Social Security is an extensive topic to cover. To digest it easier, we've broken it down into four parts: Break-Even Analysis, Portfolio Withdrawals, Spousal and Survivor Benefits, and Limitations. So, how do we put all of this together?
The best place to start is with a comprehensive financial plan. As shared previously, professional financial planning is the integrated, coordinated, and ongoing management of one's finances. We want to understand each component, how they interact with one another, and how to put the pieces together to form your bigger financial picture. And of course, that picture is continuously changing due to changes in your situation, your vision, the fluctuating markets, a dynamic economy, and ever-changing tax laws. At Destiny Capital, we prepare a detailed, comprehensive financial plan that allows us to identify and evaluate all of the variables. The first part of this analysis is linear calculations, allowing us to account for uneven cash flows. Examples include part-time or consulting income, pensions, paying off mortgages or other debts, varying spending goals… and of course, Social Security income. We generally update this plan annually.
One drawback of linear calculations is that they assume constant rates of returns and inflation. As a consequence, the risk of an adverse sequence of returns and volatility are understated. To account for this, and better evaluate the potential impact of variability, we run a Monte-Carlo analysis. Monte-Carlo is a statistical analysis that runs hundreds of hypothetical scenarios to calculate the probabilities of outcomes. Each scenario is based on the inputs we select, including when to claim Social Security, average portfolio rates of return and volatility. However, each one randomizes the sequence of returns and gives us insight into most likely outcomes, best-case outcomes, and worst-case outcomes. We can run multiple analyses with different Social Security claiming strategies and different portfolio allocations. Going through this exercise paints a much clearer picture of what the future could be. By planning for the uncertainty, you can feel much more secure in your ability to weather market downturns or economic recessions.
We have helped our clients navigate this decision countless times. In our experience, the best strategy is the right strategy, meaning the strategy that you feel most comfortable with, that you feel the best about. We encourage our clients to think about retirement distribution planning, which includes Social Security income, from a risk management standpoint. Just like portfolio management is guided by risk and return expectations, so too should your retirement distribution planning. Are you seeking to maximize upside potential, protect against downside losses, or provide the highest probability of an outcome? The right Social Security strategy is not as simple as a breakeven analysis; it instead depends on your priorities and your portfolio strategy.
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