30 June 2008
Warren Buffet, in quoting Benjamin Graham, has the pithiest observations regarding the market. “In the short run, the market is a voting machine. In the long run, it’s a weighing machine.” Buffet points out the emotion involved in short-term thinking and the logic in long-term results. With the real estate bubble painfully correcting itself this year, it is easy to focus on why it might be different this time. And it is different this time – a different problem. But the same result. The market goes up and it goes down and in that there is opportunity.
In May I wrote about when to take Social Security and how postponing the benefit as long as possible makes a lot of sense. Taking benefits at 62 versus 65 (or full retirement age, depending on what year you were born) will give you a discounted benefit so I advocated for postponing as much as possible until full retirement age. And for every year you hold off from full retirement age until age 70, you get approximately 8% per year more benefit. But in a market like this some might want to take social security early so that they do not have to tap their portfolios as much, even if those Social Security benefits will be less. Yet I believe that we are seeing a buying opportunity in the market that we will look back on in three to five years and wish we could have bought more. Whether the market recovers quickly or not, everyone can always have a do-over.
The do-over is one small bit of control that the Social Security Administration allows us. Even after you have started taking benefits, you can pay them back – without interest or penalty ofüany sort – and start your benefits again at your later age. This is possibly a huge opportunity. If you started taking benefits before the market drop, consider paying them back with cash and realize with hindsight a higher rate of return than the negative one you might currently be getting in the market. Or if you need to take benefits now, know that if the market does recover and your portfolio grows exponentially, you could take some of that growth down the road to pay back the benefits taken and start over at a higher level to give your overall retirement plan a healthier chance of success.
There are a few do-over's in life, but this is one that allows you control, with the benefit of hindsight. Sometimes the simplest opportunities have the most powerful results.