MONEY Social Security

What’s Missing in Your New Social Security Benefits Statement

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Many workers will start receiving Social Security benefits statements again. Just don't expect to see much discussion of inflation's impact on your payout.

The Social Security Administration will be mailing annual benefit statements for the first time in three years to some American workers. That’s good news, because the statements provide a useful projection of what you can expect to receive in benefits at various retirement ages, if you become widowed or suffer a disability that prevents you from working.

But if you do receive a statement next month, it is important to know how to interpret the benefit projections. They are likely somewhat smaller than the dollar amount you will receive when you actually claim benefits, because they are expressed in today’s dollars—before adjustment for inflation.

That is a good way to help future retirees understand their Social Security benefits in the context of today’s economy—both in terms of purchasing power, and how it compares with current take-home pay. “For someone who is 50 years old, this approach allows us to provide an illustration of their benefits that are in dollars comparable to people they might know today getting benefits,” says Stephen Goss, Social Security’s chief actuary. “It helps people understand their benefit relative to today’s standard of living.”

In part, the idea here is to keep Social Security out of the business of forecasting future inflation scenarios in the statement that might—or might not—pan out. The statement also provides a starting point for workers to consider the impact of delayed filing.

“It provides valuable information about how delaying when you start your benefit between 62 and 70 will increase the monthly amount for the rest of your life—an important fact for workers to consider,” says Virginia Reno, vice president for income security at the National Academy of Social Insurance.

Unfortunately, the annual statement is silent when it comes to putting context around the specific benefit amounts. The document’s only reference to inflation is a caveat that the benefit figures presented are estimates. The actual number, it explains, could be affected by changes in your earnings over time, any changes to benefits Congress might enact, and by cost-of-living increases after you start getting benefits.

And the unadjusted expression of benefits can create glitches in retirement plans if you do not put the right context around them. Financial planners don’t always get it right, says William Meyer, co-founder of Social Security Solutions, a company that trains advisers and markets a Social Security claiming decision software tool.

“Most advisers do a horrible job coming up with expected returns. They choose the wrong ones or over-estimate,” he says, adding that some financial planning software tools simply apply a single discount rate (the current value of a future sum of money) to all asset classes: stocks, bonds and Social Security. What’s needed, he says, is a differentiated calculation of how Social Security benefits are likely to grow in dollar terms by the time you retire, compared with other assets.

“Take someone who is 54 years old today—and her statement says she can expect a $1,500 monthly benefit 13 years from now when she is at her full retirement age of 67,” says William Reichenstein, Meyer’s partner and a professor of investment management at Baylor University. “If inflation runs 2% every year between now and then, that’s a cumulative inflation of 30%, so her benefit will be $1,950—but prices will be 30 percent higher, too.

“But if I show you that number, you might think ‘I don’t need to save anything—I’ll be rich.’ A much better approach for that person is to ask herself if she can live on $1,500 a month. If not, she better think about saving.”

About those annual benefit statements: the Social Security Administration stopped mailing most paper statements in 2011 in response to budget pressures, saving $70 million annually. Instead, the agency has been trying to get people to create “My Social Security” accounts at its website, which allows workers to download electronic versions of the statement. The move prompted an outcry from some critics, who argue that the mailed statement provides an invaluable reminder each year to workers of what they can expect to get back from payroll taxes in the future.

Hence the reversal. Social Security announced last spring that it is re-starting mailings in September at five-year intervals to workers who have not signed up for online accounts. The statements will be sent to workers at ages 25, 30, 35, 40, 45, 50, 55 and 60.

MONEY

These New Programs Help Workers Retire at Their Own Pace

The federal government will allow employees to phase in their retirement by working part-time. But private companies are slower to offer this benefit.

Gwendolyn Ross will turn 66 in November, but she isn’t ready to retire. A deputy comptroller for the U.S. Coast Guard in Miami Beach, Florida, she hopes to work until she’s 70—but she would like to cut back her hours.

“I have some health issues that require a lot of visits to the doctor, and I’d love to have more time to visit my family in Michigan,” she says. At the same time, she needs to keep working to prepare for retirement. “As I get closer to it, I realize I’m not as financially ready as I thought I would be when I was younger. The time went by really quickly.”

Ross is a great candidate for a new federal government program that will allow workers to opt for a phased retirement. Participants in the program, which launches this fall, will be able to work half-time while collecting half their pensions after they reach the eligible retirement age.

For the government, the program is expected to be a money saver. The Congressional Budget Office estimated recently that 1,000 employees might take advantage of phased retirement annually, and would continue work for three years. That would cut required contributions to the government’s pension system by $427 million from 2013 to 2022, and boost worker contributions by $24 million.

But phased retirement also will help the government retain talent and expertise at a time when the “brain drain” from an aging workforce is a major concern. About 600,000 people, or 31% of the federal civilian workforce, will be eligible for retirement by September 2017, according to the U.S. Government Accountability Office. Phased retirees will be required to spend at least 20% of their time mentoring younger employees.

“It can help people who want to phase out over time, but it makes sense for the whole workforce,” says Kevin E. Cahill, a research economist at Boston College’s Sloan Center on Aging and Work. “Younger workers can tap into the knowledge that the older crowd has, and make sure it doesn’t get lost lost.”

Worker interest in a flexible glide path to retirement is strong, and it’s not limited to the federal payroll. A survey this year by the Transamerica Center for Retirement Studies found that 64% of workers—of all ages—envision a phased retirement involving continued work with reduced hours. For workers closest to retirement, frequently cited reasons for continued work included financial need (34%) and a desire for income (19%). But 34% had a desire to “stay involved” or said they enjoyed their work.

Employers have been slow to respond. Just 21% of respondents to the Transamerica survey said their employers offer phased retirement—and that figure may be too optimistic.

The Society for Human Resource Management reports that 11% of employers provide some version of phased retirement, with only 4% having formal programs. Cahill’s research shows similar employer disinterest in phased retirement programs.

“Sometimes there are institutional or administrative restrictions,” he says. “And some employers may have good reasons not to offer flexible hours.”

Much more common, he found, are workers who find what they need by changing jobs. “These are bridge jobs that carry people through from their careers to withdrawal later on from the labor force,” he says.

Some experts think phased retirement options will become more popular as the economy improves and labor markets tighten, particularly as demand for specialized skills rises. And the federal government’s move could be a catalyst for change in the private sector.

Each federal agency will write its own eligibility rules, and phased retirement won’t be a guaranteed right for all workers. But basic eligibility will depend on which of the two major federal retirement programs covers an employee.

The government has a legacy Civil Service Retirement System (CSRS), a traditional defined-benefit system, and the newer Federal Employees Retirement System (FERS), a defined-contribution program with a small traditional pension component.

CSRS employees will be eligible for phased retirement at age 55 with 30 years of service, or at 60 with 20 years of service. FERS employees must be 60 with 20 years of service, or have 30 years of service and have reached their minimum retirement-eligible age.

Interest in the program is strong, according to Jessica Klement, legislative director of the National Active and Retired Federal Employees Association.

“The number of phone calls we get from members tells me there are a lot of people waiting for this,” she says. “Many of them are ready to take a step back, but they don’t really want to quit yet.”

MONEY Pensions

Reasons to Hold Off on That Pension Buyout Offer

Lump-sum pension buyouts are a good deal for employers. But workers who take them could lose out if interest rates rise.

If you work for a company with a pension plan, don’t be surprised if you get an offer soon for a lump sum buyout—a deal where you accept a pile of cash in exchange for the promise of lifetime income when you retire.

The price tag for these offers is especially attractive right now, from the plan sponsor’s perspective. But workers might do better by holding out for a better deal, or by rejecting the buyout altogether.

A growing number of plan sponsors are trying to get out of the pension business, or lighten their obligations, by buying out workers. The number of buyout offers has accelerated in recent years, in part because of interest rate changes mandated by Congress that reduce their cost to plan sponsors.

Now, revised projections for average American longevity are giving plan sponsors new reasons to accelerate buyout offers. New Internal Revenue Service actuarial tables that take effect in 2016 show average lifespans up by about four years each for men, to an average of 86.6 years, and women, to 88.8 years.

The new mortality tables will make lump sum offers 3% to 8% more expensive for sponsors, according to a recent analysis by Wilshire Consulting, which advises pension plan sponsors. Another implicit message here is that lump sum offers should be more valuable to workers who take them after the new mortality tables take effect.

Unfortunately, it’s not that simple.

“We’re definitely seeing an increase in lump sum offers from plan sponsors,” says Jeff Leonard, managing director at Wilshire Consulting, and one of the experts who prepared the analysis. “But if it was one of my parents, I’m not sure if I’d encourage them to take the offer now or wait.”

The reason for his uncertainty is the future direction of interest rates. If rates were to rise over the next couple years from today’s historic low levels, that would reduce lump sum values enough to offset increases generated by the new mortality tables. Leonard estimates that a rate jump of just 50 basis points would eliminate any gain pensioners might see from the new tables.

Deciding whether to accept a lump sum offer is highly personal. A key factor is how healthy you think you are in relation to the rest of the population. If you think you’ll beat the averages, a lifetime of pension income will always beat the lump sum.

Another consideration is financial. Some people decide to take lump sum deals when they have other guaranteed income streams, such as a spouse’s pension or high Social Security benefits.

The size of the proposed buyout matters, too. If you’ve only worked for your employer a short time and the payout is small, it may be convenient to take the buyout and consolidate it with your other retirement assets.

Some people think they can do better by taking the lump sum and investing the proceeds. It’s possible, but there are always the risks of withdrawing too much, market setbacks or living far beyond the actuarial averages, meaning you would need to stretch that nest egg further.

And doing better on a risk-adjusted basis means you would have to consistently beat the rate used to calculate the lump sum by investing in nearly risk-free investments—certificates of deposit and Treasuries—since the pension income stream you would receive is guaranteed. Although the math here is complicated, it usually doesn’t work out in a pensioner’s favor.

Could you wait for a better deal? Lump sum buyouts are take-it-or-leave it propositions. But Leonard says workers who decline an offer may get additional opportunities over the next few years as plan sponsors keep working to reduce their pension obligations. “Candidly, I think we’ll see a continued series of windows of opportunity.”

MONEY Health Care

Why the Good News for Retiree Health Care May Not Last

With overall health-care costs in check, Medicare didn't hike the premiums seniors pay again this year. But once economic growth picks up, rising prices could come back too.

Medicare turned 49 years old last week, and the program celebrated with some good financial news for seniors: Premiums will not rise in 2015 for the third consecutive year.

The question now: How long can the good news persist? Worries about Medicare’s long-range financial health persist, but for now persistent low healthcare cost inflation will translate into a monthly premium of $104.90 next year for Part B (outpatient services), according to the Medicare trustees. Meanwhile, the Centers for Medicare & Medicaid Services (CMS) says the average premium for a basic Part D prescription drug plan will rise by about $1, to $32 per month.

The Part B premium has been $104.90 since 2012—except for 2011, when it actually dropped by about $15, to $99.90. The moderation is good news for seniors, since premiums are deducted from Social Security checks. Beneficiaries will keep all of next year’s Social Security cost-of-living adjustment, which likely will be about 1.7%.

Meanwhile, the average Part D premium has been $30 or $31 since 2011. That’s because of a dramatic shift to cheap generic drugs, and innovation by plan providers competing for customers.

“Seniors can expect to see more of what they’ve been getting over the last few years, which is increasing effort by Part D insurers to offer very-low-premium plans,” says Matthew Eyles, executive vice president of Avalere Health, a consulting firm specializing in healthcare.

As in recent years, Eyles says, the best deals will be found in plans that require enrollment in preferred pharmacy networks. Those plans offer lower premiums and co-pays. “We’ll also see plans limiting or eliminating deductibles, and encouraging the use of generics by offering them free or at nominal prices,” says Eyles.

But the average figures mask a more complicated story. Part D enrollees will find significant regional variations in premiums around the country. CMS data shows average premiums will be as low as $21.19 in New Mexico, and $25.83 in Florida—but as high as $39.74 in Idaho and Utah.

Eyles says it is not entirely clear why premiums will vary so extensively, although the prices tend to track the overall cost of healthcare, and are related to the overall healthiness of seniors by state.

“The plan providers have to submit bids for regions that take into account differences in the enrolled populations, including prescribing and utilization patterns,” he says. “It could be that one state tends to have more people using statins, or a diabetes medication.”

Another complication in Part D is the “doughnut hole,” the gap in coverage for Part D enrollees with high drug costs. Higher-cost plans are available to provide gap coverage, but the hole’s size is being shrunk under a provision of the Affordable Care Act (ACA), and the gap is set to disappear in 2020.

The coverage gap begins after you and your drug plan have spent a certain amount for covered drugs. Next year the gap starts at $2,960 (up from $2,850 this year) and ends after you’ve spent $4,700 (up from $4,550 this year).

Seniors who enter the gap also get discounts on brand-name and generic drugs, and those breaks will be larger next year. Enrollees will pay 45% of the cost of brand-name drugs in 2015 (down from 47.5% this year) and 65% of the cost of generic drugs (down from 72% this year).

Can the recent good news on lower healthcare costs continue indefinitely? Medicare spending reflects our overall health economy, and the big picture is that the United States does not have effective controls on spending growth. Healthcare outlays have quadrupled since the 1950s as a percentage of gross domestic product, to 17.7% in 2011. What’s more, our spending is more than double any other major industrialized nation, according to the Organization for Economic Cooperation and Development.

Still, our per capita Medicare spending growth averaged 2% from 2009 to 2012, and it was nearly zero last year.

The Obama administration often points to the ACA, but outside experts are more skeptical. Research published this month by Health Affairs, a leading health policy and research and journal, credited 70% of the recent spending slowdown to the slack economy. Absent further changes in the structure of our healthcare system, the researchers expect higher healthcare inflation to resume as the economy improves.

“A significant amount of it is due to the economic slowdown,” says Eyles, “although we know that changes in the way providers deliver care, and how providers are being paid are also making a difference in the overall rate of growth.”

MONEY Savings

Here’s the Magic Amount You Need to Retire Happy

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George Adamson—Getty Images/The Bridgeman Art Library

A financial planner estimates how much money you need to save — and shares 5 keys to a successful retirement.

Most people would say money can buy you happiness in retirement, but financial planner Wes Moss wanted the details: Just how much money does it take to retire happily? And is there a point of diminishing happiness returns on the size of a nest egg?

Moss surveyed 1,350 retirees about net worth and income, assets and home equity. But he wasn’t hunting for the number of dollars it takes to live — rather, he wanted to understand how money correlates to retirees’ levels of happiness. To that end, he posed a series of detailed questions about their lives: where they shop, what kinds of cars they drive, how many vacations they take annually, their family lives and the activities they pursue. Then he associated their levels of reported happiness with their financial condition.

Here’s what he found: Most people can be happy in retirement with savings of about $500,000. A higher number can buy more happiness, but only to a point.

“There is a plateau-ing effect above that number, and the higher you get the rate of increase gets smaller,” Moss says. “I call it diminishing marginal happiness.”

Moss, managing partner and chief investment strategist at Capital Investment Advisors in Atlanta, explores the correlation of wealth and retirement happiness in his new book, You Can Retire Sooner Than You Think: The 5 Money Secrets of the Happiest Retirees. Moss is a registered investment adviser who previously worked for a big Wall Street firm.

His five secrets include a careful determination of what you actually want to spend money on in retirement and how you’ll save to meet your goals; paying off your mortgage early; developing diverse sources of income in retirement; and learning how to invest for income.

Here’s an edited transcript of five questions I asked Moss about his findings in a recent interview.

Q. Who are the happy retirees, and what makes them happy?

It’s not how much you save but how much you save in relation to what you need. When I worked on Wall Street, what we always were trying to breed is an expectation with clients that they need to spend more and more — you need an infinite amount because you will need to spend just as much or more in retirement. That’s what the mutual fund industry and Wall Street preach.

But we found that for most people, the amount of happiness correlates to median savings around $500,000. There are some increases above that number, but it’s a slower rate of incremental gains. So think of $500,000 as a financial bare minimum.

Q. Are the happy retirees making adjustments to their spending in order to be comfortable?

The survey data doesn’t tell me that, but my real-life experiences with clients suggest that people take a realistic look at how much income they’ll have — perhaps they have two or three thousand in Social Security income, and they can take another $3,000 monthly from their investments. They look at that and decide that they can live a good life on $6,000 a month.

Q. What makes retirees unhappy — and how can people avoid winding up there?

Many of the unhappy retirees are still paying mortgages, with no light at the end of the tunnel. Another thing I see a lot is people who don’t take care of big expenses before they retire – they wait to redo the kitchen until they retire because they think they’ll have time to deal with it then. But it’s much better to do these things while you’re working and still have cash flow.

Another mistake is people who don’t have enough core pursuits in retirement. They were too myopic and entrenched in making money and working before, and now they’re not as busy as they need to be. They are blindsided by free time.

Q. I’ve heard both sides of the mortgage-in-retirement argument — some argue it’s better to invest that money rather than use it to pay off a mortgage. Sounds like you’re a firm believer in getting rid of them.

If you have resources in a taxable account, I’d rather see a client use that to pay off the mortgage in one fell swoop — or, just accelerate your monthly payments by $200 to $400, which can shave a full decade off of a mortgage. I know people will argue that they can get a higher return putting that money in stocks, but I’ve seen a lot of periods in my career where all the market did was crash and then recover. Most Americans don’t get that average 9% stock market return over time, so a safer bet is to save that guaranteed 4% or 5% that a mortgage costs. Also, with older clients, what I see is an enormous level of contentment among people who have figured out how to get rid of their mortgages.

Q. Your book lays out a model for retiring early — or earlier than you think you could. That runs counter to much of the talk we hear today about longevity and the need for everyone to work longer. Why do you think people can retire earlier than planned — and how do you define the word “early”?

I define it as being in a position retire at 60 or 62. And there is a group of people where it’s obvious they have the financial means to retire — but the concept is foreign and they don’t have a handle on their finances. I’ve had many client meetings with couples where one spouse thinks they can retire, and the other doesn’t — but when you add up all their different accounts, you see that they have $750,000, along with pensions and Social Security. These are people who definitely could retire if they choose.

MONEY Pensions

Why Some Private-Sector Workers Are Facing Big Pension Cuts

Multi-employer pensions are in financial trouble—and any solution is likely to mean workers end up with smaller retirement benefits.

The window is closing on our last best chance to protect the pensions of 10 million American workers and retirees.

These workers are in multi-employer plans—traditional defined benefit pension plans jointly funded by groups of employers in industries like construction, trucking, mining and food retailing. Although many of the country’s 1,400 multi-employer plans are healthy, 1.5 million workers are in plans that are failing. And that threatens the broader system.

Losses during the crash of 2008-2009 left those plans badly underfunded. In many cases, the problems have been compounded by declining employment in their industries, which leaves sponsors with a growing proportion of retirees to current workers paying into the pensions funds.

The plans are insured by the Pension Benefit Guarantee Corporation, the federally sponsored agency funded through insurance premiums paid by plan sponsors. But the level of PBGC protection for workers in multi-employer plans is—by design—much lower than for single-employer plans. Multi-employer plans historically have been stable, so policymakers set premiums, and benefits, at a lower level than for single-employer pension plans.

But the PBGC projects that about 200 plans will become insolvent over the next two decades. If it has to fund benefits for those plans, many beneficiaries will suffer. That’s because the maximum benefit for these retirees is much lower than for those in single-employer plans—it’s capped this year at $12,870 for a worker retiring at age 65, compared with $59,318 for workers in single-employer plans. PBGC estimates that multi-employer workers with 30 years or more of service would lose an average of $4,000 in annual benefits.

Policymakers, legislators, business and labor groups have debated the issue for two years. Now we’re at a key turning point, argues Josh Gotbaum, the PBGC’s director. “If Congress doesn’t act this year, it is very likely that major plans will fail and the multi-employer system will collapse,” he told me in an interview this week.

It’s not that plans will run out of money this year or next, Gotbaum says. Instead, he says employers could start scrambling off a sinking ship, accelerating pressures on the system. Under the Employee Retirement Income Security Act (ERISA), one employer departing a multi-employer plan must make an exit contribution capped at two years of annual contributions. With a mass exodus, each employer pays a full proportionate share of the plan’s underfunded liability.

“We have a prisoner’s dilemma going on,” Gotbaum says. “Employers are looking at the other employers and thinking that they want to beat the rush—they don’t want to be the last one standing.”

Fixes would require revisions to ERISA, which governs private sector pension plans. Gotbaum says that needs to happen this year because “virtually all the congressional talent that has focused on this issue for the last year is leaving.”

Representative John Kline (R-Minnesota), chairman of the House Education and Workforce Committee, will rotate out of that position next year. Two others aren’t seeking re-election—House Ways and Means Chairman David Camp (R-Michigan) and Senate Health, Education, Labor and Pensions Committee Chairman Tom Harkin (D-Iowa).

If Congress doesn’t act this year, employers may be encouraged to quit the system, Gotbaum says, because they’ll conclude that change will be postponed until after the 2016 presidential elections.

Gotbaum hopes a reform package will include a mix of higher multi-employer insurance premiums, to beef up the agency’s ability to backstop plans that fail, and ERISA reforms that help other plans restructure so they can remain solvent. But he won’t be on the scene to help craft a solution; he leaves next month after four years at the PBGC to return to the private sector.

A coalition of employers and labor unions has been pushing for changes that would let healthy plans adopt more flexible plan designs aimed at keeping them in the system. But one controversial element has drawn strong pushback from pension advocates; it would give plan trustees wide latitude to cut the benefits of current retirees—albeit at levels slightly higher than PBGC guarantees.

Gotbaum is optimistic that an agreement could be forged after this year’s midterm elections. “Congress is taking this seriously,” he says. “It’s been difficult for them to reach agreement, but they clearly are trying. Democrats and Republicans both know something needs to be done.”

Related links:

 

MONEY Social Security

The 5 Key Things to Know About Social Security and Medicare

No need to panic, but both Social Security and Medicare face long-term financial challenges, this year's trustees report finds. There's still time to make fixes.

If you worry about the future of Social Security and Medicare, this is the week to get answers to your questions. The most authoritative annual reports on the long-term health of both programs were issued on Monday, and while the news was mixed, there are reasons to be encouraged about our two most important retirement programs.

Under the Social Security Act, a board of trustees reports annually to Congress on the status and long-term financial prospects of Social Security and Medicare. The reports are prepared by the professional actuaries who have made careers out of managing the numbers and are signed by three cabinet secretaries, the commissioner of Social Security and two publicly appointed trustees—one Republican, one Democrat.

Here are my five key takeaways from this year’s final word on our social insurance programs.

* Imminent collapse nowhere in sight. Social Security and Medicare face long-term financial problems, but there’s no cause for panic about either program.

Social Security’s retirement program is fully funded for the next 19 years. It has $2.8 trillion in reserves, and that figure will rise to $2.9 trillion in 2019, when the surplus funds will begin depleting rapidly as baby boomer retirements accelerate. Although you’ll often hear that Social Security spends more annually than it receives in taxes, the program actually took in $32 billion more than it spent last year, when interest on bond holdings and taxation of benefits are included.

The retirement trust fund will be depleted in 2034, at which point current revenue would be sufficient to pay only 77% of benefits—unless Congress enacts reforms to put the program back into long-term balance.

Medicare’s financial outlook improved a bit compared with last year’s report because of continued low healthcare inflation. The program’s Hospital Insurance trust fund – which finances Medicare Part A— is projected to run dry in 2030, four years later than last year’s forecast and 13 years later than forecast before passage of the Affordable Care Act (ACA).

In 2030, the hospital fund would have enough resources to cover just 85 percent of its expenditures. (Medicare’s other parts—outpatient and prescription drug services—are funded through beneficiary premiums and general revenue, so they don’t have trust funds at risk of running dry.)

Could healthcare inflation take off again? Certainly. Some analysts—and the White House – chalk up the recent cost-containment success to features of the ACA. But clouds on the horizon include higher utilization of healthcare, new medical technology and a doubling of enrollment by 2030 as boomers age.

* Medicare is delivering good pocketbook news. The monthly premium for Medicare Part B (outpatient services) is forecast to stay put at $104.90 for the third consecutive year in 2015. That means the premium won’t take a larger bite out of Social Security checks, and that retirees likely will be able to keep most— if not all—of the expected 1.5% cost-of-living adjustment (COLA) in benefits projected for next year. (Final numbers on Part B premiums and the Social Security COLA won’t be announced until this fall.)

* Social Security Disability Insurance (SSDI) requires immediate attention. The program faces a severe imbalance, and only has resources to pay full benefits only until 2016; if a fix isn’t implemented soon, benefits would be cut by 20 percent for nine million disabled people.

That can be avoided through a reallocation of a small portion of payroll tax revenues from the retirement to the disability program – just enough to keep SSDI going through 2033 while longer-range fixes to both programs are considered. Reallocations have been made at least six times in the past. Let’s get it done.

*Aging Americans aren’t gobbling up the economic pie. Social Security outlays equalled 4.9% of gross domestic product last year and will rise to 6.2% in 2035, when the last baby boomer is retired. Medicare accounted for 3.5% of GDP in 2013; it will be 3.7% of GDP in 2020 and 6.9% in 2088.

* Kicking the can is costly. There’s still time for reasonable fixes for Social Security and Medicare, but the fixes get tougher as we get closer to exhausting the programs’ trust funds. Social Security will need new revenue. Public opinion polls show solid support for gradually eliminating the cap on income subject to payroll taxes (currently $117,000) and gradually raising payroll tax rates on employers and workers, to 7.2% from 6.2%. There’s also strong public support for bolstering benefits for low-income households and beefing up COLAs.

Medicare spending can be reduced without resorting to drastic reforms such as vouchers or higher eligibility ages. Billions could be saved by letting the federal government negotiate discounts on prescription drugs, and stepping up fraud prevention efforts. And an investigative series published earlier this summer by the Center for Public Integrity uncovered needed reforms of the Medicare Advantage program, pointing to “tens of billions of dollars in overcharges and other suspect billings.”

Your move, Congress.

Related stories:

How to Fix Social Security—and What It Will Mean for Your Taxes

Why Taxing the Rich Is the Wrong Way to Fix Social Security

3 Smart Fixes for Social Security and Medicare

 

MONEY IRAs

This Simple Move Can Boost Your Savings by Thousands of Dollars

Stack of Money
iStock

Last-minute IRA savers and those who keep their money in cash are paying a procrastination penalty.

Individual Retirement Account contributions are getting larger—an encouraging sign of a recovering economy and improved habits among retirement savers.

But there is an “I” in IRA for a reason: investors are in charge of managing their accounts. And recent research by Vanguard finds that many of us are leaving returns on the table due to an all-too-human fault: procrastination in the timing of our contributions.

IRA savers can make contributions anytime from Jan. 1 of a tax year up until the tax-filing deadline the following April. But Vanguard’s analysis found that more than double the amount of contributions is made at the deadline than at the first opportunity—and that last-minute contributions dwarf the amounts contributed throughout the year. Fidelity Investments reports similar data—for the 2013 tax year, 70% of total IRA contributions came in during tax season.

Some IRA investors no doubt wait until the tax deadline in order to determine the most tax-efficient level of contribution; others may have cash-flow reasons, says Colleen Jaconetti, a senior investment analyst in the Vanguard Investment Strategy Group. “Some people don’t have the cash available during the year to make contributions, or they wait until they get their year-end bonus to fund their accounts.”

Nonetheless, procrastination has its costs. Vanguard calculates that investors who wait until the last minute lose out on a full year’s worth of tax-advantaged compounded growth—and that gets expensive over a lifetime of saving. Assuming an investor contributes the maximum $5,500 annually for 30 years ($6,500 for those over age 50), and earns 4% after inflation, procrastinators will wind up with account balances $15,500 lower than someone who contributes as early as possible in a tax year.

But for many last-minute savers, even more money is left on the table. Among savers who made last-minute contributions for the 2013 tax year just ahead of the tax-filing deadline, 21% of the contributions went into money market funds, likely because they were not prepared to make investing decisions. When Vanguard looked at those hasty money market contributions for the 2012 tax year, two-thirds of those funds were still sitting in money market funds four months later.

“They’re doing a great thing by contributing, and some people do go back to get those dollars invested,” Jaconetti says. “But with money market funds yielding little to nothing, these temporary decisions are turning into ill-advised longer-term investment choices.”

The Vanguard research comes against a backdrop of general improvement in IRA contributions. Fidelity reported on Wednesday that average contributions for tax year 2013 reached $4,150, a 5.7% increase from tax year 2012 and an all-time high. The average balance at Fidelity was up nearly 10% year-over-year to $89,100, a gain that was fueled mainly by strong market returns.

Fidelity says older IRA savers racked up the largest percentage increases in savings last year: investors aged 50 to 59 increased their contributions by 9.8%, for example—numbers that likely reflect savers trying to catch up on nest egg contributions as retirement approaches. But young savers showed strong increases in savings rates, too: 7.7% for savers aged 30-39, and 7.3% for those aged 40-49.

Users of Roth IRAs made larger contributions than owners of traditional IRAs, Fidelity found. Average Roth contributions were higher than for traditional IRAs across most age groups, with the exception of those made by investors older than 60.

But IRA investors of all stripes apparently could stand a bit of tuning up on their contribution habits. Jaconetti suggests that some of the automation that increasingly drives 401(k) plans also can help IRA investors. She suggests that IRA savers set up regular automatic monthly contributions, and establish a default investment that gets at least some level of equity exposure from the start, such as a balanced fund or target date fund.

“It’s understandable that people are deadline-oriented,” Jaconetti says. “But with these behaviors, they could be leaving returns on the table.”

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MONEY 401(k)s

Why Your 401(k) Won’t Offer This Promising Retirement Income Option

More investors are flocking to deferred annuities, which kick in guaranteed income when you're old. But 401(k) plans aren't buying.

Longevity risk—that is, the risk of outliving your retirement savings—is among retirees’ biggest worries these days. The Obama administration is trying to nudge employers to add a special type of annuity to their investment menus that addresses that risk. But here’s the response they’re likely to get: “Meh.”

The U.S. Treasury released rules earlier this month aimed at encouraging 401(k) plans to offer “longevity annuities”—a form of income annuity in which payouts start only after you reach an advanced age, typically 85.

Longevity annuities are a variation of a broader annuity category called deferred income annuities. DIAs let buyers pay an initial premium—or make a series of scheduled payments—and set a date to start receiving income.

Some forms of DIAs have taken off in the retail market, but longevity policies are a hard sell because of the uncertainty of ever seeing payments. And interest in annuities of any sort from 401(k) plan sponsors has been weak.

The Treasury rules aim to change that by addressing one problem with offering a DIA within tax-advantaged plans: namely, the required minimum distribution rules (RMDs). Participants in workplace plans—and individual retirement account owners—must start taking RMDs at age 70 1/2. That directly conflicts with the design of longevity annuities.

The new rules state that so long as a longevity annuity meets certain requirements, it will be deemed a “qualified longevity annuity contract” (QLAC), effectively waiving the RMD requirements, so long as the contract value doesn’t exceed 25% of the buyer’s account balance or $125,000, whichever is less. (The dollar limit will be adjusted for inflation over time.) The rules apply only to annuities that provide fixed payouts—no variable or equity-indexed annuities allowed.

But 401(k) plans just aren’t all that hot to add annuities—of any type. A survey of plans this year by Aon Hewitt, the employee benefits consulting firm, found that just 8% offer annuity options. Among those that don’t, 81% are unlikely to add them this year.

Employers cited worry about the fiduciary responsibility of picking annuity options from the hundreds offered by insurance companies. Another key reason is administrative complication should the plan decide to change record keepers, or if employees change jobs.

“Say your company adds an annuity and you decide to invest in it—but then you shift jobs to an employer without an annuity option,” says Rob Austin, Aon Hewitt’s director of retirement research. “How does the employer deal with that? Do you need to stay in your former employer’s plan until you start drawing on the annuity?”

Employees are showing interest in the topic: A survey this year by the LIMRA Secure Retirement Institute found 80% would like their plans to offer retirement income options. The big trend has been adding financial advice and managed account options, some of which allow workers to shift their portfolios to income-oriented investments at retirement, such as bonds and high-dividend stocks. Some 52% of workplace plans offered managed accounts last year, up from 29% in 2011, Aon Hewitt reports.

“The big difference is the guarantee,” says Austin. “With the annuity, you know for sure what you are going to get paid. With a managed account, the idea is, ‘Let’s plan for you to live to the 80th percentile of mortality, but there’s no guarantee you’ll get there.'”

Outside 401(k)s, the story is different. Some forms of DIAs have seen sharp growth lately as more baby boomers retire. DIA sales hit $2.2 billion in 2013, more than double the $1 billion pace set in 2012, according to LIMRA, an insurance industry research and consulting organization. Sales in the first quarter this year hit $620 billion, 55% ahead of the same period of 2013.

Three-quarters of those sales are inside IRAs, LIMRA says, since taking a distribution to buy an annuity triggers a large, unwanted income tax liability. But the action—so far—has been limited to DIAs that start payment by the time RMDs begin. The new Treasury rules could accelerate growth as retirees roll over funds from 401(k)s to IRAs.

“For some financial advisers, this will be an appealing way to do retirement income planning with a product that lets them go out past age 70 1/2 using qualified dollars,” says Joe Montminy, assistant vice president of the LIMRA Security Retirement Institute. “For wealthier investors, [shifting dollars to an annuity] is also a way to reduce overall RMD exposure.”

Could the trend spill over into workplace plans? Austin doubts it. “I just don’t hear a major thirst from plan sponsors saying this is something we should have in our plan.”

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MONEY retirement planning

Answers to 5 of Twitter’s Most-Asked Questions About Retirement

Following a recent Twitter chat, a retirement expert expands on answers to queries about Roth IRAs, Social Security and more.

The Twitterverse has questions about retirement. What’s the best way for young people to get started saving? Are target-date funds good or bad? Should we expand Social Security to help low-wage workers?

Those are just a few of the great questions I fielded during a retirement Tweet-up convened this week by my colleagues at Reuters. Since my column allows for responses beyond Twitter’s 140-character limit, today I’m expanding on answers to five questions I found especially interesting. You can view the entire chat —which included advice from personal finance gurus from Reuters and Charles Schwab—on Twitter at #ReutersRetire.

Q: What’s the best way for parents to help young adult children save for the long term? How about Roth IRAs?

Roth IRAs are no-brainers for young people. With a traditional IRA, you pay taxes at the end of the line, when you withdraw the money. With a Roth, you invest with after-tax money, and withdrawals (principal and returns) are tax-free in most situations. That’s especially beneficial for young retirement investors, since most people move into higher income-tax brackets as they get older and make more money.

Q: How would you expand Social Security? Any current proposal appealing?

This question was posed during Twitter chatter about the difficulty low-income workers face building retirement saving, and ways to make our retirement system more equitable. Expanding Social Security may fly in the face of conventional wisdom, which argues that rising longevity should dictate reductions in future benefits, not increases. But this is a case where the conventional wisdom is wrong.

An expanded Social Security system is the most logical response to our looming retirement security crisis because of its risk pooling and progressive approach to income distribution. Social Security replaces the highest percentage of pre-retirement income for workers at the low end of the wealth scale.

Several ideas are kicking around Congress. Most would raise revenue by gradually phasing out the cap on wages subject to the payroll tax ($117,000 in 2014) and raising payroll tax rates over a 20-year period. Some advocates also would like to see a surtax on annual incomes over $1 million. On the benefits side, advocates want to increase benefits across the board by 10%, recognize the value of family caregivers by awarding work credits toward Social Security benefits and adopt a more generous annual cost-of-living adjustment formula.

Q: With the myriad questions about retirement, can “live” advisers really be replaced by automated advice and data-driven programs?

Online software-driven services—so-called robo-adviser services – can’t fully replace human advice. But they address a key problem: how to deploy retirement guidance to mass audiences at a low cost. Services like Wealthfront and Betterment interact with clients online using algorithms, with low fee structures—typically 0.25% of assets under management or less.

Another variation on this theme: services that deliver advice through a combination of software and human advice, such as LearnVest. One of the most interesting tech-enabled experiments is Vanguard’s Personal Advisor Services, which provides access to a managed portfolio of Vanguard index funds and exchange-traded funds, along with portfolio management services from a human adviser.

Vanguard charges just 0.3% of assets under management for the service. The service is in test mode with a small group of clients, and only available to clients with $100,000 to invest. The minimum will be reduced when the service expands, and it should be rolled out more broadly over the next 12 to 18 months, a spokeswoman says. Given Vanguard’s huge scale, it’s a venture worth watching.

Q: What’s the final verdict on target-date funds—good or evil?

We don’t have a final verdict yet, but target-date funds (TDFs) are doing more good than evil—though they generate plenty of controversy, confusion and misunderstanding. The general idea is to reduce the risk you’re taking as retirement approaches by cutting your exposure to stocks in favor of fixed-income investments—the “glide path.” But some TDFs glide “to” your retirement date, while others glide “through it.” Experts debate which is better, but you should at least know which type of fund you own.

Many retirement investors misuse TDFs by mixing them with other funds, a recent survey found. These funds are designed as one-stop investment solutions that automatically keep your account balanced; doing otherwise will hurt your returns.

Bottom line? TDFs do more good than harm by automatically keeping millions of retirement portfolios balanced with reasonably good equity-to-fixed-income allocations. And they are the fastest-growing product in the market: Some $618 billion was invested in TDFs at the end of 2013, according to the Investment Company Institute, up from $160 billion in 2008.

Q: Anyone know what the highest Social Security income is for a retiree today versus what’s expected 30 years from now?

This year’s maximum monthly benefit at full retirement age (66) is $2,642. The Social Security Administration doesn’t have projections for future benefit levels, but the answer certainly will depend on how Congress decides to deal with the program’s long-term projected shortfalls. Solutions could include tax increases (discussed above) or higher retirement ages. Boosting the retirement age would mean a lower benefit at age 66.

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