E23: Market Corrections, Fixing Social Security, HSA

Executive Summary

In episode 23 of Financial Discretion Advised, Tyler brings Jim Bradley back on to discuss the current market volatility and how it fits in the historical context of the market, as well as Jim’s fixes for a broken Social Security System. The two finish up talking about the benefits of using an HSA in your financial planning and some tips to maximize their benefits!

Market Correction

I am sure most of you have seen some headlines lately that seem like doom and gloom when it comes to the US stock market. What is actually happening in the market is something that we see on average every 13-16 months, and that is a market “correction”. A Market Correction is when the market falls between 10% and 20%, and will recover from that drop in 3-4 months based on historical averages. What we don’t know is if the market will drop further than 20% and enter a bear market. Drops like these in the market happen every 3.5-4 years on average and see a recovery time of around 10 months.

So, what is causing it? Well, the fed has come out to rein in inflation by raising rates and we are seeing a lot of international uncertainty with Russia amassing troops along the Ukrainian boarder. These negative headlines seem to be what the media wants to attach to the current market drop, but negative headlines are not unique to this moment in time. Frankly, the market ignores some negative headlines and reacts to others which makes it impossible to truly understand when the market is going to drop or rally. As investors it is importance to know the historical context of market corrections and remember that all market crashes and corrections in US history have recovered, we just got to give them the time to do so.

 Fixing Social Security

Jim breaks down what is wrong with the social security system and how he was able to “fix it”.

Social Security isn’t like a 401(k).  Money you put aside doesn’t go to you.  Rather, it’s used to fund benefits for people currently taking distributions (Don’t worry – look at the younger people out there… they’ll be paying for your distributions someday.  Hopefully.).  Back in the 1930s, a lot more people were working than were eligible to collect Social Security benefits. Some estimates are that workers outnumbered Social Security recipients by 40 to 1.  By the 60s, that ratio was 5-1, and was still adequate to not only pay out benefits, but to put some aside for a rainy day in what is known as the Social Security trust fund. Today, however, that worker-recipient ratio is closer to 2-1.  That’s inadequate to pay out benefits… but why is this number changing?  Three main reasons:

  • People are living longer (apart from 2020, where the COVID pandemic actually lowered life expectancy!)
  • Baby boomers have retired, and that bump in the population is no longer paying in. They’re taking out.
  • People are having fewer kids. In the 60s the average family had 3.5 children – now it’s 1.8.  We aren’t producing enough of those offspring to support us!

That Social Security Trust Fund is commingled with the general US treasury reserves. It is invested conservatively in special issue Government bonds.  In 1983, under guidance from not-yet-Fed Chair Alan Greenspan, the fund was given a boost through tax increases that were meant to carry the fund for the next 75 years.  What taxes couldn’t cover, interest income on the trust fund made up.  Until it didn’t.  Lower interest rates in the 2000s proved Greenspan’s scheme inadequate and last year, in 2021, the outflows finally started to exceed both taxes and interest.  Now the trust fund is no longer going up in value.  It’s going down.  When it reaches zero, only money being paid into Social Security though payroll taxes will be available to pay out.  And that’s only enough for about 80 percent of the liabilities.

How can it be solved?

First, I think it’s important to say this:  SOCIAL SECURITY IS FIXABLE.  The shortfalls, while massive in absolute dollar terms, can be fixed with relatively mild changes.  Unsurprisingly, these changes involve:

  1. Increasing money going into Social Security (mainly through more taxes).
  2. Decreasing money paid out by Social Security (carefully).

The Committee for a Responsible Federal Budget, a non-partisan, non-profit organization committed to educating the public on high-impact fiscal issues, has created a neat calculator that allows users to work out their own fixes to social security by maneuvering revenue and expense items and getting an instant look at projections that result.  You can access this tool they call ‘The Reformer’ here.

After playing with The Reformer for a while, I eventually selected enough revenue and expense items to successfully get the tool to project Social Security Solvency for a 75-year period into the future and beyond.

HSA

If you have a high deductible health insurance plan you are eligible to use a Health Savings account (HSA). This is the only account that you can put pre-tax money into, and if you use the money on healthcare expenses you can draw money out tax free. No other account allows pre-tax in and tax free out, so if you can use an HSA it can be a difference maker. In addition to the tax advantages, you can also carry money in the account over each year (unlike a flexible savings plan), as well as being able to invest the money!

 

DISCLAIMER: The foregoing content reflects the opinions of Penobscot Financial Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. 


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Full Transcript

Tyler Hafford:

Welcome to Financial Discretion Advised. I’m Tyler Hafford, I have again on the podcast…

Jim Bradley:

You let me back, another time.

Tyler Hafford:

Founder of Penobscot Financial Advisor, our Chief Investment Officer, Jim Bradley.

Jim Bradley:

Thank you so much, Tyler.

Tyler Hafford:

I’m glad you could make it in. I’m glad you made it into the office, I thought I was going to have to go chip you out of the ice outside.

Jim Bradley:

As we speak I think the temperature is just about to start creeping above zero here in Bangor, Maine.

Tyler Hafford:

Yes, which kind of feels like the market these days, just trying to get into that positive. Have Jim on today, want to talk a couple of things, want to talk some headline stuff about market corrections and what we’re seeing right now in the market, anyone who has turned the news station on in the past week has probably seen some pretty scary headlines.

Tyler Hafford:

So, just want to talk about what’s going on there. Also want to dive into a topic that Jim tackled in his latest blog, so anyone who’s listening to this who doesn’t realize that Penobscot Financial Advisors also put out a blog, Jim writes one every week tackling different topics. In this latest blog that he put out was on social security, what’s wrong with it? How do we fix it? What’s going on there? Want to pick his brain and get some ideas on that and then we’ll finish up with a financial planning strategy of utilizing in the HSA, which is kind of broken into the mainstream lately.

Jim Bradley:

It’s becoming what the cool kids are doing.

Tyler Hafford:

Or at least the really healthy ones, they got that high [inaudible 00:01:38]. But let’s dive in to market corrections. So Jim, you’ve been in the industry a heck of a lot longer than I have, and that’s not a knock on your age, but more on the wisdom you bring to this, right? So, what we’re seeing today, the market the other day I think hit that key number, right? 10%. Can you get into what a market correction is?

Jim Bradley:

Sure, that’s a good question. The word correction should be a little bit of a hint there, isn’t the correction considered in most places in the world, a good thing?

Tyler Hafford:

Right.

Jim Bradley:

Frankly I guess you alluded to it, so I’ll just keep on running with it. Yes, I’m old, grizzled and I’ve been in this for a while, and frankly, when I see it now, it actually does feel like a correction. So, maybe you just have to go through a few of them. I think what’s the statistic that the market quote-unquote corrects on average every what? 16 months.

Tyler Hafford:

Yes, 13 or 16 months depending who you’re talking to, I think.

Jim Bradley:

Right, and somebody from some office somewhere where they set these kinds of standards decided that a correction is a movement of 10% or more from a peak to a trough at some point in the market’s progression.

Tyler Hafford:

Yes, and that’s essentially what we saw this past week, the NASDAQ beat the rest of the market to it as the tech stocks kind of sold off. And we’ll get into why some of this is happening, but like you said, “Healthy function of the market if it happens every 13, 16 months”. We’ve been pretty spoiled lately and haven’t seen a ton of this, but it seems like coming out of the pandemic we not only recovered in a couple of months, but we just kept going up without much of a check of that. Just seems like maybe we hit that point where the market needs to take a breather.

Jim Bradley:

Sure.

Tyler Hafford:

Unfortunately, we don’t have that crystal ball to… If we’re going to go up or this is going to become a bear market, which is a little bit more of a negative decline. But want get into, what are you seeing? What do you think is sparking this correction?

Jim Bradley:

It’s a great point, and you bring up a valid argument, that corrections are there for a reason and without them, frankly, that’s where I start getting nervous. And I think you and I talked about this quite a lot over the past year, of you could really stand to see some of the air led out of this every once in a while. It really doesn’t matter on your trajectory whether you go smoothly up over time, or whether it’s jagged you end up in the same place, adding a little dimension to that.

Jim Bradley:

What’s causing it? Gosh, a correction like this one, I think is simply the market latching onto some kind of logic as to why it should go down when really it probably should go down a little bit, it just got a little bit ahead of itself. So, what’s the logic the market’s using this time? Take your pick, we’ve got interest rates potentially on their way up and that just fundamentally changes the valuation of stocks if you look at a stock as their price is being a discounted value of their future cash flows. Raising rates you’re increasing that discount rate, discounting it further and low and behold you get lower prices. Inflation is another boogieman that we’ve been able to kind of call out this time, and it’s a legitimate worry, it’s kind of related to those rate increases.

Jim Bradley:

Boy, we’ve got lots of potential headlines, geopolitical tensions, a military risk that’s been given kind of credit for being the biggest mark of aggression since World War II on the Russian Crimean Border, the infrastructure bill that doesn’t seem to want to be able to get to move forward, lots of different things. But at the end of the day, these are always going to be headlines out there, it’s just a matter what the market’s going to use to justify its movement.

Tyler Hafford:

And I think you hit it, right. It’s not that we have just this abnormal news cycle going on, there’s always bad news out there if the market wants to look for it. Which further points to this is just a healthy function of what the market does and then uses what it needs to. I talked about the NASDAQ beating us to the correction levels before the S&P and the Dow followed suit. A lot of talk around that is that they are raising rates to fight inflation, right? And the Fed is saying that we’re going to do that. What we see is the market really didn’t care about inflation, what it cares about is the tools in which we use to reign it in, especially large growing tech companies who need to borrow money, interest rates are fairly sensitive to it and they kind of led this sell off.

Tyler Hafford:

Well, Sam and I, in our last podcast talked about this, and I know Jimmy and I have talked about it, those big growth companies put the market on its back and pulled us out of the crash of 2020, and we’re also riding that rollercoaster when they come backwards, right? And they yank the market with them.

Jim Bradley:

Hey, these kinds of stocks move more substantially in both directions.

Tyler Hafford:

Right, and the market’s kind of subject to go in that direction, as long as these companies are big as they are. Before we move on the next topic, what should investors do?

Jim Bradley:

Investors should take inventory of the fact that what a market correction is, is a part of the volatility that the stock market is made out of. Stock market volatility are not two… they’re two words, just put them together and learn to live with it. And learn to appreciate it because the way I like to put it, the volatility is what you’re getting paid for, if you want no volatility there are options out there and they don’t pay all that very well and are probably going to set you behind the rate of inflation over time.

Jim Bradley:

If you want to get more of a rate of return, the reason you’re getting this rate of return is because of the volatility, it’s because of the fact that not everybody’s jumping on all at once, and it’s because of the volatility.

Tyler Hafford:

And if the market just went straight up all of us would be having these conversations on our yachts, and everything would be just kind of really hunky dory. I think you hit it Jim, we’re putting our money at a certain amount of risk, and everyone’s risk is different. What you get out of that risk should be your rate of return, you put it out there and with that comes the volatility of the market. So, don’t panic when the market’s doing its correction, make sure you have long term goals, long term strategy in place, and just kind of trust the process.

Tyler Hafford:

The good news is every single market crash and every single market correction in US history has recovered.

Jim Bradley:

So far we’re at a hundred percent.

Tyler Hafford:

Just got to give it good time to do so. All right, let’s jump into the next topic, social security. Jim has been on the podcast before, talked about social security. So, if you guys miss that go back and check it out. He gives a really good breakdown of how you end up with your benefit, how social security works. That’s not the discussion we want to look at today. What we want to look at is I get a lot of phone calls from folks, very worried about the social security system. So Jim, where are we in social security? Is it broken or is it not what we expected it to look like at this point?

Jim Bradley:

It’s a great question, as you have probably alluded to in the past, I’m pretty interested in getting closer to actually having social security payout for me. So, let’s back up just a little bit and paint a picture of what social security is. Very simply, it’s a social program whereby money getting paid in over time is being paid out as it comes in, for the most part, to recipients of social security. So, we can stop right there and kind of differentiate that from things like a 401(k) plan or something like that, where money’s building up for an individual from them to take down. By and large, the money isn’t building up. Back in the 30s when this thing was first invent there were a lot more people paying into social security than taking out and people had a life expectancy of about 65 years, and low and behold, that was the social security age.

Jim Bradley:

So, that worked out really well from a math standpoint. The baby boomers have retired, people are having fewer children to support us in our older age over this kind of a system and that’s creating a bit of a problem where not as much money is going in to pay out the people. We created a bit of a trust fund to kind of absorb that, but now that trust fund is now started to go down. And as social security itself will be very blunt in telling you that trust fund is projected now to evaporate entirely sometime down the road, and that sometime down the road is getting kind of a little bit earlier and earlier, a lot thought within the next 11 to 12 years it would be gone. Once it’s gone, then that cushion to kind of support us there, be by virtue of the fact that less money is coming in that’s coming out, isn’t there.

Jim Bradley:

So, only the money that’s going in will be able to come out, and that money really doesn’t support the whole social security draw. They say about 80% is what they’re kind of estimating right now, so if you have a dollar that’s supposed to be coming out of social security, ostensibly the issue is that will not be a dollar, it would be 80 cents.

Tyler Hafford:

And you alluded this, when this was set up I think it was something maybe 40 workers for everyone recipient or there’s some metric there that measures… It was a lot of people…

Jim Bradley:

Lots.

Tyler Hafford:

Paying into this program for supporting one person, we’re almost down to two people.

Jim Bradley:

Just about two people for every one person.

Tyler Hafford:

Yes. So, if you are a couple and you’ve both worked your entire lives you’re essentially paying for one of your…

Jim Bradley:

Paying for one of us old people.

Tyler Hafford:

Yes.

Jim Bradley:

You and Sam, for example, I’m counting on to pay for me.

Tyler Hafford:

You’re welcome.

Jim Bradley:

So, step it up.

Tyler Hafford:

All right, demographics are changing the game here on social security. Does that mean people who are collecting social security right now there could be a day where they don’t have a benefit. Does this thing kind of wipe out?

Jim Bradley:

That’s a great question, that’s kind of the big boogeyman in the corner. And the argument most people who are kind of focused on this issue is, “No, it’s not going away. Social security is not going away. Feel free to use social security as a part of your planning. However, be open to the idea that benefits may change the amount that you have to pay in, in order to get those benefits may change down the road and will change, should change and have to change”.

Tyler Hafford:

Yes. And arguably, the folks that are dealing with social security, they must have seen this coming. I mean, the demographic changes didn’t just… One morning we wake up [crosstalk 00:13:20].

Jim Bradley:

You don’t think this was just a big surprise that all of a sudden landed on us this past year?

Tyler Hafford:

It does seem like politically it’s a very touchy subject, to start addressing social security. And that may be the reason why it’s not put on the [crosstalk 00:13:33] quite a bit.

Jim Bradley:

Forefront, absolutely. Yes.

Tyler Hafford:

Because we’re talking about taking away benefits from our older generations right here in this country. How do we fix it? What are the changes here?

Jim Bradley:

So, we started off with kind of dispelling the myth that it’s not fixable, it is fixable. Or that it’s going away, it’s not going away. The myth that it’s not fixable, it is fixable. And I’m going to dispel with one more myth, and that additional myth is that it’s just this draconian change that has to go into place in order to salvage social security, people have to retire at 90 now, or you have to give up half your paycheck in order to do this, or we have to borrow our way into oblivion in order to pay for my retirement. None of the above is true. In fact, it’s almost laughable to see how much of a political third rail this has become. Because when you look at it, there’s small changes that can be implemented both on how much people are paying in, increasing that, or how much people are taking out, decreasing that potentially. Either by changing the benefits or just changing certain people’s eligibility for benefits.

Jim Bradley:

And it can be done. And frankly, I’ve done it and done the math on it and found ways of very small changes here and there that actually fix social security, or at least fix the projection of social security. You’re right, it’s been a long time since we’ve known that social security wasn’t going to quite make it back in 1983, there were changes to how they take social security benefits and they moved it out in a gradual way, from age 65 to 67 being the full retirement age. They thought that would fix it for a little bit, but it became very obvious shortly thereafter that that wasn’t going to fix it permanently. And so, I’ve been in the industry since the year early mid 1990s, and we had sessions on it back then.

Jim Bradley:

So, it’s not something new, but the issue is those little things that I’m talking about become bigger and bigger every year that we put it off. If we put it off for another five years, I can’t guarantee that when I talk about little changes being made, that there they’re going to be as little.

Tyler Hafford:

The way I like to think about it is, this is great. And actually Jim did this, there’s a tool out there where you can kind of play with your scenarios, we can put different inputs in, and Jim corrected and fixed social security for us. So, he has my vote.

Jim Bradley:

You’re welcome.

Tyler Hafford:

Yes, you have my vote for whatever political office you’re running for. But I do like to think of it like a retirement plan, right? Someone comes in, maybe they’re short of their goal, we talk about increasing savings today. The longer we put that goal off, that extra savings, the bigger it has to be down the road.

Jim Bradley:

Really great way to identify it and understand it, it’s a way we can explain it to financial advisors.

Tyler Hafford:

We should meet some of those. So, anyone out there who wants more information on this, Check out Jim’s blog, he talks about the things that he did, but It does seem like let’s stop putting this off and start making the small tweaks today, so in 10, 15, whatever years down the road we’re not making the draconian big sweeping change that needs to happen.

Jim Bradley:

Sure, and even if you don’t have the stomach to go through my entire blog just take the time to go out to a website, crfb.org. Stands for Committee for a Responsible Federal Budget, and their tool out there that I used to fix social security is out there for you to fix social security. Your fixes might not look like my fixes, but that’s the great thing about it. You can put in something that kind of supports your values on how it gets fixed, and I think if everybody did that, everybody would get a good deal for A, how easy this thing is to fix, and B how inexcusable it is for us to kick it down the road any further.

Tyler Hafford:

I’ll make sure I drop the link below us.

Jim Bradley:

Super.

Tyler Hafford:

Click that, play around with it.

Jim Bradley:

Down there.

Tyler Hafford:

Yes, down there. We’d love to hear if you did fix it, put a comment on what you did to fix it.

Jim Bradley:

Love that.

Tyler Hafford:

We’d love to see it. It’s also right next to that like and subscribe button, so while you’re down there you might as well click those two.

Jim Bradley:

Convenient.

Tyler Hafford:

All right Jim, let’s dive into the last segment here. HSA is a financial planning piece of the podcast. These are fairly new, especially if we’re looking… like you said, “Across your career of using an HSA”, this is a health savings account, you can only use it if you have a high deductible plan. So, the ugly cousin of the HSA, as I like to think about it, would be your flex spending plan, your FSA, big difference though, right? You put money into that to help pay for your medical expenses, but at the end of the year if you have money left in there you’ll lose it. HSA is a little different, right?

Jim Bradley:

Sure is, that’s one of the bigger misconceptions. Because the FSA’s flexible spending accounts have been around since I was your age Tyler, and that’s the thing that people are most used to. HSA’s health savings accounts throughout our lives as financial advisors, we kind of go out hunting for these kind of odd animals that are just the most fascinating things to us. I can see like Steve Irwin just saying, “That’s a beautiful thing”. It’s just an absolutely beautiful thing where you get to take money off of your taxable income, put it aside, and then when you spend it for or a qualifying expense, it doesn’t get taxed at that point.

Tyler Hafford:

Wait a minute, so doesn’t get taxed going in?

Jim Bradley:

Right.

Tyler Hafford:

Doesn’t get taxed coming out?

Jim Bradley:

I mean, you think about traditional IRAs, don’t get taxed going in, get taxed going out. Roth IRAs don’t get tax going out, but do get taxed going in. This has those elements of both.

Tyler Hafford:

Those are my favorite, tax free Jim is my favorite. Anyone who’s listening to the podcast knows that. So, all right, we have tax free money coming in, tax free money going out if you use it for a qualified healthcare expense, right? But it’s not just limited to you, right? I know in my HSA when my wife had her baby, I was paying for that through my HSA, so you can use it on family members, things like that. Great flexibility there.

Tyler Hafford:

What if we put money in there? And like we said, at the end of the year if you don’t spend it stays in the account, you can invest it in there. But let’s say we’ve been just putting money in this right along, we’re getting into retirement and we have too much money and we’re not going to spend it all on our healthcare, you probably will if you’re paying attention to the cost of healthcare, but is the money just locked in there if we don’t use it for health expenses?

Jim Bradley:

It’s a really great question, and even before I get to that, I mean, you kind of alluded to this, but people think of an HSA… especially if you’re getting one through your employer as being like a 401(k) plan or something like that, and it’s not. Your HSA is your HSA. You can set up your own, you don’t have to go with what your employer has set up. You can invest the money or not. And so, in that way it’s a little bit different in that it’s a lot closer to you.

Jim Bradley:

But you’re right, if you’re not using the money for qualifying medical expenses. And I’ll tell you, this is exactly how I do my HSA. I mean, I’m putting money in pretax, the money is growing on a tax deferred basis, and when I go to the doctor I could use my little card there to pay for my HSA eligible expenses. But actually I don’t do that, I got to leave it in there because I love that idea of that continued tax deferred growth. What’s my thoughts around it? Well, sometime down in the future I might have a big expensive surgery that I have to have done and now I’ve got a bigger pool of money to be able to use on it.

Jim Bradley:

Or as you’re alluding to, once you turn age 65, you don’t have to use that money for healthcare expenses anymore to avoid a penalty. You can take that money out and use it for a nice trip to Las Vegas or something like that. Now, the one got you there is that in that particular case now it’s more like an IRA where the money is going to be taxable, but you’ve still deferred it all that time.

Tyler Hafford:

And if you use it in that fashion it gives you extra money to put away into that. You know, how many times you talk with people who want to put money into an IRA and we say, “You can only put $7,000 in a year, 50 years old, you can only do that”, and they want to put more, right? This gives you that option.

Jim Bradley:

Sure.

Tyler Hafford:

And you get an extra thousand once you get over 50, I believe in that, I believe there’s a catch up in the HSA.

Jim Bradley:

I’ve heard.

Tyler Hafford:

So, it can be a great planning tool for right now, but also a great planning tool down the road. So, the big caveat here is you need a high deductible plan, and the way I treat it, you kind of gotten yours, is I like to hold what I have for deductible in cash in my HSA, so if I get hit by a boss…

Jim Bradley:

Great idea.

Tyler Hafford:

I know I’m going to be able to pay for it, and then anything beyond that I start to invest.

Jim Bradley:

Great strategy.

Tyler Hafford:

Kind of plan for the future with it. That’s all I think we have for you guys today, unless I missed anything Jim.

Jim Bradley:

That was an exciting lineup of topics right there, I enjoyed it.

Tyler Hafford:

Well, again, check out Jim’s blogs, they’re right on our web page Penobscotfa.com. The social security one is not the only great one, he’s got a ton of them. I am going to drop that link below. Tell us how you fix social security.

Jim Bradley:

We’re really interested.

Tyler Hafford:

And make sure you like and subscribe. Thanks for coming on Jim.

Jim Bradley:

Thank you guys for having me.

Tyler Hafford:

The foregoing content reflects the opinions of Penobscot Financial Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinion or forecast provided herein will prove to be correct. Thank you.