Charles Ellis, a legendary figure in the investing world, emphasizes the underestimated significance of Social Security in financial planning. Known for his extensive work in the index fund space and numerous books on investing, Ellis argues that Social Security plays a more pivotal role in portfolio success than most Americans realize. Despite common perceptions that Social Security might vanish from their financial future, its steady income stream is an asset that deserves more credit.
Ellis has been vocal about the advantages Social Security offers, likening it to a secure, inflation-protected bond. In a recent appearance on CNBC's "ETF Edge," he stated, "We don't talk about it. We don't measure it. We don't quantify it. But it's a substantial asset." This steady stream of income can significantly influence asset allocation decisions, allowing retirees to increase their stock exposure with less risk.
The financial community often overlooks Social Security's potential to act as a stabilizing force in retirement portfolios. Ellis highlighted this point by stating, "Overlooking Social Security can be a big mistake." Given that the S&P 500 has averaged around 12% annual returns since 1928, according to New York University Stern, the opportunity for greater stock exposure could yield substantial gains over time. Ellis suggests that many people could expect to receive between $250,000 and $350,000 from Social Security throughout their retirement.
In his latest book, "Rethinking Investing – A Very Short Guide to Very Long-Term Investing," Ellis delves deeper into these concepts, urging readers to reconsider traditional views on retirement income sources. His previous work, "Winning the Loser's Game," also touches on financial strategies that challenge conventional wisdom.
Ellis compares the function of Social Security to that of bonds, which are typically held to reduce market volatility. He notes, "Almost anybody looking at the reason for holding bonds talks about the desire to reduce the fluctuations," suggesting that Social Security can fulfill a similar role in a well-balanced portfolio. While the U.S. 10 Year Treasury has offered returns of around 5% over certain periods, the dependable nature of Social Security payments provides retirees with a consistent financial foundation.
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