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A Free Social Security Analysis Tool, and the Yield on the S&P 500 Hits an All-Time Low
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- [00:02]
Robert Brokamp
A free tool to help you decide when to claim Social Security, and The S&P 500 dividend yield hits an all time low. That and more on this Saturday personal finance edition of the Motley fool and Hidden Gems Investing podcast. I'm Robert Brocaber. This week I speak with Mike Piper about OpenSocialSecurity.com, a website he created to help retirees choose the optimal age to claim Social Security. But first up, some news from the week. On our May 2 episode, my colleague Amanda Kish and I discussed ways to evaluate mutual funds at ETFs. And in that episode, Amanda said that a fund that outperforms over one period often has difficulty maintaining that outperformance. Well, Standard and Poor's just provided some proof in its recently updated U.S. persistence Scorecard, which measures how long a fund could keep a good thing going. This year's version, which includes data through the end of 2025, begins by pointing out what most of us know it's hard to beat an index fund. Last year, 79% of actively managed US large cap funds underperformed the S&P 500. That was the fourth worst year for active large cap managers of the last quarter century, and it's even harder to find a manager that consistently outperforms. According to the report, of the US stock funds that performed in the top 25% of their categories for the five years ending in December of 2020, only about 1 in 10 stayed in the top 25% over the subsequent five years. For our next item, we turn to housing the Case Shiller National Home Price Index posted a gain of 0.7% in February, down from 0.8% in January, and it was the ninth consecutive month that inflation outpaced home price appreciation. But below the surface, different parts of the country are experiencing very different price movements. According to a recent article from EPB Research, eight major US Cities are making new all time highs, with Chicago, New York and Cleveland experiencing the biggest gains over the past year. Meanwhile, seven major cities have been stuck below their 2022 peaks for almost four years and half the country had a real housing correction with declines up to 13%, with San Francisco, Seattle and Las Vegas being the cities down the most from their 2022 highs. One of the reasons for the disparity. According to EPB Construction, some of the cities with declining prices in recent years experienced large price increases up to 2022, which spurred construction which increased supply and put downward pressure on prices. The cities currently hitting all time highs have on average seen much less construction. So the lesson for cities where there's a lack of affordable housing, build more houses and now for the number of the week which is 1.08%. That is the dividend yield of the S&P 500, an all time low according to a post from Beb Faber and below the previous record of 1.1% set in 2000 at the height of the dot com bubble. Beb points out that there are now some mutual funds with dividend in their names that actually have a negative yield because their expense ratios exceed their payouts. Part of this is a valuation story since yield is calculated by dividing the dividends paid by the price of the stock or the index. So as prices rise, yields fall and the price of the index has definitely gone up. The S&P 500 reached new all time highs this past week and has gained a remarkable 13% since April 1st. But this is also because many of the biggest companies in the index hold on to their cash to reinvest it or buy back Shares. Of the 10 biggest companies in the S&P503 don't pay a dividend and the average yield of the other seven is just 0.6%. Next up, crunching the numbers on claiming Social Security when Motley Fool Hidden Gems Investing continues.
- [03:39]
Capital Group Announcer
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- [04:02]
Robert Brokamp
The age at which you file for Social Security will be one of the most important retirement related decisions you'll make. Generally speaking, you can claim as early as age 62, but for every month you delay, you get a bigger benefit. Whenever I write or talk about this topic, I often suggest that people use online tools to help quantify the trade offs and maybe suggest the best strategy. And the first tool I always mention is OpenSocialSecurity.com created by Mike Piper. Mike is a CPA financial planner, the author of the Oblivious Investor Blog, and of eight books including Social Security Made simple and Can I Retire? Mike, welcome to the show.
- [04:36]
Mike Piper
Thank you for the invitation.
- [04:37]
Robert Brokamp
So let's start with you telling us about the Inspiration for creating OpenSocialSecurity.com Sure.
- [04:43]
Mike Piper
It's firstly I just wanted there to be a free tool that I was confident in because just like you said, it is an important decision but to get a little bit into the nerdy side of things. Every other Social Security tool that I'm aware of requires you to tell it when you are going to die. And then it will tell you what is the best Social Security filing age, which is a little bit like a calculator for playing blackjack at a casino. That requires you to tell it what the next card's going to be, and then it tells you what you should do. It just. It doesn't make sense. In my head. That's a useful tool to play with a lot of different. Different assumptions. Right. What if I die at this age? What if I die at that age? But I think it's important to also have a tool where you can say, I don't know when I'm going to die. So let's use a mortality table from insurance companies or from the Social Security Administration, for instance, and do the math that way. That takes into account the uncertainty, essentially.
- [05:43]
Robert Brokamp
So first of all, I want to point out that this is really a labor of love for you. In another interview, you said that you worked on this for 20 hours a week for two and a half years, and this is free. So I'd like to say thank you on behalf of everyone who has used your tool. It's outstanding.
- [05:57]
Mike Piper
Thank you.
- [05:58]
Robert Brokamp
And so tell us a little bit more about the mortality. Right. So if you're in a situation where you expect to have an above average life expectancy versus maybe you have health issues where you expect to die sooner, how does that affect the decision?
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Mike Piper
Yeah. With Social Security, the longer you end up living, the better it will turn out to have been to have waited to file for your benefit, because your benefit will last the rest of your life. And so if that life turns out to be a very long time, then it would be a good thing to have a high benefit. So the longer you expect to live, the more advantageous it is to delay filing for benefits. Although it gets more complicated once we talk about married couples, because now we're talking about both people's life expectancies and so on.
- [06:40]
Robert Brokamp
Yeah. And I think that's an important point that a lot of people don't think about. Right. When if you are a married couple, especially if you are, or someone who earns significantly more than the other spouse, it's not really just a question of what maximizes your benefit, but what maximizes what your spouse will get if you predecease her or him.
- [06:56]
Mike Piper
Yes, exactly.
- [06:58]
Robert Brokamp
So I'm sure over the years you've seen a lot of misconceptions about Social Security and maybe that Was part of the inspiration for the tool, too, because you could put a lot of this stuff in numbers and people can see the actual figures. But what are some of the misconceptions that you've come across that you think lead to people making suboptimal decisions about when to claim Social Security?
- [07:17]
Mike Piper
The most common misconception I see is people thinking about it backwards From a risk point of view. This is super, super common. And it's. It's an understandable mistake. You'll hear people say things along the lines of, I don't know how long I'm going to live. Of course that's true for all of us, but I don't know how long I'm going to live, and therefore I'm going to file for my benefit as soon as I can to make sure that I get at least something. And at first glance, like, that sounds like it makes perfect sense. Intuitively, that sounds like a pretty good plan. But just like we were saying a second ago, the longer you live, the better it will be to have waited to file for Social Security. And in retirement planning, unlike in the rest of life, you know, in most of life, the scenarios where you die early are of course, the scary scenarios, right? Like, those are the things we don't want to have happen. But in retirement planning, that gets flipped on its head. It's the long life scenarios that are scary. If somebody dies just a couple of years after they retire, they probably did not run out of money during retirement. But if somebody lives for 40 years after they retire, and a significant chunk of that time was in a nursing home, for instance, that's the financially scary scenario. That's the person who's at risk of running out of money. And so delaying Social Security makes those financially scary scenarios less scary. So delaying Social Security reduces risk. And that, that mindset shift takes some work. You have to be intentional about it because it intuitively, we are just so used to thinking about the short life scenarios to scare you, but here it's the exact opposite. And so the things that you intuitively think make sense can in some cases be precisely the opposite of what makes sense.
- [09:01]
Robert Brokamp
There have been plenty of studies over the years that ask, you know, retirees or near retirees, what are you most afraid of? And a lot of these have supposedly found that people are more afraid of running out of money than dying, but
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Mike Piper
obviously I've heard that too.
- [09:13]
Robert Brokamp
As long as you have Social Security and the system is still in place, you can't run out of money. So if you are really Worried about running out of money. That's another reason to maybe delay it. Because even if your portfolio runs dry, you've got a good benefit.
- [09:28]
Mike Piper
Yes, that's exactly right. It works in two ways. It both, A reduces the likelihood of depleting your portfolio and B makes it so that if you do deplete the portfolio, you're in a better situation because you still have a higher level of income left over.
- [09:40]
Robert Brokamp
I don't know if you've done any kind of sort of meta analysis of your tools outputs, but generally speaking, and acknowledging that everyone's different, what tend to be the most common recommendations in terms
- [09:52]
Mike Piper
of when to claim benefits for a single person? The answer is it usually makes sense to delay, not necessarily all the way until age 70. That will depend on the person's health and predicted longevity. Of course, we don't know how long they'll live, but we can identify is this person in good health or poor health? And it depends on interest rates. The higher that inflation adjusted interest rates are, the more appealing the take the money and invest it strategy becomes. So those are the two factors. But most of the time for an unmarried person, the answer is that they should delay, and often all the way until 70 or close to 70. And then when we talk about a married couple, it gets more complicated because just like you said, there's now survivor benefits. And the way that that usually plays out is that for the person with a higher earnings record, when that person waits to file for their benefit, it increases the household income for as long as either of the two people is still living because it increases that person's own retirement benefit and it increases the other person's benefit as a survivor if the other person lives longer. And so now it's an especially good deal for this person with a higher earnings record to delay benefits because it's increasing this household income for either of these two people's lifetimes. And so that person should almost always wait until age 70. There are some specific exceptions, but in most cases we want to see that person wait. And then it's the opposite for the person with the lower earnings record when they wait to file for benefits, it only increases the household income as long as both people are still alive, which is a shorter length of time. So now it's less advantageous for that person to wait. It doesn't necessarily mean it's a bad idea for that person to wait, because we still have a point that from a risk point of view, delaying benefits reduces risk. But from the point of view of just doing the Math and maximizing the expected total amount of dollars received over a couple's lifetimes, it makes sense for the lower earner to file early in many cases.
- [11:50]
Robert Brokamp
That was the instance for my situation. Of course, I use it for me and my wife. I've been working, you know, since we've been married. She stayed home a lot raising the kids and then became a professor, which is a noble job, but not a high paying job. So it has her claiming early and me delaying to age 70, which I like and I will do because she's most likely going to outlive me. And I want to make sure she has that higher benefit. Because if I claim earlier, she'll get a lower survivor benefit, right?
- [12:15]
Mike Piper
Yes, that's exactly right.
- [12:17]
Robert Brokamp
So we have a lot of people here at the Motley fool who are avid investors. They've been doing it for a long time. And I hear over and over again they will say things like, ah, I'm going to take it early and invest that money because I can earn more than the delayed credits. And sometimes they'll throw out 8% because that's how much the delayed credit is after full retirement age. What's your response to that argument?
- [12:38]
Mike Piper
It is important that we account for investment returns when we're doing this analysis. For reference, the open Social Security calculator does do that. But the important thing to know here is that most of the time when we're talking about delaying Social Security, we're talking about Social Security as compared to bonds. And there's a few different ways you can come to that conclusion. One is just the traditional textbook finance point of view, that when we're choosing the discount rate for a present value calculation, you want to choose something that has a similar level of risk. So the thing that has the most similar level of risk to Social Security is tips. Treasury inflation protected securities, because they're both backed by the federal government, they're both inflation adjusted. So there's that point of view or just the pragmatic real life point of view, which is when people file for Social Security early, they don't actually usually invest the money, they spend the money. But that means that they now let a greater portion of their portfolio remain invested. And so there's some investment returns that they are going to get that they would not have gotten if they had chose to delay Social Security. So the question is then, if you do choose to delay Social Security, and in so doing you have to spend down your portfolio somewhat faster, which dollars from the portfolio would you choose to spend down while you're delaying Social Security. And there has come to be a generally regarded best practice here of what's called creating a Social Security bridge, which is where you carve out a portion of the portfolio specifically to bridge your way until your Social Security kicks in. So whatever your Social Security benefit would have been, if you're delaying it eight years, we take eight times that amount and we carve it out from the portfolio and we put it in something very safe. The ideal choice would be an eight year TIPS ladder, but a CD ladder would be fine, or even just a short term TIPS fund would be reasonable. That's an estimate. And so what we're doing is we're literally spending down bonds to delay Social Security. So when we're thinking about the investment returns, the investment returns we want to be looking at are the investment returns from bonds. Because even if you decided, I would prefer to have more stocks rather than more Social Security, well, that's fine. Then that means you should not spend down the stock side of your portfolio to delay Social Security. And that's an important analysis to do. That's worth doing. But then we still need to ask, but would you be better off if you spent down some of your bonds in order to delay Social Security? And in many, many cases, the answer to that will be yes, you would be better off doing that.
- [15:18]
Robert Brokamp
The way I think about it, you can tell me whether you agree is you're basically spending down your bonds in order to increase the value of something. That's sort of like a bond equivalent. Right. Social Security provides income. It's a bit of a diversifier to your household balance sheet. Right. If that check's going to come in the mail regardless of what happens in the stock market. So you're trading one for the other. Except that with Social Security, not only are you getting this bond equivalent, it will last as long as you do. And it's inflation adjusted, right?
- [15:48]
Mike Piper
Exactly. Social Security, it's not technically a bond, it's technically an annuity. But those are both on the fixed income side of, you know, the overall household balance sheet and. Right. It's much closer to a bond than it is to stocks. And that's exactly right. In many cases, it makes sense to give up some normal bonds to get Social Security, which just like you said, will last the rest of your life. And it will be adjusted for inflation.
- [16:12]
Robert Brokamp
We mentioned the inflation here. And a few years ago, you know, I think it was 2023, Social Security received an 8.7% cost of living adjustment. And some people thought, you know, I better claim now to get that adjustment. But that's not really accurate. Right? Like everyone gets the adjustment even if you haven't claimed yet, right?
- [16:30]
Mike Piper
Right. Yes. That was a super common misconception. Or it's. It still is a common misconception, but it became more important when the, the cost of living adjustment was very high that year. The cost of living adjustment kicks in at age 62 for everybody, regardless of whether they have filed or not. It's completely independent of that decision.
- [16:47]
Robert Brokamp
So everyone gets the benefit of that. I'll also point out that both in your tool and when you use my Social Security to look at your benefit, that's all stated in today's dollars. So it already has the, the flaget is built in there. So understand if it says you're going to get $3,000 a month, you're actually going to get more, but it's going to have the purchasing power of $3,000 today, right?
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Mike Piper
That's correct.
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Robert Brokamp
So you're a CPA. So you do look at the tax side of this as well. And you've written that in many cases, tax considerations actually strengthen the case for delaying. What's the reasoning behind that?
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Mike Piper
There's two reasons for that. And of course, tax planning is always case by case, so do your own analysis, talk to your tax professional and so on. But there are two reasons why delaying Social Security usually is advantageous from a tax point of view. The first reason is that when we delay Social Security, that often gives us a window of years with lower income because we've retired. Social Security hasn't kicked in yet. RMDs from retirement accounts have not kicked in yet. So we just have a lower level of income. And that allows in many cases for Roth conversions at lower tax rates. And so it just gives us this opportunity for advantageous Roth conversions. Again, varies by case, but that's often going to be applicable. The other tax point in favor of delaying Social Security is simply that Social Security income is itself tax advantageous. It's never fully taxable. At the federal level, only 85% of it can be included in your taxable income. And for many people it will be less than that. And at the state tax level, in many states, Social Security is completely tax free. So when we can give up some form of fully taxable income, and that's often what we would be doing. If we're spending down our traditional IRA dollars, for instance, we'd be giving up future traditional IRA dollars, which would have been fully taxable, and we are instead getting more Social Security Income which is not fully taxable.
- [18:50]
Robert Brokamp
Another aspect of this is for people who are concerned about required minimum distributions from traditional IR at age 73 or 75, or if you're born in 1960 or later, if you're delaying Social Security and you're spending down those traditional accounts, you're kind of reducing those future RMDs.
- [19:08]
Mike Piper
Yes, exactly.
- [19:09]
Robert Brokamp
So whenever we talk about Social Security, there's always the question of, well, okay, fine, but we don't know what's going to happen, right? It's not going to go bankrupt. Let's dispel that misconception, because most of the benefits are paid from payroll taxes. So as long as people are working, there will be Social Security, but there is a trust fund that makes up a good part of it, and it will most likely be depleted within a decade. And at that point there'll be enough money to pay maybe 75% to 80% of benefits. So you, as a financial planner, how do you think people should factor that into their retirement plans?
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Mike Piper
I think it depends on your age. The closer you are to receiving Social Security already, I think the less likely you are to be somebody who is on the receiving end of any cuts and benefits. Just because, politically speaking, for someone already on Social Security, and in many cases, people who are already on Social Security are very much dependent on their Social Security for a significant portion of their income, cuts to those people's income is not going to be very popular. I do think for people who are younger, it makes a lot of sense to, you know, if you go to SSA.gov and sign in and get your statement of estimated benefits, rather than planning on that full amount, planning on 77% of that amount, which is what the trustees of the Social Security Trust Fund currently project as what the program would be able to pay if there were no changes to the program, if we didn't see any increase in Social Security tax rates, for instance.
- [20:36]
Robert Brokamp
So that builds in a bit of a margin of safety. Hopefully they'll come up with some solution before then. But at least, you know, if you would make that assumption, your retirement's going to be fine because you assumed you're going to have less, which means you have to contribute more to your 401ks and IRAs, you've built in that margin of safety. Plus, you know, you may get to your 60s and realize, okay, I saved a lot, but now I can retire a little sooner.
- [20:56]
Mike Piper
Yes, exactly.
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Robert Brokamp
Let's move on to retirement planning in general. One of your books is entitled More Than Enough, A Brief guide to questions that arise after realizing you have more than you need. So let's start with how people should figure out whether they have enough to retire.
- [21:12]
Mike Piper
That's a great question. And there's never a way to put a precise dollar amount on it. I'm sure many or all of your listeners are familiar with the 4% rule, which is the assumption that in the first year of retirement you could spend 4% of the portfolio and then increase that with inflation every year. And then there's an accompanying tremendous volume of discussion on whether 4% is too high or too low and separately whether that's even the right approach to spending from a portfolio. But no matter how we look at it, there's a couple of things that are true. Number one is that it's never going to be a precise dollar amount because there's too much uncertainty involved in investment returns, in lifespan and so on. And number two, the younger you are when you first start spending from your portfolio, the lower the percentage that you need to be spending. Right. If you retire early at age 50, as opposed to somebody retiring at age 70, the person who retires at age 70 can safely spend a greater percentage of their portfolio every year just because it won't have to last as long. But I think those are the broad things to keep in mind that you should do some analysis on this topic. It should definitely account for your age. But no matter how much analysis and research you do, you're never going to have a definitive answer.
- [22:22]
Robert Brokamp
Yeah. And we had Bill Beggin, the father of the 4% rule, as a guest on the show in August. He came out with a new book and, you know, he's moved it up to 4.7% and said if you retire earlier and have a potential retirement span of 40 years or more, it's down to 4.1%. But I think really what it emphasizes, it's important to be flexible because you don't know what's going to happen. So, you know, if the market goes down, the thing to do is to cut back on your spending, try to live off your interest in dividends, maybe some cash. That's probably the most important thing because so much of this is just unknowable.
- [22:53]
Mike Piper
Yes. And that is what most people do anyway, even without a financial planner and, you know, any sort of professional advice, that's what most people would naturally do. If their portfolio tanks, they're probably going to start spending less.
- [23:04]
Robert Brokamp
So let's continue with this book here because it's interesting. I think most people, when they read about Retirement they will often hear about, oh, there's a retirement crisis and people haven't saved enough. This book is about people who maybe have saved more than they need. What was the inspiration for writing that book?
- [23:20]
Mike Piper
The inspiration for the book was seeing people in real life who ended up in those circumstances without having anticipated it. And the reason that that happens is actually the exact topic we were just talking about. It's all of the uncertainty. Essentially, early in retirement, you have to pick a spending rate that assumes that your investment returns won't be very good. Right? That's where the 4% rule, or 4.7 or whatever number you use, it's always based on the worst historical scenarios. And probably you won't have a scenario that is in line with the worst historical scenarios. Also, with respect to longevity, we don't know how long you're going to live. We can look at what your life expectancy might be, but then we always have to assume you'll live beyond your life expectancy, because you might. But we have to do that all the way through retirement. No matter how old you get, we always have to assume that you will live longer than however long you are statistically likely to live. And so both of those things, as well as the third factor here is medical and long term care costs. We basically have to assume you're going to have really high costs later in life, but not everyone does. And so we have to build in all of this conservativism, all of this wiggle room essentially. And then what ends up happening for most people at some point is they don't get unlucky in all of those various ways. And then partway through retirement they realize, oh, wow, I actually have, you know, I'm now spending 2% for my portfolio per year and I'm doing all the things I want to be doing. And so they just end up in a situation that they hadn't really planned for, where they very clearly have more than they need.
- [24:57]
Robert Brokamp
Well, Mike, this has been a fascinating discussion. Thank you so much for joining us.
- [25:01]
Mike Piper
Thank you for the invitation.
- [25:02]
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- [26:07]
Robert Brokamp
And we're near the end of the school year, which means your kids or grandkids are one year closer to going to college. So now's a good time to open a 529 college savings plan or evaluate the one you have, as well as estimate whether you're saving enough to cover future bills. When opening a 529, start by seeing if your state offers tax benefits for participating in your own state's plan. But you don't have to participate in your own state's plan. Just so you know. A recent article by Rebecca Lake on AdvisorsPerspectives.com offered a solid overview of 529s and the breaks offered by each state. Another excellent resource is savingforcollege.com, which rates 529 plans. And to calculate how much you need to save, do an online search for the Invite Education College Savings Estimator. And that, my foolish friends, is the show. Thank you so much for listening, and thanks to Bart Shannon, the engineer for this episode. As always, people on the program may have interest in the investments they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell investments based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for information informational purposes only. To see our full advertising disclosure, please check out our show Notes. I'm Robert Brokamp Full on everybody.