MONEY Roth IRA

Here’s the Best Way to Invest a Roth IRA in Your 20s

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

Q: I just rolled over a Roth 401(k) from my previous employer into a Roth IRA. How diversified should my Roth IRA investments be? How do I select the right balance being a 28-year-old? – KC, New York, NY

A: First, good for you for reinvesting your retirement savings. Pulling money out of your 401(k) can do serious damage to your retirement prospects—and that’s a common mistake that many people make, especially young investors, when they leave their employers. According to Vanguard, 29% of 401(k) investors overall and 35% of 20-somethings cashed out their 401(k)s when switching jobs.

Cashing out triggers income taxes and a 10% penalty if you’re under 59 ½. And you lose years of growth when you drain a chunk of savings. Cash-outs can cut your retirement income by 27%, according to Aon Hewitt.

So you’re off to a good start by rolling that money into an IRA, says Brad Sullivan, a certified financial planner and senior vice president at Beverly Hills Wealth Management in California.

At your age, you have thirty or more years until retirement. With such a long-time horizon, you need to be focused on long-term growth, and the best way to achieve that goal is to invest heavily in stocks, says Sullivan. Over time, stocks outperform more conservative investments, as well as inflation. Since the 1920s, large cap stocks have posted an average annual return of about 10% vs. 5% to 6% for bonds, while inflation clocked in at 3%.

Granted, stocks can deliver sharp losses along the way, but you have plenty of time to wait for the market to recover. A good starting point for setting your stock allocation, says Sullivan, is an old rule of thumb: subtract your age from 110 and invest that percentage of your assets in stocks and the rest in bonds. For you, that would mean a 80%/20% mix of stocks and bonds.

But whether you should opt for that mix also depends on your tolerance for risk. If you get nervous during volatile times in the stock market, keeping a higher allocation in conservative investments such as bonds—perhaps 30%—may help you stay the course during bear markets. “You have to be comfortable with your asset allocation,” says Sullivan. “You don’t want to get so nervous that you pull your money out of the market when it is down.” For those who don’t sweat market downturns, 80% or 90% in stocks is fine, says Sullivan.

Diversification is also important. For the stock portion of your portfolio, Sullivan recommends about 70% in U.S. stocks and 30% in international stocks, with a mix of large, mid-sized and small cap equities. (For more portfolio help, try this asset allocation tool.)

All this might seem complicated, but it doesn’t have to be. You could put together a well-diversified portfolio with a few low-cost index options: A total stock market index fund for U.S. equities, a total international stock index fund and a total U.S. bond market fund. (Check out our Money 50 list of recommended funds and ETFs for candidates.)

Another option is to invest your IRA in a target-date fund. You simply choose a fund that’s labeled with the year you plan to retire, and it will automatically adjust the mix of stocks, bonds and cash to maximize your return and minimize your risk as you get older.

That’s a strategy that more young people are embracing as target-date funds become more available in 401(k) plans. Among people in their 20s, one-third have retirement savings invested in target-date funds, according to the Employee Benefit Research Institute.

Keeping your investments in a Roth is also smart. The money you put into a Roth is withdrawn tax-free. What’s more, you’re likely to have a higher tax rate at retirement, which makes Roth IRAs especially beneficial for younger retirement savers.

Still, you can’t beat a 401(k) for pumping up retirement savings. You can put away up to $18,000 a year in a 401(k) vs. just $5,500 in an IRA—plus, most plans offer an employer match. So don’t hesitate to enroll, if you have another opportunity, especially if the plan offers a good menu of low-cost investments.

If that’s the case, look into the possibility of a doing a “reverse rollover”: transferring your Roth IRA into your new employer’s 401(k), says Sullivan. About 70% of 401(k)s allow reverse rollovers, according to the Plan Sponsor Council of America, and a growing number offer a Roth 401(k), which could accept your Roth IRA. It will be easier to stay on top of your asset allocation if you’ve got all your retirement savings in one place.

Read next: This Is the Biggest Mistake People Make With Their IRAs

MONEY 401(k)s

This Is the Single Biggest Threat to Boomers’ Retirement Savings

Roulette Wheel with ball on "0"
Alexander Kozachok—Getty Images

401(k) balances for longtime savers soared to $250,000, but many are taking big risks in the stock market.

IRA and 401(k) balances are holding steady near record levels. But certain risks have been creeping into the typical plan portfolio, which after a long bull market may be overexposed to stocks and otherwise burdened by a rising loan balance, new research shows.

The average balance in both IRA and 401(k) accounts dipped slightly in the second quarter, but continues to hover above $91,000 for the past year, according to new data from Fidelity Investments. Savers who have participated in a 401(k) for at least 10 years, and those who have both an IRA and a 401(k), now have balances that top $250,000.

Much of this growth owes to the stock market, which has more than doubled since the recession. But individual savers are stepping up as well. For the first time, the average 401(k) participant socked away more than $10,000 (including company match) in a 12-month period, Fidelity found. That occurred in the second quarter, when the total contribution rose to $10,180, up from $9,840 the previous quarter.

Yet bulging savings have tempted some workers to dig a little deeper into the 401(k) piggy bank. New plan loans and participants with a loan outstanding held constant in the second quarter, at 10.1% and 21.9% respectively. But the average outstanding plan loan balance climbed to $9,720, compared to $9,500 a year earlier. This leaves borrowers at greater risk of losing tax-advantaged savings and growth.

Plan loans are a primary source of retirement account leakage—money that “leaks” out of savings and never gets replaced. This may occur when a worker switches jobs and cannot repay the loan, which becomes an early distribution and may be subject to taxes and penalties.

Meanwhile, savers who are not invested in a target-date fund or managed account, and who have not rebalanced to maintain their target allocation, may find that the brisk rise in stock prices has left them with too much exposure to stocks. Baby boomers especially are at risk, Fidelity found. Pre-retirees should be lightening up on stocks, while adding bonds to reduce risk. But unless they regularly rebalance—and few people do—boomers have been riding the recent market gains, so they are holding an ever larger allocation in stocks than they originally intended.

That inertia could hurt boomers just as they move into retirement. During the last recession, 27% of those ages 56 to 65 had 90% or more of their 401(k) assets in stocks, which fell some 50% from the market peak in 2007. Those kinds of losses could wreck a retirement.

Could this scenario repeat? Very possibly. Nearly one in five of those ages 50-54 had a stock allocation at least 10 percentage points or higher than recommended, Fidelity found. For those ages 55-59, some 27% of savers exceed the recommended equity allocation. One in 10 in both age groups are 100% invested in stocks in their 401(k). It’s possible that these investors are holding a significant stake in safe assets, such as bonds or cash, outside their plans, which would cushion their risk. But that often is not the case.

Whether you’re approaching retirement, or you’re just starting out, it’s crucial to hold the right allocation in your 401(k) plan. Younger investors, who have decades of investing ahead, can ride out market downturn, so a 80% or higher allocation to stocks may be fine. But a 60-year-old would do better to keep only 50% invested equities, with the rest in a mix of bonds, real estate, cash and other alternatives. To get a suggested portfolio mix, try this asset allocation tool. And for tips on how to change your portfolio as you age, click here.

Read next: Americans Left $24 Billion in Retirement Money on the Table Last Year

MONEY retirement income

QUIZ: How Smart Are You About Retirement Income?

senior sitting in chair reading newspaper with beach view in background
Tom Merton—Getty Images

Only 4 in 10 Americans have seriously looked at their retirement income options.

Do you have a credible retirement income plan? A TIAA-CREF survey earlier this year found that only four in 10 Americans had seriously looked into how to convert their savings into post-career income. To see just how much you know about creating income that will support you throughout retirement, answer the 10 questions below—and see immediately if you got them right. You’ll find a full explanation of all the correct answers, plus a scoring guide, just below the quiz.

When $1.5 Million Isn’t Enough for Retirement

Scoring:

0-4: You really need to brush up on retirement income basics, preferably before you start collecting Social Security and drawing down your nest egg.

5-7: You understand the basics, but you’ll improve your retirement prospects immensely if you take a deeper dive into how to create a retirement income plan.

8-9: You clearly know your way around most retirement-income concepts. That doesn’t mean you couldn’t profit, however, from learning more about such topics as Social Security, different ways to get guaranteed income and how to set up a retirement income plan.

10: If the answers in this quiz weren’t so obvious, I’d say you’re a retirement income expert. Still, congratulations are in order if for no other reason than you actually read this story from top to bottom and got every answer right.

Explanation of Answers:

1. Based on projections in the Social Security trustees report released last week, the trust fund that helps pay Social Security retiree and disability benefits will run out of money in 2034. That means…
c. that payroll taxes coming into the system will still be able to pay about 79% of scheduled benefits.
d. that Congress needs to do something between now and 2034 to address this issue.

Both c and d are correct. Although the trust fund’s “exhaustion date”—2034 in the latest report—gets a lot of press attention, all it means is that we’ll have run through the surplus that accumulated over the years because more payroll taxes were collected than necessary to fund ongoing benefits. When that surplus is exhausted, enough payroll taxes will still flow in to pay about 79% of scheduled benefits. That said, I doubt the American public will stand for a system that eventually calls for them to take a 21% haircut on Social Security benefits. So at some point Congress will have to act—i.e., find some combination of new revenue and perhaps smaller or more targeted cuts—to deal with this looming shortfall, as it has addressed similar problems in the past.

2. Given the low investment returns expected in the future, what initial annual withdrawal rate subsequently increased by the inflation should you limit yourself to if you want your nest egg to last at least 30 years?
a. 3% to 4%

In eras of more generous stock and bond market returns, retirees who limited their initial withdrawal to 4% of savings and subsequently increased that draw for inflation had a roughly 90% or better chance of their nest egg lasting 30 or more years. Hence, the oft-cited “4% rule.” But later research that takes lower investment returns into account suggests that an initial withdrawal rate of 3% or so makes more sense if you want your money to last at least 30 years. Truth is, though, whatever initial withdrawal rate you start with, you should be prepared to adjust it in the future based on on market conditions and the size of your nest egg.

3. An immediate annuity can pay you a higher monthly income for life for a given sum of money than you could generate on your own by investing the same amount in very secure investments. That is due to…
c. mortality credits.

Some annuity owners will die sooner than others. The payments that would have gone to those who die early and that are essentially transferred to those who die later are called mortality credits. Thus, mortality credits are effectively an extra source of return an annuity offers that an individual investing on his own has no way of earning.

4. A Roth IRA or Roth 401(k) …
c. may or may not be a better deal depending on the particulars of your financial situation.

While it’s true in theory that a traditional 401(k) or IRA makes more sense if you expect to face a lower tax rate when you make withdrawals in retirement and you’re better off with a Roth 401(k) or Roth IRA if you expect to face a higher rate, in real life the decision is more complicated. The tax rate you pay during your career can vary significantly, which means sometimes it may go to go with a traditional account, other times the Roth may make more sense. It can also be difficult to predict what tax rate you’ll actually face in retirement, making it hard to know which is the better choice. Given the uncertainty due to these and other factors, I think it makes sense for most people to practice “tax diversification,” and try to have at least a bit of money in both types of accounts.

5. Starting at age 70 ½, you must begin taking annual required minimum distributions (RMDs) from 401(k)s, IRAs and similar retirement accounts. If you miss taking your RMD in a given year, the IRS may charge a tax penalty equal to what percentage of the amount you should have withdrawn?
d. 50%

That’s right, there’s a 50% tax penalty for not taking your RMD—and that’s in addition to the regular tax you own on that RMD. You can plead your case and ask the IRS to waive the penalty—and sometimes the IRS will. But clearly the better course is to make sure you take your RMD every year rather than putting yourself at the IRS’s mercy.

6. Many retirees focus heavily on dividend stocks to provide steady and secure income throughout retirement. How did the popular iShares Dividend Select ETF perform during the financial crisis year 2008?
d. It lost 33%.

Tilting your retirement portfolio heavily toward dividend-paying stocks and funds can leave you too concentrated in a few industries. The main reason iShares Dividend Select ETF lost 33% in 2008 was because of its heavy weighting in financial stocks, which got hammered in the financial crisis. If you want to include dividend stocks and funds in your portfolio, that’s fine. But don’t overdo it. A better way to invest for retirement income is to build a portfolio that mirrors the weightings of the broad stock and bond markets and supplement dividends and interest payments by selling stock or fund shares to get the income you need.

7. To avoid running through your savings too soon, you should spend down your nest egg so that it will last as long as the remaining life expectancy for someone your age.
b. False

Life expectancy represents the number of years on average that people of a given age are expected to live. (This life expectancy calculator can help you calculate yours.) But many people will live beyond their life expectancy; some well beyond. So if arrange your spending so that your nest egg will carry you only to life expectancy, you may find yourself forced to stint in your dotage. To avoid that possibility, I generally recommend that you plan as if you’ll live at least to your early to mid-90s.

8. If your Social Security benefit at your full retirement age of 66 is $1,000 a month, roughly how much per month will you receive if you begin collecting benefits at age 62? How about if you wait until age 70?
c. $750/$1,320

For each year you delay taking Social Security between the age of 62 and 70, your benefit increases by roughly 7% to 8% (and that’s before cost-of-living adjustments). If you also work during the time you postpone taking benefits, your payment could rise even more. To see how much delaying benefits and other strategies might boost the amount of Social Security you (and your spouse, if you’re married) collect over your lifetime, check out the Financial Engines Social Security calculator.

9. With yields so low these days, bonds and bond funds, no longer deserve a place in retirement portfolios.
b. False

There’s no doubt that if interest rates continue to rise as they already have since the beginning of the year, that bonds and bond funds could post losses. But as long as you stick to a diversified portfolio of investment-grade bonds with short- to intermediate-term maturities, those losses aren’t likely to come anywhere close to the 50% or more declines stocks have suffered in past meltdowns. Which means that while bonds at current yields may not provide as much of a cushion as they have in past years, a portfolio that includes bonds will be much more stable than an all-stocks portfolio. In short, for diversification reasons alone, it still makes sense to include short- to intermediate-term bonds or bond funds in your retirement portfolio.

10. A new type of longevity annuity called a Qualified Longevity Annuity Contract, or QLAC (pronounced “Cue Lack”), allows you to invest a relatively small sum today within your 401(k) or IRA in return for a relatively high guaranteed lifetime payout in the future. For example, a 65-year-old man who invests $25,000 in a QLAC might receive $550 a month starting at age 80, or $1,030 a month starting at 85. Putting a portion of your nest egg into a QLAC also allows you to…
b. Worry less that overspending early in retirement will exhaust your nest egg since you can count on your QLAC payments kicking in later on.
c. postpone taking RMDs on value of the QLAC (and avoid the income tax that would be due on those RMDs) until it actually begins making payments.

Both b and c are correct. The main reason to consider a QLAC is to hedge against the possibility of running through your savings and finding yourself short of the income you need late in retirement. But the fact that you can postpone RMDs and the tax that would be due on them is an added bonus. To qualify for this bonus, however, you must be sure that the longevity annuity you buy with your 401(k) or IRA funds meets the Treasury Department’s criteria to be designated as a QLAC and that the amount you put into the QLAC doesn’t exceed the lesser of $125,000 or 25% of your account balance.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

Read next: Why the Right Kind of Annuity Can Boost Your Retirement Income

MONEY Medicare

Medicare Turns 50 But Big Challenges Await

President Lyndon Johnson signing Medicare Bill in Independence, Missouri while Harry Truman looks on, July 30, 1965.
Universal History Archive—Getty Images President Lyndon Johnson signing Medicare Bill in Independence, Missouri while Harry Truman looks on, July 30, 1965.

Medicare provides coverage to one in six Americans, and federal officials look to find ways to trim the increasing cost and improve how the program operates.

Medicare, the federal health insurance program for the elderly and disabled, has come a long way since its creation in 1965 when nearly half of all seniors were uninsured. Now, the program covers 55 million people, providing insurance to one in six Americans. With that in mind, Medicare faces a host of challenges in the decades to come. Here’s a look at some of them.

Financing – While Medicare spending growth has slowed in recent years – a trend that may continue into the future – 10,000 people a day are becoming eligible for Medicare as the trend-setting baby boomers age. Yet the number of workers paying taxes to help fund the program is decreasing. That means Medicare will consume a greater share of the federal budget and beneficiaries’ share of the tab will likely climb. An abundance of proposals to curb federal expenditures on Medicare exist. They include increasing the eligibility age, restructuring benefits and cost-sharing, raising the current payroll tax rate and asking wealthier beneficiaries to pay more for coverage. Many Republicans have backed a “premium support” model — where the government would give beneficiaries a set amount of money to purchase coverage from a number of competing plans — as a way to limit Medicare spending. Democrats say premium support would undermine traditional Medicare and shift more of the program’s financial risk to beneficiaries. They favor other reforms in the program. By at least two-to-one margins, majorities of Democrats, Republicans and independents favor keeping Medicare as it is rather than changing to a premium support program, according to a recent poll from the Kaiser Family Foundation. (KHN is an editorially independent program of the foundation.)

Affordability — Most Medicare beneficiaries don’t have a lot of money and spend a large chunk of their finances on health care. Unlike many private health insurance plans, there is no cap on out-of-pocket expenditures in traditional Medicare, and the program does not cover services that many beneficiaries need, such as dental care and eyeglasses. (Private insurers that participate in Medicare Advantage may cover these and other items that traditional Medicare does not.) In 2013, half of all people on Medicare had incomes below $23,500 per person, and premiums for Medicare and supplemental insurance accounted for 42 percent of average total out-of-pocket spending among beneficiaries in traditional Medicare in 2010, according to an analysis from the Kaiser Family Foundation. Medicare does have some programs to help beneficiaries pay their Medicare expenses but the income limits can be as low as $1,001 per month with savings and other assets at or below $7,280 (limits are higher for couples).

Managing Chronic Disease — Illnesses such as heart disease or diabetes can ring up huge medical costs, so keeping beneficiaries with these conditions as healthy as possible helps not only the patients but also Medicare’s bottom line. An analysis from the Urban Institute finds that half of all Medicare beneficiaries will have diabetes in 2030 and a third will be afflicted with heart disease. Nearly half of the people on Medicare have four or more chronic conditions and 10 percent of the Medicare population accounts for 58 percent of spending. Reducing the rate of chronic disease by just 5 percent would save Medicare and Medicaid $5.5 billion a year by 2030 and reducing it by 25 percent would save $26.2 billion per year, the Urban Institute found. As beneficiaries age, many will want to remain in their homes and communities, requiring Medicare to identify ways to serve these beneficiaries as they face physical and cognitive impairments and meet their needs for more personal care, according to the Commonwealth Fund.

Delivery-System Reform — Medicare hopes to better manage beneficiaries’ needs by revolutionizing the way in which it pays for medical care. Federal officials have taken several steps to better coordinate and improve medical care, including implementing the health law’s requirement to reduce preventable hospital readmissions and form accountable care organizations, or ACOs, where doctors and others band together to care for patients with the promise of getting a piece of any savings. Another federal effort uses bundled payments, where Medicare gives providers a fixed sum for each patient, which is supposed to cover not only their initial treatment but also all the follow-up care. Last year, 20 percent of traditional Medicare spending — $72 billion — went to doctors, hospitals and other providers that coordinated patient care to make it better and cheaper. Department of Health and Human Services Secretary Sylvia M. Burwell has said that by the end of 2018 Medicare aims to have half of all traditional program payments linked to quality.

The Growth of Medicare Advantage — Enrollment in these private plans that offer alternative coverage is growing sharply. But the health law seeks to cut the rate at which the government reimburses insurers to make it closer to what it spends on beneficiaries in traditional Medicare. Nearly a third of beneficiaries are enrolled in Medicare Advantage plans. Many of the plans provide benefits beyond what traditional Medicare covers, such as eyeglasses and dental care, as well as lower out-of-pocket costs. But as federal payment rates decline the plans may become less generous. Another factor to watch is concentration in the Medicare Advantage market with just a handful of insurers now accounting for more than half of enrollment.

Kaiser Health News (KHN) is a nonprofit national health policy news service.

MONEY IRAs

This Is the Biggest Mistake People Make With Their IRAs

piggy bank under spider webs
Jan Stromme—Getty Images

Too many investors view IRAs simply as parking accounts for their rollover 401(k) money.

Millions of American have IRAs. Some people, like me, have multiple IRAs, but hardly anyone makes regular contributions to these accounts. According to a recent study by the Investment Company Institute (ICI), only 8.7% of investors with a traditional (non-Roth) IRA contributed to them in tax year 2013.

The Employee Benefit Research Institute’s IRA database, which tracks 25 million IRA accounts, estimates an even smaller percentage of investors contributed to their traditional IRA accounts—just 7%.

The problem, it seems, is that many people have come to see IRAs as a place to park money rather than as a savings vehicle that needs regular, new contributions. Most IRAs are initially established with money that is rolled over from an employer-sponsored 401(k) when a worker changes jobs or retires.

As savings options, IRAs are inferior to 401(k)s, which typically offer employer matches and a tax deduction for your contribution. With IRAs, the deduction for contributions is more limited. If you are already covered by a plan at work, you qualify for a tax deduction to a traditional IRA only if your income is $61,000 or less. Moreover, the contribution limit for IRAs is low—$5,500 a year, or $6,500 if you’re 50 and older. By contrast, the contribution limit for a 401(k) is $18,000 this year ($24,000 for those 50 and older).

Still, traditional IRA accounts will let your money grow tax-deferred; with Roth IRAs, you contribute after-tax money, which will grow tax-free. Adding an extra $5,500 a year to your savings today can make a sizable difference to your retirement security. Even if you don’t qualify for a deduction, you can make a nondeductible contribution to an IRA. (Be sure to file the required IRS form, 8606, when you make nondeductible contributions to avoid tax headaches.) Still, as these new findings show, most people don’t contribute new money to any IRA.

I get it. I have two traditional IRAs from rollovers and have been making the mistake of not contributing more to them for years. Since my traditional IRAs were started with a lump sum, I mistakenly viewed them as static (though still invested) nest eggs. If I had thought of them as active vehicles to which I should contribute annually, I would be on much firmer footing in terms of my “retirement readiness.” (I also have a SEP-IRA that I can only contribute to from freelance income, and a Roth IRA which I converted from a third rollover IRA one year when it made sense tax-wise to do so, but also now can’t contribute to. No wonder I find IRAs confusing.)

The ICI’s report suggests that very low contribution rates for IRAs “are attributable to a number of factors, including that many retirement savers are meeting their savings needs through employer-sponsored accounts.” But that explanation is misleading. Even those lucky enough to have access to 401(k)s need to have been making the absolute maximum contributions every year since they were 23 years old to feel confident they’re saving enough.

IRAs are a valuable and often overlooked part of the whole plan—and for many without 401(k)s, they are THE whole plan. There has been a lot of attention on improving 401(k) plan participation rates by automatically enrolling employees. But only recently has there been more focus by policymakers on getting people to contribute to their IRAs on a regular basis, including innovations like President Obama’s MyRA savings accounts and efforts by Illinois and other states to create state savings plans for workers who lack 401(k)s. These are worthy projects that need an even bigger push.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

Read next: Americans Left $24 Billion in Retirement Money on the Table

MONEY Spending

Why You Should Spend More Money in Retirement

illustration of senior couple taking money out of purse
Jason Schneider

Money worries can make you unnecessarily frugal. Here's how to overcome them.

You’ve saved up money your whole career. So in retirement, don’t deny yourself the pleasure of spending it.

Not a problem, you think? Actually, it can be. In 2014, 28% of people 65 and older with at least $100,000 in savings pulled less than 1% from their accounts, reports the research firm Hearts & Wallets. That’s well below the 4% that many financial planners say is safe.

Misgivings about spending play a big role, says Hearts & Wallets partner Laura Varas. In focus groups, retirees described big spenders their age as irresponsible and expressed shame about their own spending. And as people age, they tend to get more emotional about complex money decisions, says Christopher Browning, a financial planning professor at Texas Tech University: “No one gives you instructions on how to turn your savings into income. It can be a paralyzing process.”

First determine if a shortage of money is the problem rather than an inability to spend. The tool at troweprice.com/ric can help you figure out whether you indeed have enough funds for a good retirement. Then, if it’s worry that’s stifling your spending, try these steps to put yourself at ease.

Make Your Own Pension

Living off a steady income stream, not portfolio withdrawals, can boost your confidence about spending. A Towers Watson survey found that retirees relying on pension or rental income are less anxious than those who live off investments. Don’t have a pension and don’t want to be a landlord? You can create regular income by buying an immediate fixed annuity. A 65-year-old man who puts $100,000 into one today, for example, would collect about $500 a month for a lifetime.

Add up your monthly fixed costs, such as a mortgage and health insurance. If that amount exceeds your Social Security and any other guaranteed income, fill that gap with an annuity. (Get quotes at ImmediateAnnuities.com.) Granted, if you’re hesitant to spend money, you may be hesitant to lock up funds in an annuity. If so, annuitize a fraction of your money and add more once you’re more comfortable with the idea.

Bucket Your Money

Should you not want to tie up any money in an annuity, you can get comfortable about spending by dividing your portfolio into accounts for different needs. Browning suggests sorting your savings into three buckets. One provides income for everyday expenses over the next few years, the second is for fun pursuits, and the third is for future needs: day-to-day living, emergencies, and bequests.

Put the first two buckets in secure and liquid investments: money-market accounts, CDs, or high-quality bonds. The bucket for later years can have stock holdings for greater long-term growth.

Once that’s done, you can start collecting income—a paycheck for retirement. Set up a regular transfer from a money-market account that’s in your first bucket—enough to cover, with Social Security, monthly bills and usual expenses. Then relax and enjoy.

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MONEY Medicare

How Medicare’s New Rules May Improve Eldercare Benefits

caregiver helping woman with cane
Dave and Les Jacobs—Getty Images

As the number of elderly Americans soars, Medicare is testing improved benefits for seriously ill seniors.

Medicare recently announced new rules that may ease the challenges of senior health care. The changes put a new focus on improving treatment of the seriously ill, as well as better planning for end-of-life care.

These reforms are much needed and long overdue. As millions of baby boomers move into retirement, record numbers of Americans are growing older. And these seniors, along with their family members, will need all the help they can get to help them navigate their final days. Here’s how Medicare is attempting to cope with these demands.

The Caregiving Challenge

Right now, the nation’s current caregiving system relies heavily on the efforts of family members—and it falls far short of meeting demand. As a recent AARP study amply documents, family caregivers are already experiencing a rising financial, emotional, and career toll. It’s unlikely that the system will be able to meet even greater demand from a growing number of aging Americans.

Seniors who need assistance with daily living can’t get much help from Medicare, which does not cover long-term care. The program restricts its coverage to short-term stays in skilled nursing facilities for seniors who have diagnosed medical needs—usually following hospital stays. Private long-term care insurance is costly and insurers have been leaving the industry or raising premiums as they struggle with higher-than-anticipated claims expenses.

Medicaid is the long-term care insurer of last resort, but that program faces its own enormous financial challenges. And the quality of care provided by many nursing facilities is uneven, at best, and scandalous at worst. The widespread use of antipsychotic drugs in many nursing homes can amount to warehousing of the worst kind.

More Comprehensive Care

In its first move towards addressing these issues, Medicare announced in early July that it would pay physicians to have end-of-life conversations with patients and their families. This is a major reform, since the program typically reimburses doctors only for procedures, such as testing or treatments.

The details of this rule, which would take effect next year, are still to be finalized. But it’s clear that these conversations are the farthest thing possible from the mythical “death panels” that Sarah Palin and others were talking about before the 2012 elections.

Instead, these conversation can be life panels. Doctors can provide invaluable support and clarity about medical decisions that people need to think about, including the care they wish to receive near the end of their life, and how patients’ families can provide the help and support that are so important.

Easing Access to Hospice

Following easing of physician reimbursement rules, the Centers for Medicare & Medicaid Services (CMS) announced a second significant shift in end-of-life care. Beginning in 2016, Medicare will launch a large-scale test that will cover expanded hospice care. In addition to providing palliative care, which provides physical and emotional comfort to seriously ill patients, the Medicare pilot project will cover continued curative treatments to slow, if not halt, those underlying conditions.

Right now, ailing seniors and their families are faced with a wrenching choice: continue receiving curative therapies or end their efforts for a cure and enroll in a hospice program. Once in hospice, they normally have been required to end efforts to aggressively treat their illnesses and agree to receive only palliative care.

The hospice care model, including at-home care, has become increasingly popular as a more nurturing and less costly means of providing care than more traditional institutional settings. Some research also has found that hospice patients often survive longer than patients with similar diseases in active-care treatment settings.

The new test program will allow participating patients to continue treatments aimed at prolonging their lives. About 140 hospices around the country will participate in the test, half beginning next year and half in 2018. Their goal is to treat 150,000 Medicare beneficiaries during the five-year test period—that’s five times more patients than the test program originally planned.

Better Consumer Data

At the same time, Medicare is also working to provide improved performance information about the care that seniors receive. Last week, CMS announced it would begin providing “star” ratings that measure the quality of care of home health agencies, which have become increasingly important providers of care to Medicare beneficiaries.

Earlier this year, the agency beefed up its evaluations of nursing homes and now also provides star ratings of their performance.

Seniors, and especially adult family members who help them, need to learn more about their options about end-of-life care. Of equal importance, they need to have discussions before a crisis hits about how they wish to end their lives, including creating living wills, health care proxies and other advanced care directives. The Conversation Project is a good source of help for approaching these crucial family discussions.

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 is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: Cutting the High Cost of End-of-Life Care

MONEY 401(k)s

Americans Left $24 Billion in Retirement Money on the Table Last Year

stacks of cash on table
Sarina Finkelstein (photo illustration)—Getty Images (2)

The average worker is missing out on more than $1,300 a year. Make sure to get your share.

Personal savings rose last year, as conscientious workers reined in their spending. But a smaller portion of those savings were stashed in employer-sponsored retirement plans, new research shows. This and other recent findings suggest that the much-vaunted 401(k) match may not be the silver bullet for retirement savings that is widely presumed.

Personal savings jumped to 5.5% last year from 4.6% in 2013, according to data from Hearts and Wallets, a financial research firm. In the same period, average household savings allotted to employer-sponsored retirement plans fell to 22% from 29%. Among households eligible for a plan, only 56% participated, down from 60% the previous year.

Partly due to such behavior, Americans leave a staggering $24 billion on the table every year simply by not contributing enough to get their full employer match, according to a study by Financial Engines, a 401(k) advisory firm. Last year about a quarter of employees failed to collect their full match. The average worker missed out on $1,336 a year in free money—over 20 years, that can add up to $43,000.

The matching contribution is so ineffective at boosting savings that one third of eligible workers past the age of 59 ½ fail to take full advantage, research out of Yale and Harvard shows. That’s an especially dismal showing because these older workers can make penalty-free withdrawals from their plans.

If a 401(k) plan match is free money, why don’t more people take advantage? Inertia explains a lot. That’s why so many employers are switching their plans to automatically enroll new workers and automatically escalate their contribution rate. Another issue is that some workers don’t believe they can get by on less than their full take-home salary, and so they do not enroll or opt out of the plan if they have been automatically enrolled.

Typically, those who miss out on the match tend to be low- and middle-income workers. Ironically, this group would benefit the most from participation because the match would represent a bigger percentage of their income. A typical middle-income worker would more than double his or her annual savings just by raising the contribution rate to get the full match, Hearts and Wallets found.

In the end, the biggest beneficiaries of the 401(k) match are highly motivated savers, who tend be the most highly compensated. That’s why some policy experts and academics have raised questions about the fairness of corporate tax policies that encourage employers to offer a match. Maybe better public policy would be to redirect those tax dollars toward fixing Social Security, which benefits the low-income households least likely to save on their own and who need help the most.

Of course, any changes to tax policy aren’t likely to happen soon. All the more reason to make sure you are saving enough to get your full 401(k) match. Chances are, you won’t notice the difference in your take home pay—it helps that you get a tax break on the amount you sock away. To see how stepping up your savings will get you closer to your retirement goals, try this calculator.

Read next: When $1.5 Million Isn’t Enough for Retirement

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MONEY IRAs

Everything You Need to Know Before Opening an IRA

Here's why you should get one, how to choose the right one, and what to do if you already contribute to a 401(k).

According to the Social Security Administration, the average retirement benefit paid in 2013 was $1,451 per month to men, and $1,134 per month to women. That’s good for about $31,000 per year for a retired married couple, which is a far cry from the roughly $49,000 U.S. median annual income. We’re talking about a $18,000 income gap between Social Security and the median household.

Whether you’re a few years or a few decades from retirement, you can bridge the gap between Social Security and what you’ll need to live comfortably in retirement with an IRA, or individual retirement account. This is a personal account that you can fund each year, allowing you to save on taxes and building income for when you retire. Before you open that retirement account, it’s vitally important that you understand your options and the implications.

Here’s a closer look at everything you need to know before opening an IRA

What’s an IRA?
In short, it’s a savings and investment account that allows you to set aside money each year — up to $5,500 for 2015 — with some big tax benefits. There are two kinds of IRAs, with slightly different benefit structures.

A traditional IRA is most common, and offers a number of benefits, including potentially deducting contributions from your taxable income the year you make them. In other words, if your total income is $50,500 in 2015, and you contribute $5,500 to a traditional IRA, your taxable income would be $45,000.

If your employer offers a retirement program like a 401(k), you might not be able to deduct all of your IRA contributions from your income. Refer to the table below to see if you qualify for a deduction in 2015 based on your adjusted gross income, or AGI. Nonetheless, regardless of whether you qualify for a deduction, those contributions would grow tax-free until you begin taking distributions in retirement, at which point the distributions would be counted as regular income, and taxed at your nominal tax rate.

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The Roth IRA is in some ways superior. You can contribute the same $5,500 in 2015, but contributions are not deductible from your income. However, once the money is in the account, it’s never, ever taxed, as long as you take distributions after retirement age. In other words, you can create a source of completely tax-free income in retirement with a Roth.

You may also be considering a “rollover IRA” if you recently left your employer but want to take your 401(k) with you, or want to consolidate several old 401(k)s. By rolling over your funds, you don’t pay taxes and keep growing your money tax-free until taking distributions in retirement. A rollover IRA is basically a traditional IRA, but brokers use this designation to make it simpler for consumers to pick the right account to rollover funds.

Start now, even if you can’t max it out
Even if you can’t contribute the maximum amount each year, it’s worth starting as soon as you can, and with any amount you can afford. You’d be stunned by how big a difference it can make:

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Even small amounts can add up big over time. And that’s before considering the tax benefits, whether while still working or in retirement.

Which IRA should you open?
The answer is, “it depends”. It may seem like the Roth makes the most sense — tax-free retirement income is a no-brainer, right? — but it really boils down to a combination of your entire current situation, your current income, and tax status.

If you’re doing a rollover, you’ll need to open the same kind of account as the one you’re rolling over. If you have a Roth 401(k) — which are less common but growing in popularity — you’d need to rollover your Roth (401)k to a Roth IRA. And if you already have a traditional IRA, you can rollover your 401(k) into that account, without opening a new “rollover IRA”. The good news is your online broker (find a good one here) can help set up the right kind of account. Be sure to shop around, as many will give you bonus money, depending on the size of your rollover.

If you’re not doing a rollover, a Roth is the best choice for most folks, since the majority of workers have a retirement plan through their employer, and fall within the adjusted gross income limits set by the IRS each year. Here are the 2015 limits:

Screen Shot 2015-07-27 at 1.16.54 PM

If your income is above the amounts above, you can’t contribute to a Roth, but you can still contribute to a traditional IRA as there are no income limits. You won’t be able to deduct the contributions from your income if you have a retirement plan at work, but it will still grow tax-free.

If you don’t have a retirement plan at work and fall below the income guidelines in the table above, you may want to consider a traditional IRA over the Roth, especially if your effective tax rate today is likely to be higher than it will in retirement. If that’s the case, the tax savings today are worth more than than tax-free income in retirement.

This only applies to a small number of mostly self-employed people. If you’re in that category, you should consider opening a self-employed 401(k), since you can contribute a much larger amount to a 401(k), as much as $51,000 in 2015, based on combined employer and employee contributions.

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MONEY buying a home

Why Millennials Are Better Off Waiting 10 Years to Buy a Home

Millennial in front of house for rent
Daniel Grill—Getty Images

A new Fed study finds most young adults require years of saving before they can afford home ownership.

In a report sure to make the real estate industry cringe, researchers at the St. Louis Federal Reserve suggest most young adults postpone home ownership for years, if not a decade or longer. This comes as the housing market is beginning to boom again and older Millennials, a group that generally has eschewed homeownership, shows signs of wanting to take the plunge.

Can this be sound advice? Home ownership has been a reliable long-term wealth builder for generations. Often home equity is retirees’ largest asset and, along with Social Security, enough for them to live out their days financially secure.

The housing bust changed the calculus. Flipping and other short-term strategies, and risky nothing-down and no-documentation mortgages, contributed mightily to the bust. Yet short-term moves have always been dicey. Properly considered, a home is less an investment than a forced savings plan and place to live. Over time, real estate keeps pace with inflation and a stable, affordable mortgage provides a valuable tax deduction.

The Fed study does not dispute that. It is an examination of age and wealth, and finds that younger families are on track for a lower net worth than all previous living generations. Adjusted for inflation, the median wealth of families headed by someone at least age 62 rose 40% between 1989 and 2013—to $210,000 from $150,000. Meanwhile, median wealth of households headed by someone age 40 to 61 fell 31% to $106,000 and median wealth for younger families fell 28% to $14,000.

Researchers conclude that younger families would be better served by maintaining a personal asset mix that more closely resembles the asset mix of older families—less debt and less real estate relative to their other assets. In other words, stretching for that first home when you have no other savings and little ability to save going forward is a huge mistake.

This “mistake,” by the way, is one plenty of families in previous generations made—and for many it paid off well. What seems to have changed is a greater degree of speculation that leads to a boom-bust pattern in the housing market, one that can wipe you out in the short term if your timing stinks. The Fed researchers write that young people should “delay purchase of a home with its attendant debt burden until it was possible to buy a house that did not make the family’s balance sheet dangerously undiversified and highly leveraged.”

John Bucsek, managing partner of MetLife Solutions Group, finds merit in the Fed’s argument, saying that young families should rent for years for less money than a mortgage would cost. That preserves career flexibility and cuts monthly costs. They should begin saving in a Roth IRA to build long-term wealth through a diversified portfolio. They should also pay down student loans and other debts. Later, when they have more assets, if need be they may withdraw their original Roth IRA investment plus up to $10,000 penalty free for a first-time home purchase.

That is sound strategy, and would have been especially valuable advice before the housing collapse. Today the housing market is on firmer footing. Banks remain careful about extending credit, and in June the median price for an existing home rose 6.5% to a record $236,400, at last topping the previous high of $230,400 set in July 2006—before the bust. The pace of homes being sold is the strongest since 2007. All this suggests the market is in full recovery, though the prominent economist Robert Shiller, as ever, is raising red flags about a bubble.

At the same time, Millennials, a generation that pioneered the sharing economy and many of whom have claimed to never want to own anything, are poised to enter the housing market. A Digital Risk survey found that 70% of 18-to-34 year olds are interested in purchasing a home in the next five years. If they act on that interest, it will further boost the housing recovery—and if they commit to staying their house and saving a bit on the side, they will begin to build long-term wealth much like their parents and grandparents.

Read next: These States Offer the Most Help for Buying a Home

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