Social security is arguably among the richest and robust pension programs ever created. In it's current structure, social security provides federally guaranteed lifetime benefits for individuals, spouses, divorced spouses, widows/widowers, disabled individuals, minor children as well as child-in-care benefits. Furthermore, since social security also provides cost of living adjustments, all these benefits are also protected from the ravages of inflation which may otherwise potentially cripple the purchasing power of retirees during what could amount to a 20-30 year retirement period.
So where does this enormously valuable "financial asset" fit in the analysis of one's investment portfolio? Well that is a much debated topic indeed among financial planners. Some simply exclude social security entirely, treating it as an outside source of income and adopting asset allocation strategies that do not take it into account at all.
Others, however, treat social security like a bond investment given the fact that it provides regular (not to mention federally guaranteed) income the same way that fixed income securities do. Likewise, social security is also unaffected by the vagaries of the stock market.
In fact, you may be surprised to learn that none other than Vanguard Group founder Jack Bogle, who's company has $3 Trillion in assets under management, has argued in favor of treating social security like a bond investment for purposes of allocating the rest of your portfolio. He argues that you can take on more risk in buying stocks with the remainder of your savings if you know that social security will offer you the monthly income that you would otherwise need to get from bonds.
Some, if not many, would consider that to be an aggressive view and would likely be unwilling to give up their other fixed income assets to rely entirely on social security. However, for those who desire an increase in the expected return from their investment portfolio, having social security benefits as a backstop may give them the confidence to be more aggressive in their investing strategy.
So what's the answer? What does your own investment professional recommend or has he/she even addressed this issue with you in the past?
Well, like most things regarding social security, the "best" solution depends on a number of factors and there is no easy answer. The key for all financial advisors to consider is that social security is often the largest single retirement asset in most people's portfolios. It typically accounts for 30-60% of an individual's retirement income.
Today, there is a growing number of financial advisors who are becoming experts in integrating social security into retirement planning. Rather than treating social security as a stock or a bond, these specialists treat it as it's own "asset class", one that's similar to a fixed income asset, and develop sophisticated social security integration strategies. Since it has it's own unique risk, income and taxation characteristics you would be wise to consult your team of financial professionals and ask if they have experience with these strategies. It would also be important to consult with a social security income maximization specialist in order to determine the optimal social security filing strategy for your individual situation.
By utilizing all this information, in conjunction with the expertise of financial professionals, you can more confidently approach retirement knowing you have a comprehensive retirement plan
Ash Ahluwalia, NSSA, CCSCA, MBA