MONEY retirement planning

3 Ways to Be Sure You’re Not Fooling Yourself About Your Retirement Readiness

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Abrams/Lacagnina—Getty Images

Having a plan is important. But so is knowing whether your plan is realistic.

Are you on track toward a secure retirement? Before you answer, consider this: A new study shows that many people who aren’t preparing well for retirement apparently think they are—while others who actually are on track may erroneously believe they’re not.

In a recent study titled “Do U.S. Households Perceive Their Retirement Preparedness Realistically?” researchers from the University of Alabama and Ohio State found that 58% of the nearly 2,300 full-time workers age 35 to 60 polled in the Federal Reserve’s Survey of Consumer Finances weren’t on a path to a secure retirement. They also concluded that just under half of those who are unprepared didn’t realize that they were falling short. No surprises there. Plenty of studies show that lots of people are woefully unprepared for retirement, while other research finds that many are overconfident about their prospects.

But the study also revealed some counterintuitive twists. For example, the researchers found that just over half of those who are actually preparing decently for retirement don’t view themselves as being on track. And among workers who weren’t prepared, those who had a traditional defined benefit pension were more likely to be unrealistic about where they stood than those who lack a pension. These sorts of surprising disconnects could be the result of people simply not knowing how to evaluate their retirement preparedness or, in the case of pensions, mistakenly thinking that the mere fact that they have a pension means they’ll have sufficient retirement income to maintain their standard of living.

Clearly, you’re better off being on track for retirement than not. But either way, it’s also important that your outlook be accurate, so you have a more realistic notion of what you must do to have a decent shot at a secure retirement. Here are three things you can do to make sure you’re being realistic about your retirement readiness.

1. Crunch the numbers—and I mean really crunch them. If you’ve been socking away money diligently in a 401(k) or other retirement plan and investing in a broadly diversified portfolio, chances are you’re making decent headway toward a secure retirement. But the only way to know for sure is to do a full-fledged assessment of your progress.

Specifically, you need go to a retirement calculator that uses Monte Carlo analysis and plug in such information as the amount you currently have saved, the percentage of salary you’re contributing to retirement accounts each year, how you’re investing your savings, when you plan to retire, and how much you expect to spend annually in retirement. Based on that information, the calculator can estimate the probability that you’re on track toward accumulating the resources necessary to generate the income you’ll need to sustain you throughout retirement. If you’re not comfortable doing this sort of exercise on your own, you should consider having a financial adviser run the numbers for you.

Check Out: Should You Bet Your Retirement On Warren Buffett?

2. Fine-tune your plan, if necessary. There’s no official standard of what constitutes “being on track.” Generally, though, if the type of analysis I recommend shows that you have less than an 80% or so chance of generating the lifetime income you’ll need once you retire, that’s a sign you need to step up your efforts. If that’s the case—and the study cited above suggests it will be for most people—you can see what steps might tilt the odds of success more in your favor.

Typically, the single best way to improve your retirement outlook is to increase the amount you contribute to a 401(k), IRA or other retirement savings plan. Contributing even an extra couple of percentage points of pay each year can fatten the size of your nest egg by 20% over the course of a career. Revising your investing strategy may also help, but be careful: Taking a more aggressive stance by loading up with more stocks may boost returns, but it also makes your portfolio more vulnerable to market setbacks. A more effective tweak: Look for ways to cut investment fees. Reducing annual costs by even a half a percentage point a year can have the same effect as saving roughly an extra 1% of pay throughout your career. Postponing retirement a few years, claiming Social Security at a later age, and downsizing or relocating can also increase your chances of retirement success.

Check Out: Drink That Latte! How To Save And Still Enjoy Life

3. Reassess your readiness periodically. Bumps and detours along the road to retirement are the rule, not the exception. Indeed, a recent TD Ameritrade survey found that two-thirds of Americans have had their retirement planning disrupted by a job loss, illness, or other problem. And even if you’re fortunate enough to sail through your career without such a setback, there’s always the possibility that a market downturn will devastate your nest egg and seriously damage your retirement outlook.

Which is why it’s crucial that every year or so you plug updated information up that retirement calculator and get a fresh evaluation of where you stand, and take corrective measures if necessary. In periods of market turmoil, you may also want to give your retirement plan a “crash test” just to be sure a severe market correction won’t irretrievably damage your retirement prospects.

Bottom line: If you want a secure retirement, you’ve got to plan for it during your career. But it’s also a good idea to have an accurate sense of whether that planning is actually panning out.

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.

More From RealDealRetirement.com:

Can I Create My Own Pension Annuity?
The Biggest Retirement Income Mistake Most Americans Are Making
25 Ways to Get Smarter About Money Right Now

 

MONEY Careers

Surprising Ways Older Workers Find Second Act Jobs

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Alamy

If you're older and have been out of work for a while, try these strategies to land a new job

What’s the secret to landing a new job when you’ve been out of work a long time?

A new report by the AARP Public Policy Institute uncovered some surprising strategies that older workers are using to get back into the workforce.

That’s important because, while the job market is significantly better overall, the situation is still dismal for the long-term unemployed. The jobless rate for people out of work six months or longer is 30% vs. 5.5% overall.

Older workers make up a distressingly large portion of that group: 45% of job seekers 55 and older have been looking for work for six months or longer.

The AARP report examined the job search strategies that led to reemployment for people age 45 to 70 who were unemployed some time during the last five years.

It found big differences in job search strategies between older workers who landed jobs and those who are still not working.

The overall picture is mixed: Among those older workers employed again after a long time out of the workforce, some were earning more, getting better benefits, and working under better conditions. But for many, the jobs were not as good as the ones they had lost: 59% of long-term unemployed older workers made less money, while 15% earned the same and 25% made more.

So, what set the successful job seekers apart? These moves stand out.

  • Embrace change. Almost two-thirds of reemployed older workers found jobs in an entirely new occupation and women were more likely to find work in a new field than men. Of course, some of the unemployed didn’t choose to switch occupations. But for others, the change was a decision to do work that was more personally rewarding and interesting or even less stressful with fewer hours. Whether it was by choice or design, broadening your job search may pay off.
  • Go direct. Older reemployed workers were much more likely—48% vs. 37% of those still looking for work—to contact employers directly about jobs instead of just applying to the black hole of online job postings.
  • Network strategically. Everyone knows that networking is the best way to get a new job but apparently talking to everyone you know may not be the most effective method. While half of those who landed a new job reached out to their network for leads, only 34% of the unemployed used personal contacts at all. But the reemployed were less likely to rely on friends and family to find out about job opportunities, focusing instead on professional contacts.
  • Move fast. When hit with a job loss, many people use it as a time to take a break or think about what they want to do next. That lost time can cost you. The reemployed were much more likely to have begun their job search immediately or even before their job ended than those who are still unemployed.

A couple other surprising findings about what works and what doesn’t: Conventional advice is that the long-term unemployed need to keep their skills up to date if they are jobless for a while. While that can certainly help, additional training didn’t make much difference between those who landed a job and those who remained out of work.

As for social media: While 56% of the reemployed found job boards a good source of job leads, just 13% said online social media networks such as LinkedIn and Facebook were effective in helping them get a new job.

Among the most ineffective strategies: Using a job coach, talking with a headhunter, and consulting a professional association.

MONEY 401k plans

What You Can Learn From 401(k) Millionaires in the Making

These folks are doing all the right things to reach retirement with a seven-figure nest egg.

The 401(k) has become the No. 1 way for Americans to save for retirement. And save they have. The average plan balance has hit a record high, and the number of million-dollar-plus 401(k)s has more than doubled since 2012. In the first part of this series, we shared tips for building a $1 million retirement plan. Now meet workers on track to join the millionaires club—and get inspired by their smart moves. Once you hit your goal, learn more about making your money last and getting smart about taxes when you draw down that $1 million.
  • Greg and Jesseca Lyons, both 30

    Greg and Jesseca Lyons

    Carmel, Indiana
    Years to $1 million: 15
    Best move: Never cashed out their 401(k)s

    Though only 30, Greg and Jesseca Lyons are well on their way to reaching their retirement goals. The Lyons—he’s an operations manager for a small research company, she’s a product development engineer for a medical device maker—are on the same page when it comes to planning for the future.

    College sweethearts who have been married seven years, they made a commitment to start investing for retirement with their first jobs. They contribute 15% of their salaries. Employer matches bring that annual savings rate to about 19%. Together, they have $250,000 in their retirement accounts, invested 90% in stocks and 10% in bonds.

    Unlike many young people, they have resisted the temptation to cash out their 401(k)s when they changed jobs. Though they dialed back contributions for about six months when they were saving for a down payment, the Lyons didn’t stop putting money away. “We have stuck with the idea that retirement money is retirement money forever,” says Greg. His goal is to retire by age 60. For Jesseca, saving is about independence and financial security. “I love what I do, so I don’t see retiring early. But I don’t want to be worried or stressed out about our money either,” she says. “I am not going to sacrifice our retirement just to live a certain lifestyle now.”

  • Tajuana Hill, 46

    By starting to save for retirement at age 26, Tajuana Hill has put herselv on track to grow a seven-figure 401(k).
    Jesse Burke

    Indianapolis
    Years to $1 million: 17
    Best Move: Keeps raising her savings rate

    It’s taken Tajuana Hill, an employee trainer with Rolls-Royce, two decades to max out her 401(k), but she’s been a steady saver since her twenties. When she joined the firm at age 26, she put 10% of her pay into her plan right away. As her income rose, she ramped that up to 12%, then 17%, and finally 20% in January.

    Her reward: $224,000 in her 401(k)—all the more impressive since her employer offers no match. What has helped Hill is a side business she launched three years ago, Mimosa and a Masterpiece, an art studio where students can sip a drink during painting classes taught by local artists. The extra income let her pay off her credit cards, freeing up earnings from her day job so she could boost her 401(k) contributions.

    “When I retire, I hope to do it as a millionaire,” says Hill. If she sticks to this regimen, her 401(k) could top $1 million just as she reaches 65.

  • Steven and Melanie Thorne, both 37

    Steve and Melanie Thorne have been disciplined about hiking their retirement contributions with every raise. Melanie saves 10% of her pay in her plan, while Steve sets aside 12%. They even save extra in Roth IRAs.
    Jesse Burke

    York, Pennsylvania
    Years to $1 million: 15
    Best move: Invest in low-cost stock index funds

    Having a healthy stake in stocks is a hallmark of 401(k) millionaires. With decades to go until retirement, you can ride out market swings. That’s a philosophy Steven and Melanie Thorne have embraced. Together they have $310,000 in their workplace retirement plans, Roth IRAs, and a brokerage account, all invested 100% in stocks. “We are young, so we can be more aggressive,” says Steve, a security officer at a nuclear power plant.

    Investing is a passion for Steven, who first started saving for retirement with a Roth IRA when he was 18. He says he follows Warren Buffett’s philosophy about buying stocks: Be greedy when others are fearful, be fearful when others are greedy. But, he says, he and Melanie, a nurse, are buy-and-hold investors and keep most of their portfolio in low-cost index funds.

    Steven and Melanie have been disciplined about hiking their retirement contributions with every raise. Melanie saves 10% of her pay in her plan, while Steven sets aside 12%. They even save extra in Roth IRAs. They live below their means and direct tax refunds into retirement accounts, as well as save for college for their five year old son Chase. “We look for extra ways to save cash and keep our investment costs low,” says Steven.

  • Jonathan and Margaret Kallay, 56 and 53

    By saving more as big expenses fell away and their incomes rose, Jonathan and Margaret Kallay have been able to amass 401(k)s worth a combined $750,000.
    Jesse Burke

    Westerville, Ohio
    Years to $1 million: Four
    Best move: Power saving late

    Life can get in the way of saving for retirement, but ramping up your savings later in your career pays off. Jonathan and Margaret Kallay contributed only small amounts to their retirement plans early on. “It wasn’t much, about $50 a paycheck on a $13,000-a-year salary,” says Jonathan, a firefighter. Margaret, then an ER nurse, put away 5% of her pay.

    As big expenses fell away, the Kallays saved more. Married in 1993, the couple each paid child support for daughters from previous marriages until the girls reached 18. Once that ended and they paid off car loans, the money went toward retirement.

    Earning more has helped too. Jonathan worked extra shifts as a paramedic. Margaret got a business degree and is now a vice president at an insurance company, where she gets a generous company match. They each put about 15% in their 401(k)s, which total $750,000 and could hit $1 million in four years. They plan to quit work soon to spend more time traveling and spending time with their daughters and 5-year-old twin grandsons. “We’ve made a lot of sacrifices to invest for retirement,” says Jonathan. “It’s all been worth it.”

  • Mel and Heather Petersen, both 35

    Mel and Heather Petersen with sons Carter and Perry

    Reidsville, N.C.
    Years to $1 million: 17
    Best move: Buying rental properties to bring in more money

    Despite modest incomes in the early years of their careers, Mel and Heather Petersen have accumulated nearly $200,000 in retirement savings. Their strategy: Consistent saving. Mel, a public school teacher, says his salary has averaged about $40,000 most of his working life. Today he earns $50,000 a year. Heather, a marketing analyst who contributes 10% of her income to her 401(k), has seen a steadier increase in her earnings over the years, bringing the couple to a six-figure combined income.

    “We have always saved money for retirement no matter what our income, and never stopped no matter what financial challenges we have faced,” says Mel, dad to two boys, 8-year-old Carter and 4-year-old Perry.

    It helps that the Petersens supplement their retirement savings with income from rental properties that they began buying seven years ago. Several are paid off, and after expenses they gross about $5,000 a month in rental income. They hope to continue investing in real estate to boost their retirement savings. “We want to max out our retirement accounts down the road,” says Mel.

  • Larry and Christianne Schertel, both 58

    Larry and Christie Schertel

    Valatie, New York
    Years to $1 million: zero
    Best move: Kept faith in stocks

    Investors have enjoyed a roaring bull market for the past six years. But financial markets are cyclical. Even the most dedicated savers can panic and abandon stocks when the markets goes south.

    Despite the massive downturn during the Great Recession, Larry and Christianne Schertel didn’t budge from their 75% stock allocation. “When the market collapsed in 2008, we stayed the course and were nicely rewarded as the markets rebounded,” says Larry, an operations manager at a transportation company until his retirement this January. As they closed in on retirement, the Schertels reduced equities to about 60%. Together with Christianne, who works as an elementary school teaching assistant, the Schertels have just over $1 million in retirement accounts.

    In addition to their resolve during market fluctuations, the Schertels say automating their savings, living below their means, limiting debt, and investing in low-cost funds helped them reach the $1 million mark. “There really is no magic to it,” says Larry. “It is just being disciplined.”

MONEY Savings

Why Many Middle-Class Households Are Outsaving the Wealthy

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Kyu Oh/Getty Images (left)—Alamy (right)

It might seem counterintuitive, but the best savers can be found in the middle class.

Can it be that Americans are finally getting the message about saving for retirement?

Granted, studies have repeatedly confirmed America’s lack of savings. And the overall results of a new Bankrate.com survey seem to add to the pile: One in five Americans is saving nothing at all, while 28% are saving just 5% of their income or less. Overall, a mere 24% are saving more than 10% of their incomes, and only 14% of Americans are stashing away more than 15%.

But the survey also highlights an emerging countertrend: Many Americans are saving a lot—and, shocker, they’re folks in the middle class. Some 35% of households earning between $50,000 and $74,999 are putting away more than 10% of their incomes, including 14% who are saving more than 15%, according to Bankrate.com’s Financial Security Index. By contrast, only 19% of higher-income households (those earning $75,000 or more) are saving at that rate.

Why are middle-class savers outpacing their wealthier peers? “The middle class are increasingly aware that the saving for retirement is on them, and many have the discipline to do what’s necessary,” says Greg McBride, Bankrate.com’s chief financial analyst. “And they know they won’t have the resources of wealthier households if they fall short.”

The strengthening economy and improved job outlook have also provided a boost, since more households have additional money to put away. Americans also are also increasingly optimistic about their future income. Overall some 27% of workers are feeling more secure in their jobs than they did a year ago, which is twice the percentage of those who feel less secure (13%). And nearly 30% of those surveyed say their financial situation has improved vs. 18% who say it has deteriorated.

Still, most Americans remain financially challenged, as Bankrate’s study shows:

  • While 23% of those surveyed feel more comfortable with their debt level compared with a year ago, some 20% are feeling less comfortable, while the rest feel about the same.
  • Some 24% of respondents feel better about their savings vs the previous year, but 27% are less comfortable—though, as Bankrate pointed out, that margin was the smallest to date.
  • When asked about their net worth, only 24% reported it to be higher compared with last year, while most said it was lower (14%) or about same (57%).

The Bankrate.com survey did not ask whether workers were participating in a 401(k), but other research shows that consistent saving in a plan throughout your career is key to reaching your financial goals. As a recent study by Empower Retirement found, those with access to a 401(k) or other retirement plan had lifetime income scores (a measure of retirement readiness) of 74%, while those who lacked plans had an average score of just 42%. Unfortunately, only about half of workers have access to an employer plan.

Even if you do have a 401(k), it’s difficult to save consistently, and avoid tapping that money, over the course of three decades. Stuff happens, including job changes, layoffs, and health emergencies. Still, those who at least try to save end up much better off than those who don’t, as a 2014 study shows. And for the lucky few who stick to their plan—who knows?—you may even end up a 401(k) millionaire.

Read next: Here’s How to Tell If You’re Saving Enough for Retirement

MONEY Taxes

For Some Retirees, April 1 is a Crucial Tax Deadline

If you recently reached your 70s and aren't yet drawing money from your tax-deferred retirement accounts, you need to act fast.

For anyone who turned 70½ last year and has an individual retirement account, April 15 isn’t the only tax deadline you need to pay attention to this time of year.

With a traditional IRA, you must begin taking money out of your account after age 70½—what’s known as a required minimum distribution (RMD). And you must take your first RMD by April 1 of the year after you turn 70½. After that, the annual RMD deadline is December 31. After years of tax-deferred growth, you’ll face income taxes on your IRA withdrawals.

Figuring out your RMD, which is based on your account balance and life expectancy, can be tricky. Your brokerage or fund company can help, or you can use these IRS worksheets to calculate your minimum withdrawal.

Failure to pull out any or enough money triggers a hefty penalty equal to 50% of the amount you should have withdrawn. Despite the penalty, a fair number of people miss the RMD deadline.

A 2010 report by the Treasury Inspector General estimated that every year as many as 250,000 IRA owners miss the deadline for their first or annual RMD, failing to take distributions totaling some $350 million. That generates potential tax penalties of $175 million.

The rules are a bit different with a 401(k). If you’re still working for the company that sponsors your plan, you can waive this distribution rule until you quit. Otherwise, RMDs apply.

“It’s becoming increasingly common for folks to stay in the workforce after traditional retirement age,” says Andrew Meadows of Ubiquity Retirement + Savings, a web-based retirement plan provider specializing in small businesses. “If you’re still working you can leave the money in your 401(k) and let compound interest continue to do its work,” says Meadows.

What’s more, with a Roth IRA you’re exempt from RMD rules. Your money can grow tax-free indefinitely.

If you are in the fortunate position of not needing the income from your IRA, you can’t skip your RMD or avoid income taxes. You may want to reinvest the money, gift it, or donate the funds to charity, though a law that allowed you to donate money directly from an IRA expired last year and has not yet been renewed. Another option is to convert some of the money to a Roth IRA. You’ll owe income taxes on the conversion, but never face RMDs again.
Whatever you do, if you or someone you know is 70-plus, don’t miss the April 1 deadline. There’s no reason to give Uncle Sam more than you owe.

 

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 Health Care

Proposed Medicare ‘Doc Fix’ Comes at a Cost to Seniors

A measure designed to head off big cuts in payments to doctors asks Medicare recipients to foot part of the bill.

Congress is headed toward a bipartisan solution to fix a Medicare formula that threatens to slash payments to doctors every year. The so-called “doc fix” would replace the cuts with a multipronged approach that will be expensive and will have Medicare beneficiaries pay part of the bill.

Congress has repeatedly overridden the payment cuts, which are mandated under a formula called the Sustainable Growth Rate (SGR), which became law in 1997, that is a way of keeping growth in physician payments in line with the economy’s overall growth. This year, unless Congress acts, rates will automatically be slashed 21 percent.

In a rare instance of bipartisan collaboration, House Speaker John Boehner and Minority Leader Nancy Pelosi are pushing a plan to replace the SGR with a new formula that rewards physicians who meet certain government standards for providing high quality, cost-effective care. If they can get the plan through Congress, President Barack Obama has said he will sign it.

The fix will cost an estimated $200 billion over 10 years. Although Congress has not figured out how to pay the full tab, $70 billion will come from the pocketbooks of seniors.

There are better places to go for the money, such as allowing Medicare to negotiate drug prices with pharmaceutical companies and tightening up reimbursements to Medicare Advantage plans. But there’s no political will in Congress for that approach.

And the doc fix needs to be done. Eliminating the SGR will greatly reduce the risk that physicians will get fed up with the ongoing threat of reduced payments and stop accepting Medicare patients. “Access to physicians hasn’t been a big problem, but if doctors received a 21 percent cut in fees, that might change the picture,” says Tricia Neuman, senior vice president and director of the Program on Medicare Policy at the Kaiser Family Foundation.

Here’s what the plan would cost seniors:

Medigap reform

Many Medicare enrollees buy private Medigap policies that supplement their government-funded coverage (average annual cost: $2,166, according to Kaiser). The policies typically cover the deductible in Part B (outpatient services), which is $147 this year, and put a cap on out-of-pocket hospitalization costs.

Under the bipartisan plan, Medigap plans would no longer cover the annual Part B deductible for new enrollees, starting in 2020, so seniors would have to pay it themselves. Current Medigap policyholders and new enrollees up to 2020 would be protected.

The goal would be to make seniors put more “skin in the game,” which conservatives have long argued would lower costs by making patients think twice about using medical services if they know they must pay something for all services they use.

Plenty of research confirms that higher out-of-pocket expense will reduce utilization, but that doesn’t mean the reform will actually save money for Medicare.

Numerous studies show that exposure to higher out-of-pocket costs results in people using fewer services, Neuman says. If seniors forgo care because of the deductible, Medicare would achieve some savings. “The hope is people will be more sensitive to costs and go without unnecessary care,” she says. “But if instead, some forgo medical care that they need, they may require expensive care down the road, potentially raising costs for Medicare over time.”

High-income premium surcharges

Affluent enrollees already pay more for Medicare. Individuals with modified adjusted gross income (MAGI) starting at $85,000 ($170,000 for joint filers) pay a higher share of the government’s full cost of coverage in Medicare Part B and Part D for prescription drug coverage. This year, for example, seniors with incomes at or below $85,0000 pay $104.90 per month in Part B premiums, but higher income seniors pay between $146.90 and $335.70, depending on their income.

The new plan will shift a higher percentage of costs to higher-income seniors starting in 2018 for those with MAGI between $133,500 and $214,000 (twice that for couples). Seniors with income of $133,000 to $160,000 would pay 65 percent of total premium costs, rather than 50 percent today. Seniors with incomes between $160,000 and $214,000 would pay 80 percent rather than 65 percent, as they do today.

Everyone pays more for Part B

Under current law, enrollee premiums are set to cover 25 percent of Medicare Part B spending, so some of the doc fix’s increased costs will be allocated to them automatically. Neuman says a freeze in physician fees is already baked into the monthly Part B premium for this year, so she expects the doc fix to result in a relatively modest increase in premiums for next year, although it’s difficult to say how much because so many other factors drive the numbers.

MONEY Health Care

This Scary Retirement Expense Just Got Even Scarier

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GIPhotoStock—Getty Images/Cultura RF

The estimated tab for health care costs in retirement is huge—and getting bigger every year, according to a new study.

If you’re worried about paying for your health care in retirement, get ready to worry more.

A healthy couple retiring this year at age 65 will pay $266,589 for health care in retirement, according to the 2015 Retirement Healthcare Costs Data Report by health data provider HealthView Services. That’s a 6.5% jump from HealthView’s projections a year ago.

If medical costs continue their rapid rise, the tab will be even larger in the near future: Expected lifetime health care expenses will rise to $320,996 for a couple retiring in 10 years at age 65, the study found.

And that’s just what you’ll pay for Medicare Parts B and D, which cover routine medical care and prescription drugs, and a Medicare supplemental insurance policy, which most Medicare recipients buy to help with co-pays and deductibles. It doesn’t include all the out-of-pocket costs that traditional Medicare doesn’t cover, including dental, vision, and hearing services, and co-pays.

When you factor in those expenses, projected retirement health care costs rise to $394,954 for a couple retiring this year at age 65 and $463,849 for a couple retiring in 10 years. And those numbers don’t even count long-term care, which can add tens of thousands of dollars if you need extensive help at home or in a nursing home.

To put those costs in perspective, HealthViews estimates that a couple retiring today will spend 67% of their Social Security benefits on health care costs over their lifetimes. For a couple retiring in 10 years at age 65, medical care will suck up 90% of their Social Security income. That’s troubling considering that for many, Social Security makes up the majority of their retirement income. Even for middle income and wealthier families, Social Security accounts for about one-third of retirement income.

But Social Security benefits won’t be able to keep up with health care inflation. Social Security benefits have averaged a 2.6% annual cost of living increase over the past decade (and just 1.4% the past four years), while health care costs have risen more sharply. According to the Centers for Medicare and Medicaid, health care costs will rise 5% to 7% over the next eight years.

HealthView numbers are higher than other surveys on health care retirement costs. In Fidelity Benefits Consulting’s annual retirement health care costs report for 2014, a 65-year-old couple retiring today will need an average of $220,000 to cover medical expenses throughout retirement.

Counterintuitively, estimates of total lifetime health care costs are lower for people in poor health at retirement. HealthView’s estimates show that total retirement health care costs will be lower on average for someone with diabetes because of a shorter life expectancy. The total health care costs for a typical 55-year-old male with Type II diabetes will be approximately $118,000, compared to $223,000 for his healthy counterpart, primarily because the 55-year-old with diabetes has an expected longevity of 76, vs. 86 for a healthy male.

Of course, these are just averages. You can’t know exactly what your health will be after you retire, how much medical treatments will cost you, or how long you will live.

That said, even a rough guide can be a useful planning tool. So take a look at your insurance coverage. Consider the likelihood for each type of expense, as well as the average Medicare costs by age, to come up with an estimate of the savings you’ll need to fund these costs. Kaiser recently published a study on Medicare costs by age, which breaks down Medicare spending into its main components—hospitals, doctors, and drugs—and measures how much Americans spend on these services at different ages.

To prepare for that spending in advance, take a look at your sources of your retirement income. If you have a health savings account, do everything you can not to touch it now but let it grow tax free. It is an excellent vehicle for funding future medical expenses. Ditto for a Roth IRA, which lets your money grow tax free. For more tips on planning for retirement health care costs, check out MONEY’s stories here, here, and here.

MONEY Ask the Expert

The Surefire Way Not to Lose Money on Your Bond Investments

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

Q: I am leaning toward buying individual bonds and creating a bond ladder instead of a bond fund for my retirement portfolio. What are the pros and cons?—Roy Johnson, Troy, N.Y.

A: If you’re worried about interest rates rising—and many people are—buying individual bonds instead of putting some of your retirement money into a bond fund has some definite advantages, says Ryan Wibberley, CEO of CIC Wealth in Gaithersburg, Maryland. There are also some drawbacks, which we’ll get to in a moment.

First, some bond background. Rising interest rates are bad for fixed-income investments. That’s because when rates rise, the prices of bonds fall. That can cause short-term damage to bond funds. If rates spike and investors start pulling their money out of the fund, the manager may need to sell bonds at lower prices to raise cash. That would cause the net asset value of the fund to drop and erode returns.

By contrast, if you buy individual bonds and hold them to maturity, you won’t see those daily price moves. And you’ll collect your interest payments and get the bond’s face value when it comes due (assuming no credit problems), even if rates go up. So you never lose your principal. “You are guaranteed to get your money back,” says Wibberley. But with individual bonds, you will need to figure out how to reinvest that money.

One solution is to create a laddered portfolio. With this strategy, you simply buy bonds of different maturities. As each one matures, you can reinvest in a bond with a similar maturity and capture the higher yield if interest rates are rising (or accept lower yield if rates fall). All in all, it’s a sound option for retirees who seek steady income and want to protect their bond investments from higher rates.

The simplest and cheapest way to create a bond ladder is through government bonds. You can buy Treasury securities for free at TreasuryDirect.gov. You can also buy Treasuries through your bank or broker, but you’ll likely be charged fees for the transaction.

Now for the downside of bond ladders: To get the diversification you need, you should hold a mix of not only Treasuries but corporate bonds, which can be more costly to buy as a retail investor. Generally you must purchase bonds in minimum denominations, often $1,000. So to make this strategy cost-effective, you should have a portfolio of $100,000 or more.

With corporates, however, you’ll find higher yields than Treasuries offer. For safety, stick with corporate bonds that carry the highest ratings. And don’t chase yields. “Bonds with very high yields are often a sign of trouble,” says Jay Sommariva, senior portfolio manager at Fort Pitt Capital Group in Pittsburgh.

An easier option, and one that requires less cash, may be to build a bond ladder with exchange-traded bond funds. Two big ETF providers, Guggenheim and BlackRock’s iShares, now offer so-called defined-maturity or target-maturity ETFs that can be used to build a bond ladder using Treasury, corporate, high-yield or municipal bonds.

Of course, bond funds have advantages too. You don’t need a big sum to invest. And a bond fund gives you professional management and instant diversification, since it holds hundreds of different securities that mature at different dates.

Funds also provide liquidity because you can redeem shares at any time. With individual bonds, you also can sell when you want, but if you do it before maturity, you may get not get back the full value of your original investment.

There’s no one-size-fits all strategy for bond investing in retirement. A low-cost bond fund is a good option for those who prefer to avoid the hassle of managing individual bonds and who may not have a large sum to invest. “But if you want a predictable income stream and protection from rising rates, a bond ladder is a more prudent choice,” Sommariva says.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: Here’s the Retirement Income Mistake Most Americans Are Making

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

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