MONEY IRAs

The Extreme IRA Mistake You May Be Making

A new study reveals that many savers have crazy retirement portfolios. This four-step plan will keep you from going to extremes with your IRA.

When did you last pay attention to how your IRA is invested? It’s time to take a close look. Nearly two out of three IRA owners have extreme stock and bond allocations, a new study by the Employee Benefit Research Institute (EBRI) found. In 2010 and 2012, 33% of IRA savers had no money in stocks, while 23% were 100% in equities.

Many young savers and pre-retirees have portfolios that are either too cautious or too risky: 41% of 25- to 44-year-olds have 0% of their IRAs in stocks, while 21% of 55- to 65-year-olds are 100% in stocks.

An all-bond or all-stock IRA may be just what you want, of course. Perhaps you can’t tolerate the ups and downs of the stock market or you think you can handle 100% equities (more on that later). Or maybe your IRA is part of a larger portfolio.

But chances are, you ended up with an out-of-whack allocation because you left your IRA alone. “It seems likely many investors aren’t investing the right way for their goals, whether out of inertia or procrastination,” says EBRI senior research associate Craig Copeland. An earlier study by the Investment Company Institute found that less than 11% of traditional IRA investors moved money in their accounts in any of the five years ending in 2012.

To keep a closer tab on how your retirement funds are invested, take these four steps.

See where you stand. Looking at everything you have stashed in your IRA, 401(k), and taxable accounts (don’t forget your spouse’s plans), tally up your holdings by asset class—large-company stocks, short-term bonds, and the like. You’ll probably find that the bull market of the past five years has shifted your allocation dramatically. If you held 60% stocks and 40% bonds in 2009 and let your money ride, your current mix may be closer to 75% stocks and 25% bonds.

Get a grip on your risks. An extreme allocation—or a more extreme one than you planned—can put your retirement at risk. Hunkering down in fixed income means missing out on years of growth. Putting 100% in stocks could backfire if equities plunge just as you retire—what happened to many older 401(k) investors during the 2008–09 market crash.

Reset your target. If you also have a 401(k), your plan likely has an asset-allocation tool that can help you settle on a new mix, and you may find that you need to make big changes. That’s especially true for pre-retirees, who should be gradually reducing stocks, says George Papadopoulos, a financial planner in Novi, Mich.  A typical allocation for that age group is 60% stocks and 40% bonds. As you actually move into retirement, it could be 50/50.

Make the shift now. If moving a large amount of money in or out of stocks or bonds leaves you nervous, you may be tempted to do it gradually. But especially in tax-sheltered accounts, it’s best to fix your mistake quickly. (In taxable accounts you may want to add new money instead to avoid incurring taxable gains.) “If you’re someone who’s a procrastinator, you may never get around to rebalancing,” says Boca Raton, Fla., financial planner Mari Adam. And you don’t want a market downturn to do your rebalancing for you.

Get more IRA answers in the Ultimate Retirement Guide:
What’s the Difference Between a Traditional and a Roth IRA?
How Should I Invest My IRA Money?
How Will My IRA Withdrawals Be Taxed in Retirement?

MONEY stocks

Your 3 Best Investing Strategies for 2015

Trophy with money in it
Travis Rathbone—Prop Styling by Megumi Emoto

Racking up big investing victories over the past six years was easy. Now, though, the going looks to be getting tougher. These three strategies will help you stay on the path to your goals.

There’s nothing like an extended bull market to make you feel like a winner — and that’s probably just how you felt coming into the start of this year.

Sure, the recent wild swings in the stock market may have you feeling a bit more cautious. Still, even now, the Standard & Poor’s 500 stock index has returned more than 200% since the March 2009 market bottom, while and bonds have posted a respectable 34% gain.

The question is, will the winning streak continue?

Should it persist through the current bout of volatility, the stock market rally will be entering its seventh year, making it one of the longest ever; at some point a bear will stop the party. Meanwhile, the Federal Reserve is signaling the end to its program of holding down interest rates and thus encouraging risk taking. And there’s zero chance that Congress will add further fiscal stimulus. In short, the post-crisis investing era—when market performance was largely driven by Washington policy and Fed ­intervention—is over. “As the global risks have receded,” says Jeffrey Kleintop, chief global investment strategist at Charles Schwab, “the focus is going back to earnings and other fundamentals.”

The stage is set for a reversion to “normal,” but as you’ll see, it’s a normal that lacks support for high future returns. For you, that means a balancing act. If you don’t want to take on more risk, you’ll have to accept the probability of lower returns. Following these three guidelines will help you maintain the right risk/reward balance and choose the right investments for the “new” normal.

1) Keep U.S. Stocks As Your Core Holding…

Stocks are expensive. The average stock in the S&P 500 is trading at a price of 16 times this year’s estimated earnings, about 30% higher than the long-run average. A more conservative valuation gauge developed by Yale finance professor Robert Shiller that compares prices with longer-term earnings shows that stocks are trading at more than 50% above their average.

“Given current high valuations, the returns for stocks are likely to be lower over the next 10 years,” says Vanguard senior economist Roger Aliaga-Díaz. He expects annual gains to average between 5% and 8%, compared with the historical average of 10%. Shiller’s numbers suggest even lower returns over the next decade.

That doesn’t mean you should give up on U.S. stocks. They remain your best shot at staying ahead of inflation, especially today, when what you can expect from a bond portfolio is, well, not much. “Stock returns may be lower,” says Aliaga-Díaz, “but bond returns will be much less, so the relative advantage of stocks will be the same.” And the U.S. economy, though far from peak performance, is the healthiest big player on the global field.

Your best strategy: Now is a particularly important time to make sure your stock allocation is matched to your time horizon. “The worst outcome for older investors would be a bear market just as you move into retirement,” says William Bernstein, an adviser and author of The Investor’s Manifesto. A traditional asset mix for someone in his fifties is the classic 60% stock/40% bond split, with a shift to 50%/50% by retirement. If your allocation was set for a 35-year-old and you’re 52, update it before the market does.

On the other hand, if you’re in your twenties and thirties, you should be far less worried about today’s prices. Hold 70% to 80% of your portfolio in equities. The power of compounding a dollar invested over 30 to 40 years is hard to overstate. And you’ll ride through many market cycles during your career, which will give you chances to buy stocks when they’re inexpensive.

2) …But Spread Your Money Widely

With many overseas economies barely out of recession or dragged down by geopolitical crises, international equity markets have been trading at low valuations. And some market watchers are expecting a rebound over the next few years. “Central banks in Europe, China, and Japan are making fiscal policy changes that are likely to boost global growth,” says Schwab’s Klein­- top. Oil prices, which have fallen 40% in recent months, may boost some markets as consumers spend less on fuel and step up discretionary buying.

But foreign stocks aren’t uniformly bargains. The slowdown in China’s economic growth threatens the economies of the countries that supply it with natural resources. Japan’s stimulus program to date has had mixed success, and the reason to expect stimulus in Europe is that policymakers are again worried about deflation.

Your best strategy: Spread your money widely. The typical investor should hold 20% to 30% of his stock allocation in foreign equities, including 5% in emerging markets, says Bernstein. Many core overseas stock funds, such as those in your 401(k), invest mainly in developed markets, so you may need to opt for a separate emerging-markets offering—you can find excellent choices on our ­MONEY 50 list of recommended mutual and exchange-traded funds. For an all-in-one fund, you could opt for Vanguard Total International Stock Index VANGUARD TOTAL INTL STOCK INDEX FD VGTSX -0.254% , which invests 20% of its assets in emerging markets.

3) Hold Bonds for Safety, Not for Income

Fixed-income investors have few options right now. Today’s rock-bottom interest rates are expected to move a bit higher, which may ding bond fund returns. (Bond rates and prices move in opposite directions.) Yet over the long run, intermediate-term rates are likely to remain below their historical average of 5%. If you want higher income, your only alternative is to venture into riskier investments.

Your best strategy: If you don’t want to take risks outside your stock portfolio, then accept that the role of your bond funds is to provide safety, not spending money. “After years of relative calm, you can expect volatility to return to the stock market—and higher-quality bonds offer your best hedge against stock losses,” says Russ Koesterich, chief investment strategist at BlackRock. Stick with mutual funds and ETFs that hold either investment-grade, or the highest-rated junk bonds. Don’t rely solely on government issues. Corporate bonds will give you a little more yield.

You may be tempted to hunker down in a short-term bond fund, which in theory will hold up best if interest rates rise. But this is one corner of the market that hasn’t returned to normal. Short-term bonds are sensitive to moves by the Federal Reserve to push up rates. The Fed has less ability to set long-term rates, and demand for long-term Treasuries is strong, which will keep downward pressure on the rates those bonds pay. So an intermediate-term bond fund that today yields about 2.25% is a reasonable compromise. Sometimes in investing, winning means not losing.

Read next:
How 2% Yields Explain the World—and Why Rates Have Stayed So Low for So Long

 

MONEY best of 2014

6 New Ideas That Could Help You Retire Better

Lightbulb in a nest
MONEY (photo illustration)—Getty Images (2)

A great new retirement account, the case for an overlooked workplace savings plan, a push to make your town more retiree-friendly, and more good news from 2014.

Every year, there are innovators who come up with fresh solutions to nagging problems. Companies roll out new products or services, or improve on old ones. Researchers propose better theories to explain the world. Or stuff that’s been flying under the radar finally captivates a wide audience. For MONEY’s annual Best New Ideas list, our writers searched the world of money for the most compelling products, strategies, and insights of 2014. To make the list, these ideas—which cover the world of investing, technology, health care, real estate, college, and more—have to be more than novel. They have to help you save money, make money, or improve the way you spend it, like these six retirement innovations.

Best Kick-Start for Newbies: The MyRA

Half of all workers—and three-quarters of part-timers—don’t have access to an employer-sponsored retirement plan like a 401(k). The new MyRA, highlighted in President Obama’s State of the Union address in January, will fill in the gap, helping millions start socking away money for retirement. Even if you are already well on your way to establishing your retirement nest egg, you could learn something from this beginner’s savings account.

The idea: The MyRA, rolling out in late 2014, is targeted at workers without employer plans. Like a Roth IRA, the contributions aren’t tax-deductible, but the money grows tax-free. Savers fund a MyRA via payroll deductions, with no minimum investment and no fees.

What’s to like about this baby ira: The MyRA’s investments, modeled after the federal government’s 401(k)-like Thrift Savings Plan, emphasize safety, simplicity, and low costs. Those are principles more corporate plans—and individual savers—should embrace.

Best Workplace Plan That’s Finally Come of Age: The Roth 401(k)

With a 401(k), you sock away pretax money for retirement and then pay taxes when you withdraw the funds. With a Roth 401(k), you do the opposite: take a tax hit upfront but never owe the IRS a penny again. Few workers take advantage of this option. Now that could be changing.

This year Aon Hewitt reported that for the first time, 50% of large firms offer a Roth 401(k), up from 11% that did so in 2007. Adoption levels—still only 11%—tend to pick up once plans have a Roth on the menu for several years and new hires start signing up, Aon Hewitt reports.

A recent T. Rowe Price study found that even though young workers who expect to pay higher taxes in the future reap the greatest benefit, savers of almost every age collect more income in retirement with a Roth 401(k). A 45-year-old whose taxes remain the same at age 65 would see a 13% income boost, for example. And, notes ­Stuart Ritter, senior financial planner at T. Rowe Price, “the ­money in a Roth is all yours.”

Best New Defense Against Running Out of Money

When the only retirement plan you have at work is a 401(k), you may yearn for the security you would have gotten from monthly pension checks. Pensions aren’t coming back, but the government is letting 401(k) plans be more pension-like. A rule tweak by the Department of Labor and the IRS should make it easier for employers to incorporate deferred annuities into a 401(k)’s target-date fund, the default retirement option for many. Instead of a portfolio of just stocks and bonds that grows more conservative, target-date savers would have a portion of their funds socked into a deferred annuity, which they could cash out or convert to a monthly check in retirement. Done right, the system could re-create a long-missed pension perk, says Steve Shepherd, a partner at the consulting firm Hewitt EnnisKnupp. “They are making it easier and more cost-effective to lock in lifetime income.”

Best Supreme Court Ruling

In June the Supreme Court issued a ruling that makes it easier for Fifth Third employees to sue the bank over losses they suffered from holding company stock in their 401(k)s. The share price fell nearly 70% during the financial crisis. By discouraging companies from offering stock in plans in the first place, the unanimous decision could help 401(k) savers everywhere.

For years—and especially since the 2001 Enron meltdown—experts have advised against holding much, if any, company stock in your retirement plan. Still, not everyone has gotten the memo. About 6% of employees have more than 90% of their 401(k)s in company stock, the Employee Benefit Research Institute reports. About one in 10 employers still require 401(k) matching contributions to be in company shares, according to Aon Hewitt, a benefits consulting company.

With heightened legal liability, that could finally change. The upshot, according benefits lawyer Marcia Wagner, is that fewer employers will offer their own stock in their 401(k)s. “It’s risky for them now,” she says. That’s “a tectonic shift.”

Best New Book on Retirement

You may think you’ve heard a lot the looming retirement crisis. Well, it’s worse than you think. That’s the message of a new book, Falling Short, written by retirement experts Charles Ellis, Alicia Munnell, and Andrew Eschtruth.

One of their main targets is the 401(k), whose success depends on an unlikely combo of investor savvy, disciplined saving and great market returns. As things stand now half of Americans may not be able to maintain their standard of living in retirement. Their prescription? Don’t wait for Washington to fix things. Save as much as you can, work longer, and delay Social Security to increase your benefits.

Best New Idea About Where to Retire

Whether you can stay in your home after you retire is as much about where you live as it is about your house. Yes, there are inexpensive changes you can make to age-proof your home, but is your town a good place to age? AARP is helping people answer that question. Through its Network of Age-Friendly Communities, AARP is working with dozens of cities and towns to help them adopt features that will make their communities great places for older adults. Those include public transportation, senior services, walkable streets, housing, community activities, job opportunities for older workers, and health services.

Nearly half of the 41 places that have joined the network signed on in 2014, including biggies such as San Francisco, Boston, Atlanta, and Denver. Membership requires a commitment by the community’s mayor or chief executive, and communities are evaluated in a rigorous program that is affiliated with the World Health Organization’s Age Friendly Cities and Communities program and is guided by state AARP offices. This spring, AARP will launch an online index rating livability data about every community in the U.S.

MONEY stocks

The Hidden Risk in “Safe Haven” Stocks

life preserver
Michael Crichton—Prop Styling by Jason MacIsaac

Steady Eddies and dividend payers may be too inflated to keep you afloat if the market sinks.

In early fall, you got a reminder of how risky stocks can be. The market sank more than 7% from Sept. 18 to Oct. 15, on fears that the global economic recovery was losing steam. Stocks eventually rebounded, with the S&P 500 and Dow back to setting record highs by early November. Even so, spooked investors did what you’d expect: They pulled $17 billion from equity funds and ETFs from late September to late October, while seeking shelter from the storm in the market’s usual hiding spots.

This flight to safety, which comes on the heels of several similar bouts of anxiety in recent years, has driven up valuations on conservative fare. This includes dividend-paying equities and “low volatility” stocks—you know, boring but stable giants such as Clorox or 3M.

Over the past half-century, low-volatility stocks have traded at about a 25% discount to the broad market, according to the investment firm Research Affiliates. Yet today many of these shares sport higher price/earnings ratios than the S&P 500. The same goes for dividend-paying stocks.

Why is this important? It means the market’s safe havens don’t offer as much protection as you think. Here’s what defensive-­minded investors need to know:
RISING

If You’ve Been Loading Up On Safe Havens, Stop

It’s easy to see why dividend and low-vol stocks have been popular. Both strategies have beaten the market in downturns—as was the case in this pullback (see chart)—as well as over the long run.

Alas, rising valuations change the calculus. For starters, there’s no guarantee defensive stocks will hold up better in the next slide. In the October 2007–March 2009 bear market, the iShares Dow Jones Select Dividend ETF plunged 61%, vs. 55% for the S&P 500, owing to the fund’s large stake in financial stocks that were pricey at the time. “The higher the valuation, the greater the risk of a steep drop in a bad market,” says Chris Brightman, chief investment officer of Research Affiliates.

Meanwhile, there’s a simple reason why these stocks have traditionally beaten the market: “You’re really buying value investments, since they’re lower-priced stocks,” says Gregg Fisher, head of investment company Gerstein Fisher. Yet you can’t really make the case now that these shares are undervalued and therefore likely to outperform.

Focus on Real Value

If what you’re really seeking is the protection that low-priced stocks can sometimes provide, go with a traditional “value” fund that focuses on shares with cheaper-than-average P/E ratios.

Over the past 15 years, American Century Value has outpaced the S&P 500 by more than three percentage points annually. Yet in months when the market fell, the fund lost only around three-­quarters as much, according to Morningstar. Prefer a passively managed option? Vanguard Value Index has also beaten the S&P over the past 15 years while falling less in down months.

And Don’t Forget Bonds

Say you held a 60% stock/40% bond portfolio in 2009 and haven’t reset that mix since. You’re now sitting on a 73/27 portfolio, as stocks have outpaced fixed income. If you’re in your thirties or forties you may not have to worry, as your lengthy time horizon warrants a big stake in equities.

If you’re older and your tolerance for risk has changed, then you may choose to dial back that stock allocation, perhaps even shifting more to high-quality bonds, says Vanguard senior analyst Chris Philips.

Aren’t bonds themselves frothy? Yes. And they grew more expensive in this pullback, as yields on 10-year Treasuries sank from an already low 2.63% to an even lower 2.09% before recovering. But here’s the thing: When bonds lose, they lose a lot less. The worst year for equities was a drop of 43%. For fixed income, it was only an 8% slide.

In fact, bonds made you money in the 2007–’09 bear. And isn’t that the ultimate defense—something that zigs when stocks zag?

 

MONEY Social Security

This Letter Can Be Worth $1 Million

envelope with $100 bills
Steven Puetzer—Getty Images

Paper Social Security statements are back. Here’s how to use that information to plan smarter.

This fall the Social Security Administration began mailing out benefit statements for the first time since 2011. It’s crucial information, especially if you’re poised to move to your beach condo in Boca soon. “For many upper-middle-class couples, those benefits can be worth as much as $1 million over the course of your retirement,” says Chris Jones, chief investment officer of 401(k) adviser Financial Engines.

To save money, Social Security had been directing people to its website for benefits information. After a backlash, the agency resumed mailings to most workers reaching landmark birthdays—ages 40, 45, and so on. Of course, you don’t need to wait for a paper statement to find out how your benefit stacks up. For an estimate, simply sign up online.

YOURThat’s well worth doing if you’re within a few years of retirement. Your future Social Security income is key to determining if your financial strategy is on track. Then take these steps.

Proofread it. Make sure your earnings history is accurate. “If Social Security doesn’t have an earnings record for a particular year, there will be a zero, which may reduce your benefit,” says Boston University economics professor Laurence Kotlikoff, who heads MaximizeMySocialSecurity.com, an online benefits calculator.

Set your target. Your statement will have the income you can expect at three different retirement ages, assuming you keep working at your current salary. But you have far more options for when to start collecting benefits. If you are single, have never married, and don’t plan to work in retirement, your choice will be straightforward most of the time. Your main decision is whether to delay filing, which will boost your benefit by 6% to 8% a year up until the maximum at age 70. Financial Engines and AARP have free online tools that let you compare your annual and lifetime benefits based on the age you claim.

Plot the best strategy. If you’ve ever been married, your choices are more complex. “Your claiming strategy can be the biggest retirement decision you’ll make,” says Jones. Coordinating benefits with your spouse the right way can add as much as $250,000 to your lifetime Social Security income, according to Financial Engines. That’s why you may want to pay for a calculator that allows you to add more variables, such as working in retirement or a wide age gap in your marriage. MaximizeMySocialSecurity.com ($40) and SocialSecuritySolutions.com (starts at $20) both do that.

Get a reality check. Once you have a rough idea of your future benefit, plug that number into a retirement-income calculator, such as the tool at T. Rowe Price. You’ll see if your payouts, plus your portfolio withdrawals, are enough to ensure a comfortable retirement. If not, use the tool to see how saving more or working longer can help, or consult an adviser. Given the dollars at stake, devising a smart Social Security strategy can be well worth a fee.

MONEY 401(k)s

The Big Flaws in Your 401(k), and How to Fix Them

Falling Short book cover

Badly designed 401(k) plans are a key reason Americans are headed towards a retirement crisis, a new book explains. Here are three moves that can help.

Every week seems to bring a new study with more scary data about the Americans’ looming retirement crisis—and it’s all too easy to tune out. Don’t. As a sobering new book, Falling Short, explains, the crisis is real and getting worse. And if you want to preserve your chances of a comfortable retirement, it’s time to take action.

One of the most critical problems is the flawed 401(k) plan, which is failing workers just as they need more help than ever. “The dream of the 401(k) has not matched the reality,” says co-author Charles Ellis. “It’s turned out to be a bad idea to ask people to become investing experts—most aren’t, and they don’t want to be.”

When it comes to money management, Ellis has plenty of perspective on what works and what doesn’t. Now 77, he wrote the investing classic Winning the Loser’s Game and founded the well-known financial consulting firm Greenwich Associates. His co-authors are Alicia Munnell, a prominent retirement expert who heads the Center for Retirement Research at Boston College, and Andrew Eschtruth, the center’s associate director.

What’s wrong with the 401(k)? For basic behavioral reasons, workers consistently fail to take full advantage of their plans. Most enroll, or are auto-enrolled, at a low initial savings rate, often just 3% of pay— and they stay at that level, since few plans automatically increase workers’ contributions. Many employees borrow money from their plans, or simply cash out when they change jobs, which further erodes their retirement security. Even if investors are up to the task of money management, their 401(k)s may hamper their efforts. Many plans have limited investing menus, few index funds, and all too often saddle workers with high costs.

When you add it up, investor mismanagement, along with 401(k) design and implementation flaws, have cost Americans a big chunk of their retirement savings, according to a recent Center for Retirement Research study. Among working households headed by a 55- to 64-year-old, the median retirement savings—both 401(k)s and IRAs—is just $100,000. By contrast, if 401(k)s worked well, the median amount would have been $373,000, or $273,000 more. As things stand now, half of Americans are at risk of not being able to maintain their standard of living in retirement, according to the center’s research.

Can the 401(k) be fixed? Yes, the authors say, if employers adopt reforms such as auto enrollment, a higher automatic contribution rate, and the use of low-cost index funds. But even those changes won’t end the retirement crisis—after all, only half of private sector workers have an employer-sponsored retirement plan. Moreover, Americans face other economic challenges, including funding Social Security, increased longevity, and rising health care costs.

To address these problems, authors discuss possible policy changes, such as automatic IRAs for small businesses and proposals for a new national retirement plan. Still, major reforms are unlikely to happen soon. Meanwhile, there’s a lot you can do now to improve your odds of a comfortable retirement. The authors highlight these three moves to get you started:

Aim to save 14%: The best way to ensure that you actually save is to make the process automatic. That’s why few people consistently put away money without help from a company retirement plan. If you save 14% of your income each year, starting at age 35, you can expect to retire comfortably at age 67, the authors’ research shows. Start saving at age 25, and put away 12%, and you may be able to retire at 65. If you get a 401(k) matching contribution, that can help your reach your goal.

Choose low-cost index funds. One of the smartest ways to pump up your savings is to lower your investment fees—after all, each dollar you pay in costs reduces your return. Opt for index funds and ETFs, which typically charge just 0.2% or less. By contrast, actively managed stock funds often cost 1.4% or more, and odds are, they will lag their benchmarks.

Adjust your goals to match reality. You 401(k) account isn’t something you can set and forget. Make sure you’re saving enough, and that your investments still match your risk tolerance and goals—a lot can change in your life over two or more decades. The good news is that you can find plenty of free online calculators, both inside and outside your plan, to help you stay on course.

If you’re behind in your savings, consider working a few years longer if you can. By delaying retirement, you give yourself the opportunity to save more, and your portfolio has more time to grow. Just as important, each year that you defer your Social Security claim between the ages of 62 and 70 will boost the size of your benefit by 8% a year. “You get 76% more at age 70 than you will at age 62,” says Ellis. If working till 70 isn’t your idea of an dream retirement, then you have plenty of incentive to save even more now.

More on 401(k)s:
Why Millennials are flocking to 401(k)s in record numbers
Why your 401(k) may only return 4%
This Nobel economist nails what’s really wrong with your 401(k)

MONEY

Here’s a New Reason to Think Twice Before Buying Long-term Care Insurance

woman helping woman with walker
Tom Grill—Getty Images

You'll likely need some form of long-term care in retirement. Too bad long-term care insurance isn't the right choice for most people.

It’s one of the biggest risks in retirement, and it’s one that hardly anyone is ready to face: long-term care costs. Some 70% of those over 65 end up needing some form of long-term care, which is likely to be costly.

What to do? One commonly recommended option is to purchase long-term care insurance, which would reimburse you for the cost of getting help with daily activities, including in-home health aides and nursing home care. But these policies are pricey, and few people buy them—only 13% of those eligible do so, according to some estimates. It’s a problem that researchers call the long-term care insurance puzzle.

Turns out, it’s not really a puzzle. That’s the conclusion of a new study by Boston College’s Center for Retirement Research, which found that long-term care insurance makes financial sense for far fewer people than originally thought—only about 20% of those eligible vs. earlier estimates of 30% to 40%. “Previous research has overstated the financial risks of going into nursing home care,” says study co-author Anthony Webb, senior research economist at the Center.

Make no mistake, long-term care is dangerously expensive. As a recent study by EBRI found, when you factor in long-term care costs, most lower-income households will run short of money in retirement, and even among middle-class and upper-income families, the odds of running short soar.

But the Center’s analysis, which focused on single individuals, found that the odds of requiring long, expensive stays in a nursing facility are lower than previously thought. By using longitudinal data, the Center found that individuals typically transition through different care stages—from living independently to needing some assistance to nursing home—and, often, back again. That brings down the odds of a long and costly stay in a facility, Webb says. (A typical nursing home costs $212 day or $77,000 a year, according to a recent survey.)

One factor not addressed by the study is that long-term care insurance is becoming a riskier purchase. After discovering that they had underestimated the likelihood that policyholders would file claims, many insurers have raised premiums or stopped selling this coverage altogether. Recently Genworth, one of the leading long-term care insurers, posted steep losses, and some analysts warned that its business outlook is dicey.

For most people it makes more sense to spend down their assets and rely on Medicaid rather than purchase long-term care insurance, the study found.”There’s a Medicaid crowd-out effect,” says Webb. (Many people mistakenly believe Medicare pays long-term care costs, but that program only covers short-term care.) Medicaid will pay for nursing home stays, as well as in-home care, for those with low incomes and few assets. Each state has its own eligibility rules. Most families end up spending down their assets before qualifying for Medicaid coverage.

Even if you never need a long nursing home stay, chances are you’ll need some form of in-home care, and that can be costly too—home health aides charge an average of $20 an hour. Most seniors end up relying on family for most of their at-home care.

What the Center’s study shows most clearly is that better options are needed. Studies have found that more people would be willing to purchase a supplemental policy that would transform Medicaid into a more comprehensive, means-tested insurance. Other experts are pushing for an expanded form of social insurance for long-term care. It’s unlikely, of course, that any major reforms are likely to happen soon.

Meanwhile, your best options is to plan ahead with your family about care—including living in a place that will make it easy to get around, receive services, and see friends. Living a healthy and happy life is one way to help reduce your chances of needing costly care in retirement.

Read next: Millions Fewer Americans Will Enroll in Obamacare Plans Than Predicted

MONEY mutual funds

What Investors in Pimco’s Giant Bond Fund Should Do Now

One-time star manager Bill Gross is leaving. The case for choosing an index fund for your bonds has never looked better.

For many bond fund investors, star fixed-income manager Bill Gross’s sudden leap from Pimco to Janus is a moment to rethink. Gross’s flagship mutual fund, Pimco Total Return long seemed like the no-brainer fixed-income choice. Over the past 15 years, Gross had steered Total Return to a 6.2% average annual return, which placed it in the top 12% of its peers. And based on that track record it became the nation’s largest fixed income fund.

But much of that performance was the result of past glory. Over the past five years, Pimco has fallen to the middle of its category, as Gross’s fabled ability to outguess interest rates faded. It ranks in the bottom 20% of its peers over the past year, and its return of 3.9% lags its largest index rival, $100 billion Vanguard Total Bond Market, by 0.5%.

Nervous bond investors have yanked nearly $70 billion out of the fund since May 2013. Those outflows are driven not only because of performance but also because of news stories about Gross’s behavior and personal management style. Still, Pimco Total Return holds a massive $222 billion in assets, down from a peak of $293 billion, and it continues to dominate many 401(k)s and other retirement plans as the core bond holding.

If you’re one of the investors hanging on to Pimco Total Return, you’re probably wondering, should I sell? Look, there’s no rush. Your portfolio isn’t in any immediate trouble: Pimco has a lot of other smart fixed-income managers who will step in. And even if you can’t expect above-average gains in the future, the fund will likely do okay. The bigger issue is whether you should hold any actively managed bond fund as your core holding.

The simple truth is most actively managed funds fail to beat their benchmarks over long periods. Gross’s impressive record was an outlier, which is precisely why he got so much attention. That’s why MONEY believes you are best off choosing low-cost index funds for your core portfolio. With bond funds, the case for indexing is especially compelling, since your potential returns are lower than for stocks, and the higher fees you pay to have a human guiding your fund can easily erode your gains.

Our MONEY 50 list of recommended funds and ETFs includes Harbor Bond, which mimics Pimco Total Return, as an option for those who want to customize their core portfolio with an actively managed fund. When issues about Pimco Total Return first began to surface, we recommended hanging on. But with Gross now out of the picture, we are looking for the right replacement.

If you do choose to sell, be sure to weigh the potential tax implications of the trade. Here are three bond index funds to consider:

*Vanguard Total Bond Market Index, with a 0.20% expense ratio, which is our Money 50 recommendation for your core portfolio.

*Fidelity Spartan U.S. Bond, which charges 0.22%

*Schwab Total Bond Market, which charges 0.29%

All three funds hold well-diversified portfolios that track large swaths of the bond market, including government and high-quality corporate issues. Which one you pick will probably depend on what’s available in your 401(k) plan or your brokerage platform. In the long-run, you’re likely to get returns that beat most actively managed bond funds—and without any star manager drama.

MONEY retirement income

Boomers Are Hoarding Cash in Their 401(k)s—Here’s a Better Strategy

Paul Blow

Yes, you need a cash reserve in retirement, but you can go overboard in the name of safety. Here's how to strike the right balance.

As you close in on retirement, it’s crucial to minimize the risk of big losses in your portfolio. Given how expensive traditional safe havens, such as blue chips and high-quality bonds, have become, that’s tricky to do today. So for many pre-retirees, the go-to solution is more cash.

How much cash is enough? Many savers seem to believe that today’s high market valuations call for a huge stash—the average investor has 36% in cash, up from 26% in 2012, according to a recent study by State Street. The percentage is even higher for Baby Boomers (41%), who are approaching retirement—or already there.

That may be too much of a good thing. Granted, as you start to withdraw money from your retirement savings, having cash on hand is essential. But if you’re counting on your portfolio to support you over two or more decades, it will need to grow. Stashing nearly half in a zero-returning investment won’t get you to your goals.

To strike the right balance between safety and growth, focus on your actual retirement needs, not market conditions. Here’s how.

Safeguard your income. If you have a pension or annuity that, along with Social Security, covers your essential expenses, you probably don’t need a large cash stake. What you need to protect is money you’re counting on for income. Calculate your annual withdrawals and aim to keep two to three years’ worth split between cash and short-term bonds, says Marc Freedman, a financial planner in Peabody, Mass.  That lets you ride out market downturns without having to sell stocks, giving your investments time to recover.

This strategy is especially crucial early on. As a study by T. Rowe Price found, those who retired between 2000 and 2010—a decade that saw two bear markets—would have had to reduce their withdrawals by 25% for three years after each drop to maintain their odds of retirement success.

Budget for unknowns. You may be able to anticipate some extra costs, such as replacing an aging car. Other bills may be totally unexpected—say, your adult child moves back in. “People tend to forget to build in a reserve for unplanned costs,” says Henry Hebeler, head of AnalyzeNow.com, a retirement-planning website.

In addition to a two- to three-year spending account, keep a rainy-day fund with three to six months of cash. Or prepare to cut your budget by 10% if you have to.

Shift gradually. “For pre-retirees, the question is not just how much in cash, but how to get there,” says Minneapolis financial planner Jonathan Guyton. Don’t suddenly sell stocks in year one of retirement. Instead, five to 10 years out, invest new savings in cash and other fixed-income assets to build your reserves, Guyton says. Then keep a healthy allocation in stocks—that’s your best shot at earning the returns you’ll need, and you can replenish your cash account from those gains.

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