Just give us your best guess.

Most financial advisors let the software do the heavy lifting when it comes to stress-testing a client’s retirement income plan with modern tools that can quickly run Monte Carlo simulations to address longevity risks. Useful as they are, though, a common problem has become inputting inaccurate Social Security benefit projections sourced from the Social Security Administration itself. As the agency has admitted, its estimates often cause individuals to either over or underestimate their future benefits, especially younger workers and women. It’s a problem that advisors will have to address in order to build successful retirement plans.

“We’ve looked into the issue and we do see many traditional planning models struggling with this,” said Sharon Carson, retirement strategist at J.P. Morgan Asset Management, adding that advisors usually overshoot on the benefit estimate. “It’s a problem when people end up with less income than they were expecting.”

Don’t Get Overzealous

If a client is currently earning $150,000 a year, the SSA calculates their primary insurance amount as if they’ll work for the same wage until retirement, plus a small annual inflation adjustment. In reality, they might not work that long or at wages that high.

“Most software either uses your most current salary as the starting point to back into an estimated Social Security benefit, or it asks someone to put in their primary insurance amount from their most recent statement,” said Marcia Mantell, a Social Security expert and founder of Mantell Retirement Consulting. “If you aren’t really close to your full retirement age, the numbers can get skewed and become overzealous.” Mantell’s other chief concern is that income planning tools aren’t inflating Medicare Part B premiums aggressively enough. “Best practice today is to project 8% to 10% Part B annual increases,” she warned.

The latest Chase consumer banking data shows American households earning $300,000 replace just 55% of their pre-retirement income on average after retirement, with 41% coming from private sources like 401(k) plans and 14% coming from Social Security. It sounds like a dramatic cutback, but a 45% reduction in annual income is not as big a lifestyle change as one might assume. “You have to keep in mind that these people are entering a stage of life where they’ve already paid off their mortgages, they’ve finished paying for their children’s college, they’re not commuting to work,” Carson said. “They don’t need to spend as much.”

People who are lower on the income spectrum may replace more of their income in retirement, but that doesn’t mean they’re better off. Take, for example, the average household with $100,000 in pre-retirement income:

• They replace 76% of their working income, with 33% of the money coming from Social Security checks.
• The replacement rate is higher, but their $76,000 in retirement income is lower in absolute terms compared with the wealthiest cohorts.

“A household at the $40,000 level replaces 95% of income, with more than half of that coming from Social Security, but you obviously wouldn’t say they are better off,” Carson said.

Are Cuts Coming? Many clients (and some advisors) believe Social Security’s shaky financial position makes benefit cuts inevitable, so they do things like claim early to get their hands on the money while they still can. “We think this is the wrong perspective,” Carson said. “Reforms aren’t easy to accomplish, but the political power of seniors is undeniable. It’s politically untenable to think that members of Congress would simply do nothing and let Social Security cuts happen.”

Up. Down. Curiously calm, then volatile.

The US-led attacks on Iran have sent sector ETFs climbing or falling after dragging down the major market indexes on Tuesday. Broad markets showed little change on Monday, though the ETFs initially performing best after the large-scale bombings included those focused on defense, oil, gold and crypto assets. Meanwhile, airline ETFs plummeted, along with emerging markets. The Vanguard S&P 500 ETF (VOO) was down less than 1% as of market close on Tuesday.

Investors tend to get spooked immediately after invasions, though markets may bounce back weeks later. “It seems like more fear is creeping into the market,” Amplify ETFs CEO Christian Magoon said. “Over the last 24 hours, as things have played out, the market has become more concerned.”

Gold, Guns and Oil

As the roughly 20% of global petroleum shipments that come via the Strait of Hormuz all but stopped, oil prices spiked. The $39 billion State Street Energy Select Sector SPDR ETF (XLE) was up 2% over five days as of market close on Tuesday. Amplify’s Breakwave Tanker Shipping ETF (BWET) rose 5% over five days after falling 13% yesterday. Before the attacks on Iran over the weekend, energy and basic materials were strong performers in the wider market, and investors may have felt more confident about those areas than technology amid volatility related to AI, Magoon said.

A category typically viewed as a safe haven, gold, initially rose before falling Tuesday. “Gold and silver have been good performers this year,” Magoon said. “There is some profit-taking in some of those areas right now, to potentially raise cash to be defensive or deploy at lower levels.” Other causes of the price drops are a flight to the US dollar and changes in expectations for rate cuts by the Federal Reserve, said Aakash Doshi, head of gold strategy at State Street Investment Management.

A look at how the crisis has affected ETFs by categories:

• With commercial air traffic halted at major hubs in the Middle East, airline stocks fell Monday, and the US Global Jets ETF (JETS) dropped 5% over five days, including a 1% decline on Tuesday. The iShares Core MSCI Emerging Markets ETF (IEMG) fell Tuesday by over 5%, bringing its five-day drop to over 6%.
• The SPDR Gold Trust (GLD) ETF fell 4.5% Tuesday, bringing its five-day decline to over 1.5%.
• The iShares US Aerospace & Defense ETF (ITA) rose 2% Monday but fell just as much on Tuesday.

Sell or Hold? The outcome of a potential war lasting more than a few weeks is uncertain. But a review of geopolitical events since 1990 shows a pattern: “Markets experience an initial shock, followed by recovery over the subsequent three to six months,” Westwood CIO of multi-asset strategies Adrian Helfert said in a statement. “The investors who fare worst in these episodes are those who sell into the initial panic.” Still, every episode is different. “This truly seems to be the first war that is livestreamed on social media,” Magoon said, of videos bystanders have posted of Iranian missiles landing in the UAE. “This is an emotional market, as we know.”

BlackRock just proved that in private credit, the distance between “perfectly fine” and “worthless” is roughly 90 days.

Investors were jolted by the investment giant’s recent writedown of a $25 million loan to an Amazon storefront aggregator from 100 cents on the dollar to nothing. It had marked the loan on par three months ago.

Roaches and Dumb Things

Concerns about defaults in the massive $2 trillion private credit market were magnified last fall, when auto parts manufacturer First Brands collapsed, leaving many in the industry exposed. Soon after, JPMorgan CEO Jamie Dimon famously quipped, “When you see one cockroach, there are probably more,” implying other bad loans are out there. Private credit’s opaque nature can make it hard to identify. The industry rapidly expanded in the last decade as banks reduced their exposure to leveraged lending. In their place, private equity firms and asset managers began lending to middle-market companies under terms that aren’t publicly disclosed, typically with floating interest rates.

The wider financial system has also taken on exposure over time. Moody’s estimates banks hold roughly $300 billion in loans to private credit issuers and have made hundreds of billions more in commitments. All of this is why some investors are hyper-sensitive to private credit writedowns, even a relatively small $25 million blip like the one BlackRock quietly disclosed in an SEC filing on February 27. Dimon has more recently pointed to the obvious parallels with risky loans made in the lead-up to the 2008 financial crisis, many of which were declared worthless overnight. Last month, he warned of “people doing some dumb things … to create [net interest income].”

Private credit default fears are also mounting because of the industry’s exposure to software businesses whose products could be replaced by “agentic” artificial intelligence tools:

• In January, analysts at UBS estimated 25% to 35% of the private-credit market was exposed to AI disruption, while analysts at iCapital earlier estimated that software companies account for roughly 20% of outstanding private-direct lender loans.
• The iShares Expanded Tech-Software Sector ETF is down 18% this year, reflecting investor pessimism about software businesses.

But Wait, There’s Upside: This week, short sellers have piled on bets against private credit shop Blue Owl Capital, which announced plans to sell $1.4 billion in assets last month to pay down debt and return capital to investors. As for BlackRock, its shares slid 1.4% Thursday amid news reports of the writedown. Still, Eric Clark, a portfolio manager at LOGO ETF, told Barron’s he believes private credit pessimism is “creating a very rare opportunity to enter a high quality business” when it comes to the most sophisticated and diversified asset managers, which he said “do better research, set better terms, and have incredible default work-out capabilities to not lose the money people think they will lose.”