TD Wealth Perspectives Newsletter: Summer 2025

We now turn to drones, where the war in Ukraine has seen a ‘Cambrian Explosion’ in shapes, sizes, and capabilities. Global shipments have increased ten-fold since 2015 and some estimates project a 14% compound annual growth rate for worldwide revenues from 2025 to 2030. Drones have already dramatically changed the defense industry, and delivery drones are also flying high, led by Amazon.com, Inc.  and Walmart Inc.  in America, and Meituan Dianping in China.^[3]

In terms of production, China is miles ahead, making more drones in a day than the U.S. does in a year. The Trump administration, however, is determined to narrow this gap. A June 6 executive order promises to strengthen the American drone industrial base and promote their export.^[4] Further, the Federal Aviation Administration will publish rules to encourage the drone industry by early 2026. Will this work? Early signs are encouraging, with startups such as Anduril (currently building a drone factory in Ohio the size of 87 football fields) driving the future of autonomous drones.^[5]

Physical AI is exciting, but the future won’t arrive overnight. There remain many hurdles, including training data, vexing edge cases (the last 10% is always fiendishly difficult), and legitimate safety concerns. It is also likely that Large Language Models alone won’t get us there. Next-gen model architecture requires a better understanding of the physical 3D/sensory world, as well as persistent memory, and improved capabilities for planning and reasoning. Today, the most sophisticated robots find it exceedingly difficult to fold laundry, load a dishwasher, or make a sandwich.^[6] Everything about bringing AI into the world of atoms is hard and we can think of only a handful of firms globally that excel at both software and hardware. Expect progress to be measured in years and decades rather than months and quarters.

2. AI Superpower: China is Home to 50% of the World's AI Researchers

China has made enormous advances in all verticals, including physical AI, infrastructure, applications and foundational models.^[7] A few months ago, China’s Hangzhou Deeply Seeking Artificial Intelligence Basic Technology Research Co., Ltd. (DeepSeek) released its R1 model, sending shockwaves through global markets. R1’s reasoning and problem-solving capabilities demonstrated that America’s lead over China has narrowed significantly (Figure 2). This reflects the fact that China has 25% more software engineers than the U.S., leads in AI research publications, and was granted 50% more AI patents in 2024 (although U.S. patents are cited seven times as often).^[8]

China is leading the U.S. in physical AI, largely because of its "Made in China 2025” plan to dominate industries of the future. To illustrate, China accounts for 51% of all global robot installations (vs. 9% for the U.S.) and has a 70% share in drones. Additionally, China makes 70% of batteries, which is a critical component of physical AI systems.

However, most Chinese companies are very poor capital allocators. For example, China’s largest contract chipmaker is the Semiconductor Manufacturing International Corporation (SMIC). It has an important public mission (countering U.S. export controls) and is 40% to 50% state-owned. Reflecting on this, SMIC has produced a dismal return on invested capital (ROIC), averaging 2% over the last decade. However, several AI-adjacent companies are global champions and feature impressive returns. These include BYD Company Limited (BYD) in EVs and Contemporary Amperex Technology Co. Limited (CATL) in batteries (Figure 3).

China also possesses numerous private companies that are global leaders. Huawei Co., Ltd. is the world's dominant telecom equipment manufacturer. It also manufactures smart phones, semiconductors and AV systems, and in terms of breadth, is considered to be the world's #1 tech company. Other examples include DJI Technology Co., Ltd (dominant in drones), ByteDance Ltd. (its companies include TikTok), and SenseTime Group Inc. (computer vision, smart security, and AVs).

3. Pro-tech Trump: "It’s Time to Build"

Beijing’s “Made in China 2025” industrial policy, aimed at dominating the industries of the future, has been enormously successful. It has also created gaping vulnerabilities and critical risks for the U.S.  which, for the first time in decades, now views industrial policy as a national security imperative.

Recall that technology CEOs enjoyed front row seats during President Trump’s inauguration, signaling their importance to the administration. The Trump administration is developing an “America First” strategy on AI, recognizing it is critical for all three domains of power (economic strength, technology leadership, defense capabilities). So far, the strategy has resulted in executive orders (EOs) on critical minerals, the electric grid, nuclear power and natural gas permitting, as well as revoking former U.S. President Joe Biden’s EO on AI safety.

President Trump has also introduced tariffs to encourage the homeshoring of semiconductors and other sectors critical to AI development. Further, a major objective of the "One Big Beautiful Bill" (OBBB) is to encourage domestic investment. And the evidence over the last few years suggests such incentives can be extremely effective (Figure 4). Beyond semiconductors, the administration wants to encourage the construction of data centers, as well as factories for batteries, drones, and all elements of defense tech.

4. Agentic AI: From a Glitchy Gimmick to Diffuse Deployment

Agentic models have made great strides over the last twelve months. They break complex objectives into small, simple tasks, with the number that leading models are capable of handling doubling every seven months. While generative AI models respond directly to prompts, agentic AI reasons through multi-step tasks. Examples of applications include writing code (debugging, building Application Programming Interfaces (API) and websites) and customer service reps (pulling data from customer profiles, learning from previous conversations).

Agentic AI is also improving at tasks such as organizing a birthday party or booking a trip. Imagine the dozens of steps required to book a week’s holiday in Paris, researching hotels, restaurants, and activities.

Roughly 40% of startups are now focused on agentic AI. By 2030, we expect its capabilities will include: generating human-level text (e.g., legal analysis), creating full-length films and games, real-time translation into multiple languages, advanced personal assistants, fully operational customer service reps, and autonomous drug design. It will also become an indispensable collaborative partner, for projects such as writing books, music production, interior design, portfolio management and retirement planning.

AI progress continues to accelerate: Three implications for investors

First, we believe investors should maintain a preference for quality tech. This is where the bulk of innovation is occurring, as reflected in the sector’s high margins and return on capital. Further, rather than concentrated bets on hype stocks, we recommend a diversified portfolio of companies that have demonstrated skill in capital allocation and possess a track record of free cash flow generation.

Second, outside of tech, in our view, U.S. exceptionalism is waning. This suggests investors may consider increasing their exposure to global champions outside the U.S., many of which trade at discounted multiples. We also believe the U.S. dollar is overvalued and could decline over the next few years.

Third, exposure to infrastructure remains attractive. The AI boom requires enormous spending on data centers, electrical grids, and so on. Further, the “reinventing globalization” theme means huge outlays for factories, ports, and pipelines. Together, we believe that this creates an excellent environment for investors to benefit from a well-diversified and long-term approach to achieving their financial goals.

Who qualifies for Social Security retirement benefits?

In order to be eligible for retirement benefits, you must be age 62 or older (unless you become disabled or blind prior to age 62) and have earned at least 40 Social Security "credits" over the course of your employment.

The earliest that you are eligible for a retirement benefit is the first month in which you are age 62 for the entire month.

You earn Social Security credits by working at a job where Social Security taxes are withheld from your pay, or by earning money from self-employment. For 2025, you receive one credit for every $1,810 of income earned during the year. You can earn a maximum of four credits each year. Accordingly, you will receive the full four credits in 2025 if you earn $7,240 at any time during the year ($1,810 x 4).

How are my retirement benefits calculated?

Social Security uses a formula to determine your "primary insurance amount" ("PIA"). That's the monthly retirement benefit you will receive if you begin your benefits at "full retirement age."

Your "full retirement age" depends on the year you were born. It's age 66 for anyone born from 1943-1954. If you were born 1955-1959, it's age 66 plus 2 months for each year after 1954. For anyone born in 1960 or later, your full retirement age is 67.

The starting point for calculating your PIA is your earnings record. In this regard, the SSA keeps track of how much money you have paid Social Security taxes on each year. For many people, their actual income, and the amount of income on which they have paid Social Security taxes is identical. However, that is not the case for higher income earners. For instance, in 2025, you only pay Social Security taxes on the first $176,100 that you earn. Any earnings above that threshold are not subject to Social Security taxes and therefore excluded from your Social Security earnings record.

All of your annual earnings from any years prior to the year you turned 60 are then inflation adjusted. Any earnings from age 60 on are taken at face value with no inflation adjustments.

The next step is to sum up your 35 highest-earning years and divide that total by 420 (i.e., the # of months in 35 years). The result is your average indexed monthly earnings (AIME).

Your AIME is then plugged into the Social Security benefits formula in effect during the year that you turn 62. Here's the formula in effect for 2025:

1. Multiply the first $1,226 of your AIME by 90%
2. Multiply any amount between $1,226 and $7,391 by 32%
3. Multiply any amount over $7,391 by 15%
4. Add up the results to arrive at your PIA.

The final step is to account for the age at which you intend to claim your benefits. A bite is taken out if you begin receiving them before reaching full retirement age. Alternatively, an amount is added to your benefits if you claim them after reaching full retirement age, but only up until you reach age 70.

There are a couple of noteworthy items regarding the above calculations. First, as you can see, Social Security replaces a higher portion of wages for lower-earning workers versus higher-earning workers. Also, if you have fewer than 35 years of earnings, the calculation will include zeros.

Working additional years will knock out those $0 earnings years and may be something worth considering in connection with your retirement planning.

What's the impact of claiming benefits before or after my full retirement age?

If you claim your benefits prior to full retirement age, you will receive an amount smaller than your PIA. Your benefits will be reduced by 5/9's of 1% for each month up to 36 months and 5/12's of 1% for each month in excess of 36 months. This equates to a reduction of 6.67% per year (up to 3 years) and an additional 5% for each year in excess of 3 years.

If you wait until after your full retirement age to claim benefits, your retirement benefit will be higher than your PIA. Your benefits will be increased by 2/3's of 1% for each month up to age 70, beyond which there is no further increase for waiting. This equates to an increase of 8% per year up until age 70.

Here's a quick summary of the rules:

Age Claiming Benefit  Amount of Benefit

5 years before FRA       70% of PIA

4 years before FRA       75% of PIA

3 years before FRA       80% of PIA

2 years before FRA       86.67% of PIA

1 year before FRA          93.33% of PIA

At FRA                             100% of PIA

1 year after FRA             108% of PIA

2 years after FRA           116% of PIA

3 years after FRA           124% of PIA

4 years after FRA           132% of PIA

Is my spouse eligible for any benefits?

Yes, a spouse is eligible for retirement benefits based on the higher of their own benefit or their spousal benefit. Spousal benefits are Social Security benefits based on a spouse's work record instead of your own.

Spousal benefits can range from 32.5% to 50% of your spouse's PIA depending on when they are claimed.

You qualify for spousal benefits if:

• You are at least 62 (or younger and caring for a child who is under the age of 16 or disabled), and
• You have been married for at least one year, and
• Your spouse is already collecting their retirement benefits.

If you wait until full retirement age to begin collecting spousal benefits (and you are not receiving your own retirement benefit), your spousal benefit will be equal to 50% of your spouse's PIA.

If you file for spousal benefits while you are receiving a retirement benefit of your own, your spousal benefit will be reduced by the greater of your current monthly retirement benefit or your PIA.

Unlike retirement benefits, spousal benefits are not increased by delaying them beyond your full retirement age. However, they are permanently reduced if you claim them prior to full retirement age in a manner much like retirement benefits albeit with a slightly more aggressive reduction factor.

Are my children eligible for benefits as well?

Yes, if your children are under the age of 18 (or disabled with a disability that began before age 22), and you are receiving Social Security retirement benefits, your children may be eligible for a benefit of up to 50% of your PIA.

However, there is a maximum benefit that can be paid to a family based on the work record of a single person. If the family's benefits exceed this maximum limit, the benefits of each person other than the worker will be reduced proportionately.

How are my Social Security benefits taxed?

The tax code treats Social Security benefits differently from all other types of income. To determine if any of your benefits are taxable you need to look at your "combined income." Your "combined income" is equal to the sum of:

• Your adjusted gross income, not including any Social Security benefits, plus
• Any tax-exempt interest you earned, plus
• 50% of your Social Security benefits.

If your "combined income" is below $25,000 ($32,000 if married filing jointly), none of your Social Security benefits will be taxed.

For every dollar of combined income above that level, $0.50 of your benefits will be taxable until the point that 50% of your benefits are taxed or you reach $34,000 of combined income ($44,000 if married filing jointly).

For every dollar of combined income above $34,000 ($44,000 if married filing jointly), $0.85 of your benefits will be taxable up to the point that 85% of all your Social Security benefits are taxable.

Unlike the income tax brackets, these combined income thresholds have not been indexed for inflation since 1993. Accordingly, a larger portion of Social Security benefits will be taxed over time due to bracket creep.

Can I collect retirement benefits while I am still working?

The short answer is yes. However, prior to reaching full retirement age, if you work while collecting Social Security benefits, the amount that you and your family receive will be reduced by 50% of the amount by which your annual earnings exceed a certain threshold ($23,400 in 2025).

In addition, if a family member is working while receiving a benefit based on your work record, their benefit (but not your own benefit) will be reduced if their earnings exceed that same threshold amount.

After reaching full retirement age, the earnings test no longer applies, and you can earn as much as you want without any reduction in your benefits. At that time, your benefit will also be recalculated and increased to account for any prior months that your benefit was reduced or eliminated as a result of the earnings test.

Is it possible to undo a poor Social Security claiming decision?

For the most part, your initial claiming decision is permanent. However, there are a few options available for those who change their mind.

First, if you have been receiving your benefits for less than 12 months, you can withdraw your application by filing a form with the SSA and paying back all the benefits received to date. This includes all benefits paid out on your work record, so any benefits paid to your spouse or children must be repaid as well.

If approved, it will be like you never filed at all. You can only take advantage of this option once in your lifetime.

If you have been receiving benefits for 12 months or more, it's no longer possible to "undo" your application and start over. However, once you reach full retirement age, you can request to have your benefits "suspended," so that they continue to grow as if you hadn't yet filed for them. This will allow your benefit amount to grow by 8% each year up until you reach the age of 70.

Alternatively, if you wish you had claimed your benefits earlier, you can choose to backdate your application by up to six months. However, this option is only available for those that have deferred their benefits beyond their full retirement age.

Is Social Security going bankrupt?

Social Security is facing a long-term solvency crisis, but it is not going bankrupt.

In this regard, it's important to understand that Social Security is set up as a self-funded pay-as-you go program. Monthly social security checks are primarily funded by the payroll taxes collected from current workers with the Social Security Trust Fund making up any deficits.

Unfortunately, current projections are that the Trust Fund could be depleted within the next 10 years. This is primarily because we now have a decreasing number of workers paying for an increasing number of retirees.

According to the most recent Trustees Report, the Trust Fund is projected to have enough resources to cover all promised benefits until 2034. Absent a change from Congress, Social Security benefits would then need to be cut for all current and future beneficiaries to about 81% of scheduled benefits. So, once again, Social Security will not run out of money in 2034, it just won't be able to pay benefits at the same level.

We have had 2 other solvency crises with Social Security in the past (one in 1977 and another in 1983). In both cases, legislators were able to come together and pass bipartisan legislation to fix the problem. In 1977, they raised the payroll tax by 25% and the maximum taxable wage base by 68%. In 1983, they essentially cut benefits by slowly phasing an increase in the full retirement age from 65 to 67.

Congress could do something very similar today in terms of raising taxes and/or cutting benefits to solve this crisis as well. Hopefully, as in the past, legislators will find the political will to unite and resolve this matter before the trust fund is exhausted.

What is the optimal claiming strategy for me and my family?

Unfortunately, the answer to this question would literally require a book. In this regard, the Social Security rules are amazingly complex, and, on top of that, each family has their own unique set of variables (ages, marital status, health issues, need for income, tax position, retirement ages, outlook for the future, risk tolerance, etc.). Unfortunately, there is no one-size-fits-all answer.