What State Economies Tell Us About the Country

4/28/2016

By Michael McKeown, CFA, CPA - Chief Investment Officer

Whenever people talk about the “U.S. economy” in broad terms, we can forget how diverse the industries and regions are in this vast land.  The Federal Reserve Bank of Philadelphia publishes an index every month for all 50 states to provide a gauge of where growth stands today and where it points in the months ahead.  The Leading Index takes into account employment, manufacturing, housing permits, and interest rates.  We will look to see what this data shows us about economic conditions today and if we can draw any parallels to the past.

Let’s start with looking at how many states out of 50 show expansion.  The graphic below shows the total count on the vertical axis with time on the horizontal axis.  Only four times in its history have less than 40 states been positive – 1982, 1986, 1990, 2001, and 2008.  The only one of these years that did not contain a recession was 1986.

Today, 45 states show expansion with Tennessee and Nevada at the highest levels.  On the other end, just slightly in negative territory is Iowa followed by Louisiana, North Dakota, West Virginia, and Wyoming.

Next, we have five states chosen for the size and differences in their economies, including California, whose $2.4 trillion in economic output is roughly the same size as France.  Here is how the Leading Index for each state grew and contracted over time.

The dip in the above chart in 1986 from both Texas and North Dakota were from the oil price shock that year, when prices fell 61% in just a few months.  Over-supply drove prices down, rather than less demand from end consumers and businesses.  This is similar to the situation today, where fracking in the U.S. and continued pumping from abroad led the supply of oil to overwhelm the price, thus pushing it from $115 per barrel in June 2014 to $27 per barrel in January 2016 to about $45 per barrel today.

In the first quarter, markets worried that the oil price fall was indicating a demand problem.  Our friends at Guggenheim coined the phrase, “The Great Recession Scare of 2016,” which may end up sticking as demand seems to be in good shape.  The states showing negative data have economies reliant upon the energy sector – North Dakota, Wyoming, West Virginia – so the supply shock idea holds weight, while the most other states continue to do well.

Let’s look at where most of readership comes from, Ohio.  Ranking 7th in the country in terms of Gross Domestic Product, the Ohio economy produced just shy of $600 billion in economic activity in 2015.  The Coincident Economic Index tells us where the economy stands today using changes in employment, hours worked, and wages/salary growth. 

This index grew at 3.2% over the last year, down from the cycle peak of 4.9% in 2012, but still a fairly healthy clip.  Given Ohio’s diverse economic engines from manufacturing, healthcare, financial services, energy, and education – it is a nice gauge and currently shows expansion.

States with economies reliant upon the energy sector are feeling the pinch from lower commodity prices, but if oil keeps going up or holds steady, this will help.  Otherwise, most states are chugging along nicely.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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King Dollar Gets Dethroned

3/30/2016

By Michael McKeown, CFA, CPA - Chief Investment Officer

We are less than a month away from the new season of Game of Thrones (!). One of the most exciting aspects of the show is the unpredictability and that what you think is going to happen, hardly every does.  Once someone gets momentum for sitting on the iron throne, the writers throw the viewers a curve ball.

In a way, the moves in currency markets are similar.  The one way street higher in the dollar from 2011 to 2015 seems to be meeting a speed bump.  It is not what markets anticipated with the Federal Reserve being the only central bank in the world to embark on a hiking cycle at this point, but that is what makes the markets (and the story) interesting.

In the last 30 years, there were four previous hiking cycles and we just entered the fifth this past December.  In previous cycles, the U.S. dollar index tended to rally in the months preceding the first interest rate hike, followed by the dollar falling in the two years after the first rate hike (the exception being 1999).

So far, the dollar index is sticking to the playbook.   Expectations for the hiking cycle were fully baked into the currency when the Fed hiked the fed funds rate on December 15th.  The dollar is down 5% since then.

Assets with foreign currency denomination will be a place for opportunity if the dollar continues its fall.  Below we show the MSCI Emerging Markets Index denominated in the U.S. dollar and local currency.  Because the dollar appreciated against emerging market currencies, the MSCI EM Dollar Index underperformed by 25% the last five years.  As can be seen in the bottom graphic in pink fuchsia, this underperformance flattened out and ended in January.  Since then, emerging market currencies made up ground lost to the dollar.

The high correlation of the dollar and other risk assets (from equities to commodities) seems to be fading.  Traders and analysts continue to discuss the silent 'quid pro quo' among central bankers, that is, to stop with the currency wars as the strong dollar hurts global exports.  In her speech yesterday, Fed Chair Janet Yellen expressed concern over the global economy and how a fast pace of rate hikes could do more damage.  In turn, the dollar continued to tumble, so this will be important to watch as the hiking cycle continues. 

Which currency will take the throne?  It may not be the one that everybody thinks.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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The Global Market Portfolio

3/11/2016

By Michael McKeown, CFA, CPA - Chief Investment Officer

Every few years, authors of the Financial Analysts Journal update a version of the global multi-asset market portfolio.  It considers the total market value of investable assets in the world.  I made some tweaks since the article seems to understate some large asset classes like private equity and real estate.  This provides a framework for analyzing where your portfolio weights compare to a passive version of the world.

Even Nobel Prize winner William Sharpe stated that he “cannot easily understand why funds do not routinely compare their asset allocation with current market proportions.”

We will start with the big picture.  The total value of investable assets is $179 TRILLION, yes with a “T.”  Of that, public equities make up $66 trillion, fixed income securities $93 trillion, real estate $17 trillion, and private equity/venture capital at $3 trillion.  All figures are estimated as of the year-end 2015.

For my purposes, I excluded hedge funds as these are a vehicle to mainly access equity, fixed income, and derivative securities.  At a quite relevant $2.7 trillion, the argument can be made for inclusion, but this would result in double counting a large portion of assets since actual holdings are largely traditional equities and bonds, with leverage.  I also excluded commodities because historically this “asset class” provides a 0% real return with massive volatility (which is worse than cash, over time).  I went back and forth on excluding the $6.6 trillion of negative yielding global bonds as well, but kept them since perhaps one day the yields will be positive and investable again.

Below we have a breakdown of each asset class with regions and sub-asset classes.

The U.S. is still the biggest public equity market, but with Japan and China so large, the Asia Pacific Region is larger than the EMEA region (Europe, Middle East, & Africa).  The surprising items from going through this exercise was how much developed market debt there is outside of the U.S.  It is the largest asset class and sadly the yields are mostly below 2%.  I also was surprised at the size of the U.S. single family rental market, which is an emerging asset class for institutions.  The measly size of private equity was interesting considering all of the media attention.

Here is a look at the values above but presented in proportion to one another as the next level look of the Global Market Portfolio.

Whether an individual or institutional investor, one’s asset allocation will have some difference to the Global Market Portfolio.  The time horizon, liabilities, overall objectives, and risk tolerances all play a factor on whether the right design is overweight equity and underweight fixed income, for example.  Still, it serves as a gauge of where one falls on the spectrum for areas such as Mortgage Backed Securities (MBS) or Investment Grade Corporate bonds.

We think of having more than a benchmark as being “overweight” an asset and less than a benchmark as being “underweight.”  Arguably, the most common overweight positions for external portfolios we review are in U.S. Equity (14% of Global Market Portfolio), U.S. High Yield Corporate bonds (1%), and MLPs (0.2%). 

The most common underweights are to a few areas which I do not mind, since the foreign currency exposure would be too costly to hedge. This includes developed market fixed income and emerging market fixed income (though a modest allocation is surely appropriate).  Most also tend to be underweight real estate (since one’s home rarely is cash flow positive even if it is paid off, I cannot classify this as an “investment).  In addition, most hold an underweight to foreign equities (both developed and emerging, which make up 23% of investable assets).

Where does your portfolio stand relative to the Global Market Portfolio?

 

Sources: Securities Industry and Financial Markets Association, World Federation of Exchanges 2015 Report, Norway Sovereign Wealth Fund Real Estate Study 2015, Prequin, JPMorgan Guide to the Markets, Morgan Stanley Research

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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3 Watch List Ideas for Investment Committees

2/26/2016

By Michael McKeown, CFA, CPA - Chief Investment Officer

After wrapping up due diligence on fund performance for 2015 across our 401(k) clients, thinking about the message to convey to plan sponsors is on my mind.  Here are a few areas the executives, board members, finance, and human resources teams should think about when reviewing funds.

1. Your bond funds have credit risk – how much is okay at this stage in the cycle?  This expansion is turning seven years old in June (yay!).  The longest economic expansion in history is ten years, so at some point, there will be a recession.  Corporations took out $8 trillion in debt since 2008 and this area will likely be the epicenter in the next economic downturn (unlike the last cycle where household mortgage debt was the powder keg).  Be wary of funds dipping in credit quality compared to previous years.  This could mean the fund is reaching for yield at the expense of capital preservation – not something one wants in the ‘safe’ part of a portfolio.  You will not find this in the returns data of the shiny due diligence report.  Your analyst must dig deeper and not just be a numbers ‘reporter.’

2. After a straight up market the past 7 years, it is tough to catch up with index returns.  Do not sell your quality manager just to do something.  You cannot get those returns back – and if it is a low turnover strategy, you are simply buying high to sell low if you are rotating within the same asset class.  Focus on process over outcomes.  On average, institutional investment consultants do a terrible job of selling managers at the wrong time and buying managers after outperformance.  Simply try to minimize mistakes.

3. Three asset classes (fund categories) that we do not think are appropriate for 401(k) plans include high yield corporate bonds, commodities, and sector specific funds (except REITs).  While it may sound like I am picking on areas that have gone down over the last year, we advised committees against these areas since we started advising plan sponsors on ‘cleaning up’ bad funds lineups.  Asset classes that can permanently impair capital due to very cyclical return patterns or a low historical return premium are inappropriate.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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2 For the Bulls & 2 For the Bears

2/4/2016

By Michael McKeown, CFA, CPA - Chief Investment Officer

Let’s dive into some important charts.

Leading up to the past two recessions, people dramatically stopped looking for houses.  It began slowing down two years before, as people worry about making a big purchase on credit.  That is not the case today.  Consumers are looking for houses. The National Association of Home Builders shows sales and foot traffic increasing steadily for four straight years. 

There is a ton of noise in investor surveys and not clear signals.  At extremes though, the data gets more interesting.  Only in 2008-09, 2011, and briefly in 2015 have bearish advisors outnumbered bullish advisors.  This is typically a contrarian signal, as when too many people get bearish, there is not anyone left to sell and push prices lower.  Stock prices today are near the same level as the lows of August 2015 when bears outnumbered bulls, but it is important nonetheless for those with bullish outlooks.

It is a bloodbath in the energy sector.  Total asset writedowns for oil and gas companies hit a quarterly record.  The corporate bond market is telling us that energy today is as bad as the telecom bust in 2001 and the financial sector meltdown in 2008.  Will it feed into other sectors that require credit?  That is the bigger question now.

Both large and small banks tightened credit standards for commercial and industrial loans during the last two quarters of 2015.  This was the first consecutive drop during this economic expansion.  Demand for loans also fell in the last Federal Reserve survey of Senior Loan Officers.  This is certainly partly related to the energy fall, but could feed into other areas.  Tighter credit standards and a drop in demand for funds preceded the last two recessions. 

Stay tuned for more charts as we follow the evolving economy and markets.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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Big Changes to Accredited Investor Definition & Crowdfunding

1/27/2016

By Michael McKeown, CFA, CPA - Chief Investment Officer

When Congress passed the Dodd-Frank Act, there was a provision that said the SEC would examine the accredited investor definition every four years.  Why does this matter?  Per the report (with our emphasis):

“The “accredited investor” definition is a central component of Regulation D.  It is
“intended to encompass those persons whose financial sophistication and ability to sustain the
risk of loss of investment or ability to fend for themselves render the protections of the Securities
Act’s registration process unnecessary.”  Qualifying as an accredited investor is significant
because accredited investors may, under Commission rules, participate in investment
opportunities that are generally not available to non-accredited investors, such as investments in
private companies and offerings by hedge funds, private equity funds and venture capital funds. 

Issuers of unregistered structured finance products and debt securities also may rely on
Regulation D.

The exemptions in Regulation D are the most widely used transactional
exemptions for securities offerings by issuers.  Issuers using these exemptions raised over $1.3
trillion in 2014 alone
, an amount comparable to what was raised in registered offerings."

The definition change also matters because of the ease of investing in private offerings via crowdfunding using online platforms today.  Many sites popped up offering access deals from real estate to technology startup companies and much more.

Since 1982, the accredited investor requirements have been the same - $200,000 of individual income, $300,000 of joint household income, or $1 million net worth (excluding primary residence).

Here is what the SEC recommends from its report issued in December 2015:

  • Grandfather in the previous income and net worth requirements, but subject to 10% investment limitation in any one issuer
  • Increase income threshold to $500,000 and net worth to $2,500,000 (no percentage limitation)
  • Index the threshold requirements for income and net worth to inflation
  • Grandfather issuers' existing investors that are accredited under current definition

In addition, the SEC also recommends the accredited investor definition be expanded to include individuals with the following attributes:

  • Certain professional credentials (Series 7, CPA, CFA, etc.)
  • A minimum amount of investments of $750,000
  • A minimum amount of experience investing in exempt offerings
  • Individuals who pass an accredited investor examination

The SEC estimates there are currently about 12.4 million accredited investor households.  The new inflation-adjusted requirements would impose a limit (10%) on 4.4 million households, which could lessen funds available for issuers under Regulation D.  The limit is probably a pretty good idea to prevent people from "putting all their eggs in one basket."  Including all of the new expanded definitions, the pool of accredited investor households would expand to 14 million.

All of these changes would have a big effect on the private capital markets over time. Record amounts of money flowed into venture capital (VC) the last few years.  Given easy capital access and lower levels of due diligence on crowdfunding platforms, I suspect there will be many failures and few winners of those using the VC platforms (like any portfolio of VC investments).  When VC investments hit though, they will be big, but a huge gamble rather than an ‘investment’ in the end.  Far more interesting to me are the real estate and private equity opportunities with more tangible businesses and quality cash flows.  While not knowing anyone personally, my inclination that those who fail to build a quality peer network of lenders or investors will be the ones using the platforms as sources of capital.  This could result in negative selection bias. At the same time, the pure convenience of the platform and quick execution may make crowdfunding platforms a viable solution for all or a portion of capital raising.

In the future, online crowdfunding platforms could become the norm rather than the exception.  Hopefully there will be an increase in quality and greater due diligence standards on a self-imposed basis by the industry.  Will more qualifying individuals consider crowdfunding as part of basic asset allocation?  Could this be offered in 401(k) plans in the future? 

It will be really interesting to see what, if any, of the SEC recommendations become law and the subsequent impact on crowdfunding and individual investors. Keep an eye on this, we sure will.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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4 Quick Year-End Financial Tips

12/23/15

By Michael McKeown, CFA, CPA - Chief Investment Officer

It is a busy time of year, but here are some easy ways you or your advisor can save money before we ring in 2016.

1. Tax Loss Harvesting - The amount of losses taken can offset your tax liability from 0% to 43.6%. It depends if you are netting losses against long-term gains, short-term gains, or ordinary income (up to $3,000).  There are several areas to seek out portfolio losses like Master Limited Partnerships, which along with any commodity related asset like oil, are down over 40% on the year. 

2. Bump up 401k savings (or overall rate) - Is your savings rate 15% of your pre-tax income?  That is the magic number it takes to fund a successful retirement, according to the Boston College Center of Retirement Research.  (Here is a quick check-up we wrote earlier this year to see how you are doing.)  The 401k limits are the same for 2016, with a maximum of $18,000 and a catch-up of $6,000 for those over age 50.

3. Take your RMDs - For those in retirement, make sure to take your required minimum distribution from traditional IRAs and 401k(s) before year-end.  The penalty is 50% of the amount that should have been withdrawn, so it is not a cheap mistake.

4. Examine your income and spending - It sounds easy, but most people just will not do it.  The average American spends more time deciding which movies they will see in a given year than on their finances (which reminds me, I cannot wait to see The Big Short).   Consider your income and expenses over the past year and projections for 2016.  Is there an area that could be improved? A few ideas: refinance mortgage, health/auto/home insurance, 529 college savings plans for kids or grandkids.  If you are retired, what is the spend rate as a percentage of your overall portfolio value? If consistently above 4%, given the low interest rate environment, there could be a long-term issue.

 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

http://crr.bc.edu/wp-content/uploads/2014/07/IB_14-111.pdf

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The Wait is Over

12/17/15

By Michael McKeown, CFA, CPA - Chief Investment Officer 

The federal funds rate is the most interesting interest rate in the world.  It is the rate that depository institutions can charge one another for overnight loans.  Banks make these loans to maintain the required reserves, which is the minimum amount banks must keep by law in relation to the loans outstanding (i). 

The Federal Reserve last changed the federal funds rate, on December 16, 2008.  At the time, it cut interest rates by 1% to a 0 to 0.25% range.  It came to be known as the floor or the zero lower band, assuming that interest rates could not go negative.  On December 16, 2015, the U.S. Federal Reserve, after months and years of anticipation, raised interest rates to a 0.25% to 0.50% range. 

 

The last two interest rate hiking cycles began in June 1999 and June 2004, respectively.  The last fed funds interest rate increase was June 2006.   
 
The Federal Reserve's mandate is to maintain price stability and full employment. Let's check in on a few metrics. 

Due to the selloff in energy and commodity prices, the headline Consumer Price Index (CPI) is just barely positive.  The Federal Reserve focuses on the Personal Consumption Expenditures (PCE) Core Index, which at 1.3%, is still below the 2.0% target, which the Fed believe is due to 'transitory' factors. 

Core inflation rates in '99 and '04 were relatively similar, though headline numbers were in a much more normal range compared to today's headline CPI data. 

The unemployment rate today stands at 5% and likely relatively close to full employment.  One sub-sector of the labor market we like to watch is temporary hires.  It usually provides a strong leading indicator for the trend in the economy.  At the beginning of the interest rate hiking cycles in '99 and '04, temporary hires were increasing at 9% and 7.5%, respectively.  As of November 2015, temporary hires increased at only a 2.6% rate from the previous year. 

Perhaps there was a change in the dynamics of temporary hires or a lack of talent available, but this is a data point flashing caution.  This is especially so since any time the rate fell below 3%, it never came back above 3% until after the next recession. 

The increase in the fed funds rate and expectations of the future increases will undoubtedly affect pricing across the fixed income universe.  We recommend investors utilize experienced bond managers and strategies that have seen a hiking cycle before, and avoid loading up on short-duration bonds, which could take the brunt of the pain.  In our portfolios, we prefer barbell strategies, using floating-rate securities paired with longer dated investment grade bonds. 

(i)  http://useconomy.about.com/od/monetarypolicy/a/fed_funds_rate.htm

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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Walking in a Winter… Heatwave?

12/9/15

By Michael McKeown, CFA, CPA - Chief Investment Officer

If you were born and raised in Northeast Ohio, golfing is not exactly an activity one does in the winter months. 

While not exactly a heatwave, the warm temperature compared to most Novembers and Decembers has everyone walking around without coats and even in a slightly better mood (no thanks to the Cleveland Browns).

In Buffalo, our Snowbelt cousins have not seen any snow yet in November or December this year, the first time this has happened since 1899!

There is hope for a continuation of a mild winter thanks to el Niño.  Warm water in the Pacific Ocean combined with trade winds release atmospheric pressure that affects weather around the world.  In the U.S., it means warmer temperatures across most of the country.  In addition, many areas have had mild precipitation, though historically some Western ski areas and parts of the Midwest received above average snowfall.

Source: ENSO

According to Live Science, "El Niño was originally named El Niño de Navidad by Peruvian fishermen in the 1600s. This name was used for the tendency of the phenomenon to arrive around Christmas. Climate records of El Niño go back millions of years, with evidence of the cycle found in ice cores, deep sea muds, coral, caves and tree rings."

Are you dreaming of a white Christmas?

Watching the 1954 classic, White Christmas, is an annual holiday tradition in my family, even though we all know the scenes and songs by heart.  According to The Weather Channel's forecast for snow across the nation, Cleveland has a 45% chance to see snow each Christmas.  Nonetheless, the last five el Niño patterns from 1957, 1965, 1972, 1982, and 1997 never brought snow on December 25th, and is a sign that the mildness from November should continue throughout December.

The last two winters were unseasonably cold and huge snow storms resulted in below average economic data and the worst two quarters of growth in the last three years.   If this winter stays true to the past and ends up being warmer with only average precipitation, the comparisons to last year are a low hurdle and could result in economic data surprising on the upside in the first quarter of 2016.

Indeed, this happened in 1997/98 with surprising growth across data.  Looking further back at the el Niño years, it was difficult to find a pattern, though the warmth contributed to above average performance in 1957 and 1965.  So there's a small sample size, but the low comparisons from '14 and '15 should be easy to outpace.

The el Niño weather pattern is only one piece of the puzzle for forecasting changes to growth which many may be underestimating in the near term.  Still, the economy must contend with the Federal Reserve poised to raise interest rates on December 16th for the first time since 2006.  In addition, the strength of the U.S. dollar weighs on export growth while loan conditions are showing signs of tightening, which could cause issues in the second half of '16.
 

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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How the New Budget Deal May Affect Your Social Security Strategy

12/2/2015

By Laura Springer, CFP, CPRC - Client Manager

News coverage on the recently passed Congressional bill that includes the phase out of a lesser known Social Security claiming strategy called “File & Suspend/Restricted Spousal Application” has caused quite a stir among the retired, soon to be retired… and younger workers paying into the program who are concerned about its viability.  In other words, close to everyone.  As pensions become less common, Social Security is quickly becoming the backbone of retirement for many.  But because there are a multitude of strategies that vary based on marital status, earnings and disability history, most agree that decisions around benefits can be confusing and any changes to policy feel alarming, particularly in light of much political discussion surrounding possible future insolvency of the program.  Between the various claiming options, updates to the program and misinformation available, exactly how should you decide on a strategy, who is affected by this change and which strategy was phased out?  And which strategies should those individuals consider now? 

When considering your Social Security strategy, you'll want to first do so within the context of a full financial plan due to the complexity and variance around each individual's tax situation and spending goals, marital history, health status and intention of working through age 70… for starters.  The next step is to focus on three key ages: The soonest you can apply for benefits (which varies but is generally 62), the age you may collect "full" benefits called "Full Retirement Age" (FRA) and the latest you may collect benefits, which is age 70 for everyone.  Because the Social Security Administration is no longer regularly mailing statements, to determine your benefits at each of these ages, you will need to visit the Social Security website www.ssa.gov to create a login to your personal record and find your “Full Retirement Age.”  This is the age any American who has worked long enough at a job where they paid into the Social Security system (40 calendar quarters) may claim a “full” benefit.  If you fall into this category and are married or divorced but previously married for more than 10 years, the recent legislative changes may apply to you. 

While everyone should research their options, you will not be affected by the recent changes if you are single, divorced but married for less than 10 years, turning 62 before the end of 2015, and anyone who is currently married or divorced but previously married for 10 or more years but have worked less than 40 quarters to claim your own benefits.  The latter group may claim a spousal benefit, which is half the amount of their spouse's FRA benefit.  If you are widowed, disabled or care for a disabled dependent, contact your local Social Security office to discuss your options.

The strategy in question "File & Suspend/Restricted Spousal Application" used by some married couples and divorced individuals who qualified (see below), was also known as “Claim now, Claim more later.” The now sunsetted strategy worked like this: If the higher earner was older, they would file for benefits at FRA, but immediately suspend them until a later date, thus accumulating an 8% higher benefit for each year they waited to collect. Once their spouse, the lower earner, turned FRA, they filed a restricted spousal application and collected the spousal benefit while allowing their own to also accumulate at 8% a year.  Then at 70, they elect to stop collecting the spousal benefit and instead collect their own, maximized benefit. For divorced individuals who never remarried and reached full retirement age, the strategy was even more costly to the Social Security Administration.  They could both collect a spousal benefit while allowing their own to be maximized at 70. 

In the new budget deal, Congress deemed this to be an unintended loophole in policy that was more beneficial to those with financial means who could afford to suspend benefits until age 70.  Thus, it will no longer be available to the following individuals who previously qualified, which were:

Currently married individuals turning 62 in 2016 or later who have both worked in jobs contributing to Social Security for more than 40 quarters and are eligible to collect on their own benefits.

Divorced individuals who were married for over 10 years and fulfill the same work/age/eligibility requirements as above married individuals turning 62 in 2016 or later.

For everyone turning 62 in 2016 or later, when applying for benefits, you will be considered filing for benefits based on your own work history.  If your spousal benefit happens to be higher, you may elect the spousal benefit and will continue to collect it until the death of your spouse.  At that time, you will have the option to collect your deceased spouse's benefit (assuming it was higher than your own). 

Although File & Suspend/Restricted Spousal Application strategy is no longer available, there are many strategies and combinations of strategies married couples may consider.  These include both claiming early at 62 at a reduced benefit, claiming at full retirement age, waiting until a later age up until 70 or any combination of these strategies.  And again, if you turn 62 before the end of 2015, you may still elect the File & Suspend/Restricted Spousal Application strategy.  If you are interested in how a financial plan can help you make the best Social Security decision for your family, please contact Aurum Wealth Management at 440-605-1900.

 

This material is for informational purposes and is based on public information as of the specified date. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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