Protect Your Corn: 3 Ways to Self-Fund Retirement in a Means-Tested Social Security World
Remember the Aesop’s fable, "The Ant and the Grasshopper"? The Ant moiled and toiled throughout the summer to store up corn for the winter. The Grasshopper wiled away his time dancing and singing, mocking the hard-working Ant.
Then winter came, and the Ant sat snug in his home, with plenty to eat. The Grasshopper was left hungry and miserable out in the cold.
Entrepreneurs are Ants by nature and work enthusiastically for the future. But while they may work diligently today, only 3 percent are simultaneously planning for a self-funded, defined benefit retirement plan for tomorrow.
To update the fable: The Grasshoppers among us are likely planning on social security to provide supplemental revenue as we reach retirement age -- but we may want to rethink that expectation.
The reason: Recent Social Security claims changes could spell the beginning of "means testing" to obtain social security benefits at all.
Means testing implies that if your personal savings and investment income are above a government-designated minimum, benefits could be reduced or even eliminated.
Last fall, Congress quickly and quietly killed two strategies for maximizing Social Security benefits: File & Suspend and Restricted Application. The move effectively cut $100,000 in lifetime Social Security income for married couples.
That decision may have been based on one paragraph of the 2015 federal budget proposal, which said the budget aimed to eliminate “aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement.”
The question is, what does “upper income” mean? Outside income from savings, investments and real estate of $50,000 a year? $100,000? The amount is yet unclear.
Means testing for Social Security benefits could have the greatest impact on those who work hardest and provide the most jobs of any sector of the American economy: entrepreneurs. And though no one knows definitively if means testing will become a reality, there’s enough discussion nationwide now that the subject needs to be explored.
Those surprised by this observation need only look to history for a clue. In 1934, President Franklin Roosevelt addressed the Social Security founding committee and said that it “takes so very much money to provide even a moderate pension for everybody, that when the funds are raised by taxation only, a ‘means test’ must necessarily be made a condition of the grant of pensions.”
In short, more than 80 years ago, a U.S. president said that taxpayer-paid retirement benefits should go only to those who really need them.
So, if all this worries you, here are three ways to act like an Ant and plan for a self-funded retirement -- just in case means testing becomes a reality sooner rather than later:
1. Work with a professional financial advisor.
Work with an advisor who acts as a fiduciary, to help create a plan for your next moves when it comes to saving money, investing it and dealing with tax liabilities. Business owners tend to appreciate the expertise that other professionals bring to the game -- and according to a Vanguard Advisor Alpha study, having a professional financial advisor can add a 3 percent-to-4 percent net value to a portfolio over time.
For a million-dollar portfolio, this could mean $30,000 to $40,000 per year.
The idea is to shift from a “beat the market” objective to a “best practices of wealth management” model. Professional financial advisors focus on low-cost investments, locate assets properly in taxable and tax-advantaged accounts, rebalance assets and help clients decide where to draw assets to meet spending needs. They also provide support to help you stay the course during market stresses.
2. Establish a defined benefit or self-funded pension plan.
Again, work with a professional advisor on this -- unless you have time to become a tax expert as well as an entrepreneur.
Unlike IRAs and 401(k)s, which allow business owners to invest up to $24,000 annually, specialized defined benefit plans, properly structured, can significantly increase contributions and reduce taxes by 50 percent -- in some cases, a double benefit. Additionally, these unique, fully-insured plans can create guaranteed lifetime income streams of well over $100,000 per year.
When you're in your 30s, these contributions can equal over $125,000 per year; in your 40s, nearly $200,000; and in your 50s to 60s, over $300,000 per year.
3. Lobby for equity.
Stay informed about the Social Security issue and lobby legislators to work for equity for all those who pay into the system; or at least allow those under 40 years old to opt-out and self-fund their retirements.
Former President George W. Bush suggested Social Security privatization in 2004, but his ideas received little traction at the time. The corporate sector listened, though, and killed most defined benefit and pension plans. The norm for worker retirement benefits in corporate America today is a company 401(k) plan, but the funds from these plans may not be enough.
The bottom line is, neither Ants nor Grasshoppers know if social security means testing will occur -- or when. But if we’re all going to moil and toil anyway, we should protect our corn from the elements.
David Reyes is founder of Reyes Financial Architecture of La Jolla, Calif., a Registered Investment Advisory firm that acts as a fiduciary and specializes in portfolio risk management strategies, retirement income distribution and Social Security planning. He has been named the National Social Security Advisor of the Year, an annual award given to professional advisors who are knowledgeable and passionate advocates for Social Security education.