MONEY Viewpoint

Why the Medicare “Doc Fix” Bill Isn’t a Fix for the Rest of Us

The problem it tries to address is real—but this isn't the right solution.

The “doc fix” bill that passed the House last week on a 392-37 vote is a piece of cheese that could smell really, really bad by the time the Senate comes back from its spring break to consider the measure.

If signed into law, the bill would halt a scheduled 21% cut in the fees that doctors get for treating Medicare patients. The fear is that if their pay is reduced—and especially if reduced this drastically—many doctors would simply choose to stop treating Medicare patients.

So who proposed the 21% cut in the first place? It stems from a 1997 law that automatically trims physician reimbursement rates if and when medical costs rise faster than overall economic growth. That’s happened so often in recent years that cuts were scheduled 17 times—but each time Congress voted to override the cut. So when the latest scheduled cuts came around, lots of folks expected Congress to kick the can down the road yet again.

All of sudden, however, Congressional leaders of both parties decided they’d had enough short-term fixes and the “doc fix” bill was born.

Here’s what everyone should know about it:

It’s got a real shot of passing

Before leaving town, a solid majority of Senators seemed to be in favor of the measure, even if some liberals and fiscal hawks are holding their noses. And the Obama White House has already signaled support.

It’s a fix, but a very expensive one

The stated price tag is more than $200 billion over 10 years, $140 million of which would hit the federal budget with no compensating spending offsets.

The 17 earlier short-term fixes were funded with $165 billion in offsetting savings from other parts of Medicare. But the bill approved by the House does not provide such offsets, which is why it will raise federal deficits so much.

How much? The Committee for a Responsible Federal Budget, a nonprofit Washington watchdog group, estimates that it will lead to more than half a trillion dollars of additional debt by 2035.

On top of that, affluent seniors will pay more for Medicare; everyone with a Medicare Supplement policy will get nicked with a higher price tag; and health care providers—other than doctors, of course—would be dinged with higher costs.

It could change everything about the way health care is delivered

This is where Messrs. Limburger and Roquefort enter the room. The bill could become a powerful enabler to drastically change, if not end, the traditional fee-for-service model of Medicare.

That’s because the law would create—get ready for two more healthcare acronyms—MIPS and APM. MIPS stands for the Merit-Based Incentive Payment System, which would reward or penalize doctors based on patient health outcomes compared with performance thresholds. APM is short for Alternative Payment Model programs, which provide different rates and incentives for doctor payments. These programs could trigger big changes in how Medicare works and in how doctors perform medicine.

There’s a better solution

A better approach would be an 18th year-long fix. It wouldn’t cost much and thus won’t worsen federal deficits. Rethinking the way we deliver healthcare to Medicare beneficiaries absolutely needs to be done, but not in such a hurry. Take the next year to do this very important but complicated piece of work, and then come back with a true fix worthy of the name.

Of course, this won’t happen. It’s hard enough to get one Congressional consensus these days, let alone two. And we pick a new President next year, which also argues against expecting Congress to again be in a cooperative mood.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

MONEY Ask the Expert

How to Max Out Social Security Benefits for Your Family

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q. Does the family maximum benefit (FMB) apply only to one spouse’s individual’s work history or to both spouses in a family? That is, assume two high-earning spouses both delay claiming a benefit till, say, 70. Would the FMB rules limit their overall family benefits? Or does the FMB include just the overall family benefits derived from the earnings record of one particular worker? —Steve

A: Kudos to Steve for not only knowing about the family maximum benefit but having the savvy to ask how it applies to two-earner households. The short answer here is that Social Security tends to favor, not penalize, two-earner households in terms of their FMBs.

To get everyone else up to speed, the FMB limits the amount of Social Security benefits that can be paid on a person’s earnings record to family members—a spouse, survivors, children, even parents. (Benefits paid to a divorced spouse do not fall under the FMB rules.) The amount may include your individual retirement benefit plus any auxiliary benefits (payouts to those family members) that are based on that earnings record.

Fair warning: the FMB is far from user-friendly. Few Social Security rules are as mind-bendingly complex as the FMB and its cousin, the combined family maximum (CFM). And Social Security has a lot of complex rules. Unfortunately, you need to do your homework to claim all the family benefits you are entitled to receive.

To address Steve’s question, these FMB calculations may be based on the combined earnings records of both spouses. More about this in a bit, but first, here are the basics for an individual beneficiary.

The ABCs of the FMB

The FMB usually ranges from 150% to 187% of what’s called the worker’s primary insurance amount (PIA). This is the retirement benefit a person would be entitled to receive at his or her full retirement age. Even if you wait until 70 to claim your benefit, it won’t increase the FMB based on your earnings record.

Now, I try to explain Social Security’s rules as simply as possible—but there are times when the system’s complexity needs to be seen to be believed. So, here is the four-part formula used in 2015 to determine the FMB for an individual worker:

(a) 150% of the first $1,056 of the worker’s PIA, plus

(b) 272% of the worker’s PIA over $1,056 through $1,524, plus

(c) 134% of the worker’s PIA over $1,524 through $1,987, plus

(d) 175% of the worker’s PIA over $1,987.

Let’s use these rules for determining the FMB of a worker with a PIA of $2,000. It will be $3,500, which equals (a) $1,584 plus (b) $1,273 plus (c) $620 plus (d) $23. The difference between $3,500 and $2,000 is $1,500—that’s the amount of auxiliary benefits that can go to your family. Got that?

And here’s a key point that trips up many people: Even if the worker claimed Social Security early, which means his benefits were lower than the value of his PIA, it would not change the $1,500 limit on auxiliary benefits. However, when the worker dies, the entire $3,500, which includes the PIA amount, becomes available in auxiliary benefits.

It’s quite common for family claims to exceed the FMB cap. When this happens, anyone claiming on his record (except the worker) would see their benefits proportionately reduced until the total no longer exceeded the FMB. If, say, those claimed auxiliary benefits actually totaled $3,000, or double the allowable $1,500, all auxiliary beneficiaries would see their benefits cut in half.

How CFM Can Boosts Benefits

Enter the combined family maximum (CFM). This formula can substantially increase auxiliary benefits to dependents of married couples who both have work records—typically multiple children of retired or deceased beneficiaries.

The children can be up to 19 years old if they are still in elementary or secondary school (and older if they are disabled and became so before age 22). Because each child is eligible for a benefit of 50% or even 75% percent of a parent’s work PIA, even having only two qualifying auxiliary beneficiaries—say a spouse and a child, or two children—can bring the FMB into play.

But with the CFM, the FMBs of each earner in the household can be combined to effectively raise the benefits to children that might otherwise would be limited by the FMB of just one parent. Under its rules, Social Security is charged with determining the claiming situation that produces the most cumulative benefits to all auxiliary beneficiaries.

Using our earlier example, let’s assume we now have two workers, each with PIAs of $2,000 and FMB’s of $3,500. A qualifying child would still be limited to a benefit linked to the FMB of a single parent. But the CFM used to determine the size of the family’s benefits “pool” has now doubled to $7,000 a month, permitting total auxiliary benefits of up to $3,000.

Well, they would have totaled this much—except there’s another Social Security rule that puts a cap on the CFM. For 2015, that cap is $4,912. Subtracting one of the $2,000 PIAs from this amount leaves us with up to $2,912 in auxiliary benefits for this family. That’s not $3,000 but almost.

So it’s quite possible that three, four, or possibly more children would get their full child benefits in this household. Even if they totaled 200% of one parent’s FMB, they would add up to a smaller percentage of the household’s CFM, and either wouldn’t trigger benefit reductions, or at least much small ones.

And if eligible children live in a household where one or both of their parents also has a divorced or deceased spouse, even more work records can come into play. This is complicated stuff, as borne out in some thought-twisting illustrations provided by the agency.

Before moving ahead with family benefit claims, I recommend making a face-to-face appointment at your local Social Security office. Bring printouts of your own earnings records, which you can obtain by opening an online account for each person whose earnings record is involved. I’d also print out the contents of the Social Security rules, which are linked in today’s answer, or at the very least, write down their web addresses so the Social Security representative can access them.

Good luck!

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: Why Social Security Rules Are Making Inequality Worse

MONEY retirement planning

The Smart Way to Choose a Retirement Community

The decision to move to a retirement community is never easy. But new pricing information can help you plan.

Moving into a retirement community is a complex and often emotional decision, especially if health issues are a reason. Figuring out the finances of this move adds to the challenge. But by understanding the expenses you’ll need to pay, seniors and their families can make the best possible choices.

The good news is more cost data is now available. A Place for Mom, a senior community placement service, just released what it claims is the first pricing survey of these residences—one that is does not rely primarily on data reported by the communities themselves. Its Senior Living Price Index is based on reports from seniors it has placed. The company works with 20,000 residences around the country and advises an average 50,000 families a month.

The prices are listed by category of residence—independent living, assisted living and memory care (for those with dementia) —as well as by region. (The prices for independent living do not include health care expenses, but they are included for assisted living and memory care.) The survey only covers larger communities—those with more than 20 residential units.

Here are the top-level results for each type of community by region, showing average monthly prices:

  • Independent Living — $2,520 (U.S.); $2,532 (West); $2,362 (Midwest); $2,765 (Northeast); $2,587 (South)
  • Assisted Living — $3,823 (U.S.); $3,771 (West), $3,825 (Midwest); $4,315 (Northeast); $3,562 (South)
  • Memory Care — $4,849 (U.S.); $4,787 (West); $4,958 (Midwest); $5,779 (Northeast); $4,345 (South)

Clearly, senior living can be expensive. But keep in mind, these are averages covering a wide range of prices, says Edward Nevraumont, chief marketing officer at A Place for Mom. So look at these figures as just a starting point. And be sure to consider future price hikes, which are likely to outpace inflation, thanks to rising demand for living units.

Prices don’t tell you everything you need to know about a residence—other factors can be just as important, though harder to compare. There are communities geared to a wide range of preferences, budget levels, and health status. Some provide a full range of food services and on-site healthcare. Some are tightly regulated (nursing homes), while others are less so (independent living). “In our space, people have no idea of what they’re even looking for,” says Nevraumont.

That’s largely because families tend to wait till the last minute to start planning a move—typically when an aging family member is having health issues. The average person working with A Place for Mom adviser is 80 years old vs. 77 a few years ago. Of the clients the company helps place, five of every eight are single women, while two are men, and one is a couple. The average length of stay is 20 months.

For those considering a senior community, Nevraumont offers these tips:

Start shopping before a move is needed. Aside from the research that you’ll need to do, many residences have waiting lists that are months long. You’ll also need to have a conversation with all the affected family members to avoid potential conflicts.

Expect the move to take time. You may think you’ll be able to get Uncle Matt into a new apartment in a couple of weeks. The actual process takes an average of three months—or longer, if you’re on a waiting list.

Keep cash on hand. No getting around it—senior living communities are costly, especially for those with serious health care needs. So you’ll need to build a cash cushion to tap for those bills. “For both your emotional sanity and your financial sanity,” Nevraumont said, “figuring out this stuff early is really important.”

For more advice on choosing a retirement community, take a look at this checklist from AARP.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: The Secrets to Making a $1 Million Retirement Stash Last

MONEY Medicare

Why the Bill to Fix Medicare Keeps Soaring

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Getty Images

Congress must act to prevent a big cut in fees to Medicare doctors. But a short-term solution now will mean soaring costs for older Americans later.

A perennial congressional battle over Medicare is about to erupt. And the result is likely to be a steep increase in the program’s long-term costs—with older Americans eventually paying many of those bills.

As of April 1 fees paid by Medicare to participating doctors will be slashed by a steep 21%. This cut is the result of a 1997 budget formula, called the Sustainable Growth Rate (SGR), which should have been junked years ago. Physicians have already been complaining about Medicare’s low level of reimbursement, and if the cut happens, there could be a mass exodus of physicians from the program.

Congress has had plenty of opportunities to reset the the SGR formula to permit fair fees and annual adjustments but instead has opted for short-term fixes 17 times. Last year lawmakers agreed on a long-term plan to set physician rates—a so-called “doc fix”—and this consensus proposal has been reintroduced in the new Congress. But the long-term price tag for the adjustment threatens to make it a non-starter.

How much would a long-term doc fix cost? The Congressional Budget Office (CBO) estimated the 10-year budget hit of a permanent reform at $138 billion in early 2014. A year later, the 10-year bill has risen to nearly $175 billion. For perspective, the agency’s latest 10-year price tag for the Affordable Care Act is “only” $142 billion.

It’s hard to believe that Congress will be able to find $175 billion in spending offsets in the next couple of weeks, or that Republicans would agree to boost the deficit in order to pay the long-term tab. So expect another one-year fix—number 18. It would cost an estimated $6 billion, which would not have much of an immediate impact on consumers.

If Congress doesn’t vote in a fix, higher Medicare costs would slam older Americans and their families. As a new Kaiser Family Foundation analysis points out, under current law beneficiaries would automatically absorb their share of Part B Medicare costs if the formula is changed. That out-of-pocket price tag would be nearly $60 billion over 10 years, Kaiser estimates.

That’s just for physician fees. Consumer out-of-pocket costs are likely to rise even higher once other effects of the change are factored into Part B premiums and co-insurance payments. “One option under discussion would require beneficiaries to assume a portion of the $175 billion federal price tax, above what they will automatically pay in premiums and cost-sharing,” the Kaiser analysis says.

Other major Medicare service providers, including insurers and drug companies, could also be asked to take a haircut to finance high doctor payments. Of course, those costs are likely to be passed along to consumers eventually.

Paying higher Medicare costs is asking a lot of most older Americans. Half of all Medicare recipients live on incomes of about $23,500 or less. And seniors already spend triple the amount of money on health care, as a percentage of their household budgets, compared with younger households.

Still, a permanent doc fix has to happen at some point. And Kaiser’s report notes that Congress has been getting closer to a serious response to the problem.

So if you depend on Medicare, you would do well to set aside what savings you can to meet those inevitable health care bills. And at the very least, expect a big increase in Washington rhetoric over Medicare.

Philip Moeller is an expert on retirement, aging, and health. He is the co-author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: The New Rules for Making Your Money Last in Retirement

MONEY Ask the Expert

The 3 Secrets to Maxing out Social Security Spousal Benefits

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: My wife was born in 1950 and will be 65 this year; I was born in 1953 and will be 62. As I have earned more in my lifetime, my Social Security benefit is estimated to be larger than hers at full retirement age. But her spousal benefit would be less than half of her individual retirement benefit. When the younger spouse has a higher estimated benefit, what are some strategies to explore? —Jack

A: If there’s one set of rules worth understanding, it’s spousal benefits. Every year, couples leave literally billions of dollars on the table because they make the wrong claiming choices. Here are three secrets to getting this claim right, and how they apply to your situation:

1. To get spousal benefits, the primary earner must file for retirement benefits first. Spousal benefits can equal as much as half of the amount the person would receive in individual Social Security benefits at full retirement age (FRA). For anyone born in 1943 through 1954, FRA is 66; it will gradually rise to 67 for people born in 1960 or later.

2. If you file for a spousal benefit before your FRA, you will end up with a smaller amount. You can file as early as age 62 but if you do, you will be hit with benefit reductions. Retirement benefits will rise each month they are deferred between FRA and age 70. Spousal benefits peak at FRA, so there is no reason to defer claiming them past that point.

An early filing will also trigger a Social Security provision called deeming—this means the agency considers you to be filing both for your individual retirement benefit and you spousal benefit. You will be paid an amount roughly equal to the greater of the two benefits. But you lose the opportunity to get increases for delayed claiming on your individual benefits. This is a bad deal.

3. Use a file-and-suspend strategy. If both spouses defer claiming until FRA, the higher-earning spouse can file and suspend benefits then. This way, the lower-earning spouse can file for spousal benefits, allowing his or her individual retirement benefit to grow due to delayed retirement credits. Then you can each file for maximum retirement benefits at age 70.

So what’s the right approach for you? If you both defer filing, you can file and suspend your benefit at age 66. This will enable your spouse, who will have turned 69, to file for her maximum spousal benefit. Meanwhile, she can continue to allow her individual benefit to grow due to delayed credits up to age 70

Alternatively, your wife can file and suspend at 69, allowing you to file for your maximum spousal benefit at 66 and collect it for four years, while deferring your own retirement benefit until 70. Even though you are the higher earner. this strategy seems likely to maximize your family’s total benefits.

There’s another advantage to waiting until 70: if you die before your wife, she will receive a widow’s benefit that will equal your maximum retirement benefit. (She can only collect the greater of her retirement or widow’s benefit.)

Of course, choosing the best spousal claiming strategy for a couple depends on many factors, including relative ages, finances and health. This is something married partners need to talk about.

Best of luck!

Philip Moeller is an expert on retirement, aging, and health. He is the co-author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: New Rules for Making Your Money Last in Retirement

MONEY Longevity

The New Rules for Making Your Money Last in Retirement

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Murat Giray/Getty Images

In today's longevity economy, retirement as we know it is disappearing. Here's what to do now.

Are you ready to live to age 95—or beyond?

It’s a real possibility. For an upper-middle-class couple age 65 today, there’s a 43% chance that one or both will reach at least age 95, according to the latest data from the Society of Actuaries.

Living longer is a good thing, of course. But there’s a downside—increasing longevity may mean the end of retirement as we know it.

Problem is, a long lifetime in retirement is a huge financial challenge. As Laura Carstensen, head of Stanford Center on Longevity, said in a recent presentation, “Most people can’t save enough in 40 years of working to support themselves for 30 or more years of not working. Nor can society provide enough in terms of pensions to support nonworking people that long.” Instead, Carstensen argues, we need to move toward a longer, more flexible working life.

Carstensen is hardly alone here. Alicia Munnell, head of the Center for Retirement Research at Boston College and a co-author of “Falling Short: The Coming Retirement Crisis and What to Do About It”, has long warned about the nation’s lack of retirement preparedness. Following the Great Recession, Munnell has pounded away at the reality that continuing to work is the only feasible strategy for many people if they wish to have any hope of affording even modestly comfortable retirements.

For many retiring Baby Boomers, the notion of working longer has appeal—not only for the additional income but as a way of staying involved and giving back. That’s what spurred Marc Freedman, founder of Encore.org, to encourage older workers to use their skills for social purpose. Chris Farrell, a Money contributor, captures this movement in his recent book, “Unretirement: How Baby Boomers are Changing the Way We Think About Work, Community, and the Good Life.”

Still, to afford a longer life, Americans will have to rethink their savings and withdrawal methods too. Right now, most retirement calculators default to no more than a 30-year time horizon. What if you want to keep your retirement income going past age 95? Fidelity’s planners suggest three alternatives that can help:

*Stay on the job longer. Say you are a 65-year old woman who earned $100,000 a year, and you have a $1 million portfolio. You’ll also receive a $30,000 Social Security benefit ($2,500 a month) and you plan to withdraw an initial $50,000 a year from your portfolio. All told, you’ll have $80,000, or 80% of your pre-retirement income. If inflation averages 2%, and the portfolio grows by 4%, your savings will likely last for 25 years, or until age 90. After that, odds are the money will run out.

But if you instead work four more years, until age 69, and keep saving 15% of your income, your portfolio will grow to $1,240,000. That would be enough to provide income for eight more years—until age 98.

*Postpone Social Security. Another move is to work two more years and defer claiming Social Security till age 67, which means your monthly benefit will rise from $2,500 to $2,850. That would replace 35% of her income, instead of 30%, and her portfolio would need replace just 45% of your pre-retirement earnings vs 50%. By age 67, your portfolio will total $1,110,000, which will deliver retirement income till age 98.

*Consider an annuity. You could purchase an immediate annuity, which would give you a lifetime stream of income. The trade-off, of course, is that your money is locked up and payments will cease when you die (unless you add a joint-and-survivor option, which would reduce your payout). Many advisers suggest using only a portion of your portfolio to buy an annuity—you might aim to cover your essential expenses with a guaranteed income stream, which would include Social Security.

A 65-year-old woman who invested $200,000 in an immediate annuity with a 2% annual inflation adjustment would receive guaranteed monthly payments of about $870 a month, or $10,440 a year, according to Income Solutions. Added to Social Security, this income would replace roughly 40% of a $100,000 salary, which will allow the rest of the portfolio to keep growing longer.

But make no mistake. This is a big decision, and many investment experts oppose locking up money in an annuity, given today’s low interest rates. But longevity investing raises the appeal of guaranteed streams of income, and annuity payouts will become more attractive if and when interest rates slowly rise toward historical norms.

Philip Moeller is an expert on retirement, aging, and health. He is the co-author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: The Suddenly Hot Job Market for Workers Over 50

MONEY Social Security

The Taxing Problem With Working Longer

Earning money after you start collecting Social Security can be a tax headache.

The question of when and how to file for Social Security is a tough one for many retirees—I regularly field questions on the topic. Recently a reader wrote to say he’d like to draw Social Security benefits at age 66 yet keep working until 75. What are the tax implications?

When you continue to work and draw Social Security, your benefits are reduced temporarily if you’re 65 or younger and your outside income exceeds certain levels. After 65, these reductions do not apply. You may, however, owe taxes on your Social Security income.

How Earnings Can Hurt

Not all of your Social Security income is taxable. Social Security uses a measure it calls “combined income” to determine how much of your benefit is taxable, and it can be tricky to understand.

To determine your combined income, take your adjusted gross income (check last year’s tax return), then add any nontaxable interest income and half of your Social Security benefit. (If you haven’t started claiming, you can get a projection online by setting up an account at ssa.gov.)

If the total is less than $25,000 ($32,000 on joint tax returns), you owe no income taxes on your Social Security benefits. If the total is between $25,000 and $34,000 ($32,000 and $44,000 on joint returns), you may have to pay taxes on half of your Social Security that’s over that threshold. Above that, 85% of your benefits may be taxable—the top rate.

Here’s how that could play out. Take a retiree in the 15% federal tax bracket who is taxed on 50% of his Social Security. When he earns another $1,000, his so-called combined income rises by that much too, subjecting another $500 of Social Security income to taxes. So the tax bill on that $1,000 won’t be $150 (15% of $1,000) but $225 (15% of $1,500), for an effective rate of 22.5%.

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MONEY

Your Workarounds

Beefing up your tax-free holdings, especially Roth IRAs, can mean money coming in that won’t trigger more taxable Social Security income. (Working less lowers your tax bill too, but you’re usually better off earning the money.)

If you can live on just your salary, deferring Social Security until age 70 also helps. Your taxes should be lower while you wait. And delaying benefits will increase your monthly Social Security payments by 8% a year (plus annual inflation adjustments).

Hedging Your Bets

Single retirees should think about one other option: filing for and suspending Social Security benefits at age 66. By doing so you will be able to request a lump-sum payment for all the suspended benefits
anytime until age 70.

Even the best of plans can change, so that payment could come in handy if you face an emergency cash crunch. But there’s a downside: Once you request a lump sum, your payout will be valued as if you took benefits at 66, as will your regular monthly benefit going forward.

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” was published in February by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

MONEY housing

Boomers’ Homes Are Once Again Their Castles

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Getty Images

A new study looks at the relationship older Americans have with their homes and finds some surprises.

Aging Baby Boomers apparently missed the memo about how badly they’ve prepared for retirement. While study after study highlights inadequate retirement savings and planning, a new survey and report sponsored by Merrill Lynch finds that a broad cross-section of older Americans are eagerly looking forward to new adventures and, especially, freedoms, in their later years.

“Home in Retirement: More Freedom, New Choices,” prepared for Merrill Lynch by the Age Wave consulting firm, focuses on the age-related transitions that people are making in the way they live and how they regard their homes. According to the study, nearly two-thirds of retirees say they are now living in the “best home of their lives” and making active efforts to create living spaces that match their new retirement lifestyles. Nearly as many say they are likely to move during their retirement years, and most of this group has already relocated once.

“When I look out at the future of our aging population, I have concerns, too,” said Ken Dychtwald, head of Age Wave and a longtime leader in aging research. “I am not a beginner at this. But I think a lot of our worries are not a fait accompli,” he said. “I think we have, to a fair extent, overemphasized the misery of aging.”

After lives largely determined by work and family responsibilities, boomer retirees find they are experiencing a new sense of freedom about where and how they live. An estimated 4.2 million retirees moved into new homes last year alone, the report found. And while downsizing is often recommended as a new lifestyle for retirees, nearly a third of retirees who relocated actually moved into larger homes. (One reason: One out of every six retirees has a “boomerang” child who moved back in with them.)

Only one in six retirees who moved last year wound up in a different state, emphasizing the strong attachments that boomers have to their existing communities. Among future retirees, 60% say they expect to stay in their current state while 40% want to explore other parts of the country.

From their 60s to their late 70’s, people “think of this as a great time and a time of great freedom,” Dychtwald said. “That word—freedom—came up over and over again.”

Reaching age 60 seems to represent a “threshold event” for people, added Cyndi Hutchins, director of financial gerontology for Bank of America Merrill Lynch. With careers winding down and children out of the house, people take a new look at their futures. Another transition occurs in the early to middle 70s, when many begin to slow down and become less active. “We see a spike in that freedom threshold again at that age,” she said. “We see retirement as a succession of different time periods.”

Whether people move or not, or downsize or not, their homes assume added significance, the study found. “Prior to age 55, more homeowners say the financial value of their home outweighs its emotional value,” the report said. “As people age, however, they are far more likely to say their home’s emotional value is more important than its financial value.” More than 80% of people aged 65 and older own their own homes, and more than 70% of them have paid off their mortgages.

If boomers do reinvest in their homes, it would provide a major boost to the housing and home furnishings business. In the next decade, the study notes, the number of U.S. households will increase by nearly 13 million, with nearly all of this growth—nearly 11 million—occurring among people aged 65 and older.

“Age 55+ households account for nearly half (47%) of all spending on home renovations—about $90 billion annually,” the report noted. “While younger households slowed or reduced spending on home renovations between 2003 and 2013, spending among those age 65+ increased by 26%.”

Common renovations among retired homeowners include: home office (35%), improved curb appeal (34%), a kitchen upgrade (32%), improved bathroom (29%), adding age-friendly safety features in a bathroom (28%), and modifying their home so they can live on a single level if needed (15%).

The report found the South Atlantic states were the favorite place for people to live and to relocate, followed by Mountain and Pacific states.

It also echoed other research that finds people overwhelmingly prefer to “age in place” in their own homes, with 85% of people preferring this option as opposed to moving to a senior or assisted living community.

Leading age-ready home features include a no-step entry; single-floor living; extra-wide hallways and doors; accessible electrical controls; lever-style handles on doors and faucets; bathroom safety features, and, accessible countertops and cabinets.

The Merrill Lynch study is the fifth in its series of seven planned reports dealing with people’s life priorities for their health, home, family, finance, giving, work, and leisure. Its findings are based on a survey of more than 3,600 adults representative of the broader U.S. population in terms of age, income, gender and place of residence.

Philip Moeller is an expert on retirement, aging, and health, and co-author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

MONEY Social Security

How to Max Out Your Social Security Checks

Understanding how Social Security computes benefits for full-time workers past the age of 60 may make you feel better about working into your later years.

One of the most common misconceptions I hear about Social Security is that it makes no sense to work in your later years—and keep forking over payroll taxes—because your benefits won’t rise.

For full-time workers, this is absolutely not true. Social Security uses very favorable rules for measuring wages for people age 60 and older who are still working. And older workers are a big and growing army: More than 8.2 million persons age 65 or older were in the labor force last month, up from 4.7 million 10 years earlier, according to the U.S. Bureau of Labor Statistics.

Of course, one of the main reasons people are staying on the job is because they need the money. Their retirement prospects may be bleak to boot. So understanding these Social Security rules is more important than ever.

Social Security bases your benefits on the top 35 years of your covered earnings. As used here, “covered” means wages on which you’ve paid FICA (Federal Insurance Contribution Act) taxes. There is an annual cap on wages subject to these taxes, but it goes up each year to reflect the past year’s increase in national wages. In 2015, the cap is $118,500.

Each year, Social Security indexes your wage earnings, adjusting them to reflect the impact of wage inflation. It uses these indexed wage amounts to determine your top 35 years of earnings.

This way, people get fair credit for all of their past earnings years. Otherwise, a 66-year-old who earned most of his wages 30 years ago would receive less in benefits than a 66-year-old whose earnings occurred in more recent years.

Wage indexing stops at age 60. This is a big deal. The reasons aren’t important here—what is important is that your post-60 earnings are not indexed and thus flow directly into your earnings record in their unadjusted, or nominal, form.

Because wages have increased in this country nearly every year since 1950, the odds are very good that someone who keeps working full-time past age 60 will earn enough money to represent a new “top 35 year.”

This is automatically the case for high earners whose wages exceed the annual cap. As the cap rises, so will the amount of their covered earnings, automatically becoming a new top-35 year. But even lower-earning individuals face good odds of having their post-60 earnings become new top-35 years.

When this happens, Social Security will automatically recompute not only your retirement benefits but the benefits of anyone else—a present or former spouse, young children, and even your parents—that are linked to your earnings record. And it will do this for every year in which your unadjusted earnings are large enough to become one of your top 35 earnings years.

Having said this, I share the frustration that many older workers express for continuing to fork over payroll taxes even after they’ve reached their maximum Social Security benefits. Paying something for nothing is no fun, and in this case it’s not right.

My solution, which maybe has just a constituency of me, would be to cut payroll taxes for workers who are at least 70 years old—and to cut them for their employers as well. This will still bring new taxes into Social Security, but it also will recognize the reality that these workers largely have already paid for their Social Security benefits.

Giving their employers a break will also create needed incentives to encourage hiring and retaining older workers. Right now, many employers balk at doing do, citing higher health care and perhaps retraining costs for older employees. Yet the need for this and other “aging America” changes is becoming clearer with each passing day.

Philip Moeller is an expert on retirement, aging, and health, and co-author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

MONEY IRAs

The Retirement Investing Mistake You Don’t Know You’re Making

The investor rush to beat the April 15 deadline for IRA contributions often leads to bad decisions. Here's how to keep your investments growing.

It happens every year around this time: the rush by investors to make 11th-hour contributions to their IRAs before the April 15 tax deadline.

If you’ve recently managed to send in your contribution, congrats. But next time around, plan ahead—turns out, this beat-the-clock strategy comes at a cost, or a “procrastination penalty,” according to Vanguard.

Over 30 years, a last-minute IRA investor will wind up with $15,500 less than someone who invests at the start of the tax year, assuming identical contributions and returns, Vanguard calculations show. The reason for the procrastinator’s shortfall, of course, is the lost compounding of that money, which has less time to grow.

Granted, missing out on $15,500 over 30 years may not sound like an enormous penalty, though anyone who wants to send me a check for this amount is more than welcome to do so. But lost earnings aren’t the only cost of the IRA rush—last-minute contributions also lead to poor investment decisions, which may further erode your portfolio.

Many hurried IRA investors simply stash their new contributions in money-market funds—a move Vanguard calls a “parking lot” strategy. Unfortunately, nearly two-thirds of such contributions are still stashed in money funds a full 120 days later, where they have been earning zero returns. So what seems like a reasonable short-term decision often ends up being a bad long-term choice, says Vanguard retirement expert Maria Bruno.

Why are so many people fumbling their IRA strategy? All too often, investors focus mainly on their 401(k) plan, while IRAs are an after-thought. But fact is, most of your money will likely end up in an IRA, when you roll out of your 401(k). Overall, IRAs collectively hold some $7.3 trillion, the Investment Company Institute (ICI) found, fueled by 401(k) rollovers—that’s more than the money held in 401(k)s ($4.5 trillion) and other defined-contribution accounts ($2.2 trillion) combined.

Clearly, having a smart IRA plan can go a long way toward improving your retirement security. To get the most out of your IRA—and avoid mistakes—Bruno lays out five guidelines for investors:

  • Set up your contribution schedule. If you can’t stash away a large amount at the start of the year, establish a dollar-cost averaging program at your brokerage. That way, your money flows into your IRA throughout the year.
  • Invest the max. You can save as much as $5,500 in an IRA account in 2015. But for those 50 and older, you can make an additional tax-deferred “catch up” contribution of $1,000. A survey of IRA account holders by the ICI found that just 14% of investors take advantage of this savings opportunity. (You can find details on IRS contribution limits here.)
  • Select a go-to fund. Skip the money fund, and choose a target-date retirement fund or a balanced fund as the default choice for your IRA contributions. You can always change your investment choice later, but meantime you will get the benefits—and the potential growth—of a diversified portfolio.
  • Invest in a Roth IRA. Unlike traditional IRAs, which hold pre-tax dollars, Roths are designed to hold after tax money, but their investment gains and later payouts escape federal income taxes. With Roths, you also avoid RMDs (required minimum distributions) when you turn 70 ½, which gives you more flexibility. Vanguard says nine out of every 10 dollars contributed to IRAs by its younger customers under age 30 are flowing into Roths. Here are the IRS rules for 2015 Roth contributions.
  • Consider a Roth conversion. High-income earners who do not qualify for tax-deferred Roth contributions can still make post-tax contributions to an IRA and then convert this account to a Roth. The Obama Administration’s proposed 2016 federal budget would end these so-called backdoor Roth conversions, which have become very popular. Of course, it’s far from clear if that proposal will be enacted.

Once you have your IRA set up, resist tapping it until retirement. The longer you can let that money ride, the more growth you’re likely to get. Raiding your IRA for anything less than real emergency would be the worst mistake of all.

Philip Moeller is an expert on retirement, aging, and health. His latest book is “Get What’s Yours: The Secrets to Maxing Out Your Social Security.” Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: 25 Ways to Get Smarter About Money Right Now

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