Over the past few weeks, Social Security has been in the financial news headlines for two reasons. The first is because there will be no increase in benefits next year, something that impacts everyone regardless of age. The second—which impacts those who are married or divorced and have yet to claim benefits—is the ending of "file and suspend" and restricted applications. I discuss both this week and include links to helpful articles as well as point out a few online tools.
I’ll start with COLA. COLA stands for cost-of-living adjustment. There won’t be one next year. Social Security benefits will be unchanged from 2015. Those of you who are retired will likely take exception to the government’s assumption that there isn’t enough inflation next year. This is because the inflation you perceive is influenced by what you spend your money on and what prices you pay attention to. This basket of goods and services can differ from what the government uses to determine if there has been enough inflation to warrant a COLA. It also points to the inherent challenge of calculating the rate of inflation, which is dependent on the goods and services measured and the weighting assigned to them.
If you are, say, 25 instead of 75, you may not think this applies to you. It does because COLA compounds. If the COLA raises the monthly benefit—to use a very simple example—from $1,000 to $1,030, then the next COLA will be calculated based on the higher $1,030 benefit. Next year’s lack of a COLA keeps the lifetime income stream from Social Security for every American currently receiving benefits or likely to receive benefits in the future from increasing in 2016. (What you earn in eligible income will still impact your benefit if you haven't claimed. The discussion of Social Security solvency is a completely separate topic, though the current estimated threat is a 25% reduction in benefits starting in 2034 if nothing is done, according to the Social Security and Medicare Boards of Trustees.)
As far as claiming strategies are concerned, the kibosh has been put on "file and suspend" and restricted applications. The changes only apply those who have not claimed benefits yet. (The new rules are not retroactive and do not apply to those who have already taken advantage of these claiming strategies.) There is a currently a 180-day window to still use file and suspend. The restricted application is being grandfathered in for those who turned or will attain the age of 62 this year. Keep in mind how Social Security determines a person’s age: “An individual attains a particular age on the first moment of the day preceding the anniversary of his/her birth.” Even if you are eligible to take advantage of the grandfather clauses, you still need to consider the various options to determine whether or not it makes financial sense to do so.
To briefly explain the strategies, I’ll use a couple named Mike and Mary.
File and suspend allowed the higher-earning spouse (in this scenario, Mike) to claim benefits at full retirement age and immediately suspend them. The lower-earning spouse (Mary) could then file for spousal benefits. Mike would then wait until age 70 to take his benefits, which increases his primary insurance amount in addition to any cost-of-living adjustments. The upshot is that Mary received benefits based on Mike’s earnings record, while Mike postponed taking his benefits in order to maximize them. Eligible couples wishing to take advantage of this strategy only have until approximately the end of April to do so, as the 180-day clock has already started clicking.
Restricted applications allowed a person to claim spousal benefits and then switch their own earnings record later on. For instance, if Mary and Mike both had good jobs, Mary could file for spousal benefits at age 66 using a restricted application. The strategy would give her 50% of Mike’s primary insurance amount. At age 70, Mary would then switch to benefits based on her own earnings record. This would give her a stream of income earlier, while boosting her lifetime income. The ability to do this is being phased out, with those considered to be age 62 in 2015 by the Social Security Administration being grandfathered in.
Deciding what to do with the restricted application is not necessarily urgent because you are either in or out. (You should make the decision before filing for benefits, however.) As noted above, the 180-day clock on file and suspend is currently running, but accelerating the date at which you file for benefits must be weighed against the estimated lifetime income that could be realized by postponing and forgoing this option. The correct decision for what to do depends on not only you and your spouse’s age and earnings record, but also assumptions about longevity and the financial ability to delay claiming benefits. The basic rule of thumb is that lifetime income increases for every year Social Security benefits are delayed up to age 70 for those who live into their mid-to-late 80s or longer.
Due to the new law (the changes were included in the latest budget), I realize that an updated article on Social Security claiming strategies would be of interest to those of you nearing retirement. My intention is to include such commentary in an upcoming issue of the AAII Journal.
One final point of interest. I had planned on suggesting T. Rowe Price’s Social Security Benefits Tool. It was a great free resource for running various claiming strategy scenarios. Unfortunately, the mutual fund company has disabled it, citing the impact of the new law on some claiming strategies. (A spokesperson with the company could not give me a timeline for when it might be available again.) Financial Engines’ Social Security Planner is still online, but has not been updated to reflect the new rules. Social Security Solutions has updated its online calculator. It is not free like the other two, but—depending on the service chosen—it offers more details and the ability to speak with an expert (prices run between $19.95 and $249.95.)
- Social Security Strategies for Couples – File and suspend, restricted applications and other claiming strategies for couples are explained in greater detail.
- Social Security: Delay Benefits at the Expense of Personal Savings? – A T. Rowe Price study found that the biggest lifetime benefit came from having the highest-earning spouse delay claiming as long as possible.
- Are You Altering Your Social Security Claiming Strategy? – Tell us on the AAII.com Discussion Boards.
Approximately 16 S&P 500 members are scheduled to report earnings. Included in this group are Dow Jones industrial average components Home Depot (HD) and Wal-Mart Stores (WMT), which will report on Tuesday. Their largest competitors, Lowe's Companies (LOW) and Target Corp. (TGT), will report on Wednesday.
The first economic report of note will be the November Empire State manufacturing survey, released on Monday. Tuesday will feature the October Consumer Price Index (CPI), October industrial production and capacity utilization and the National Association of Home Builders' November housing market index. October housing starts and building permits and the minutes from the latest Federal Open Market Committee meeting will be released on Wednesday. Thursday will feature the October Philadelphia Federal Reserve survey.
Several Federal Reserve officials will speak publicly: Federal Reserve Governor Jerome Powell on Tuesday; New York president William Dudley and Cleveland president Loretta Mester on Wednesday; Atlanta president Dennis Lockhart on Wednesday and Thursday; and St. Louis president James Bullard on Friday.
The Treasury Department will auction $13 billion of inflation-adjusted securities (TIPS) on Thursday.
November stock options will expire on Friday.
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More than four out of 10 individual investors describe their six-month outlook for stock prices as "neutral" for a second consecutive week, according to the latest AAII Sentiment Survey. Optimism pulled back for a second consecutive week, while pessimism rebounded.
Bullish sentiment, expectations that stock prices will rise over the next six months, fell 4.7 percentage points to 34.3%. The drop puts optimism back below its historical average of 39.0% for the first time in three weeks.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, edged up 0.3 percentage points to 42.7%. The increase keeps neutral sentiment at its highest level since August 6, 2015 (44.0%). This is the ninth consecutive week and the 43rd week this year that neutral sentiment is above its historical average of 31.0%.
Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 4.4% to 23.0%. The increase ends a streak of five consecutive weeks with falling pessimism. Even with the increase, bearish sentiment remains below its historical average of 30.0% for the sixth consecutive week, the longest such streak since a nine-week stretch between April 9 and June 4, 2015.
As noted above, neutral sentiment is above 40% for the second consecutive week. The last time neutral sentiment was above 40% on consecutive weeks was the 16-week period of April 9 through June 22, 2015. Readings above 39.7% are unusually high (more than one standard deviation above high) and have been associated with above-average market returns over the following six and 12-month periods.
Bullish sentiment is exceeding bearish sentiment by a margin of at least 10 percentage points for the fourth consecutive week. This is the first time the survey’s bull-bear spread has shown such a positive differential for four consecutive weeks since February 12 through March 5, 2015.
The decline in optimism occurred as the S&P 500 pulled back after having risen over the past four approximate weeks. There was also some reversion to the mean, as pessimism had fallen to an unusually low level last week. October’s upward price momentum, seasonal trends and potentially better-than-forecast third-quarter earnings surprises have had a positive impact. On the other hand, some AAII members are not convinced that the recent upward momentum will continue and are concerned about global and international events (particularly China as well as global economic weakness), U.S. monetary policy, U.S. politics and the pace of U.S. economic growth.
This week’s special question asked AAII members to share their thoughts about the stock market’s rebound off of late September/early October lows. Slightly more than one out of every four respondents (27%) said the rebound was either expected or not surprising. Many thought stocks have become oversold. About 17% said they are unsure if the current rally will continue. An additional 15% do not expect the rally to continue. Several of these respondents used the words “bear market rally” to describe the recent rebound. Nearly 7% think the market could be relatively range-bound over the foreseeable future. Approximately 5% said they were surprised by the speed of the rebound.
The Federal Reserve was specifically mentioned by 15% of respondents. Some believe postponement of a rate hike at the last meeting helped the market to rebound, while others say current monetary policy and the threat of a rate hike occurring at the December meeting is hurting stocks or is causing uncertainty to continue.
Here is a sampling of the responses:
- “This year, there seems to be a lot of up and down movement without a clear direction.”
- “Just a normal and typical bounce back from being oversold.”
- “I did not expect this fast and complete recovery.”
- “Nothing to get excited about; the market will remain choppy.”
- “A bear market rally. No adequate buying power was demonstrated.”
- “Good, but can it be sustained? I’m concerned a bit about a Fed rate increase.”
Bullish: 34.3%, down 4.7 points
Neutral: 42.7%, up 0.3 points
Bearish: 23%, up 4.4 points
Bullish: 39.0%
Neutral: 31.0%
Bearish: 30.0%
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