No Social Security Benefit Increase This Year

You’ve probably heard by now that the 2016 cost of living (COLA) adjustment for Social Security benefits is zero—the third time this has happened in the last seven years. (2010 and 2011 were the other recent years.) In fact, Social Security benefit increases have stalled since the Great Recession; only once since 2008 have they risen by more than 2%.

For many retirees, this was surprising news. Anybody who has visited the grocery store lately knows that the price of food is rising. Every day, the papers tell us that housing costs are increasing and medical care costs are also rising.

You will undoubtedly see websites which blame the Obama Administration or Democrats generally for trying to balance the federal budget on the backs of people who have paid into the Social Security system, but in fact the annual COLA calculation is automatic and set by formula.

The formula is something called the Consumer Price Index for All Urban Wage Earners and Clerical Workers, known to economists as CPI-W, calculated by the government’s Bureau of Labor Statistics in an effort to make the purchasing power of Social Security as close as possible to the same each year. The CPI-W was attached to Social Security payments in 1972 and has never been replaced. There are many components, and indeed most of them rose in 2015. Food was calculated to be 1.6% more expensive than it was last year; shelter costs rose 3.2% and medical costs were up 2.4%. Ironically, the falling price of gasoline was the factor which drove the CPI-W back to zero; the index tells us that energy prices declined 18.4% this year.

Is this a fair way to calculate actual costs of living? Many believe it is not, for several reasons. First, the CPI-W is a weighted formula, based on the costs of urban workers, not retirees. Therefore, it presupposes, in the weightings, a very different lifestyle than most Social Security recipients are living. The price of gasoline, for example, is assumed to represent 20.1% of a retiree’s total expenditures, which may be true for somebody who commutes to work every day in one of America’s major cities, but doesn’t reflect the normal lifestyle of a retiree. Medical care is assumed to be 5.1% of a retiree’s annual expenditures. For a young office worker, that may be a slight overstatement. For a retiree over age 70, it is almost certainly a gross understatement.

Recreation is assumed to be 5.4% of expenditures, which again sounds about right for the office worker who brings home work on the weekends. But a retiree almost certainly spends more on travel and greens fees. (Amusingly, college tuition is assumed to be 1% of the average CPI-W person’s expenditures.)

Is there a way to fix the formula so it more accurately reflects the actual costs of living in retirement? The Bureau of Labor Statistics actually calculates, each year, something called the Consumer Price Index for the Elderly. In that index, transportation costs are assumed to make up a more realistic 14% of yearly expenditures, and medical care counts double the CPI-W figure: 10.9% of assumed expenditures. Curiously, the index assumes that retirees spend less money on recreation (4.4%) and food away from home (4.6%, compared with 6.4% for that urban worker). The Social Security Administration has calculated that if it had been using the CPI-E COLA each year, rather than the CPI-W, the result would have been significantly higher Social Security benefits, more than 15% higher than today’s payments.

So is it time to push for a switch? Alas, the proposals currently in Congress have nothing to do with the CPI-E. Our elected representatives want to switch the index tied to Social Security benefits to something called the “chain-weighted CPI,” which annually comes up with lower COLA figures—and would, indeed, help balance the budget on the backs of seniors. Instead of complaining, should we celebrate the fact that the cost of living calculation wasn’t negative for next year?

With the federal reserve holding interest rates at zero percent, and now no COLA increase for social security recipients, our senior citizens continue to see an erosion of their buying power and no return on their low-risk savings which they worked a lifetime to accumulate. It certainly doesn’t seem very fair, and makes the case for careful financial planning very clear.

If you would like to exchange thoughts about your social security benefits or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.


The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Searching for Yield in Today’s Market

Income-oriented investors have had a tough go of it for the past several years. Persistently low interest rates have curtailed traditional sources of yield. Yet, by broadening their search criteria, investors may uncover new ways to diversify their income portfolios with potentially more attractive options.

Consider Total Return

When evaluating income-generating opportunities investors need to consider total return — income plus price appreciation, while maintaining a consistent focus on risk reduction. When you think in these terms, certain asset classes can emerge as relatively more attractive. Given these parameters, here are a few equity and fixed-income investments to consider.

Equity real estate investment trusts (REITs) — Equity REITs are investments consisting of diversified portfolios of commercial real estate that are publicly traded on major exchanges.1 Because their focus tends to be on owning U.S.-based properties, equity REITs stand to benefit from improving economic conditions, such as the boost in U.S. job growth, which, in turn, could increase demand for commercial real estate. From a yield perspective, REITs are required to distribute 90% of their annual income to shareholders in the form of dividend payments.

When this income-generating capability is coupled with real estate’s potential to appreciate in value, equity REITs may be considered an attractive investment from a total return perspective. To manage risk, it is wise to maintain a portfolio that is broadly diversified by property type, location, and geographic area. In addition, even though equity REITs are considered equity investments, they historically have had a low correlation with stocks, which allows investors to benefit from the potential for enhanced returns while lowering their equity portfolio’s overall risk profile.

Global bonds — One of the key arguments for considering an allocation to global bonds is to add currency exposure to a portfolio.2 Although currency adds another level of volatility to a portfolio’s fixed-income allocation, it also provides investors with a natural hedge against the devaluation of the dollar, which traditional domestic fixed-income asset classes cannot offer. Another reason to consider adding global bonds is the prospect for higher economic growth rates outside the United States (see table below).2 As world economies grow more quickly, investors with an exposure to global bonds stand to benefit from this growth.

World Economic Growth Rates

2014 2015 — Projected
United States 2.4% 3.1%
Developed World (incl the USA) 1.8% 2.4%
Emerging/Developing Markets 4.6% 4.3%

Source: International Monetary Fund, World Economic Growth, April 2015.

When researching global bonds from an income perspective, it may be important to consider that many foreign countries typically run on different business/interest rate cycles than the United States. Therefore, when interest rates are higher abroad, global bond investors potentially may be able to take advantage of these varying cycles to earn higher yields.

Keep in mind that unlike international bond funds, which typically are bound by their investment policies to adhere to a non-U.S.-allocation mandate, managers of global bond funds have the flexibility to shift allocations out of foreign markets back into domestic securities (and vice versa) as conditions warrant. In this way, U.S. investors in global bonds may potentially gain protection on the downside while retaining the ability to participate on the upside.

Leveraged loans — When considering high yield, few investors tend to think of leveraged loans.3 Briefly, leveraged loans are floating rate loans that banks make to below-investment-grade companies, hence their high-yield status. Since they are adjustable rate instruments, tied to short-term interest rates, they can provide investors a hedge against interest rate risk — if interest rates rise, the coupon on the loan resets accordingly. This feature can potentially result in better performance relative to longer-term fixed income in a rising rate environment, as traditional fixed-income asset prices tend to move inversely with changes in interest rates.

One unique feature of leveraged loans that makes them potentially less risky than traditional high-yield bonds is their senior-secured status, meaning in case of a potential default, investors in leveraged loans may be more likely to get their money back.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.


1The stock prices of companies in the real estate industry are typically sensitive to changes in real estate values; property taxes; interest rates; cash flow of underlying real estate assets; occupancy rates; government regulations affecting zoning, land use and rents; and the management skill and creditworthiness of the issuer. Companies in the real estate industry may also be subject to liabilities under environmental and hazardous waste laws which could negatively affect their value.

2Foreign bond investments involve greater risks than U.S. bond investments, including political and economic risks, the risk of currency fluctuations, as well as liquidity risks and may not be suitable for all investors.

3Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer. They may not be suitable for all investors.

2015 Third Quarter Review

Many investors will be glad to finally see the end of the third quarter of 2015, and most of them will feel like their portfolios are worse off than they actually are. That whooshing sound you hear is not just air being let out of the markets; it’s also an end to that optimistic feeling that many people had been cautiously building during the long 6-year bull market that followed the Great Recession.

The past three months turned yearly gains into yearly losses almost completely across the board of the investment opportunity set. The Wilshire 5000–the broadest measure of U.S. stocks—fell 6.91% in the third quarter of 2015, posting a total return of -5.79% in the first half of the year. The comparable Russell 3000 index is down 5.45% so far this year.

The Wilshire U.S. Large Cap index dropped 6.44% of its value for the quarter, and is now down 5.15% for 2015. The Russell 1000 large-cap index is down 5.24% so far this year, while the widely-quoted S&P 500 index of large company stocks posted a loss of 6.94% in the third quarter, and is now down 6.75% for the year.

The Wilshire U.S. Mid-Cap index lost 8.96% for the quarter, and is now off 4.86% as we head into the fourth quarter. The Russell Midcap Index has lost 8.58% so far this year.

Small company stocks, as measured by the Wilshire U.S. Small-Cap index, gave investors a 10.88% loss during the latest three months, which takes the index down 7.29% so far in 2015. The comparable Russell 2000 Small-Cap Index is down 7.73% in the first three-quarters of the year, while the technology-heavy Nasdaq Composite Index lost 7.35% for the quarter, and stands at a 2.45% loss for the first three quarters of the year.

Meanwhile, in the global markets, the broad-based EAFE index of companies in developed foreign economies lost 10.75% in dollar terms in the third quarter of the year, for a negative 7.35% return so far this year. In aggregate, European stocks lost 9.07%, and are down 7.33% for the year. Emerging markets stocks of less developed countries, as represented by the EAFE EM index, were down a whopping 18.53% for the quarter, and are down 17.18% for the year.

Looking over the other investment categories, real estate investments, as measured by the Wilshire U.S. REIT index, gained 2.88% for the third quarter, but is still standing at a 3.01% loss for the year. Commodities, as measured by the S&P GSCI index, lost 19.3% in the third quarter, largely due to a fall in oil prices that may be nearing its end. They are down 19.46% this year.

There were many contributors to the loss of confidence in the stock market, and they appear to have been mainly psychological. Analysts blame the Federal Reserve Board for not having raised rates as the so-called “smart money” seems to have expected in September. Why are low rates a bad thing? Because Fed economists seem to believe that the economy has not recovered sufficiently to warrant stopping the central bank’s long-running stimulus program. Who are we investors to argue with the Fed economists?

Except… The explanation for not raising rates had little to do with actual economic activity, which is finally moving ahead, as of the second quarter, at an annualized 3.9% growth rate for U.S. GDP. This is higher than the 3.7% estimate from the Bureau of Economic Analysis, and much higher than the 2% rate that the U.S. economy has experienced since 2009. At the same time, consumer income, wages and salaries, and spending are all increasing modestly, existing home sales are growing at a 6.2% rate over last year, and the unemployment rate, once higher than 10%, has finally dropped down to the 5% range.

The Fed explained that it was delaying its rate rise because the core inflation rate—currently 1.83%, is below the 2% target rate the Fed set back in June 2012. Some people believe low inflation is a GOOD thing, and speculate that’s the real reason.

And another reason why many investors are nervous about the markets—could be the slower growth of the Chinese economy, coupled with the recent unnerving drop in its stock market. Unfortunately, the Chinese government controls the economic statistics that come out of the world’s second largest economy, which makes it hard to know exactly how fast China is or isn’t growing. But it’s worth noting that Chinese stock prices, even after the drop, are still up 31.6% from where they were a year ago.

For the time being, investors will have to continue to accept interest rates at historically low levels. The Bloomberg U.S. Corporate Bond Index now has an effective yield of 3.42%. 30-year Treasuries are yielding 2.87%, down from 3.13% a quarter ago, and 10-year Treasuries currently yield 2.06%, down from 2.36% in June.

At the low end, the yield on 3-month U.S. T-bills remains at 0.01%. 6-month bills are only slightly more generous, at 0.08%. Long-term (30-year) municipal bonds are yielding 3.16%, more than comparable Treasuries, and you get the federal tax-exemption thrown in for good measure.

When you look at the decline year-to-date, you see relatively small losses. But many investors are remembering that they were 10-15% wealthier just a couple of months ago, measuring their pain from the high point of the various indices. It’s tough to watch your portfolio go down, but it’s also worth remembering that people have been predicting a significant downturn—erroneously—for the better part of six years. Now that the downturn has finally arrived, it hasn’t been terribly painful, mostly giving back gains that were posted in the first two quarters.

The third quarter could be a temporary drawdown that sets the market up for a push back into positive territory by the end of the year, which would give us a record seven years of positive market performance. Or we could see the year end in negative territory, perhaps even giving us the first true bear market (defined as a drop of 20% from the peak) since the Great Recession. We don’t know how the psychology of millions of investors will turn in the next few months, and neither do the smart money analysts who thought that interest rates would be nudged upward by our central bank last month.

We do, however, have confidence that the next bear market will be followed by yet another bullish period that will eventually take us back into record territory, and we’re pretty sure that the markets will punish anyone who tries to outguess their unpredictable behavior in the short term. If you know what the next quarter will bring, please tell us now. Meanwhile, perhaps we should celebrate the fact that we can buy many kinds of investments at cheaper prices than we could just three short months ago. It’s not much, but it’s something to feel good about.

In our client portfolios, our returns this quarter were buffered by a larger than normal cash position, investments in inverse funds, a focus on defensive sectors, and by selling call options against some of our positions. If the market chooses to launch a 4th quarter rally, we’ll be ready for it. It may even have already started. But if the market instead chooses to go the bear route, we’ll increase our defensiveness further.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.


Wilshire index data:

Russell index data:

S&P index data:–p-us-l–

Nasdaq index data:

International indices:

Commodities index data:

Treasury market rates:

Aggregate corporate bond rates:

Aggregate corporate bond rates:

Muni rates:

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post.

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