The majority of individuals do not consider their future Social Security payments to be a commodity or an investment. In reality, when it comes down to it, the regular monthly payments you will receive from the government during retirement are identical to any other type of annuity or pension you might get in retirement.
For people retiring now, Social Security is increasing in value. This is due to the fact that, unlike other assets, the value of Social Security rises when inflation rises dramatically. While a falling dollar would have an impact on other investments like equities or bonds, Social Security payments are consistent every year owing to annual adjustments based on changes in cost of living.
Growth with inflation
There are a few more inflation-protection alternatives.
You can make investments in I Series Savings Bonds, however you are limited to yearly purchases of $10,000 per person, plus the choice to use another $5,000 of a tax refunds toward the savings instrument. Interest will compound over time and investors do not receive a payout until after they redeem the bond, so it isn’t an income source either. However, because real returns on I Bonds are presently high, it makes tax planning simpler.
TIPS, or Treasury Inflation Protected Securities, are another form of fixed-income investment that may be used to protect against inflation. They can nevertheless be a disaster if you are taxed on the semi yearly principal adjustments and interest payments. Because TIPS prices are set by auction and traded on the market, their ability to give positive real returns is determined by market forces.
Meanwhile, Social Security has the potential to appreciate beyond inflation. Every year that a retiree does not start taking Social Security benefits, his or her monthly payment will increase. Delaying as long as possible may produce a genuine return even if you don’t expect to live a longer than average life.
What it can mean for investors
Investors should be interested in delaying taking their Social Security benefits for another few years, according to a recent Boston College study. While you’ll still receive inflation adjustments once you begin receiving payments, the prospect that your benefits may increase in real dollar value is now gone. Delaying allows your Social Security pension’s potential value to expand as much as possible while protecting you against future inflation.
In the meantime, investors should think about how Social Security will fit into their drawdown plans and retirement portfolio. Living off any other retirement assets until reaching age 70 may mean delaying Social Security until that age. However, investors must first consider how much weight Social Security should have in their overall asset allocation and portfolio.
Some investors might consider Social Security checks a fixed-income investment. They do, after all, move in the same patterns and provide comparable yield, but Social Security offers greater inflation protection and growth potential than most fixed-income assets.
Every year you wait to claim Social Security, its worth supposedly rises, and your portfolio should be adjusted accordingly. As a result, if you want to keep your asset allocation balanced, you’ll need to draw down more from your bonds than you do stocks, pushing the proportion of your regular portfolio invested in stocks up as the value of your Social Security payments rises. However, many retirees prefer to add more bonds to their portfolio over time, so as Social Security’s value rises, investors may be able to keep the proportion in their overall portfolio roughly the same.
Given the lack of clarity about where inflation will go in the future and how it may affect a retiree’s portfolio in the future, allowing your Social Security checks to increase while withdrawing other assets is one of the most intelligent decisions a retiree can make.
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