Money topics of any kind cause anxiety, and it doesn’t help that some of the information in these areas can be misleading or incomplete.
Many people worry that their Social Security benefits will disappear when they retire. Some people emphasize investing in the volatile stock market and avoid it. And a significant proportion of the population seems unable to deposit large sums of money in savings accounts, finding it a difficult task.
But some of the anxiety about these topics may be misplaced. Seeing or viewing challenges and obstacles from a different perspective may increase your optimism and increase your chances of success. Here are three financial statements or assumptions you might want to think about differently.
Social Security becomes insolvent, bankrupt, or insolvent.
News reports regularly describe the worsening pressures facing the nation’s retirement system in alarming ways. It is true that payroll taxes are decreasing compared to retiree benefits, which are the source of funding. The Social Security Administration is putting money into a trust fund to make up the difference. The trust fund is on track to be depleted in about 10 years.
Congress still has time to right the ship by raising payroll taxes, cutting or slowing benefits, or making other adjustments. In the worst-case scenario, if no fixes are made, the trust fund will be depleted and Social Security will only pay about 79% of promised benefits.
But that doesn’t mean the program will disappear. “Payroll taxes, which fund benefits, will continue to flow into the program,” the Boston University Retirement Research Center said. “Benefits will not be abolished even if the reserve is depleted, but they will have to be reduced if Congress does not act.”
The public has a hard time understanding this, in part because of the way Social Security is financed. A recent study used graphs to analyze this. When people were shown graphs of trust fund assets heading toward zero, they became anxious. But when shown a different graph showing payroll tax revenue versus benefits paid, they looked more optimistic about the program. The two lines showing tax revenue on benefits paid remain roughly parallel, even though outflows exceed inflows.
This graphical study by the National Economic Research Bureau shows the potential to improve public understanding of social security. It did so “by emphasizing a reliable flow to the program, payroll tax revenue withheld from workers’ paychecks, rather than reducing trust fund balances,” according to a Boston College group that analyzed the study.
Another way to explain the finances of Social Security is to describe the program in terms of having a savings account and a checking account. Savings accounts and trust funds are being depleted. But your checking account will continue to receive the funds you need to pay most, if not all, of your bills.
Stock market is too risky
It’s so common to think of stocks as risky that few people give it a second thought. But risk is a relative term, and so is stock market movement (better called volatility).
Stock prices are clearly rebounding. Also, they are not guaranteed. If a company’s earnings outlook is poor, stock prices will fall. In some cases, a company’s value may disappear.
However, it does not work the same way in the broad market, as there is virtually no chance that all or even most companies will be at zero. Buying diversified stocks in broad markets and hundreds of companies through mutual funds, exchange-traded funds, and other vehicles is easy and relatively inexpensive. Diversification significantly reduces risk and volatility.
Yes, broad markets and diversified funds can take a dive, but these downdrafts tend to be short-lived. Financial industry regulator FINRA said savvy investors with diverse interests and long-term horizons “tend to treat volatility like background noise.”
Volatility can be a disadvantage if you need to take your money out of the market relatively quickly, for example for a down payment on a house. Otherwise, it’s usually not a big deal. “Diversification is one way to manage volatility and the anxiety that comes with it, FINRA said in its commentary.
The calculation will look like this:How long are you likely to live after retirement? Good guesses can help with financial planning
For those who have a diversified portfolio and can sit solidly for years, the stock market is less risky and volatile. That’s because past market returns tend to cluster around long-term averages.
For example, the Standard & Poor’s 500 Index, a commonly used stock market indicator, has fallen at least 10% at some point in 24 of the past 43 years, according to JPMorgan Asset Management. The worst annual decline was in 2008, when it fell 49%. Still, over that 40-year period, the S&P 500 produced an average annual return of 11.1%, easily outpacing bonds, cash, and inflation.
It’s almost impossible to save money
From emergency savings to 401(k) retirement plans, many people are struggling to store cash, and the problem seems to be getting worse. However, there are ways to change your mindset, such as starting small and increasing gradually.
George Fraser, a retirement specialist with Fraser Group in Scottsdale, said he likes to build hope and redefine challenges in a positive way. One example is telling new participants in a 401(k) plan that they can start saving 1 penny per dollar of their salary and then increase it by 1 penny per year thereafter.
“Everyone knows what a penny is, and most people don’t even bother picking one up on the street,” he said. “If people think they have to start saving 15% right away, they’ll never start.”
Even if you’re slow to start saving, whether it’s for an emergency fund or a retirement plan, you can get ahead by just getting started, Fraser said. Then, when progress is made, people are more likely to increase their savings rate, he added.
To contact the writer, russ.wiles@arizonarepublic.com.
