Social Security, AI Investing & When Growth Shifts to Protection | Ep 31

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Three questions keep coming up in client meetings lately. Will Social Security really run out of money? Should portfolios be tilted even more heavily toward AI? And when does protecting wealth become more important than growing it?

Adam Newman and Andy Pratt tackle all three in this episode, starting with what "going broke" actually means for Social Security. If the trust fund hits zero and Congress does nothing (which is extremely unlikely), benefits wouldn't disappear. Payroll taxes alone would still fund roughly 75-80% of what's owed. That's a real problem, but it's not the apocalyptic scenario many people envision.

The fix will likely involve some combination of three approaches: lifting the payroll tax cap for high earners, raising the full retirement age, or means-testing benefits based on income. The uncomfortable truth is that younger generations will probably shoulder most of the burden.

Same Story, Different Theme

The second question shows up whenever investment themes get hot. Right now, that theme is AI.

Andy points out that if you own a diversified portfolio, you likely already have significant AI exposure. The companies driving AI development (Nvidia, Meta, Google, Microsoft) are among the largest holdings in major indexes. Your portfolio has probably benefited substantially from the AI trade already.

But when everyone starts asking how to get more exposure to a hot theme, that's often a warning sign rather than an opportunity. Markets go through predictable cycles with disruptive technology. First comes the hype phase, where simply being associated with the theme drives stock prices higher. Eventually, the market shifts to demanding actual results. Revenue, earnings, and cash flow start mattering more than promises.

We've seen this pattern with 3D printers, cryptocurrencies, and streaming services. The technology can be genuinely revolutionary while the forward-looking stock returns disappoint. AI will almost certainly transform how we work and live. That doesn't automatically make AI stocks at current prices a great investment for the next five years.

The recommendation remains what it's always been: maintain broad diversification rather than overweighting whatever theme currently dominates headlines.

Your “Don't Screw It Up” Money

The third question gets to something more personal: when should your investment focus shift from growth to protection?

If you're 15 or more years from retirement, the answer is simple. You're still firmly in growth mode. Your human capital (your earning potential and savings rate) is probably much larger than your financial capital (what you've already accumulated). Market downturns at this stage are opportunities, not threats, because you're buying into lower prices with each paycheck.

Things get more interesting within 10-15 years of retirement. This is when you need to start fragmenting your wealth into what Adam calls tier one and tier two capital.

Tier one is your "don't screw it up" money. It's what you'll need to generate income in retirement, plus a cushion for emergencies and healthcare expenses. This money needs to be positioned conservatively enough that a market crash in your first few years of retirement doesn't derail your entire plan.

Tier two is everything else. It's money you'll never touch, that will outlive you. This is legacy money for family, charitable giving, or other purposes beyond your own spending needs. Since this money has a multi-decade time horizon, it can stay positioned for growth even after you retire.

The split between these two buckets varies wildly by investor. Someone might have 80% in tier one and 20% in tier two. Another person might be the reverse. That ratio, combined with your psychological tolerance for volatility, drives most of the portfolio construction decisions.

Numbers Reduce Anxiety

What Adam emphasizes throughout this conversation is that putting actual numbers to these concepts reduces anxiety. Retirement brings enormous psychological uncertainty. The transition from saving to spending triggers fear even when the math says you're fine.

Going through the exercise of quantifying your spending needs, identifying your tier one capital, and understanding your tier two capital creates confidence. You're making decisions from a position of strength rather than reacting emotionally to market movements or life transitions.

The tier two conversation also opens up possibilities. If you know certain money will outlive you, you can make different choices. Lifetime gifting to children or grandchildren. Roth conversions to create tax-free growth for heirs. Charitable strategies that generate current tax savings. These become real options rather than theoretical concepts once you've identified which dollars fall into which bucket.

Protection versus growth isn't just about age or proximity to retirement. It's about understanding what you need, what you'll never need, and positioning each portion appropriately. That clarity makes every subsequent financial decision easier.

Listen to the full conversation on Long Story Short: