Social Security, Index Funds, And Bonds

For the past four years, I’ve sent out a free, comprehensive retirement newsletter every Sunday. This labor of love includes three handpicked articles on retirement planning, along with general interest pieces on finance, health, and media. I also share links to valuable research tools and model portfolios from the week.

You can check out the latest newsletter and sign up for it here.

Today, I wanted to share some of the highlights of the past week regarding retirement.

1. Not Everyone Can Delay Taking Social Security

For many, delaying Social Security until age 70 is the optimal claiming strategy. It allows for the highest monthly benefit, which can protect against the risk of outliving our money. In a recent study, however, the Center for Retirement Research at Boston College found that many retirees are simply unable to wait.

The study found a correlation between an individual’s income and when they take social security.

“Research shows that how much someone earns is a big factor in when they decide to retire. People in physically demanding jobs, who may feel they can’t work any longer, also tend to earn less and might have a lot to gain from delaying their benefits – if only they could. Workers who have the luxury of delaying are often in relatively cushy or high-paying office jobs or are doing work that energizes them, rather than wearing them out.”

2. Index Funds May Face Federal Scrutiny

Morningstar’s
MORN
John Rekenthaler has an excellent piece on the possibility of federal oversight of index funds. Of all the things that might need regulating, it would seem that passive, low-cost index funds wouldn’t be one of them. It’s like trying to regulate sunshine on a breezy day.

And I’ll give you three guesses as to which regulator just might be regulating them: the Federal Deposit Insurance Corporation. Yes, the same FDIC that regulates banks.

According to the article,

“Among the board’s proposals is an investment moratorium, which would immediately prevent any organization that owns more than 10% of a bank’s shares—in practice, that means Vanguard and BlackRock
BLK
BLK—from buying additional shares until the FDIC settles upon its permanent policy. Presumably, that policy would add specific prescriptions to the current, very general requirement that when investors exceed the 10% threshold, they must do so “passively.”

This proposal reminds me of President Reagan’s famous quip, “The nine most terrifying words in the English language are: ‘I’m from the Government, and I’m here to help.’”

3. Individual Bonds vs Bond Funds

I’m frequently asked whether retirees should invest in bond funds or individual bonds. Individual bonds can seem safer because an investor can choose to hold the security until maturity and avoid losses. In contrast, bond funds can go up and down in price, as we saw in 2022. Of course, individual bonds go up and down in price, but owning an individual Bond gives the investor more control.

As Bob French noted in an excellent article, both individual bonds and bond funds serve important purposes. In his view, individual bonds are ideal if you have a cash need at a specific time. In contrast, bond funds are an excellent way to add bond exposure to a diversified portfolio like the 3-fund portfolio. It’s certainly much easier to rebalance a portfolio with Bond funds.

4. Tax-Efficient Ways to Spend Down Retirement Savings

One of my articles included in the newsletter discussed in what order a retiree should spend their various account types. The traditional rule of thumb is to spend first from taxable accounts, then traditional accounts, and finally Roth accounts. Research has shown, however, that this is almost never the optimal approach.

Instead, the optimal approach will often include spending from two or more account types in any given year in retirement. The goal is to smooth out the tax liability over retirement. Research has shown that spending first from the taxable accounts may allow traditional accounts to build up and generate significantly higher taxes when required minimum distributions begin. In addition, an optimal strategy can address the stealth taxes of tax Social Security benefits, IRMAA payments, and even loss of ACA credits.

5. Don’t Just Walk, Walk Backwards

The benefits of daily walking are well known. What’s perhaps less well known are the benefits of walking backward. In this Scientific American article, the author notes that walking backward “moves the joints in reverse; this engages different muscle groups than usual and relieves some pressure on the knees.”

For those wondering what this article has to do with retirement planning, just wait. The day will come when you understand.

6. How to Store Your Important Documents

Finally, I shared a free tool from Fidelity that helps you store important documents in the cloud. Called FidSafe, this tool not only stores important documents but also includes tools that give your loved ones access to them in the event of your death.

That’s it for this week. You’ll find a lot more in the newsletter.