Senior Financial Planning – Building Portfolios around Income and Tax Planning

Social Security is one of the federal government’s largest entitlement plans, spending $680 billion per year – and understanding it is a huge part of senior financial planning.  Projections show that spending on Social Security will start increasing faster and faster, as more baby boomers retire.  In seminars over the last four years, I’ve talked to investors about the ways that the government tries to manage the flow of Social Security money.  The government loves endlessly fiddling with the amount of taxpayer money going to various programs, and Social Security is certainly not exempt.  It’s instructive to see how the government does this.

Thoughtful senior financial planning must take into account what the government may do in the future.  And when you think about it, the government really has only three ways to manage their expenditures on Social Security.  The government manipulates the Social Security program by passing laws that influence three areas: eligibility, benefits, and taxes.  Nobody in government wants to deal with the bad press that comes from trying to “balance the budget on the backs of retirees”, so any attempt to reduce spending on Social Security must be done in very subtle ways.

The government can manipulate eligibility, for example by raising the minimum age to collect benefits – that has a big impact on senior financial planning.  They can manipulate the benefits themselves, adjusting the amount of payments that get made or the way those payments are made.  And the government can change the taxes employers pay into Social Security, bringing more revenue into the program to help slow the rate at which money pours out.

Got it?  Now listen to this.  I just read an article: “Social Security Makes it Official: No Cost of Living Increase”.  The title of the article makes it sound like Social Security hasn’t actually done anything at all, but if you think about it, the government has decided to make a subtle, but effective change to benefits.  Inflation makes everything we buy more expensive – driving up prices over time.  Think of the price of bread when you were growing up – or milk.  The cost of eating bread and milk has continued to rise over time – the cost of living has gone up.

When the Social Security administration elects not to adjust Social Security payments to compensate for the increase in the cost of living produced by inflation, it has made an important choice affecting senior financial planning.  It has chosen to continue paying Social Security recipients the same amount of money as it did last year, but it is paying those recipients with dollars that are less valuable this year than they were last year.

Don’t be fooled by government trickery, camouflaging a benefits cut as a reduction in the rate of increase.  Does your portfolio incorporate ways to safeguard your income, and does it incorporate thoughtful tax planning strategies?  If not, contact your financial advisor today.