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.

MONEY retirement income

Need Low-Risk Yield? CDs are Back in Fashion

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Retirees and other people desperate to earn interest can find respectable deals on certificates of deposit.

Getting low-risk yield has been one of the toughest challenges for retirees ever since the financial meltdown of 2008-2009. Interest rates are near zero, and many retirees are nervous about bonds out of fear that rates might jump.

All of which leaves a simple question: How about a good old-fashioned certificate of deposit?

Retirees desperate for yield can find some respectable deals on CDs. The yields may not sound sexy, but there’s no risk to principal and the Federal Deposit Insurance Corporation protects accounts up to $250,000.

There’s nothing new about the higher rates on CDs compared with bonds. Banks, especially those without extensive retail branch networks, have long offered generous rates on CDs, mostly online, as an inexpensive way to attract deposits. It’s also a way for banks to bring in retail clients who can be cross-sold other higher-margin products.

But there’s an especially compelling case to be made for CDs in the current rate environment.

“For retirees, it’s the one corner of the investment world where you can get additional return without additional risk,” says Greg McBride, chief financial analyst for Bankrate.com.

The most aggressive banks will sell you a two-year CD with an annual percentage yield (APY) of 1.25%; compare that with current two-year Treasury rates, now at about 0.48%. Three-year CDs top out at 1.45%, compared with 0.92% on a Treasury of the same duration. If you want to go longer, five-year CDs top out over 2%.

Five or 10 years ago, the high rates came mainly from smaller no-name banks, but that’s not the case now. Some of the more aggressive offers currently come from big names like Synchrony Bank (formerly GE Capital Retail Bank), Barclays and CIT Bank. Bankrate.com lets you search and compare offers.

You could get higher yields on corporate or junk bonds. But they’re risky because the available yield isn’t adequate for the credit risk you need to take, argues Sam Lee, editor of Morningstar’s ETFInvestor newsletter.

“I’d rather be in a five-year CD than a bond fund taking on more duration or credit risk,” Lee says. “If rates do rise, you can lose a whole bunch of money on long-duration bonds — maybe 10 or 20% of your principal.”

The only risk you face locking in a longer CD — five years, for example — is the lost opportunity cost of obtaining a higher rate should rates jump. Lee likes that strategy.

“The interest rate sensitivity is very low, because you can always just get out and reinvest at a higher rate,” he says. “You’ll pay a bit of a penalty, but that is more than offset by the higher rate and value of the FDIC guarantee.”

McBride isn’t convinced rates will jump substantially anytime soon. “The long-awaited rising rate environment has yet to show itself — it might happen next year, or maybe not.”

Still, you should understand CD penalties in case you do need to make a move, because the terms can vary. The most common penalties for early withdrawal on a five-year CD are 6 or 12 months’ worth of interest, says McBride. “The terms can vary widely — some are assessed just on the amount you withdraw, others on the entire investment.”

If you’re worried about opportunity cost, some of the banks offering aggressive CD rates also have attractive savings accounts that let you make a move at any time – although some require a minimum level of deposit to qualify for the best rates. For example, Synchrony will pay you 0.95%. That’s not much less than the 1.1% it pays on a one-year CD – or the 1.2% for a two-year CD, for that matter.

The other option is a step-up CD that boosts your rate if interest rates rise in return for a lower initial rate. But those aren’t easy to find right now, McBride says. “We’ll see those become more prevalent if we get into a rising rate environment.”

No matter how long you go, Lee says, the implication for retirees is clear: Use CDs for the risk-free part of your portfolio and equities for whatever portion where some risk is acceptable.

Equities should help keep your overall portfolio returns substantially above the rate of inflation. The Consumer Price Index is up 2.1% for the 12 months ended in May.

“The U.S. stock market’s expected real [after-inflation] return right now is about 4%,” he says. “The expected inflation-adjusted yield on bonds right now is close to zero.”

MONEY Aging

Americans Want to Age in Place, and Your Town Isn’t Ready

Households headed by 70-year-olds will surge 42% by 2025. Who will drive them to the store?

The graying of the American homeowner is upon us. The question is: Will communities be ready for the challenges that come with that?

The number of households headed by someone age 70 or older will surge by 42% from 2015 to 2025, according to a report on the state of housing released last month by the Joint Center for Housing Studies of Harvard University, or JCHS.

The Harvard researchers note that a majority of those households will be aging in place, not downsizing or moving to retirement communities. That will have implications for an array of support services people will need as they age.

But the housing age wave comes at a time when federal programs that provide those supports are treading water in Washington. Consider the signature federal legislation that helps fund community planning and service programs for independent aging, the Older Americans Act. The OAA supports everything from home-delivered meals to transportation and caregiver support programs—and importantly, helps communities plan for future needs as their populations get older.

States and municipalities use the federal dollars they receive via the OAA to leverage local funding. The law requires reauthorization every five years, a step that has been on hold in Congress since 2011. Funding has continued during that time, with one exception: During sequestration in March 2013, OAA programs were cut by 5%; many have since been reversed, but other cuts now appear to be permanent.

A survey last year by the National Association of Area Agencies on Aging (NAAAA), which represents local government aging service providers, found that some states had reduced nutrition programs, transportation services and caregiver support programs.

Recovery since then has been uneven, according to Sandy Markwood, chief executive officer of the NAAAA. “In some cases, states made up the differences, but many programs still are not back to pre-sequestration levels.”

But here’s the more critical point: Even if all the cuts had been restored, treading water wouldn’t be good enough in light of the challenges communities will soon face.

“From a planning perspective, putting in place things like infrastructure and transportation services takes time,” Markwood says. “We don’t have the luxury of time here.”

Indeed, aging of communities is shaping up as a signature trend as the housing industry continues its slow recovery after the crash of 2008-2009.

Young people typically drive household formation, but the Harvard study notes that millennials haven’t shown up in big numbers because of the economic headwinds they face. Real median incomes fell 8% from 2007 to 2012 among 35- to 44-year-olds, JCHS notes, and the share of 25- to 34-year-old households carrying student loan debt soared from 26% to 39%. Meanwhile, home prices have been jumping, and qualifying for mortgage loans remains difficult.

Millennials eventually will account for a bigger share of households as more marry and start having families, according to the study. But for now, boomers are the story.

The oldest boomers start turning 70 after 2015, and the number of these households will jump by 8.3 million from 2014 to 2025. Most will be staying right where they are. Mobility rates (the share of people who move each year) typically fall with age: Less than 4% of people over age 65 moved in 2013, compared with 21% of 18- to 34-year-olds and 12% for those 35 to 45.

Mobility has been on a downward trend since the 1990s, and the housing crisis accelerated the trend, according to Daniel McCue, research manager at JCHS.

Aging in place could create problems in suburbs, which are designed around driving, McCue says. “People are going to need a more distributed network of services for transportation, healthcare and shopping in the suburbs. They’ll need some way to get to services or for the services to get to them.”

There is one possible silver lining in this story: The needs of aging-in-place seniors could spur better community planning. If so, the elderly won’t be the only group that benefits.

“When you do things to make roads safer or increase public transportation, or add volunteer driver programs, that’s good for everyone in the community,” Markwood says. “It’s not a zero-sum game.”

Related story: Why Most Seniors Can’t Afford to Pay More for Medicare

Related story: The State of Senior Health Depends on Your State

MONEY Aging

Why Most Seniors Can’t Afford to Pay More for Medicare

Replacing Medicare with vouchers would push costs higher and put older Americans at risk.

Should seniors pay more for Medicare? Republicans think so; they have repeatedly called for replacing the current program with vouchers that would shift cost and risk to seniors.

There’s no doubt this is where Republicans will take us if they capture control of Congress this year, and the White House in 2016. Representative Paul Ryan, the Wisconsin Republican who chairs the House Budget Committee, advocates “premium support” reforms that would give seniors vouchers to buy private Medicare insurance policies in lieu of traditional fee-for-service Medicare.

Under the latest version of Ryan’s budget proposed in April, starting in 2024 seniors could opt to buy premium-supported private plans or stay in traditional Medicare. Ryan has argued that introducing competition will bring down costs over time, and capping the government’s costs does sound like a tempting way to address Medicare’s financial problems.

Medicare’s trustees project total annual spending will jump 78% by 2022, to $1.09 trillion. Much of that increase will be fueled by higher enrollment as the baby boom generation ages.

But premium supports would shift risk to seniors, and could effectively make traditional Medicare much more expensive by siphoning off healthier seniors to private plans. The Congressional Budget Office has estimated that this effect could boost traditional Medicare premiums 50% by 2020 compared with current projections.

Most seniors simply can’t afford to pay more. If you doubt it, check out the new interactive tool launched last month by the Henry J. Kaiser Family Foundation, one of the country’s leading healthcare research groups.

The tool analyzes the income and assets of today’s 52.4 million Medicare beneficiaries, and how their financial picture will change between now and 2030, when 80.9 million people will be covered by the program. It can compare different demographic slices of the Medicare population based on variables such as education, race, gender and marital status—and here you get a stark look at how economic inequality affects the pocketbooks of seniors.

Kaiser’s tool is based on a simulation model developed by the Urban Institute that uses population data to analyze the long-range impact on retirement and aging issues. I encourage you to test-drive the tool, but here are some highlights:

INCOME

Fifty-three percent of Medicare beneficiaries had $25,000 or less in annual income last year; half had savings below $61,400 and less than $67,700 in home equity on a per-person basis.

The income figures reflect the sharp divisions that characterize the wider U.S. population. Just 4% of seniors had income over $100,000 last year; 27% had income below $15,000 (which is just a bit higher than the average annual Social Security benefit).

Healthcare already is one of the largest expenses for seniors, most of whom are on fixed incomes. HealthView Services, which develops software for gauging healthcare costs, recently estimated that a senior retiring this year in high-cost Massachusetts would pay $7,020 in Medicare premiums alone—a number that will jump to $11,536 in 2024. And that figure doesn’t include co-pays and out-of-pocket costs for things Medicare doesn’t cover, such as dental care. It also doesn’t include costs for a catastrophic event.

“Sixty-six thousand in savings is less than the cost of one year in a nursing home,” says Tricia Neuman, senior vice-president at the foundation and director of the foundation’s Medicare policy program. “That tells us that many people on Medicare today don’t have the resources they’d need to pay for a significant health or long-term-care expense if it should arise.”

DEMOGRAPHIC DIVIDES

Neuman says she was especially surprised by the extent of the gaps in income and saving by race, ethnicity and gender. Median 2013 per capita income for white Medicare beneficiaries was $26,400, compared with $16,350 for African Americans and $13,000 for Hispanics.

Men had $25,880 in median income, compared with $21,800 for women. And married couples were better off than singles: Per capita income for married seniors in 2013 was $27,400, compared with $20,250 for divorced people, $21,050 for widows and $14,150 for those who never married.

That’s unlikely to change by 2030. “The model suggests there won’t be phenomenal changes in wealth, or that seniors will be that much more comfortable,” Neuman says.

Neuman says the data also points to continued income inequality and sharp divisions in the status of seniors. In 2030, 5% of Medicare beneficiaries will have income over $111,900, while half will have income below $28,250.

“There will always be a small share of the Medicare population with sufficient wealth and resources to absorb higher costs, but most will not be in that position,” she says. “The assumption that boomers are healthier and wealthier and that we’ll have a much rosier Medicare outlook down the road just isn’t going to happen.”

MONEY Health Care

The State of Senior Health Depends on Your State

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Reports on senior health reveal a north-south divide. Many worst-ranking states rejected Medicaid expansion.

What are the best and worst places to stay healthy as you age? For answers, take out a map and follow the Mississippi River from north to south. The healthiest people over 65 are in Minnesota, the sickest in Mississippi.

That’s among the findings of the America’s Health Rankings Senior Report released in May by the United Health Foundation. The report ranks the 50 states by assessing data covering individual behavior, the environment and communities where seniors live, local health policy and clinical care.

Minnesota took top honors for the second year in a row, ranking high for everything from the rate of annual dental visits, volunteerism, high percentage of quality nursing-home beds and low percentage of food insecurity. This year’s runners-up are Hawaii, New Hampshire, Vermont and Massachusetts. (See how your state fared here.).

The researchers base their rankings on 34 measures of health. But here’s one you won’t find in the report: state compliance with the Affordable Care Act (ACA). While the health reform law isn’t mainly about seniors, it has one important feature that can boost the health of lower-income older people: the expansion of Medicaid.

The ACA aims to expand health insurance coverage for low-income Americans through broadened Medicaid eligibility, with the federal government picking up 100% of the tab for the first three years (2014-2016) and no less than 90% after that. But when the U.S. Supreme Court affirmed the ACA’s legality in 2012, it made the Medicaid expansion optional, and 21 states have rejected the expansion for ideological or fiscal reasons.

And guess what: Most of the states with the worst senior health report cards also rejected the Medicaid expansion.

Nearly all Americans over age 65 are covered by Medicare. But the Medicaid expansion also is a key lever for improving senior health because it extends coverage to older people who haven’t yet become eligible for Medicare. That means otherwise uninsured low-income seniors are able to get medical care in the years leading up to age 65—and they are healthier when they arrive at Medicare’s doorstep.

Two studies from non-partisan reports verify this. The U.S. Government Accountability Office reported late last year that seniors who had continuous health insurance coverage in the six years before enrolling in Medicare used fewer and less costly medical services during their first six years in the program; in their first year of Medicare enrollment, they had 35% lower average total spending.

The GAO study confirmed the findings of a 2009 study report by two researchers at the Harvard Medical School. That study looked at individuals who were continuously or intermittently uninsured between age 51 and 64; these patients cost Medicare an additional $1,000 per person due mainly to complications from cardiovascular disease, diabetes and delayed surgeries for arthritis.

Fifty-two percent of Medicaid-rejecting states ranked in the study’s bottom third for senior health, including two very large states, Texas and Florida. Many of these states also can be found in a list of states with the highest rates of poverty among people over 65.

What emerges is a north-south divide on senior health. “Many states that haven’t expanded Medicaid are in the South, and there’s a clear link between socioeconomic status and health status,” says Tricia Neuman, senior vice-president at the Henry J Kaiser Family Foundation and director of the foundation’s Medicare policy program. “Insurance may not be the only answer, but it certainly is helpful.”

The United Health Foundation—a non-profit funded by the insurer UnitedHealth Groupdidn’t consider insurance coverage in its study, but it did consider poverty. Minnesota’s rate was 5.4%—well below the 9.3% national rate. Mississippi ranked dead last, with a 13.5% poverty rate.

In states that rejected the Medicaid expansion, we are witnessing a victory of politics over compassion and morality. Jonathan Gruber, an economics professor at the Massachusetts Institute of Technology and a key architect of health reform in Massachusetts and under the ACA, summed it up in an interview with HealthInsurance.org earlier this year, saying that these states “are willing to sacrifice billions of dollars of injections into their economy in order to punish poor people. It really is just almost awesome in its evilness.”

MONEY Social Security

As Social Security Cuts Take Effect, The Most Vulnerable Are Left to Cope

Cuts to Social Security have closed offices in some of the areas where they're needed most.

Until earlier this year, there was a Social Security field office in Gadsden County, Florida, in the state’s panhandle. It’s the kind of place where seniors need to get in-person help with their benefits rather than pick up a phone or go online.

“Our poverty rate is nearly double the state average, and we trail the state averages in education,” said Brenda Holt, a county commissioner. “Most of the people here don’t have computers, let alone reliable Internet access.”

Holt testified Wednesday before the U.S. Senate Special Committee on Aging, which is investigating the impact of budget cutting at the Social Security Administration over the past five years. Sixty-four field offices and more than 500 temporary mobile offices, known as contact stations, have been closed. And the SSA is reducing or eliminating a variety of in-person services that it once provided in its offices.

The SSA also has been developing a long-range strategy for delivering services. A draft document states that it will rely on the Internet and “self-service delivery”—and provide in-person services in “very limited circumstances, such as for complex transactions and to meet the needs of vulnerable populations.”

Gadsden County meets any criteria you could pick for vulnerability. But the field office in Quincy, the county seat, was closed with just a few weeks’ notice in March, Holt said. The nearest office is 30 miles away in Tallahassee—reachable only by car or a crowded shuttle bus that runs once a day in each direction.

The Senate committee’s investigation found SSA’s process for office consolidation wanting for clear criteria, transparency and community feedback. Only after persistent objections by local officials did the SSA offer to set up a videoconferencing station in a local library that connects seniors to representatives in its Tallahassee office.

“It’s deeply frustrated and angered our community,” said Holt. “Many of our residents live in a financial environment where they make choices between medications and food to feed their families. Problems with Social Security benefits can have a catastrophic effect on families.”

The SSA’s workload is rising as baby boomers retire; the number of claims in fiscal 2013 was 27 percent higher than in 2007. Yet the agency has 11,000 fewer workers than it did three years ago, and hiring freezes have led to uneven staffing in offices.

The SSA has received less than its budget request in 14 of the last 16 years. In fiscal 2012, it operated with 88% of the amount requested ($11.4 billion). The budget was restored somewhat in fiscal 2014 to $11.7 billion. And President Barack Obama’s 2015 budget request is $12 billion.

But service still suffers. The National Council of Social Security Management Associations reports that field office wait time is 30% longer than in 2012, and wait times and busy rates on the agency’s toll-free 800 number have doubled.

The SSA’s plan to save $70 million a year by replacing annual paper benefit statements with electronic access also has been a misstep, at least in the short run. Paper statements were suspended in 2011, but just 6 percent of all workers have signed up for online access, in some cases because of a lack of computer access or literacy but also because of sign-up difficulties related to the website’s complex anti-fraud systems.

In April the agency backtracked, announcing it will resume mailings of paper statements this September at five-year intervals to workers who have not signed up to view their statements online. (You can create an online account here.)

Wednesday’s hearing shed much-needed light on the customer service squeeze at SSA, though it would have been good to hear legislators acknowledge that Congress had no business cutting the SSA budget in the first place. The agency is funded by the same dedicated stream (payroll taxes) that funds benefits, and its administrative costs are low, 1.4% of all outlays. The SSA is funded by Americans’ tax dollars and exists to provide customer service to all Americans.

Nancy Berryhill, the SSA’s deputy commissioner for operations, did her best at the hearing to defend the agency’s efforts to cope. “It’s my job to balance service across nation—these are difficult times.”

Still, she conceded that there’s room for improvement. “We need to get more input from the community,” she said, speaking about the events in Gadsden County. “Adding the video service made a difference after the fact, but we need to be more thoughtful in the future.”

MONEY Social Security

When to Take Social Security? Your 401(k) Plan May Know Best

New claiming tools can help you make the right choice. Adding them to your 401(k) withdrawal strategy may be a game-changer.

Deciding when to file for Social Security is no simple task, and most Americans don’t handle it well. But increasingly, help is available from an unexpected source: your employer.

The nation’s largest independent investment advisory firm is rolling out a service today that walks 401(k) plan participants through their Social Security claiming options, with the aim of helping them maximize benefits. Financial Engines, which works with company retirement plans, will show participants how to integrate their Social Security income plan with drawdown from retirement savings. The service includes an online tool and optional one-on-one guidance from advisers.

This isn’t the first service of its type, but Financial Engines’ large presence in workplace plans means the service will be available immediately to 9 million 401(k) savers. Meanwhile, a more limited free version of the Social Security claiming tool—lacking integration and one-on-one advice—is available on the company’s website.

Integrating robust Social Security planning tools into 401(k) plans is a positive development. Social Security is the most important retirement benefit for most Americans, but most of us leave big dollars on the table in lifetime income by failing to pick the optimal filing strategy.

“Coordinating 401(k) savings with Social Security is a big part of the retirement planning puzzle,” says Brooks Herman, head of data and research at BrightScope, which ranks and analyzes 401(k) plans. “More companies will be moving into this space—there’s a real need for robust tools.”

Timing is the key issue in Social Security claiming decisions. Benefits are calculated using a formula called the primary insurance amount, or PIA. Claimants who wait to start Social Security until their full retirement age (currently 66) receive 100% of PIA; taking benefits at 62, the first year of eligibility, gets them 75% of PIA. By waiting until age 70 (the maximum year for delayed filing credits), they’ll receive 132% of the PIA. And those benefits are enhanced by an annual cost-of-living adjustment, which is added in for years of delayed filing.

Filing later means higher annual income for life, which can be a great hedge against the risk of running out of money in old age. Couples can boost their combined benefits further by executing a file-and-suspend strategy.

“It’s a screamingly good deal,” says Christopher Jones, Financial Engines’ chief investment officer. “There’s a 6% to 8% increase in payout for every year you defer up to age 70—that’s a real rate of return guaranteed by the federal government. Very few investments out there can match it.”

Yet 40% of Americans file at age 62, and another 40% file sometime before their full retirement age, according to Social Security Administration data. Filing early isn’t always the wrong move; it can make sense if you’re in poor health and don’t expect to live long, or if you simply need the money. But studies have shown that early claiming is most often tied to incorrect expectations about longevity and misunderstandings about the risk that Social Security will run out of money and not be able to pay benefits.

The public already has access to some solid Social Security claiming decision tools. AARP, T. Rowe Price and the Social Security Administration offer free tools, and SocialSecuritySolutions.com can help you out for a small fee. But the workplace is where the rubber most often hits the road when it comes to retirement planning.

GuidedChoice, which competes with Financial Engines in the 401(k) advisory market, already has a Social Security optimization feature coupled with one-on-one advice. Morningstar, another player in the field, doesn’t offer Social Security optimization yet but plans to add it, a spokeswoman says.

Financial Engines’ offering begins with a projection of likely nest egg size at retirement, followed by an illustration of how savings can be converted to income-oriented investments that generate income to meet living expenses while waiting for Social Security to begin—and how the strategy results in higher lifetime income.

The illustration aims to help people get over a key psychological hurdle, Jones says. “Retirees are reluctant to spend all of their savings, or even a large fraction up front,” he says. “They see their accumulated balances as a safety net, so they’re reluctant to spend that down too quickly.”

So, how much is it worth to optimize your benefits? Financial Engines has been testing its new service over the past three months with a few large corporate clients; the median amount of additional benefits found for a typical married couple over the course of their retirement has been well over $100,000.

A screamingly good deal, indeed.

MONEY Social Security

Surprise! Even Wealthy Retirees Live On Social Security and Pensions

Older Americans with six-figure portfolios rely on old-fashioned programs for half their income.

Where do affluent retirees get their income? Portfolios invested in stocks and bonds, you might think—but you’d be wrong. Turns out many are living mainly on Social Security and good old pensions.

That’s the surprising finding of new research from a surprising source: Vanguard, a leading provider of retirement saving products like individual retirement accounts and 401(k)s. Vanguard studied the income sources and wealth holdings of more than 2,600 older households (ages 60-79) with at least $100,000 in retirement savings. The respondents’ median income was $69,500, with median financial assets of $395,000. (The value of housing was excluded.)

The researchers were looking for answers to a mysterious question about the behavior of wealthier retirement account owners: Why do few of them draw down their savings? They found that nearly half the aggregate wealth of these households comes from the two mothers of all guaranteed income programs, Social Security (28%) and traditional defined-benefit pensions (20%).

The median annual income for these households is $22,000 from Social Security, with an additional $20,000 from pensions. Tax-deferred retirement accounts came in third among those who have them, at $13,000 (11%).

“Only a small number of the people who have 401(k)s and IRAs are really relying on them as a regular source of income,” said Steve Utkus, director of the Vanguard Center for Retirement Research. “There’s a lot more income from pensions than we expected,” he adds.

That last finding may seem surprising, given all the publicity about shrinkage of defined-benefit pensions. Although most state and local government workers still have pensions, only a third of private-sector workers hold a traditional pension, down from 88% in 1975, according to the National Institute on Retirement Security. And NIRS data points to a continued slide in the years ahead.

“Will this look different 10 years from now—will we have less pension income and more from retirement savings accounts? I think so,” Utkus says.

Another interesting finding: 29% of affluent retirees get some income from work, with a median income of $24,600. And the rate of labor force participation was even higher—40%— among households more reliant on retirement accounts.

“That’s only going to jump dramatically over the next few years,” Utkus says. “All the surveys show there’s a real demand for work as a structure to life. People say they can use the money, or they want to work to get social interaction.”

The findings are all the more striking because the big buzz in the retirement industry these days is about how to generate income from nest eggs. That includes creation of income-oriented portfolios, systematic drawdown plans and annuity products that act as do-it-yourself pensions.

Yet few retirement account holders actually are tapping them for income. The Investment Company Institute reports that just 3.5% of all participants in 401(k) plans took withdrawals in 2013. That figure includes current workers as well as retirees; the numbers are higher when IRAs are included, since those accounts include many rollovers from workplace plans by retired workers. With that wider lens, 20% of younger retired households (ages 60-69) take withdrawals, according to a study for the National Bureau of Economic Research and the Social Security Administration’s Retirement Research Consortium.

The income annuity market has been especially slow to take off. One option is an immediate annuity, where you make a single payment at the point of retirement or later to an insurance company and start getting a monthly check; the other is a deferred annuity, which lets you pay premiums over time entitling them to future regular income in retirement.

Deferred annuity sales doubled in 2013, to about $2 billion, according to LIMRA, the insurance industry research and consulting group. But that’s still a drop in the bucket of the broader retirement products market. And the Vanguard survey found that just 5% of investors surveyed held annuity contracts.

“The theme of translating retirement balances into income streams is emerging very slowly,” Utkus says.

The Vanguard study also underscores the importance of smart Social Security claiming decisions, especially delayed filing. “There’s been a sea change over the past year,” Utkus says, with more people recognizing that delayed filing is one of the best ways to boost guaranteed income in retirement. Vanguard is “actively discussing” adding Social Security advice to the services it offers investors, he says.

 

 

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