Should You Treat Your Social Security Checks Like Low-Risk Assets?

Here’s the good news on Social Security: Even if the Republicans and Democrats in Congress never stop fighting long enough to address the fact that the trust funds will run dry in just over a decade, the government’s retirement benefit program is not going anywhere. Payouts might shrink. They won’t vanish. But when you’re doing the math around your retirement plan, how should you count those checks? That question popped up in the Motley Fool Answers mailbag, and the answer is not as simple as it might seem.

In this segment, hosts Alison Southwick and Robert Brokamp — and special guest Sean Gates, a financial planner with Motley Fool Wealth Management, a sister company of The Motley Fool — discuss the ways your thought process could color your other choices, and possibly put you in a riskier position down the road.

A full transcript follows the video.

This video was recorded on Jan. 29, 2019.

Alison Southwick: The next question comes from Bill. “Based on our Social Security reports, my wife and I can estimate the amount of cash we will be paid each month upon retirement. When evaluating our portfolio allocation, is it better to ignore those future estimated payments, or should we factor them into our allocations? If we consider it as cash in the bank, it would allow us to have more invested in equities today.”

Sean Gates: This is a great question and it brings up a lot of issues. I would say the first one I want to call out is something called “sequencing risk.” This is more of a behavioral type of question, but if you count Social Security income as a portion of your asset allocation, I think it’s fair to do so, covering off on the safer investments like bonds or cash, but what it robs you of is having a placeholder value in your account that doesn’t move.

So you’ve accounted for your stable resource in your asset allocation from an income source that hasn’t started to arrive. You could have all of the rest of your assets be invested in stocks, but now your entire value that’s in stocks is going to move wildly with the stock market. From a behavioral standpoint that’s very difficult to digest, because this is just a mental accounting issue. You’re not really going to be paying attention to the money that’s in Social Security, because it’s not coming to you yet.

What’s important from a sequencing risk perspective is that if all of your money that you need to spend from — in this case, your investment assets — are in stocks and you go to draw on that money for your retirement needs, those stocks could be depressed in value temporarily because of the stock market; and it’s very difficult to come back from an early withdrawal at depressed prices early in your retirement. So having a stable placeholder inside of your account for those occasions is critical to avoiding sequencing risk.

Robert Brokamp: That’s why we have the income cushion that we talk about in RYR. You at least have something that is going to hold up no matter what happens to the stock market when you’re in retirement.

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