MONEY Social Security

How Your Income Can Slash Your Social Security Benefits

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Ian Nolan—Getty Images

Read this if you plan to claim benefits before your full retirement age.

You may count on Social Security as a mainstay of income in your looming retirement. When you take benefits and how much you keep working can shrink that monthly check, though. Here’s what to know.

When you receive Social Security benefits before your Full Retirement Age (FRA), which is 67 if you were born in 1960 or later, an earnings test can reduce or even eliminate the benefit you plan on. You can file early for benefits, at 62, and get a lesser amount than if you waited until FRA.

If your annual earned income exceeds $15,720 this year and you reach your FRA after 2015, Social Security withholds $1 from your benefit for every $2 over this limit.

For example, if you fall into this FRA category and earn $20,000 in 2015, your benefits will drop $2,140, or half of the $4,280 that you earn over the limit. If you receive a benefit of $1,070 per month, Social Security withholds two months’ benefits.

Big, unpleasant surprise if you got the full benefit for a time and the earnings test kicks in at the beginning of the following year and you don’t receive a check for two months.

After you reach FRA, you get an adjustment to your benefit for the withheld checks. From the above example, if you had two months’ benefits withheld during the three years before the year when you reach your FRA, you receive credit for the months of withheld benefits. At FRA, Social Security adjusts your benefit as if you filed six months later than you actually filed.

So if you originally filed at 62, your benefit adjusts to if you filed at 62 years and six months, translating into a 2.5% increase in your monthly benefit.

In a year that you reach FRA but before you actually turn 66, the earnings test eases up a lot and allows you to make $41,880. Plus the rule in this case becomes that Social Security withholds $1 from your benefits for every $3 over the limit. This higher exempt amount applies only to earnings that you made in months prior to the month when you reached your FRA.

These exempt amounts also generally go up annually with increases in the national average wage index. Only your income from employment or self-employment counts regarding the earnings tests.

So does all your money apply? No, and among your earnings that Social Security doesn’t count:

  • Deferred income for services you performed before becoming entitled to Social Security benefits;
  • Court awards, including back pay from an employer;
  • Payments for disability insurance;
  • Pensions;
  • Retirement pay, such as from the military;
  • Rental income from real estate if not considered self-employment (i.e., you did not materially participate in the production of the income);
  • Interest and dividends on accounts and investments;
  • Capital gains on stock and other investments;
  • Workers’ compensation or unemployment benefits.

Other examples of income that Social Security doesn’t count in the earnings test: jury duty pay; reimbursed travel or moving expenses if you’re an employee; and royalties (only in the year you will reach FRA; otherwise your royalties count).

Jim Blankenship, CFP, EA, is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is the author of An IRA Owner’s Manual and A Social Security Owner’s Manual. His blog is Getting Your Financial Ducks In A Row, where he writes regularly about taxes, retirement savings and Social Security.

Read next: How Your Income Can Slash Your Social Security Benefits

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MONEY IRAs

3 Pro Tips for Anyone Who’s Confused About Roth IRAs

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GK Hart/Vikki Hart—Getty Images

Not everyone can contribute to one, and it may not be the best choice even if you can.

Roth IRAs can be retirement savers, if used effectively. Most people familiar with them know just the basics, but it’s good to learn more, lest you run afoul of some rules or not take advantage of some benefit. Today, three Fool contributors offer information you might not know or appreciate about Roths. H&R BLOCK HRB -0.15%

First, though, let’s review exactly what a Roth IRA is, by contrasting it with its counterpart, the traditional IRA. With the traditional IRA, you contribute pre-tax money that reduces your taxable income and, therefore, your tax bill for the year. When you withdraw the money in retirement, it’s taxed as ordinary income to you. With the Roth IRA, you contribute post-tax money — i.e., sums that don’t offer any upfront tax break. But you do get a tax break, and a potentially big one, when you withdraw from the account in retirement — because you get to take all the money out of the account tax-free.

Dan Caplinger: The Roth IRA’s best trait is that it can produce income and capital gains that’s entirely tax-free, even after you withdraw it for use in retirement. In order to get that favorable tax-free treatment, though, you have to follow the rules; if you don’t, some of your Roth gains might turn out to be taxable after all.

Contributions to Roth IRAs are never taxed, because they represent post-tax contributions that you made voluntarily. When it comes to the income and gains on those contributions, though, different rules can apply. First of all, if you withdraw any Roth income within five years of having set up the account, you’ll have to pay taxes and penalties of 10% on the withdrawn amount. Second, if you haven’t reached age 59 1/2, then you’ll end up paying taxes on the portion of your withdrawal that represents earnings on your Roth assets. You might be able to have penalties waived if you qualify for certain special distributions, such as for a first-time home purchase, but often, you’ll still owe tax.

Because withdrawals of contributions, either through direct deposits or via conversions of traditional retirement assets, are generally eligible for tax-free treatment, it’s rare to have to pay income tax on a Roth IRA. However, the potential does exist, so make sure you know the rules before you take money out.

Jason Hall: The obvious benefit of a Roth, as Dan explained, is the tax-free growth and tax-free distributions in retirement. But what many people don’t realize is that you may be giving up a bigger benefit today, especially if you pay a higher marginal tax rate now than you’ll pay when you retire.

If this is the case for you, then here’s one approach that’s worth considering.

If you take the amount that you’d normally contribute to a Roth (the maximum for those aged 49 and younger in 2015 is $5,500) and instead increase your contributions to your 401(k), you’ll reduce your taxes each year. If you pay 28% in federal taxes, that’s $1,540 more you’ll take home this year. Instead of taking it home, though, put that in your Roth. If you were to start doing this at 40 and keep it up until 65, you’d end up with nearly $133,000 more, based on an 8% annualized rate of return:

That would be worth about $1,600 per year in additional income if your tax rate fell to 20% in retirement, and you took the typical 4% yearly distributions.

Selena Maranjian: Many people don’t realize it, but contributions to Roth IRAs aren’t allowed for everyone. It’s possible to earn so much that you’re prohibited from contributing or that you’re allowed only a reduced amount. Income limits are based on your modified adjusted gross income, or AGI. For 2015, they are as follows:

Filing Status Modified AGI Maximum Contribution
Married filing jointly or qualifying widow(er) < $183,000 up to the limit
> $183,000 but < $193,000 a reduced amount
> $193,000 zero
Married filing separately and you lived with your spouse at any time during the year < $10,000 a reduced amount
> $10,000 zero
Single, head of household , ormarried filing separately and you did not live with your spouse at any time during the year < $116,000 up to the limit
> $116,000 but < $131,000 a reduced amount
> $131,000 zero

Source: IRS.

Your modified AGI is your AGI, with any of the following deductions you’re taking added back to it: student loan interest, half of the self-employment tax, qualified tuition expenses, tuition and fees deduction, passive loss or passive income, IRA contributions, taxable social security payments, the exclusion for income from U.S. savings bonds, the exclusion under 137 for adoption expenses, rental losses, and any overall loss from a publicly traded partnership.

If you’re wondering about traditional IRAs, your income doesn’t limit your ability to contribute the maximum each year, but the deductibility of your contributions may be limited or entirely eliminated.

Finally, know that — for now — there’s a “back-door” way to fund a Roth IRA for high earners that involves making a nondeductible IRA contribution and then converting that newly created IRA to a Roth. It’s frowned on by some in Congress, so it might disappear one of these years, but for now it’s available.

If you’re a high earner, it’s important to understand these Roth IRA restrictions. Most of us, though, won’t be affected by them.

MONEY Opinion

Medicare Is Part of the Solution to Rising Health Care Costs

Democratic House Leader Nancy Pelosi Marks 50th Anniversary Of Medicare And Medicaid With Senate And House Lawmakers
Astrid Riecken—Getty Images Seniors listen to Democratic House Leader Nancy Pelosi mark the 50th Anniversary of Medicare and Medicaid on Capitol Hill on July 29, 2015 in Washington, DC. Pelosi was joined by Senate and House lawmakers who oppose any cuts to the important program for seniors.

The health insurance program's massive size gives it the power to set prices that providers will accept.

Medicare turns 50 on Thursday, riding high in the polls but under attack from presidential candidates proposing benefit cuts or even phasing out the U.S. healthcare program for older people.

When President Lyndon Johnson signed the law, half of Americans age 65 or older had no health insurance. Today, just 2% go uncovered.

And the public really, really likes Medicare, which last year covered 54 million Americans. A poll released earlier this month by the Kaiser Family Foundation found strong support across political party lines for Medicare and Medicaid, which insures low-income Americans and became law alongside Medicare.

But Medicare still sticks in the craw of conservatives.

“We need to figure out a way to phase out this program for (people who are not already receiving benefits) and move to a new system that allows them to have something, because they’re not going to have anything,” Republican presidential contender Jeb Bush told an audience of conservatives in New Hampshire last week.

Bush later tried to walk back his comment, but he is not alone in his desire to euthanize Medicare just as it hits midlife.

Fellow Republican presidential candidate Chris Christie has proposed raising the eligibility age for Medicare and Social Security to 69.

Beyond all the noise lies an important question: how to best pay for health care for our aging population.

In 2050, the 65-and-older population will reach 83.7 million, almost double what it was in 2012, according to the U.S. Census Bureau. That, along with rising healthcare costs, means Medicare will account for a rising share of the federal budget in the years ahead.

The line of attack against Medicare is that its finances are not sustainable, but what we really have is a healthcare cost problem, not a Medicare problem.

The program is funded through two trust funds.

The Hospital Insurance fund, which finances Medicare’s Part A hospital benefits, receives money mainly from the 1.45% payroll tax that employees pay and employers match. This fund is projected to run dry in 2030, leaving Medicare able to meet only 85% of that part of the program’s costs.

Meanwhile, the Supplementary Medical Insurance trust fund finances outpatient services and the Part D prescription drug program. It gets 75% of its funding from general tax revenues and 25% from yearly premiums that beneficiaries pay. It will stay solvent because contributions are reset annually to match anticipated spending, but that is expected to put more pressure on government and household budgets in the years ahead, especially if healthcare inflation takes off.

Medicare actually does a better job of restraining spending growth than private health insurance because its massive size gives it the power to set prices that providers will accept. And the Affordable Care Act mandated constraints in provider payments that have been paying off.

Medicare spending has been slowing in recent years. Reflecting that, the annual Part B (outpatient services) premium has been flat at $104.90 for the past three years.

Medicare’s trustees projected last week that the program’s total spending as a percent of the gross domestic product would rise from 3.5% to 5.4% in 2035. That is “not nothing, but neither is it insurmountable,” says Jared Bernstein, an economist and senior fellow at the Center on Budget and Policy Priorities.

The gap can be closed through efficiencies. We could change the law to allow the government to negotiate drug prices with pharmaceutical companies, for example. Or a small increase in the Medicare payroll tax from 1.45% to 1.8% would do the trick.

The conservative plan, however, is to reduce the value of Medicare’s benefits. That can be done by raising the eligibility age, effectively a lifetime benefit cut, or by replacing the program’s set of defined benefits with something called “premium support.”

With that, people would receive a voucher that they could use to purchase private insurance plans. Bush was showcasing that idea in his New Hampshire remarks.

A phase-out or redesign of Medicare will mean higher out-of-pocket costs in a program where the median income of enrollees is just $23,500 per year.

“These folks would unquestionably be worse off in the absence of Medicare,” Bernstein said.

Instead, we should continue working on reforming the delivery of care and negotiate savings with pharmaceutical companies.

And we should wish our most important health insurance program a happy birthday. Medicare, you are part of the solution, not the problem.

Read next: Medicare Turns 50 But Big Challenges Await

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 1/2, 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. (If you’re still working, you may be able to postpone RMDs from your current 401(k) until after you retire, if the plan allows). 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.

Read next: Medicare Is Part of the Solution to Rising Health Care Costs

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

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