then partway through retirement, they realize, oh, wow, I actually have, you know, I'm now spending 2% for my portfolio per year. And I'm doing all the things I want to be doing. And so they just end up in a situation that they hadn't really planned for where they very clearly have more than they need. Well, Mike, this has been a fascinating discussion. Thank you so much for joining us. Thank you for the invitation. The Madamy Holmes Bike for Brain Health

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Starting point is 00:25:48 Register today at Bike for Brain Health. It's time we get it done, fools, and we're near the end of the school year, which means your kids or grandkids are one year closer to going to college. So now's a good time to open a 529 college savings plan or evaluate the one you have, as well as estimate whether you're saving enough to cover future bills. When opening a 529, start by seeing if your state offers tax benefits for participating in your own state's plan, but you don't have to participate in your own state's plan. A recent article by Rebecca Lake onAdvisorsperspectives.com offered, a solid overview of 529s and the breaks offered by each state, another excellent resource is savingforcollege.com, which rates 529 plans. And to calculate how much you need to save, do an online search for the invite education college savings estimator. And that, my foolish

Starting point is 00:26:43 friends, is the show. Thank you so much for listening, and thanks to Bart Shannon, the engineer for this episode. As always, people on the program may have interest in the investments they talk about, and the Motley Fool may have formal recommendations for or against. so don't buy or sell investments based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only.

Starting point is 00:27:08 To see our full advertising disclosure, please check out our show notes. I'm Robert Brokamp. Full on, everybody.

Motley Fool Money - A Free Social Security Analysis Tool, and the Yield on the S&P 500 Hits an All-Time Low

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