Most people don't think of their future Social Security benefits as an asset or an investment. When it comes down to it, though, the monthly checks you'll receive from the government in retirement are just like any other annuity or pension you might receive in retirement.
And for retirees right now, Social Security is growing in value. That's because unlike most other investments, the value of Social Security actually increases amid periods of high inflation. While a deteriorating dollar might negatively affect other investments like stocks or bonds, Social Security benefits remain stable every year as they receive a cost-of-living adjustment.
Growth on top of inflation
There are a few other investment options for protecting against inflation.
You can invest in I Series Savings Bonds, but you're limited to annual purchases of $10,000 per individual, with the option to put another $5,000 of a tax refund toward the savings instrument. Interest compounds over time, and investors don't receive a payout until they redeem the bond, so it won't provide an income stream, either. That said, it makes tax planning easier, and real returns on I Bonds are currently attractive.
Treasury Inflation Protected Securities, or TIPS, may also provide a way to hedge against inflation. They can, however, become a tax nightmare, since you're taxed on the semiannual principal adjustments and the interest payments. Their ability to deliver positive real returns is dictated by market forces, as TIPS prices are determined at auction and they're available for trade on the open market.
Meanwhile, Social Security has the opportunity to grow in value on top of inflation. Every year a retiree delays taking Social Security benefits, the government will increase its monthly payment. If you can reasonably expect to live longer than average, delaying as long as possible produces a real return. Even if you can't expect to live longer than average, Social Security can still provide protection against inflation.
What it means for investors
The inflation protection afforded by Social Security should give investors yet another reason to delay taking benefits. While you'll still get inflation adjustments once you've started collecting benefits, the potential for your benefits to grow in real dollar value no longer exists once you pull the trigger. Delaying allows the potential value of your Social Security pension to grow as large as possible while protecting against future inflation.
In the meantime, investors should consider how Social Security fits into their retirement portfolio and drawdown plans. Delaying Social Security until age 70 likely means living off other retirement assets for some time before reaching that age. But investors need to consider how Social Security should factor into their overall portfolio and asset allocation.
Investors may consider Social Security benefits a fixed-income asset. Indeed, they behave in a similar manner, but Social Security provides greater growth potential and inflation protection than most fixed-income investments.
Every year you delay Social Security, its value theoretically increases, and you should adjust your portfolio accordingly. As such, if you want to maintain your asset allocation, you ought to draw down more from bonds than you do stocks, increasing your regular portfolio weighting toward stocks as the value of your Social Security benefits increases. That said, many retirees prefer to increase the weight of bonds in their portfolio over time, so the increasing value of Social Security may allow investors to keep the allocation in the rest of their portfolio about the same as they approach the year they start collecting Social Security.
With such uncertainty about where inflation lands, and how it can affect a retiree's portfolio over time, allowing your Social Security benefits to grow while drawing down other assets is one of the most prudent moves a retiree can make.
