Like it or not, decisions about our money affect nearly every aspect of our lives.
Sometimes these decisions aren’t so obvious — at least at first glance — and other times they are glaring.
For example, news that Congress was removing the file-and-suspend benefit affects some married couples’ retirement-income decisions.
While the change is significant, it does not remove the core benefit that any worker earned over his or her lifetime. In addition, a relatively small number of people actually use file-and-suspend, which has only been around since 2000. It was not a key strategy enshrined in the laws that established Social Security. There’s no point rehashing the mechanisms of file-and-suspend here because it will soon be relegated to history.
But these changes are a jarring reminder of the ongoing nature of financial decision making.
Unfortunately, putting decisions on hold, or, worse, trying to ignore them altogether, is a form of decision-making. That unpleasant thing you don’t want to think about — like how much you may or may not be saving for your golden years? If you avoid confronting the question, that’s a form of decision-making.
Here are some areas where I frequently see people avoid making money decisions:
Social Security: Although file-and-suspend is going away, there are still decisions about spousal benefits, or even waiting and letting one’s own benefit grow until age 70. Even without file-and-suspend, many people immediately claimed their own benefit at age 62, without realizing they could collect more if they waited until full retirement age. This includes people with resources or other income streams that would have allowed them to wait. Now that the laws are changing, it’s even more crucial to do a detailed analysis of your Social Security strategy, particularly if you are married, divorced or widowed. The proposed laws are still being amended, and I’ll write more about this in next month’s column, when more complete information is available.
All the cash: Yes, having too much cash sounds like a wonderful “problem” that most people would volunteer for. But that’s not exactly what I’m referring to. I hear from a surprisingly large number of people whose retirement accounts or other brokerage accounts are not invested at all, but parked in money market funds. For some, the cash feels like a “safe” option. However, there’s really nothing safe about losing spending power due to inflation, even in small amounts, or facing very real opportunity costs because the money could have been growing, instead of stagnating.
For many people, though, they simply don’t know what to do with all the cash. I understand this; the financial media have endless (and reckless) stories about impending doom. They generate clicks and viewership for media companies, but harm investors who decide to do nothing, based on fear-mongering reports.
That annuity you bought: Now, don’t get me wrong here. I’m not saying all annuities are necessarily bad. Annuities are simply investment vehicles, structured in various forms. They can be a very effective way for people to “lock up” some money for a few years (and protect it from themselves!) while letting it grow. With fixed annuities, you won’t see the complete upside potential that you’d have by simply investing in the stock market, but you are also protected from the complete downside risk of the market. It’s a trade-off that many people find worthwhile, if they want to avoid losses and protect their principal, at least with some portion of their money.
Unfortunately, annuities have been painted with a broad brush by some personal-finance gurus on television. Yes, I’m talking about Suze Orman. However, even her advice on this topic has been misinterpreted: She is mainly opposed to variable annuities, and I agree 100 percent. Variable annuities put the account owner at complete stock market risk, with no control over his or her investment options — and there are additional fees, to boot! Buying an annuity can be a very good financial decision, but it has to be evaluated correctly. You must understand exactly what you’re buying and why. It’s not enough to just reject the idea out of hand, or just sign the dotted line because somebody tells you it’s a “great investment.”
Life insurance: This is an area where a lack of decision-making can have tragic results. There are far too many stories of a family breadwinner passing away unexpectedly, and the surviving parent and children struggling to make ends meet. Even in a couple without children, if one spouse is a much higher earner, loss of that income stream would be devastating, at a time when survivors are already grieving.
Sure, it’s a pain to pay an extra premium every month. All of us already feel nickeled and dimed in all directions. I’m not saying it’s easy to set aside some extra bucks for life insurance, but it’s one of those decisions that has proven valuable to many households in a time of crisis. Fortunately, term life insurance rates are fairly low, putting it within the reach of many working families and couples.
Don’t let indecision become your de-facto decision. Your money isn’t a separate little area of your life, cordoned off from everything else. It deserves some real decision-making.
Kate Stalter, founder of the independent firm Better Money Decisions, helps people throughout Northern New Mexico plan for retirement, as well as other phases of life. You may reach her at 844-507-0961 or firstname.lastname@example.org.
Social Security presentation
Financial columnist Kate Stalter will give a free presentation on social security and pending changes at 4:30 p.m. Nov. 19 at the downtown office of The Santa Fe New Mexican, 202 E. Marcy St.
Parking for participants will be availbale in the lot across from the front entrance to the newspaper on Marcy Street. The presentation will be an hour with time for questions.