Monthly Archives: April 2016

Albion in UBM: Navigating the Myriad Social Security Options

Mon, APR 25th, 2016

This article ran in the April 2016 edition of Utah Business Magazine

Chart Your Course

Navigating the myriad Social Security options

At first glance Social Security is a simple program; you work for several decades, retire, and you receive a pension from the government. While this is mostly true there are decisions to be made along the way that if done correctly may significantly increase the dollars you receive. To be eligible for Social Security you must have a record of working – and paying Social Security tax – for forty calendar quarters; a ten year work history. Once you have qualified and are ready to retire you have some decisions to make. Below we review your claiming options, claiming status and touch on maximization strategies. Finally, we’ll review the Social Security changes codified in the Bipartisan Budget Act of 2015. The brevity of this overview precludes a detailed analysis of all the options and decisions you should consider but does provide a broad outline of many choices you will face.

Claiming options relate to when you choose to begin receiving Social Security benefits; before full retirement age, at full retirement age, or after full retirement age. If you choose to receive the benefit as early as possible, at age 62, your monthly benefit will be about 70% of what it would have been at full retirement age. You will also find your benefit reduced if you are still earning more than $15,720 a year in income. This earnings test stops at full retirement age. Note that full retirement age is based on your birth year. The age is 66 for those born before 1954 and gradually scales up to age 67 for those born after 1960. For every year you delay starting Social Security after full retirement age your base benefit increases by 8%; if you wait until age 70 – the latest start date allowed – your base benefit will be approximately 30% greater than it would have been at full retirement age.

Claiming status refers to your marital status; single, married, divorced, survivor, or divorced survivor. Those who are single can only claim a benefit based on their own Social Security record while those who are married may have the option to claim based on their spouse’s record. In general, if you wait until full retirement age, the spousal benefit is equal to one half of what your spouse will receive at their full retirement age. If you are divorced you may also have the option of claiming a benefit based on your divorced spouses Social Security record. A widow or widower has the option to claim based on their deceased spouses record and may be able to claim this benefit as early as age 60. Finally if you were married for at least ten years prior to divorce you can file for a benefit based on your deceased divorced spouse’s record. Note that any single individual can only use one of these strategies – typically the one that pays the individual the greatest monthly benefit.

Given the number of claiming options and various claiming statuses you have several choices to make. Navigating these choices correctly – and being prescient about your life expectancy – can have a huge impact on the total Social Security dollars you receive. There are a few additional strategies to consider that will work for some but are being phased out for most of us as part of the Bipartisan Budget Act of 2015. For married couples the file and suspend option is helpful. In this case the higher earning spouse files for their social security benefit at full retirement age and immediately suspends receipt of the benefit. This allows their benefit to continue to grow at 8% per year but importantly allows the spouse to claim a spousal benefit at full retirement age, while allowing their own benefit to also continue growing at 8% per year. The restricted application strategy, available if both spouses have reached full retirement age, allows you to restrict your application for just a spousal benefit; your benefit continues to grow at 8% per annum.  This strategy can also be used for divorced, survivor and divorced survivors.

The phase out of file and suspend and restricted application strategies is based on a participant’s age. Those born prior to May 2, 1950 have until April 29, 2016 to implement the file and suspend strategy. Even if your spouse is not full retirement age – but you are – you must implement the strategy prior to April 29, 2016. If you were born prior to January 2, 1954 you retain the option to restrict your application to just a spousal benefit. This allows your benefit to grow while receiving just a spousal benefit. Finally for those born on or after January 2, 1954 the file and suspend and restricted application strategies are no longer available, except for those who are surviving spouses. A claim for a benefit will be deemed as a claim for both you and your applicable spousal benefit with no delaying options.

These changes will affect all of us in one way or another.  It is crucial you understand your options so you can make the best decision for your situation.

Devin Pope is a CERTIFIED FINANCIAL PLANNER™ with Albion Financial Group – A Fee Only Wealth Management Company. He can be contacted here

Market Surveillance : Q1 in the Books

Fri, APR 15th, 2016

The truth is that markets are more like a roller coaster ride than a cruise.” – Vivek Wadhaw

In the first quarter, global stock markets experienced a rather intense white-knuckle thrill-ride. Out of the gate, chaos from China (mostly yuan driven), general global growth concerns, geopolitical punch-ups in the Middle East and North Korea, and fears of an imminent US recession sank equities in one of the worst annual starts in history. By the last week of January, however, an unusual rally emerged, led by low quality, left-for-dead, fundamentally challenged stocks in the market – energy, materials, industrials, and richly-valued high dividend payers in utilities, telecom, and consumer staples sectors. This odd mixture of investors sifting through the rubble to buy both junkier and defensive names left behind the stocks of health care, financials, and growth technology industries, despite their sundry of merits. Health care, for example, is projected to record the best revenue growth in 2016 of all ten S&P 500 sectors and is likely to finish in the top three for earnings growth.

As the calendar turned to February and March, these lower quality slices of the market continued their rally, leading the market higher, while many of the market’s most fundamentally sound stocks largely sat out this rebound. When the dust cleared, most major indices had traveled much ground in the first quarter only to settle somewhere between modestly lower to just a bit better than flat. In this tale, Rip Van Winkle would have missed abundant action during his short snooze, yet awakened to find little had changed.

Unfortunately, our crystal ball can neither see nor predict the erratic nature of near-term money flows and sentiment shifts on Wall Street. What we can control is doing what we’ve done well for nearly 34 years – own financially sound companies with good products / services sporting competitive advantages that are run by deft managers. This is the fountain which serves up growth in sales, earnings and cash flows over time. Virtually all of the companies we own are seeing improving fundamentals and their businesses are progressing well. Indeed, it is these key parameters that matter most in driving stock prices and returns higher over the long-run.

We continue to think the risk of a U.S. recession remains low, and if the economic recovery is not ending anytime soon a sustained bear market in stocks is unlikely. We wrote about this very notion a few months back on our blog during (what we see now in hindsight) the most frightening point in the sell-off. U.S. economic policies are not recessionary. The Treasury yield curve remains positively-sloped, rates remain low, and the money supply continues to expand at a steady clip, all thanks to the Fed’s easy monetary policy – a stance we expect to continue for the foreseeable future.

There are also scant current excesses evident in the economy. Consumer spending has been steady but measured and has been accompanied by increasing household savings rates. Household debt servicing ratios are near record low levels, while net worth has reached record highs. Businesses are not behaving in reckless ways, as verified by moderate capital spending levels and capital utilization rates below 80%. Meanwhile job growth continues to impress amid tame inflation, and the bulky US services sector continues its expansion.

In sum, balance sheets across the economy are strong; consumer spending and attitudes are cautiously optimistic; credit growth and delinquency rates are low; and corporate profits are increasing (with the exception, broadly speaking, of the impact on certain sectors of dramatically lower oil prices and a strong dollar).

What about the rest of the world?

China continues its gentler growth trajectory as foreign direct investment slows, returns on debt-financed growth wanes, and domestic consumption – as opposed to export centric growth – becomes paramount. These are long wave shifts in their economic structure and will take time to fully develop. In the interim, we are neither cheerful nor glum on Chinese economic data.

In Japan, monetary and fiscal authorities remain committed to throwing everything but the kitchen sink at their economy in an effort to resuscitate it from its flat lined condition, including newly introduced negative nominal interest rates.

In Europe, the ECB is going full bore with its own stab at negative rates, which now dominate the first 5-8 years of the yield curve for a few of its major economies. Concurrently, growing anxieties waft from the UK as we approach the country’s June 23rd vote to determine their future as part of the EU project. India seems to be accelerating, but has deep political and structural challenges. And Russia continues to clearly demonstrate that it is an antiquated power in secular decay with energy its only lifeline (but only when prices are going up!). Considering the above, we expect blended growth in world output to march forward another +2-3% this year.

In the face of this sanguine view, there are also vulnerabilities in the stock market that we are tirelessly monitoring. The U.S. corporate earnings cycle is more mature at this point, along with profit margins, and wage costs may finally begin to increase in earnest as the labor economy tightens, further squeezing business income statements. If wage pressures accelerate, the Fed may normalize monetary policy more quickly by raising interest rates in order to stem inflation. And while this may not crush the bull market (with Fed Funds currently at ~0.37%, there is plenty of room for increase before interest rates get tight), it could render its trajectory more rocky and unclear. Valuation, the multiple investors are willing to pay for earnings, sits at about 17x 2016 earnings estimates. This level is not cheap, but it is also not dear, especially when juxtaposed against the ultralow interest rate environment and near zero rates on cash balances. Either way, it is important to remember that bull markets rarely end simply because valuations are perceived as fair or slightly extended. Rather, it is typically economic recession that ushers in the bear, an occurrence we don’t currently anticipate.

On net, we remain prudently optimistic on stocks and continue our efforts to find and own high quality investments for our clients. Markets ebb and flow, but finding and owning a slice of first-rate American businesses endures.

Jason L. Ware, MBA / Chief Investment Officer
Albion Financial Group
(801) 487-3700