Broker Check

Meritage Periodical - August 2022

Advisor Perspective

Prompting critical thinking and conversations around issues in our industry. Not intended as personal financial advice.

What is your best asset?

This is a question we’ve been asking new clients for over a decade. The purpose of the question has been to learn how people think about their money, so we can better understand them and serve their best interests. The answers we’ve received over the years have taught us just how subjective we all are about money.

The most frequent answer to “what is your best asset” has been the client’s house. The least frequent answer is the one we’ve never received, which is social security income. This is fascinating to us as advisors because the majority of people we work with are already retired or thinking about retirement. Retirement inherently involves replacing some or all the income you made while working. Even with a primary goal of retirement income, most people still define their house as their best asset.

It is easy for us to understand why no one has reflexively decided social security is their best asset. It’s not something that appears on a balance sheet, and most of us carry around a level of frustration with our system of government and elected officials. We also are regularly consuming exaggerated statistics about the status of the social security system. However, as financial planners, we feel that social security is likely one of the most useful assets for many people. Why is that?

Social security is a guaranteed, inflation-adjusted, lifetime income stream. This is exactly what everyone wants more of as they transition from working years to retirement years. The two biggest risks in retirement are inflation risk and longevity risk, and social security is the only asset in existence that addresses both these risks on a guaranteed basis. However, we live in a society where the majority of people decide to take social security benefits at age 62 instead of their normal retirement age, which is inherently shrinking the size of this asset and reducing the inflation and longevity protection it provides. In 2023, social security is expected to get its largest inflation adjustment in over 40 years. The figure will not be released until October, however it is being estimated at about 10%. A hypothetical couple who elected social security at 62 instead of waiting until 70 would have about 40% less in social security payments. For the sake of this example, let’s assume they receive $4,000/month instead of $6,650/month, or a difference of $2,650/month. That means that they are getting $265 less in inflation protection next year (10% of the $2,650) than they would be receiving if they had waited until age 70. So where will the money come from to pay for higher grocery costs?

In contrast to the negative views that are common with social security, we find most people regard their house as a valuable asset. Homes are places where families are raised, memories are made, and can be a source of great joy. Loving where we live is always an ideal situation, but that doesn’t mean a home is a great financial asset. Most people would agree that great financial assets provide income and/or appreciate in value with little associated expense. Homes may appreciate in value, but only with material ongoing expenses in the form of real estate taxes, home maintenance, etc. Equity in your home is not something that can create an income stream for you, but your home does create expenses that have to be covered.

The only ways to convert your home equity into an income stream are: 1.) sell your home and reinvest the proceeds, 2.) rent your home to someone else, 3.) establish a reverse mortgage. With the exception of a reverse mortgage, these are all impractical options as you need to live somewhere. As a society, we tend to covet homes as status symbols, and the bigger and more expensive the home, the more covetable. The problem with this is that it always represents an asset that can’t pay our bills and instead creates more. Sadly, many people are house-rich and income-poor, because the generations before us have imprinted this idea that a house is your best asset, even though there is no objective proof of that.

So, what’s the point of sharing all of this? All of us carry around a collection of biases, many of which are cultural, that strongly impact our decision making. This can be a huge risk in making financial decisions that are in our own best interests. As a best practice, we would recommend thinking about assets or investment strategies in terms of what they help you accomplish. Considering your primary goals, what would you say is your best asset?

As financial advisors, we want to spend our time helping you make decisions in context. This often involves helping you separate the subjective from the objective. We are always here to have those conversations.

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