Paul Winkler: Welcome to “The Investor Coaching Show.” I’m Paul Winkler, talking money and investing. Yeah, so that’s what I get into around here.
Complimentary Workshops
We had a workshop, and one of the things that I wanted to bring up here in this hour is just a little bit about the workshops that we do and just a little bit about some of the details of this one on Social Security. So on the website, PaulWinkler.com, you can actually go and look at workshops that we have coming up and things that are happening. There’s lots of video content on there, lots of information on there.
I, for many years, worked for big companies that would tell us to get out there and teach workshops, and get out there and sell things at those workshops, and sign people up. If you can get lots of heads in the room, and then feed them, they’ll buy whatever it is you’re selling.
And I never did that, I never really felt comfortable with it. But yeah, there are a lot of people that do it, and a lot of people that have done it. The problem is that you get people in a room and you’re saying, “Hey, I’m going to give you all this information about something.” Some of the information may be good, but some may be self-serving because it gets people to do what you want them to do, so a lot of times it’s being used to scare people.
I’ve seen some pretty gimmicky workshops in my day. But typically what is being sold isn’t something you really want to have anything to do with.
That’s what I have found so much with these workshops. So, I like to do the workshops for free on our website. Or complimentary. Wait a minute, you have to say complimentary — I think that’s the proper term in parlance in our industry.
It’s funny, because I hear people say that we have this free workshop, and I’m going, technically you’re not supposed to say that, you’re supposed to say complimentary, whatever the difference is. But anyway, the government thinks there’s a difference.
When to Delay Filing for Social Security
The Social Security workshop that we did is complimentary. You can go to the website and sign up for it even after the fact. People ask questions. So, that’s the only thing, you won’t be able to ask questions on that.
Anyway, it covered a lot of territory. Really the big thing that we wanted to cover in that workshop was early or delayed retirement in Social Security. Do you want to get a penalty or do you want to get a bonus by how you file Social Security? And in reality, what happens is a lot of people don’t recognize how big of a deal it can be filing late for Social Security, or filing delayed for Social Security.
Many people think that I have to retire and file for Social Security at the same time, if I’m going to retire at a certain age. Because I’ve told people, “Hey, you might want to wait on your Social Security.”
And this isn’t uniform, it’s not across for everybody. But to some people, I’ll say, “Hey, I think you ought to wait based on your benefit relative to your spouse, and you might have a situation where one person has a much smaller benefit than the other, from their work history.”
I talk a lot about how that is determined, how you can find out what those benefits are, and some of the things you ought to really know about that in the workshop. But you can find that sometimes when one spouse has a benefit that’s less than half the other person’s, it may behoove them to actually file early, because they’re going to get it delayed, or they’re going to actually get a spousal benefit on the other person delaying their benefit. It could actually be a lot better to do that.
In some cases, if both people have a much higher benefit, sometimes waiting is better. It really depends on your situation.
But one of the things that I often tell people to think about is how much in benefits they might get. If you have a $2,000 a month benefit from Social Security, because they’re going to look at your work history, they’re going to look at approximately the first $14,000 of income in today’s dollars that you earned. So, if you earned $5,000 at some year in the past, they’re going to bring that up to today’s dollars, and then they’re going to continually do that for every year for the 35 highest years of earnings in today’s dollars, and they’re going to determine what your Social Security benefit is based on that.
So, you may have had a very low income amount 35 years ago, and you may go, “Well, I only earned $5,000 that particular year — what if I go and work today and I make $12,000? Won’t that increase my Social Security benefit?”
Maybe, or maybe not; it depends on how many years ago it was, and what the cost of living was over that period of time. I might have a situation where that $5,000 in today’s dollars is 15, which is higher than the 12 that you’d go out and work and earn, and it won’t increase your Social Security benefit at all. So, recognize that.
But recognize that if you had — let’s say your benefit was $2,000 a month — your full retirement benefit, and you lived another 20 years, you could be having somewhere in the neighborhood of — if you have a 2% cost of living increase — about $600,000 in benefits in your lifetime. If you live 30 years — and a lot of people certainly could do that, at least one of them in between one spouse versus another — you’re looking at almost a million dollars of benefits right there.
Is Social Security Broken?
People often ask me, “Well, isn’t Social Security broken? And is it a Ponzi scheme?” As a matter of fact, somebody asked that question — Stan asked that question, I think it was — about whether or not it’s a kind of a pyramid scheme, a Ponzi scheme.
Technically, when you’re looking at a Ponzi scheme, you’re looking at somebody managing money, and then what they do is they come up with these fictitious statements on how much each person earned, and what they do is, if a person leaves the investment pool, they take new money that flowed in and they pay it to that person that left. Social Security technically takes people who are working right now and passes those taxes on to retired people.
So, that’s why it gets that reputation. But in reality, when it was set up in the 1930s, you may love it, may hate it, but it was set up in the 1930s because there were a lot of people that were staying in the workforce into advanced ages, and they were taking up spots from younger people, and younger people couldn’t get work, and hence the unemployment rate was incredibly high.
So, to get them out of the workforce, we’ll take some money from a Social Security system, we’ll institute a tax, take that money, and then pay it to people to get them to retire, and that way we freed up jobs for younger people. That’s where it all started. So, that’s where it gets that reputation.
The issue is that you’d have 100 people working for every one person in retirement back then, and now it’s more like 2.7 or 2.8, or something like that, for every one person in retirement. So, you have a lot fewer people working for every person in retirement, and the extra money that they collected in years past is actually being spent down.
Because that’s what they did: They bought government bonds with it. One of the guys at the workshop asked the question, “Well, wouldn’t it be better if they invested it?” Well, maybe, but here’s the thing: It got demagogued.
When people heard about possibly investing Social Security money into the stock market, all of a sudden, they said, “Oh, that’s gambling.” People often think of investing as gambling anyway, right? You hear people say that.
And I’ll often offset that and go, “Hey, do you know anybody that owns a business?” And they’ll say, “Yeah, sure.”
Do you think that they feel like they’re gambling when they go to work? Well, no. Well, they’re owning a business.
What’s the stock market? You own businesses, you just don’t have to work at them. That’s the big difference between them.
But people think, oh, it’s just gambling. And I go, well, the way most people approach investing, yeah, it is gambling. Because you go and buy this stock that you think is going to do well, and you buy it from somebody that thinks it’s going to do poorly. Then you go and sell something, and you go, “I think this is going to do poorly, I’m going to get rid of it,” and you buy something else, and you’re selling the thing that you think is going to do poorly to somebody that thinks it’s going to do great.
Fear of Investing
So the way people approach investing quite often is just crazy. But with Social Security, the money was put in government bonds, and the question was whether you could increase the return of the trust fund. It’s kind of late for that really now. We had that discussion 20 years ago when it might’ve made some sense, so in my humble opinion, it’s kind of late to be even having that discussion.
There was this guy that I studied under who’s a Nobel Prize-winning economist now. His son actually helped set up some of the investments down in Chile, and they had done that.
I actually had him on the radio show several times in the early years, talking about this stuff, because he and I were very much on the same page as far as how money should be invested. And it was so much fun because he was way ahead of me back 20-something years ago. He was way ahead of me.
What I did is I said, “Hey, you love being on the radio,” and he said, “Yeah, I love it.” He really did. He was just a radio junky, he loved it.
And I said, “I want to learn from you. Let’s do this, I’ll bring you on my radio show, and then you have little conversations with me before we go on about investing.”
It was just a great trade-off; it was really, really cool. Fun memories.
So, Chile actually did that, and what they found was that people who actually invested the money in the Social Security system opted out of the regular system, which was like America’s system. Those who opted out actually did better, by far, than the ones who stayed in the traditional system.
But I’ll never forget him telling me that most people stayed in the traditional system because they were scared of investing.
And I thought, isn’t that interesting, how people just don’t change?And they don’t understand the market. That’s why I’m so absolutely adamant that people understand investing. I’ve been doing this show for all these years for that reason.
Bolstering the Social Security System
So, Social Security, they take the money and then they invest it in government bonds. If it’s not needed, they pay it to people who are physically in retirement. They’re spending that money down to where you’ll have about 80% of promised benefits payable if the whole system goes broke. That’s basically where we’re at.
But there are a lot of things that they can do to bolster the system. Number one, right now, as we speak, the cost of living increases are based on labor inflation rates. You could go back to regular inflation rates, and you could increase the tax threshold, which I wouldn’t be crazy about because really people who are upper-income aren’t benefiting from the system.
It’s tiered in such a way that people who have an income of $14,000 approximately or less — let’s say that’s your lifetime income, since this is the way Social Security works — if your income has never been above $14,000, your Social Security benefit will be 90% of what you earned while you were working. If you look at the next bunch of income, about $70,000 of income, any income above $14,000 up to the next $70,000 of income is replaced at 32%.
So, as you can imagine, if you made an income of $84,000 — the example I gave in the workshop — then most of your income is actually going to be only replaced at 32%.
Hence, that is why it’s so important to save money for retirement, because Social Security was never meant to be a replacement for retirement.
Then, above the next threshold, you’re only looking at a 15% replacement — a very low amount of your income being replaced by Social Security.
What happens is, if you go and increase the tax above the income where you’re taxing people right now, those people don’t benefit, and tax increases notoriously end up creating unintended consequences, where it slows down economies and people lose jobs and things like that. So I’m not in great favor of that for many, many reasons.
Taking Social Security Early
Now, when might you decide to take Social Security early versus taking it later? Sometimes you’ll have people that just simply don’t work. They’re not working, they can’t work anymore, they can’t do what they used to do.
Some people are in jobs that have been tough on their bodies. Now, they may transition to a job that’s less tough on their body. They may be able to do that, they may not be able to do that. But you could have that situation where they just absolutely have to have income, they do have some savings, but they have to have income because they can’t work anymore, and sometimes they do take Social Security early.
Sometimes they’ll take it later if they can do that and live off of some savings, and I talk a bit about that in the workshop, some strategies for that.
But let’s say that you have a very short life expectancy for one reason or another — sometimes taking it early might make sense in that particular instance as well.
You’re going to take it early because otherwise you’re not going to benefit from it at all.
But many times if you have a husband or wife, you have two spouses, that survivor between the two of them is going to end up with the higher benefit. And because the survivor gets the higher benefit, many times it makes sense to push off that benefit to later. Because basically, the way it works is this: Your full retirement age, if you’re born in 1960 or after, is age 67 — that’s your full retirement age for Social Security benefits.
Now, if you take the benefit one month early from age 67, so age 66 and 11 months, what is going to happen is your benefit is going to be reduced by five ninths of 1%. If you add that up and multiply it, add that up by each month or multiply by 36 months — three years — your benefit is reduced by 20%.
Then if you take it even earlier than that — four years early — it’s that 20% reduction in your benefit for life, plus another 5%. So, you have a 25% reduction for life, taking your benefit four years early.
If you have a situation where you take it five years early, then you have a 30% reduction. So, it can be a pretty big deal. Versus if you take it later past your full retirement age, you have an 8% increase per year, which is pretty good.
So, if you, let’s say you have a 66 full retirement age, you take it four years later, at age 70, you have a 32% increase in your benefit for life. And something I pointed out in the workshop — again, that workshop’s at paulwinkler.com — I pointed out that not only do you get the delayed credits, but you get the cost of living increases on those delayed credits as well, and it can make a really big difference.
Break-Even Analysis
That’s why a lot of times when people do break-even analysis, does it make sense? And when they try to do it on their own, I often find that they don’t come to the right conclusion because they don’t know how to take that into account because mathematically, it gets a little complicated.
Then, you also have to think about how you could have taxation on your benefits due to work, taking your benefit before your full retirement age, 66 or 67. You could have taxation on your income from Social Security, so you could have up to 85% of your Social Security taxed.
Now, that can be tricky too because they take your provisional income, which is income from your pensions, income from IRA withdrawals, income from work, and income even from municipal bonds, I pointed out. If somebody had municipal bonds, even though they’re tax-free in most cases, there could be state taxes.
You can have tax-free income, but you can have a situation where that will actually affect your Social Security taxation.
Because that provisional income, half of your Social Security benefit, plus that income from pensions, IRAs, and savings accounts that pay interest, all that stuff, add those two things together. That income from those sources, plus half your Social Security, if it’s above $44,000, then you creep into territory where 85% of the Social Security gets added to taxable income.
That’s where you end up with, or could end up with, what’s called a torpedo tax. And I describe that in the workshop a little bit. This is where when you pull money out of an IRA, not only do you pay taxes on that, but you pay taxes on Social Security that wasn’t previously taxed, and you can have a situation where you have a 40% tax on a dollar withdrawn, even though your tax rate is 22%. So, you have to really be conscious of this stuff.
Again, that workshop, Social Security, has a lot of really great information on that. Paulwinckler.com is where that is. And you know what? You don’t even have to sit in a restaurant and be pitched to an annuity just to watch that workshop.
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Paul Winkler: All right, I’m back here on “The Investor Coaching Show.” I am Paul Winkler. talking money and investing.
Commodities Outperforming Equities
So I did a little run through my email. I get things every once in a while, and I go, “Oh, boy, I probably ought to just talk a little bit about this.” That email was a chart of the month, “Commodities Outperform Equities and Keep Pace With Inflation Year-to-Date.”
The reason this hits me is because I see commodity funds so often inside people’s investment accounts. Remember, it was back in 2008 and 2009 that we started seeing a ton of this.
Literally, Fidelity is in their target date funds. Remember, their Target 2040 fund? Well, that was the one if you were accumulating money that was mainly stock. And I was just shaking my head.
It was the top holding, the number one holding, where the greatest amount of money was in their target date fund. And I was shaking my head because commodities are things that just sit there — like gold is a commodity, like wood is a commodity, like wheat or whatever, anything that is just a thing.
When I’m looking at any kind of commodity, whether it’s silver, gold, diamonds, paintings, or whatever, it just sits there and does not produce an income. I’ve used this example with people, but it’s helpful to understand what the cost of capital concept is. If I have something that is paying $2,000 a year and I know that the interest rate is 2%, I could tell you that the value of it is 100,000. I know that because 2% of 100,000 is 2,000, and I could tell you that that is what that’s worth definitively.
When I have a commodity that’s not producing anything, I can’t really tell you what it’s worth other than what people will pay for it.
Now you say, “Well, that’s the same thing with real estate. I know what my house is worth based on what somebody will pay for it.”
Yeah, but it has a rental value. I can look at the rental value of the house, and I can tell you approximately what it’s worth too. Now it’s a little bit less easy to figure out the value because you have to look at comparables and all those types of things, but the reality is it has a cost of capital, and that is what people will pay to actually live in this place.
The Fluctuation of Commodities
When we’re talking about commodities, they go up and down based on the Lord only knows what. Supply and demand. This is one of the things they pointed out in their email, and this is trying to get financial advisors to sell this stuff: “Hey, we want you to sell this thing. We want you to get this thing out there.”
They were pointing out that the CPI report, the Consumer Price Index, was showing an inflation rate in March of three-and-a-half percent a year earlier. And you think, oh wow, we’re going to have lots of inflation. Commodities ought to do really, really well.
Doesn’t that make sense that it ought to do well? Maybe, maybe not.
Think about how one of the worst decades for gold ever was the 1980s when inflation was really high. But it is a story, and this is so often how investments are sold. What will you do?
And I remember hearing people talk about China back in 2008 and 2009. You know me, you know this show, I like academic research. But when I hear academics go off the beaten path and they start to tell people to do things or they start telling me that they’re doing things that are against what their research shows is a good idea, I’m going to walk away.
No, I can’t stand up for that. If you don’t stand for something, you’re going to fall for anything.
What happens so often is people put commodities in, and I was seeing a tremendous amount of research stating that it has low correlation with other investments. Well, what does that mean?
Well, if I have two things that have low correlation with each other, when one zigs — goes up in value — the other one zags — goes down in value. They tend to offset each other to some extent.
But when the turnaround comes and the first one that went up goes down and the other one goes up, that could have diversification benefits.
It could reduce the risk of my portfolio, and that way I can be more assured of what I might have in the future — how much money I might have in the future — if I can put things together that don’t move in lockstep with each other. It’s a really well-founded concept of investing that’s rarely used.
Popular Stocks in Portfolios
Most of the time what I do is I look at portfolios and I see a really, really heavy concentration in single areas of the market. Large US stocks.
As a matter of fact, somebody brought that up to me this week and said, “Well, large US stocks are really, really big in portfolios right now because they had a really good return, and that’s why people are holding them.” And I said, “No.”
I said, “Even back when I started this radio show and large US stocks had a terrible return, they still took up most of the space in target date funds or allocated portfolios where people, financial advisors, were putting portfolios together.” Why? Because it was so familiar. You couldn’t even make a case based on short-term past performance that it was a good idea, but I still saw it.
But commodities are one of those things that after they did well, especially in 2007 and 2008, that messy downturn, all of a sudden I started seeing them like crazy in people’s portfolios. And then for the next decade-and-a-half, there were literally horrible returns.
So when I see something like this telling you, “Hey, look, we got this thing that shows year-to-date this area of the market or this particular thing that we happen to sell did better than stocks,” my question is, wait, where were you before? Number one, well, maybe you did have it, but you weren’t going out there and trumpeting about it.
You weren’t telling everybody how great it was. It’s only after it does well that you start to bring people in.
The same thing happened in 2008, 2009. In 2007, 2008, and 2009, you literally had all this money flowing into commodity funds. And literally, there were people I knew, financial advisors that knew about some of the stuff that I’ve preached about on this radio show for 20-plus years.
Many of them, I could tell you lots of stories, knew the research and still pushed for this kind of garbage in a portfolio. It was an emotional decision. It was not about academics.
It was not about research. You couldn’t point to any great research that said it was a good idea, but they still did it.
So this is why I think it’s so important to be educated about this on a regular basis because the more you get it when you hear this stuff, then you go, “I’m not going to do that.” I’ve had many opportunities where people go, “Hey, I was thinking about doing this, Paul, and all I could hear was your voice in my head saying, ‘Don’t do this.’”
And that’s what I want to be. I want to be that person haunting you.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
