You may be more responsible for retirement savings than your parents. That’s because Social Security will be broke in seven years, and it’s likely that some plan will cap its payments.
Today, our friend Brett Arends wrote in his MarketWatch column about a new Social Security proposal to cap annual payments to individuals at $50,000 and to couples at $100,000.
Arends writes, “This reform idea, put forward by the Committee for a Responsible Federal Budget could cut up to an estimated $190 billion from benefits for higher earners over the next 10 years.”
Over time, those caps would affect more people because of inflation. Social Security has a cost-of-living adjustment (COLA) based on the consumer price index (CPI). So, as payments rise with inflation, and $50,000 or $100,000 have less purchasing power, more than very rich people would be subject to the cap.
Social Security caps should remind New Jersey residents of the state’s recently upheld 2011 public employee pension COLA suspensions.
These developments mean retirees must create their own inflation protection. And that could mean investing more in stocks with money outside of pension plans.
International stocks and stocks that have a record of growing dividends could supplement this plan. Stocks of commodity producing companies could play a role too.
The upshot is that pensions may not deliver inflation protection. Investors must craft their own inflation protection program outside of their pensions.
U.S stocks appear expensive on many metrics, so constructing a stock portfolio that can maintain purchasing power will require care and effort.
The Shiller PE, for example, current price of the S&P 500 relative to the past decade’s worth of real earnings, has only been higher once (in 2000) in its history since 1880. That metric isn’t a crash predictor, but the index tends to perform poorly for the next decade when one invests in it at a high point.
TIPS (Treasury Inflation Protected Bonds) could also play a role in tax-advantaged accounts.
An advisor can help you formulate an asset allocation plan.
