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Stories We Tell

Adam M. Grossman

YALE UNIVERSITY economist Robert Shiller, in his book Narrative Economics, argues that storytelling has more of an impact on economic events than we might imagine. It might seem like the financial world ought to be driven by facts and data, and yet stories often take on a life of their own.

For instance, financial narratives often play a key role in stock market bubbles and busts. More generally, financial myths and misperceptions are widespread, and navigating them can be a challenge. Examples? Below are five common myths.

1. “Investors should be careful when the market keeps hitting new all-time highs.” This seems like it ought to make sense. Anyone who lived through a mania like the dot-com bubble might conclude that bubbles inevitably burst, so it’s best to step aside when markets are hitting all-time highs.

But here’s the problem: Because the stock market trends upward over time, it’s not unusual for market indexes to hit new all-time highs. J.P. Morgan provides this perspective: In nearly 30% of cases when the market closes at an all-time high, that new high has represented a “floor” below which the market has never dropped more than 5%. In other words, while sometimes a bubble truly is a bubble, that’s not always the case—and it’s difficult to tell the difference.

2. “In my parents’ generation, people could live on the income from their portfolio. Things were better then.” Look at your investment statement, and my guess is that dividends aren’t the main attraction. Some stocks don’t pay dividends at all and, on average, the S&P 500 currently yields just 1.5%.

That stands in contrast to history. Between 1926 and 2023, dividends accounted for nearly 40% of the S&P 500’s total return. As a result, retirees used to talk about living off their portfolio’s income. Investors nostalgic for that era might be less enthused about today’s more meager dividends. But you shouldn’t be concerned.

It’s not that companies are less profitable today. To the contrary, public company profit margins have increased over time. But companies have changed how they allocate those profits. In the past, a much greater portion was paid out to shareholders in the form of dividends.

But today, companies allocate roughly equal amounts to dividends and to buying back company shares. Why the shift? Consider the change in how companies compensate their executives. Today, there’s a much greater emphasis on stock-based compensation, and that’s created more of an incentive for managers to see their company’s share price rise. Result: Companies today allocate more cash to buying back shares because buybacks have the effect of driving up share prices.

Should investors be upset by this change? In my view, no. In aggregate, buybacks now account for about 1.5 percentage points of the S&P 500’s return, with dividends providing another 1.5 percentage points. Taken together, that 3% isn’t far off the 4% that investors have historically received as dividends. In other words, dividends may be lower than in the past, but investors are no worse off because total returns—that is, price appreciation plus dividends—are no lower.

3. “There’s a penalty if I claim Social Security while I’m still working.” You may have even heard the formula, which sounds punitive: Social Security will deduct $1 from benefits for every $2 earned. While this is technically true, it overlooks some important details.

First, this penalty is imposed only when benefits are claimed before your full Social Security retirement age (FRA), which is between ages 66 and 67, depending on the year you were born. Second, this isn’t a true penalty. Those dollars aren’t lost forever.

Instead, after a worker reaches FRA, Social Security adds back the amounts that were earlier withheld. In addition, any year in which you work will add to your Social Security earnings record, and that could potentially increase your benefit. The bottom line: If you want to work part-time in retirement while receiving Social Security, you shouldn’t worry.

4. “It’s a mistake to claim Social Security before age 70.” Age 70 is when the largest benefit check is available, and for that reason it’s become a sort of personal finance commandment that everyone must wait. But this should be viewed more as a guideline than a rule.

Why? While you wait, you’re also taking a risk of another sort. For each year that you don’t claim benefits, your benefit needs to be that much larger down the road to make up for the missed years. And because of the time value of money, that breakeven point is pushed out even further.

For many people, it makes good sense to take this risk, since the breakeven point tends to be around age 78, and folks who make it to 70 can expect to live until their early- or mid-80s. But if you’re married, the math changes. That’s because it’s only worthwhile for both spouses to delay until age 70 if both spouses outlive that breakeven point. That’s why it can make good sense for one spouse to claim earlier than 70.

5. “The estate tax won’t be a problem for me.” Under current rules, only a tiny fraction of estates—just 0.2%—are large enough to owe any estate tax. That’s because, for a married couple, the federal estate tax applies only to estates with $27 million in assets. Even after the potential rules change in 2026, that figure will still be very high, at over $13 million for couples.

For that reason—and because there are other less complicated strategies available that can shrink an estate—many people dismiss the idea of formal estate tax planning. For some, that makes sense—but it depends. Twelve states and the District of Columbia impose their own estate taxes, and six states have inheritance taxes, meaning that they tax the recipient of a bequest.

Making this even more of a challenge, many jurisdictions tax estates with as little as $1 million. Simply owning a home in those states might push an individual above the threshold. And while state estate tax rates are lower than the 40% federal rate, they’re not immaterial—with top rates between 10% and 20% in many cases. For that reason, it’s worth researching the rules where you live.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and on Threads, and check out his earlier articles.

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