The February 2007 AAII Journal article by Christine Fahlund, “Invest or Delay? Strategies for Taking Social Security Benefits,” was the best I’ve seen in helping to decide when to take Social Security benefits. Three additional points not discussed, which I believe skew the decision toward taking early Social Security benefits, are: (1) Considering the present value of drawing early benefits seems to me to push the break-even point out even further; (2) Expect the government to continue to tinker with limiting benefits to those who have other retirement income; (3) Quality of life in the early retirement years is at its peak and if taking early Social Security benefits permits greater enjoyment of life quality, then this would be a very important factor to consider.
I cannot determine what allocation model is a match for the Model Mutual Fund Portfolio [last updated in the February 2009 Model Portfolios column]. It seems like it is missing a lot and is focused on large-, mid- and small-cap markets. I’d like to use and follow the portfolio, but am concerned it’s not broad or diversified enough. Can you comment on that? Also, do you believe the portfolio is appropriately positioned for whe
James Cloonan Responds:
The Mutual Fund Portfolio is intended for the equity portion of a portfolio or for part of that portfolio for those who also wish to choose some individual stocks of their own. It assumes that the individual investor also invests in sufficient cash and debt to adjust to their personal risk tolerance.
Even if the funds in the portfolio were the only equities held, the equity portfolio would be very well diversified—more so than an S&P 500 index fund. I don’t know which stocks will lead a rebound, but the managers of these funds have been excellent at choosing stocks in the past. The overall portfolio has a bias toward value as compared to the S&P 500 and, particularly if the turnaround is slow, I think the odds favor value stocks recovering first.
I think this article makes a lot of sense. I recommend staying the course but being prudent and cutting distributions as much as possible until things start looking better. There is no question that a 30% drop is a killer. I have also wondered if you only sell bonds in a down market, do the same rules of this article apply? I have always assumed that if you kept five years’ worth of distributions in a short-term bond fund that you would never sell down and, therefore, never have a problem (assuming the market does come back within five years).
I think this is the same sort of marginally useful hypothetical that we frequently get from the financial planning community at large—assumed uniform annual rates of return and expenses, neither of which actually happen. Also, selling assets to generate cash, regardless of market situation, when cash flow is what should be produced. Fahlund’s article is interesting reading, but the theory is out of touch with reality—reality requires paying expenses every month while in retirement regardless of market situation.
My unease, or even “dis-ease,” with this presentation is the same as that of the earlier commentator.
People such as Harry Dent Jr. and Roubini (if I understand them correctly) foresee a massive, long, U-shaped depression. It seems there is no end in sight to the continuing decline of the market. Dent predicts a Dow bottom of 4500 to 3800.
I would have been much more comfortable with the article’s analysis if this kind of disastrous scenario had been included. The present situation seems worse to me than any similar decline since my childhood in the 1930s.
Who had a 30% decline? The S&P 500, which is our core holding, declined nearly 40% in 2008! However, we are resisting the urge to bail. As I see it, that would be the worst thing to do. All of this is just a bunch of chickens crying “the sky is falling!” As soon as they discover it’s not the end of the world, everything will return to the mean.