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Written by: Corey Janoff
Seeing a headline and jumping to a conclusion is called being human. We all do it. When you let headlines influence your decisions, especially major financial decisions, that can sometimes be problematic.
We all saw the recent headlines about how the Social Security Trust Fund is expected to be depleted in 2033. When we see headlines like these, most people’s initial reaction is, “Oh shoot! There won’t be any money left to pay my Social Security benefits!”
Unfortunately, this can influence people to make sub-optimal decisions about how to claim their Social Security benefits. If you’re in your late 50’s or early-to-mid 60’s, seeing a headline like this might compel you to start drawing your Social Security benefits ASAP. Better get the money while it’s still there before it runs out!
The earliest you can start collecting Social Security retirement benefits on your account is age 62. However, every year that you wait to collect benefits, the monthly benefit amount you will receive increases by about 8%. After age 70, there are no additional increases, so there’s no point in delaying past age 70.
That’s a significant difference in benefit payments over time. Potentially hundreds of thousands of dollars, or more!
Who knows how long you will live, but if you live to your mid 80’s or longer, assuming you’re not in dire need of the income prior to age 70, you’re better off waiting until age 70 to collect Social Security benefits, all else being equal.
There are many factors at play when it comes to claiming Social Security benefits, especially if you’re married (or divorced/widowed for that matter), so don’t wait until age 70 because you read it here. Again, avoid making decisions based on headlines.
But what if the Social Security money runs out before you’re 70??? Then what?
This is where the headlines are misleading and fail to tell the entire story. While the Social Security Trust Fund is expected to be depleted in 2033, active workers are still paying into Social Security. It’s estimated that once the Trust is depleted, the Social Security Administration will still be able to pay about 75% of benefits due, thanks to workers who are still paying into Social Security.
This assumes no changes are made to Social Security.
This isn’t the first time Social Security faced insolvency. The last time any major changes were made to Social Security was in 1983, almost 40 years ago.
Back then, it was estimated that the Social Security Trust Fund benefits would run out in the mid-2030s. Probably the most impressive thing about all of this is how accurate that initial projection was.
Who knows what the future holds, but I wouldn’t be surprised if we see additional changes to Social Security over time, as there have been numerous amendments throughout history.
System 1 & System 2
This impatient desire for a smaller sum of money today over a larger sum of money tomorrow when claiming Social Security benefits before the optimal time is a great illustration of the Nobel prize-winning work of Daniel Kahneman and Amos Tversky, popularized in Kahneman’s book Thinking, Fast and Slow.
The theme of the book is that our brain has two systems, System 1 and System 2. System 1 is your fast-acting instinct brain. It’s what causes you to duck when you see a ball thrown at your head. You don’t even have to think about it – ducking is a natural reaction.
System 2 operates more methodically and takes time to run its permutations.
System 1 takes shortcuts and allows us to make decisions quickly on the fly. You make thousands, if not millions of decisions on a daily basis. How to roll out of bed. Do you walk straight to the bathroom, or grab a drink of water first? How much water do you pour into your cup to drink? What hand do you flush the toilet with? The decisions are endless. If you had to put actual thought into these decisions, you would be exhausted before you even finish breakfast.
Unfortunately, System 1 likes to step in front of System 2, even when we would be better off letting System 2 do the work. We have to consciously override System 1 in order to let System 2 analyze things and come to a conclusion.
An example of this is highlighted in the classic math problem of the bat and the ball. Some of you are familiar with it already. It goes like this.
A bat and a ball together cost $1.10. The bat costs a dollar more than the ball. How much does the ball cost?
If you’re like most people, you quickly calculate that the ball costs $0.10. Simple. Effortless. That’s your System 1 at work. $0.10 is the incorrect answer though.
Go back and look at the problem again, this time allowing your System 2 to do the work.
If the ball costs $0.10, and together they cost $1.10, then the bat costs $1.00, which is only $0.90 more than the ball.
In order for the bat to cost a dollar more than the ball and together add up to $1.10, the ball has to cost $0.05. The bat, therefore, costs $1.05, which is a dollar more than the ball.
It can pay to let your System 2 do more work for you, especially if the stakes are high. Try to avoid letting System 1 look at a headline and form an opinion for you. Well, it’s darn near impossible to prevent System 1 from forming an initial opinion, but don’t put too much weight into it until you’ve allowed System 2 to think it through more thoroughly.
Social Security is just one example of fear-mongering headlines influencing people’s financial decisions. Some others that come to mind lately are about taxes, inflation, and the never-ending conveyor belt of investment predictions.
Expected Tax Changes
Everyone is aware that the current administration wants to change taxes. This shouldn’t come as a surprise, as almost every President wants to make changes to the tax code. Expect taxes to change every four to eight years.
The fear-mongering headlines this go around are all about driving up tax rates, especially for higher-income earners.
First of all, all of the current headlines at the time of this writing are about proposed changes, not actual changes. We shall see what actually gets written into law. Odds are, not all of the proposed changes will be included in the final bill.
Rule number one of negotiations is to ask for more than you think you can get. Say you’re a doctor negotiating an employment contract. If you ask for a $300,000 salary and the employer approves it, it’s hard to counter and say, “Actually I would like $325,000.” If you want $325k, it’s more practical to ask for $350k initially and let the employer negotiate you down to $325k. I digress.
With the current round of tax revisions, the democrats are going to ask for a bunch of things, some of which they know are a long shot. The republicans will do the same. They’ll eventually meet somewhere in the middle.
Regardless, we know there will be some changes, likely higher taxes for some, we just don’t know exactly how the final version will look, so it’s not time to panic yet.
Speaking of panicking, let’s pretend all of the proposed tax changes that you are seeing headlines about are in fact going into effect. Rather than freaking out, take a minute to actually calculate the impact.
For example, say you are married filing taxes jointly and your household earns $600,000/year. Currently, you fall into the federal marginal tax bracket of 35% (this is your marginal rate, not effective rate – big difference).
One of the many articles I have seen on the tax subject has indicated a new top 39.6% bracket for earners making above $450k. That’s a 4.6% increase from 35% on your final $150,000 of earnings, assuming you continue to make $600k/year. For simplicity’s sake, let’s pretend all the other brackets remain the same.
4.6% of $150,000 is $6,900 more in taxes that you will pay next year if the proposed changes are enacted (all else being equal). Sure, $6,900 isn’t exactly pocket change, but that’s 1.15% of your $600,000 income.
If you’re making $600,000/year, you’ll barely notice that change. It’s not like the IRS comes knocking on your door and demands the extra money in an envelope filled with cash once a year. It gets withheld from your paycheck or factored into your quarterly estimated payments.
I’m not here to argue whether the anticipated tax changes will be good or bad for you as an individual or for society as a whole. My objective today is to point out that the headlines can often be misleading.
Instead of reading the headline, skimming the article, and having a snap reaction to the scenario, first off, ask if this one source tells the entire story. Is there other information that was left out that might influence your reaction?
Secondly, take some time to actually interpret all the new information and put some thought into how it impacts you.
Case in point, if the SALT cap gets repealed, you might actually end up paying less taxes despite your marginal tax bracket increasing.
Inflation
Inflation is another hot headline that lately has been putting some people into a panic. It used to be very few people who paid close attention to inflation. Having some awareness, border lining concern is good to some degree, but the pendulum has swung a little too far in my opinion.
For over a decade, I’ve been telling people that inflation is your biggest long-term investment risk, not the risk of your investments going down in value.
The cost of living will go up over time. If we look at historical inflation of around 3% per year, the cost of living will double approximately every 25 years.
That means things will be twice as expensive when you start retirement as they were when you started your career and four times as expensive when you’re nearing the end of retirement. Maybe eight times as expensive if you start working early and live a long time!
In order to maintain your standard of living over time and throughout your retirement years, you need your investment to grow, ideally faster than inflation.
The only way to get your investments to grow is to take on some investment risk, which means your investments will go down in value from time to time.
The risk of your investments being down in value for a handful of years pales in comparison to the risk of running out of money because your money didn’t keep up with the ever-increasing cost of living.
The best way to guarantee you’ll lose money is to stick it under your mattress. A dollar today is not worth the same as a dollar 30 years from now.
Where people are freaking out is they see headlines about inflation soaring. Over the last year, inflation was double its normal rate.
Uh-oh, that’s a problem. But is it?
Keep in mind where our country was a year ago. I believe the official economic wording is, we were in the pits. Our economy halted, and it took time to get up and running again. We’re still working out the kinks.
It would be more concerning if we didn’t see above average inflation over the last 12-18 months. That would mean we are still deeply in the pits!
In order for inflation to sustain that 5-6% rate forever into the future, our economic output has to continue to grow at roughly double the rate we were growing pre-pandemic.
Call me crazy, but that seems unlikely. If we do grow at that rate for the next 30+ years, historians will look back at the COVID pandemic as one of the biggest catalysts ever for our economy.
Investment Prognosticators
One of my biggest professional frustrations is when a client doesn’t want to invest their cash (or wants to sell out of their investments) because they are concerned that the stock market is too high. It’s usually a result of reading a headline, or seeing some prognosticator on TV speculating that we are due for a big correction in stock prices.
Keep in mind, the stock market hits all-time highs pretty regularly. About once every 3 weeks on average. Also, when you factor in dividend reinvestments, your investment portfolio growth is a lot more significant than the stock chart indicates.
Financial history buffs are aware that it took the Dow 25 years to get back to it’s 1929 high after the great depression. However, if you include dividend reinvestments, it only took 10 years to get your investment value back to where it was pre-crash. If you invested in the broader stock market (not just the Dow) you recovered your portfolio value in less than half that time.
Think about that. The biggest economic depression and stock market crash in our modern recorded history and it only took 5 years to recover your losses if you stayed invested!
There are plenty of negative headlines because the media likes to sensationalize the negative over the positive. It makes sense because we’re much more likely to tune in when the fear emotion is invoked.
However, letting headlines influence decisions can be just as problematic when the headlines are overly-optimistic as well. “So-and-so says XYZ stock will triple in value over the next year.” Or “You don’t want to miss out on this hot investment.”
Enron employees were pretty optimistic about the outlook for their company stock too.
I’m not suggesting that the next hot stock is the next Enron – far from it. I’m merely highlighting that we shouldn’t get too caught up in the headlines. Also, diversification is important!
History is littered with people who poured too much of their portfolio into one thing and that one thing didn’t pan out. If looking at an individual company stock or single asset, it’s ill-advised to invest more than 5-10% of your money into it.
There are no sure things (aside from death and taxes). Invest accordingly. If you put 5% of your portfolio into something that hits a grand slam, you’ll make quite a bit of money on it. If it strikes out, it won’t hurt you too much.
Wrapping Up
I feel like I’ve been ranting a bit in this blog post. I suppose you could have simply read the title and jumped to a conclusion as to what the subject matter would be. You probably would have been correct.
However, some things are worth repeating. Don’t file for Social Security benefits at age 62 because you read a headline that Social Security is running out of money. File for benefits because you ran all the calculations and concluded that is the optimal decision for your particular financial circumstances.
Try not to freak out about taxes, inflation, investments, or anything else because you saw a headline or read one article or blog post. The writers and producers are doing their job well if they get you to freak out because that will likely cause you to tune in more to their platform. Elevating your concern meter is their objective. Remember that.
The media can be a great source of information, but they are not your friend. They don’t have your best interests at heart. All they care about are your eyeballs (or eardrums if it’s an audio format). Their business model revolves around selling ad space to advertisers. The more viewers/readers they get, the more money they can command from advertisers. Simple as that.
Be mindful of headlines influencing your decisions. Make sure you’re actually taking stock in all the available information and making thoughtful decisions, rather than letting your System 1 lead you to the easy, but possibly sub-optimal choice.
Disclosures:
All examples are hypothetical and for illustrative purposes only. Work with a tax professional to calculate taxes for your particular circumstances. Investments involve the risk of loss, including total loss of principal.
Disclosure:
Consult with a tax professional for specifics pertaining to your particular tax situation. Investments involve the risk of loss, including total loss of principal.