One Tough Decision – The Social Security Dilemma

As the New Year begins, I have been laser-focused on reframing my strategic goals from a wealth building strategy to a retirement planning strategy. One of the necessary steps required in developing strategic goals focused on retirement is Social Security. More specifically, when to apply for Social Security: as soon as possible, at full retirement age, or when the law requires you to?

For me, time is money and a dollar today is worth more than a dollar tomorrow. I have always looked at retirement as a financial number and not an age. However, since Social Security is about both time and money, I thought I should run the numbers to see which option of age is best.

There are two aspects to the retirement dilemma of when a person should apply for his or her Social Security benefits. No one can apply for the medical aspect of Social Security before 65, so this question, when should a person apply for Medicare, is a self-answering question. Even your Social Security statement provides direction to apply for Medicare at age 65 even if you continue to work.

What I am more interested in concerns the monetary benefits and when is the most advantageous time to apply for those benefits. There are several theories with multiple variables that complicate this question. A person may apply for Social Security any time after his or her 62^nd birthday. The earlier a person applies, the more the monthly benefit is reduced.

No one wants to receive a reduced benefit, but one needs to be fully informed before deciding on the age of retirement. As I have said, retirement is not an age for me, it is a financial number. If a person has been diligent in managing his or her finances throughout the working years, he or she is likely to have a significant amount of financial resources going into this decision.

Ideally, a person could live off of his or her retirement savings until he or she reaches the age of 70, but at what cost? If a person has enough retirement savings off of which he or she could live, then why wait until the age of 70 to apply for Social Security benefits? A lot can happen between the ages of 62 and 70.

Based on the number of variables one must account for in this equation, including the work history of a person, choosing when to begin to receive benefits can be a difficult decision. Your financial work history determines the value of your benefits. A lower wage earner will likely have to work longer and therefore, the age at which he or she will apply for benefits will be determined by his or her ability to build wealth in tax-favored accounts such as 401ks and IRAs.

When my older brothers decide to apply for benefits will be vastly different from when I decide to apply simply because of our financial work history. In my case, age has very little to do with that decision, outside of having to at least be 62. Whereas, in the case of my eldest brother, age is a factor and in the case of my 2^nd eldest brother, age has everything to do with it.

So for those whose age is not a determining factor, the question of value becomes the most important factor. Social Security benefits have a see-saw type value structure. The earlier one applies for benefits, the less that person receives. The later a person applies, the more a person receives. This see-saw causes many financial planners to disagree as to when would be the right time to apply for benefits.

When it comes to making this decision, each person must consider the following. The time value of money and the value of time. These are two real questions each person must answer. Beyond that, one must consider, on a practical level, is there a fair trade-off between these two? The best way to analyze two dependent factors is to determine where the middle of the see-saw lies.

A person, who decides to receive Social Security benefits at age 62 gains 5 years of retirement for a discount of benefits, but to what does that translate? I have developed the following table to illustrate how the Social Security see-saw works.

At age 62, the worker in the above example would receive $1,784 a month of $21,408 annually. He or she would do this for five years essentially enjoying five years of retirement while his or her peers continue to work. Ready for the first variable to this calculation? While the person who stopped working at 62 enjoys 5 years of retirement, the people still working continue to contribute to the system. Calculating in the potential loss of additional benefits due to no longer contributing is a variable that cannot be known.

What if the person who decided to continue working and contributing suddenly lost his or her job due to a down-turn in the economy? What if that person suddenly became ill and was not able to recover? These variables will affect a person’s reality, but cannot easily be accounted for in figuring out future benefits or the loss thereof. So let’s keep the math simple and go on the information provided in the table.

The person who takes benefits at 62 would receive $107,040 during those five years, essentially exchanging the reduction in benefits for time. This is the value of time of which I spoke. If he or she had waited and chose to take benefits at 67, he or she would not break-even for another 11 years. Therefore, taking benefits at the age of 62 gains the person 16 years of retirement before the extra benefits would begin to be realized.

The annual difference between the benefits at 62 and 67 are $9,372. Given that the person retiring at the age of 62 would receive $107,040 in those five years, the break-even point would be age 78. Assuming that those 16 years are healthy years, if this were you, would you exchange $107,040 for 16 years of not having to work?

Now let me introduce you to the next variable. Your lifestyle. Everybody has a different reason to retire. Some want to travel, some want to find a vibrant community of like-minded individuals and socialize, and others just want to spend time pursuing a dream they have always wanted to, but never had the time to. This is a real factor, but not one that is a sound basis for deciding when to take benefits. Therefore, focus on the see-saw: time value of money and the value of time.

If the person who is 62 had waited until he or she was age 70, the trade-off would be 8 years plus another 10 years to burn-up the cash. The difference between the annual benefits of 62 and 70 would be $16,908. However, the amount of benefits received in the 8 years that separate those two target years would have been $171,264. This equates to just over 10 years of retirement beyond age 70 before the person would reach the break-even point. That is 18 years of retirement at a cost of $171,264.



At this point the person who decided to take benefits at age 62 would be 80 years old before he or she reached the break-even point. Again, what do you value more, time or money? You can always make money in retirement: write a book, sell a craft, or offer your knowledge for a fee… but you cannot manufacture more time. Money has a current. That is why they call it currency. It circulates and sometimes more flows to you and sometimes more flows away from you. But time is absolute. Once it is gone, you can absolutely not have more.

As previously alluded to… every person’s situation, financial work history, and motivations are different. There is absolutely no right or wrong answer as to when to retire and take your Social Security benefits. There is only a right and wrong answer for you, by you. No one can determine what is best for you, except you. However, I wanted to offer a different perspective. A different way to think about the question of retirement and Social Security.

For me, retirement is not an age, it is a financial number and when I hit that number, I am moving on because for me, time is far more valuable than money. I would rather have 18 years to relax than $171,264 in benefits. But then again, that’s just me.

Pick Up A Reason To Change In The New Year

The end of an old year and the beginning of a new one is the best time to pick up a few good reads that are both inspirational and encouraging. Here is a list of all of the books I have written to help improve the lives of those who read. I have written on topics such as strategic planning, financial management, spiritual growth, and even a couple of books of poetry. There is something for everyone so why not take the time to realize that financial wellness encompasses personal and spiritual growth.

The Plan is a book packed with information that will improve your relationships and equip you to be an agent of restoration. The information contained within this book will change how you view those around you who are struggling with life's difficulties. It will open your eyes to see the needs of others in ways you never knew you could.

https://www.amazon.com/dp/1544874758  

The Plan Supplement: In his blockbuster book The Plan, Ken Rupert walks you through the dynamics of building relationships that are focused on restoring broken people to wholeness. The Plan Supplement provides you with the logistics of how to develop M.E.N.S. Network groups within your church or organization.

https://www.amazon.com/dp/1546655115  

Simple Wealth Building Strategies: What you do today will have a direct impact on where you end up tomorrow. In a world of uncertainty, having a strategy for building wealth is a necessity. Wealth is less about how much you earn and more to do with what you do with what you earn. It is behavior that is predictive of a person's ability to turn the average income into a lifetime of wealth.

https://www.amazon.com/dp/1530482259

The Change Quotient: Change is everywhere and if you learn how to welcome it into your life, you will accomplish things you once only dreamed were possible. This workbook walks you through a rather detailed process of learning how to manage change with an optimal mindset. Those who can optimize their performance, create focus, increase accountability, and drive results all have one thing in common. They welcome change as a path to achievement.

https://www.amazon.com/dp/1502481057

The M.E.N.S. Network 31 Day Devotional Book 1: This devotional has been writing with men in mind. Each passage of scripture has been carefully selected to speak to the hearts of men who seek to image Jesus Christ. The purpose of The M.E.N.S. Network is to Mentor, Encourage, Nurture, and Strengthen men to live beyond themselves and influence others with the word of God.

https://www.amazon.com/dp/1507778805

God, I was wondering… Assuming that God exists and you were to meet Him face to face, what one question would you ask Him if you had the chance? This was the premise upon which this book was written. Atheists, agnostics, and theists contributed by submitting questions that they would ask God if they had the opportunity. Each question is answered and probes the depths of God's word. Although this is not a doctrinal book, it is written from a Christian perspective.

https://www.amazon.com/dp/1499248113

Empathy: "Don't do for me, that which I can do for myself. Do for me what I am incapable of doing for myself." This is the heart cry of someone who is struggling with life's problems. This is what God did through Jesus Christ when He set aside His glory, entered into the reality of His creation, and provided a path of reconciliation for you. In this is the heart of empathy.

https://www.amazon.com/dp/1494227258

10 Aspects of Finding Your Niche: When I was in my twenties, a colleague of mine said “eventually you will find your niche.” He was referring to that place where who you are aligns with what you do. For me, the journey has been a long and arduous road, filled with potholes, debris, and wrong turns. However, after years of studying and gathering information, I have learned that it is not about aligning who you are with what you do. It is actually quite the opposite. Finding your niche is about aligning what you do with who you are.

https://www.amazon.com/dp/1500373486

Strategic Goals: Personal success doesn't just happen. This book guides you through the process of developing a strategic plan that allows you to succeed. These principles are tried and true. You will learn how to create a consistent structure to your success by using the model for strategic goals outlined in this book. You will learn concepts such as Roadmapping, Scorecarding, and Paradigming. You will also learn the three pathways of strategic goals that move you towards your success.

https://www.amazon.com/dp/1493783734

10 Ways to Maximize Your Income: Living paycheck to paycheck might be a reality for most people, but it does not have to be for you. Having a strategic financial plan gives you the ability to achieve more. The Comprehensive Asset Management Plan (C.A.M.P.) might be the tool you are looking for to maximize your income and achieve your goals.

https://www.amazon.com/dp/1497466598

10 Ways to Improve Your Retirement Planning: In today economy there are a number of pressure points that squeeze the life out of retirement savings. Although it is a difficult task to manage the external pressures, we can begin to learn and practice behaviors that ultimately position us to win from a financial perspective. Ten ways to improve your retirement planning is focused on providing you with practical behaviors that impact the planning process. It is often not how much you earn, but how you manage how much you earn that makes the difference.

https://www.amazon.com/dp/1494227231

10 Ways to Improve Your Goals: Ten ways to improve your goals provides you with a number of practical principles that will assist you in taking your ability to achieve your strategic goals to the next level. By understanding the cause and effect continuum and practicing the ten concepts that are consistent with high levels of achievement, you will learn new ways to think about and approach life. Any life plan faces challenges, so Ten ways to improve your goals gives you four axioms to help you change your thinking and overcome these challenges.

https://www.amazon.com/dp/1494351331

Reflections in Time: Echoes In The Mind Of A Poet: A collection of poems that captures the struggle of a young man who is transitioning from the teen years to adulthood. The poems written in this volume covers a wide variety of topics such as love, loneliness, faith, and others.

https://www.amazon.com/dp/1726238199

Poetry and Proverbs: Thoughts Of A Creative Intellectual: Written between 1991 and present, these poems and philosophical thoughts capture the emotional journey of the author through the up and downs of life. Many can relate to moments of joy and experiences of sorrow and sadness. Like most poetry, the real value of this material is under appreciated. However, if a reader looks behind the walls he or she has constructed to protect the soul, the value contained in this second book of poetry is immeasurable.

https://www.amazon.com/dp/1727325656

Overcoming Emotionality

Part 2 of 10

If there is one roadblock to successful investing that is timelier than any other, it would be this one. Emotionality! With the broader S&P 500 losing nearly 7% in October and the DOW index dropping 1,300 points, or 5% in October, there is cause for fear. November was relatively flat for the indexes and December has turned out to be a total meltdown.

The combination of tariffs, interest rate hikes, political unrest in Central Europe and the continued political division in the United States, which now includes a government shutdown, the light at the end of the tunnel is an oncoming freight train. And it appears that we have no way to get off the tracks. It is the perfect storm and none of us can shelter in place.

With all of this uncertainty, there is little doubt that the pressure of a recession is mounting. Fear is all around us and the most important thing to keep in mind is this. “Investing is emotional… It can’t be, but it is.” Let me unpack that a little bit before addressing the broader topic of emotionality and how to overcome this particular roadblock.

First, Investing is emotional. Just as the market responds to Geo-political events, investors tend to be driven by emotions, with fear being the primary driver of most investing decisions. Now it is important to develop the following core value when it comes to emotions. Emotions are real, and you have to acknowledge them, but emotions are also real bad decision makers. Decisions that follow emotional inputs often lead to losses.

Investing is as much of a psychological game as it is a financial game. You can learn how to play fear if you understand that Geo-political events can spoke the market into deep discounts on good companies. However, in order to play fear, you have to understand the types of fears you, as an individual investor will experience during times of market volatility.

There are four primary fears (in no particular order concerning the current market volatility) that an individual investor can, and often will, experience over the course of his or her investing lifetime. The first fear is known as FOMO, or the Fear of Missing Out. If an investor has been sitting on the sidelines, meaning that he or she has a lot of cash, he or she might become fearful about missing out on a market rally.

When the market is in full growth mode, an investor needs to be more cautious because it is easier to make bad decisions. It is hard not to get caught up in market exuberance. When the market is hot, there are always people warning of a correction, which makes it harder for the investor to know when to enter the market. This obfuscation is directly related to the second type of fear; FOGI (pronounced “faux gee”), or the Fear of Getting In.

When the fear of getting in is greater than the fear of missing out, the investor will miss market opportunities. When the fear of missing out is greater than the fear of getting in, the investor can end up overpaying for a stock. This principle is known as the pain / pleasure threshold.

This principle basically states that when the pleasure derived from an action is greater than the pain associated with the action, a person is more likely to commit to the action. However, when the pain of an action is greater than the pleasure derived from the action, the person is more likely to abstain from the action.

Applying this philosophy to FOMO and FOGI, when the fear of missing out is greater than the fear of getting in, an investor is more likely to make an investment. When the fear of getting in is greater than the fear of missing out, the investor is more likely to abstain from investing. This principle can be applied broader when the market experiences any emotion associated with investing.

When you think about it, FOMO and FOGI are truly opposite fears. However, there is another set of fears that are common ancestors. FOGO, or the Fear of Getting Out and FOSI, or the Fear of Staying In, have their root in the fear of losing money; even money that is not yet realized by the investor.

Let’s assume that you purchased a stock at $35 per share. The following week the stock drops 6.5% to $32.275 per share on bad forward guidance. You had purchased 500 shares for a total of $17,500. You investment is now only worth $16,137.50 for a total, one day loss of $1,362.50. FOGO, the fear of getting out, will cause an investor to hold the stock until it comes back to at least the purchase cost before selling. FOSI, the fear of staying in, says to the investor “cut your losses and run.” Both of these fears are driven by the exact same root; the fear of losing money.

If you stay in, the stock might rebound and if you had sold it, you would have lost the money (the emotion of regret, which I will discuss later).  If you get out, you guarantee a loss, but not as bad as it could be. Jim Cramer often says “Your first loss, is your best loss.” I do not necessarily agree with that philosophy, but it does have some validity if you invest with emotions.

The fundamentals of a company do not change hour to hour. The valuation of a company does not change hour to hour. What does change from hour to hour are the emotions that drive investing decisions. You need not fear market downturns nor should you try to ride a cresting wave. The best way to begin to overcome the roadblock of emotionality is to begin to understand the drivers and invest appropriately.

Whenever there is a Geo-political event, you can bet portfolio managers are going to react. News that is perceived as negative will result in a sell-off and news that is perceived to be positive will result in a market run-up. Usually this happens disproportionately to the news. In other words, money managers tend to over-react in an effort to satisfy the IGMBYGY rule. That is the “I’ll Get Mine Before You Get Yours” rule.

They sell on perceived negative news to capture gains or they buy on perceived good news to get in early before the market runs-up. Warren Buffett says “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” which amounts to “Buy when everyone else is selling and sell when everyone else is buying.”

Therefore, the best days to buy tend to be when the markets are selling off and the best times to sell are when the markets are euphoric. However, it is rarely good to sell a winning stock on an up day or to buy a losing stock on a down day. You have to do your homework and make wise buying decisions devoid of emotional drivers.

So, how does an investor overcome the veritable plethora of emotional drivers that lead to bad investment decisions? Three simple things.

1.                Know thyself. Temperament can limit one’s ability to overcome emotionality. It is about balance. Using your head and using your gut in unison will cause you to not follow the herd mentality of the market makers. The best word picture I have heard is this. Be the center of the teeter-totter where neither up-ness nor down-ness exists, but both run through.

2.                Know the markets. If you can anticipate how the market is going to react to Geo-political events, you can learn when to buy and sell to increase your success. The key to knowing yourself is honesty. The key to knowing the markets is study. If you take the time to study the markets and how Geo-political, financial, and other world events affect the markets, you have the potential to become a successful investor.

3.                Know the company. Knowing the markets happens on the macro level. It is the big picture or the 35,000 foot view. Knowing the company is the micro level. It is the down in the weeds, where the rubber meets the road view. If you are invested in a company, it is in your best interest to stay current on the news and direction of the company.

Worry and anxiety can foster the four forms of fear; FOMO, FOGI, FOGO, and FOSI. Ironically, fear can foster a stranger emotion known as regret. If you have the fear of missing out and you invest heavily, without doing your homework, you might end up regretting doing so. This regret will then drive you to sell at a non-advantageous time.

You have to learn to not have any regrets. Don’t regret staying in a losing position too long. Never regret exiting a winning position too early. Jim Cramer has a great saying that I believe reduces the level of regret in these two scenarios. He says “Bulls make money, Bears make money, and Pigs get slaughtered.” It is okay to exit a position and move on. A gain is a win and a loss is a lesson. Both can be invaluable.

Fear and exuberance are the two basic emotions investors can experience. If you understand the fundamentals of the company and learn how to read the market and its reactions to geo-political events, you will be able to overcome these two emotions. 

You overcome fear with knowledge. You overcome exuberance with patience. You overcome depression with encouragement. You overcome doubt with the confidence in the strategy you are executing and you overcome the urge to quit by marking the progress you are making.

The final thought is this. The best way to navigate the emotional swings in the market is to have a strategy that remains consistent through the market cycles of fear and euphoria. Strategy is the “dollar-cost-averaging” of market emotions as it flattens out the sine wave. Emotions cause money to impact your life. Strategy causes you to impact your money.

Ignorance Is Not Bliss

Part 1 of 10

I want to start by asking you a question. How long does it take an average person to become a millionaire? This might seem like a silly question, but the answer will give you a new perspective on how building wealth is less about your assets than it is about your asset management. The truth is “An average person does not become a millionaire.” To become a millionaire, you have to do the extra-ordinary; often times with average resources. You have to do things differently.

Applying the aforementioned statements to your situation, consider this additional question. “What stops YOU from becoming a millionaire?” In this series, I plan on addressing ten roadblocks that stop the average person from excelling at building wealth. I want to encourage you to recognize that we all struggle with these roadblocks. However, those who can overcome these roadblocks have a greater propensity to become millionaires.

So, let me begin with the most common roadblock of Ignorance. Ignorance is simply the lack of knowledge. Stupidity is the lack of application. The question that must be asked is “If every person knows that he or she should be investing, and he or she isn’t, do we have a stupidity problem or an ignorance problem?”

I believe the number one roadblock to successful investing is ignorance; ignorance of how to invest successfully, not whether or not one should invest. Knowing that you should be doing something and knowing how to actually do it are two separate things. Stupidity would be knowing how to invest and making a willful decision not to. Is it possible that most people do not invest because they simply do not know how to?

There is no easy way for an individual to become a financial guru overnight. However, with enough work, the average person can learn how to manage his or her own investment accounts. Learning how to invest strategically requires three elements: time, resources, and desire. You have to commit the time necessary to learn how to preserve the resources you have and not give in to the desire to exchange your future security for today’s pleasures.

Statistically speaking, most people are not prepared for retirement, let alone a major negative financial event. It is common knowledge to first, have an emergency fund to second, have as little debt as possible and to third, spend less than you earn. So, if you do not have an emergency fund, have high levels of debt, and spend more than what you earn, you cannot claim ignorance. You know better, but you choose to ignore conventional wisdom. That is not ignorance, that is just plain stupidity.

Have you ever heard the phrase “You don’t know what you don’t know yet?” I was once told that by a supervisor and, without even thinking, I snapped back; “I know what I know and anything outside of what I know that I know, I do not know. Therefore, I do know what I don’t know. The key is to seek after the knowledge of the things I know I don’t know so that I can know them.” Choosing to not learn something just because you know you do not know it is a back door to stupidity.

To overcome the roadblock of ignorance, as it pertains to successful investing, there are ten bits of knowledge a perspective investor needs to pursue, the depth of which cannot be adequately addressed in a blog. I will give you the macro-view and allow you to dive into the micro-view on your own. Remember, no one will ever plan for your future better than you and if you fail to plan, then you plan to fail. So, let’s get started.

1.     Understand the company. Knowing what the company does and how it makes money is very important. It is important to know how being a shareholder will impact your return on investment and taxes.

2.     Understand the P/E ratio. A high P/E ratio in relationship to the broader industry might mean the stock is more expensive even if the share price is lower than other companies within the same industry.

3.     Study the financials. Knowing where a company was is important, but knowing where it is going is the real key to making an investment decision. Since the economy is always changing, the historical data can only provide so much insight. You have to understand where the company is headed and understand how it plans on getting there.

4.     Understand the dividend cycle. Does the company pay dividends monthly, quarterly, semi-annually, or annually? Know when these payments are made can help you plan when to add a few additional shares at a lower cost.

5.     Understand the impact of dividends. There are three important dates to remember when holding dividend stocks. Those are the Ex-dividend date, the Record date, and the Payout date. Of these three dates, the most important to keep in mind is the ex-dividend date.

6.     Subscribe to investment websites. Before you become a shareholder, it is important to read about the company you intend to own. Beyond that, it is equally important to continue to stay abreast of the news surrounding the companies you own.

7.     Know the financial facts. You want to look for companies with a history of EPS (earnings per share), revenue, and dividend growth. The earnings per share and revenue growth are important, but the best companies often outpace the industry averages in these two categories.

8.     Get comfortable as a contrarian. This particular behavior will take years to master, but with good research, a person can learn when to be conforming and when to be contrarian. To master this behavior, a person needs to be able to look beyond the risk and see opportunity.

9.     Understand the value of arbitrage. Arbitrage is nothing more than the spread between the stock price and value of a company’s stock. This is where mergers and acquisitions, spinoffs, special or irregular dividends and stock splits can provide unique opportunities to investors.

10.  Know the market in which you trade. Most every trade happens in the secondary market. IPOs (initial public offerings) make up the primary market where the money used to purchase shares of a newly trading company goes to the company and its underwriters. When you purchase shares of a publically traded company from a broker, you are buying in the secondary market where supply and demand rule the trade.

11.  Bonus: Know the market influencers. While supply and demand can drive the price of stocks, keep in mind that shorts, options, and margin traders have a strong influence on the price of stocks. Increased activity on the part of these types of traders can increase volatility.

I hope this short post has given you something to think about concerning your financial future. You do not need to depend upon others to manage your financial assets. You can learn how to do it yourself. It’s going to take time, but if you are willing to do the work and preserve the resources, you can become a successful investor.