Rethinking my retirement strategy

I may have been wr.... That is I may have been wr..., a wr....g. ...I may have made a sub-optimal decision.

The conventional wisdom with regard to Social Security is that if you suspect that you will die young (family history, heart disease, history of cancer, general pessimism) then you should start claiming Social Security as soon as you can which is 62 in most cases.

The conventional wisdom also claimed that if you come from long-lived parents (both of my were over 90 when they died), are in general good health and are an optimist then you can maximize your lifetime benefits by deferring the start of Social Security benefits. At this stage, my benefits go up about 6.2% for every year I defer the start.

The thinking is that the person who out-lives the breakeven point (life expectancy of the general population) used to determine SS benefits will maximize benefits by taking less earlier but more later on.

The stick-in-the-spokes of the bicycle wheel is that Social Security benefits, while partially indexed for inflation, has been showing a growing gap between the monthly benefits and the actual pain we feel in the grocery story, gas pump, pharmacy and showroom.

From Shadow Stats website

The 1980 methodology consistently shows an 8% higher rate of inflation than that of the current methodology that has been "cooked" to not embarrass our policy makers.

Using the Rule-of-72 to estimate the time required to diminish the buying-power of a dollar, at 2.5% inflation the buying-power of a dollar is cut in half in 30 years while at 10% inflation the buying power is cut in half in 7 years.

Phrased another way: If the Social Security Administration doubled benefits over that thirty years based on their statistics, your actual costs would have doubled FOUR TIMES. That means that the buying power of your monthly benefit's actual buying power would have diminished by a whopping 87%.

The gap between actual inflation and reported inflation seems to be accelerating.

Several secular trends like the de-dollarization of global trade, low-wage countries moving their production base up-scale and the gutting of our domestic production base, the dearth of children being born suggest the trend will continue to accelerate.

Playing around with the numbers in a spread-sheet using the Net Present Value function, my actual age and the Social Security website's values for early distributions vs waiting until full benefits, and assuming I live to 87, it looks like the break-even between pulling the trigger now (two-and-a-half years after I could have started and two years before 100% benefits) is a 4% gap between actual inflation and the CPI used by the Social Security Administration.

My impression is that the gap is significantly MORE than 4%.

The flip side involves comparisons between the return in my 401-k and the nominal 6.2% annual increase in nominal benefits in Social Security. I have been harvesting money out of my 401-k to make up the shortfalls in our monthly budget so the funds from Social Security would minimize those withdrawals.

If I was making money hand-over-fist in my 401-k it would be a no-brainer. Protect the capital and pull the trigger on the SS. Looking at the previous 12 months, it looks like I only made 4.5% so the opportunity costs of not pulling the trigger on SS is not very great unless I had a better place to put the money.

Alternative investments

At one time the answer would have been to diversify into "real" assets like rental housing to shelter against inflation.

That option soured for a couple of reasons. For me, the biggest issue is that governments and courts demonstrated that they can shut-off rent payments whenever they want. Even though they shut off the rent they still demanded that the property owners continue to pay property taxes. And of course, many of the landlords had borrowed some of the money to purchase the property. The bank still expected to receive monthly payments.

Another issue is that property values are tanking (in real terms) in core cities where most of the rental property is available. The reason it is on the market is that the owners are bailing out. Too much maintenance. Too many taxes. Too many aggressive inspectors. Too hard/expensive to find tradesmen willing to park on the street while performing maintenance tasks.

We live in interesting times.