MONEY IRAs

There’s Free Money for IRA Rollovers—Here’s How to Invest It

Should you take the money and run? Only if you choose the right low-cost funds.

Back in the day, you could walk into a bank to open a new account and walk out with a free toaster.

Today, you can get anywhere from $50 to $2,500 for rolling over a 401(k) into an Individual Retirement Account, or just by moving an IRA from another financial institution.

But since banks are not in the habit of giving away money, you need to ask: What is the catch?

IRA providers use cash incentives, which are cheaper than advertising or direct mail, to acquire new customers. The latest marketing twist comes from Fidelity Investments, which is offering an “IRA Match” program to new and existing customers who transfer a Roth, traditional or rollover IRA to the company. Rollovers from 401(k)s are not eligible.

Fidelity will match your contributions up to 10% for the first three years that the account is open, although you would have to roll over a whopping $500,000 or more to get that level of match.

For most people, the match will be much smaller. A rollover of $50,000, for example, would qualify for a 1.5% match in each of the next three years. That is worth $260 over three years if you max out your annual contributions at $5,500, or $290 if you are over age 50 and eligible to make additional $1,000 catch-up contributions.

Fidelity is pitching this as the way to encourage higher levels of retirement savings, the way many employers make matching contributions to workers’ 401(k) plans.

“When you look at what really works in the retirement space, you can see that the employer match is a major factor driving participation,” says Lauren Brouhard, Fidelity Investments’ senior vice president for retirement. “We wanted to take an element of what works in the workplace and bring it to the IRA.”

Similar deals abound. For example, Charles Schwab Corp frequently runs promotions offering up to $2,500 for opening a new account, including rollovers from 401(k)s. Ally Bank will pay a $100 bonus for rolling between $25,000 and $50,000, and more for larger rollovers. Just do a Web search for “IRA cash bonus” to see how pervasive the practice has become.

Should you take the money and run? Perhaps, but do not let the cash distract you from more fundamental considerations.

For starters, do not roll funds out of a workplace 401(k) plan into an IRA if it charges higher fees. You should also make sure that the new provider offers the type of retirement investments you are looking for.

If you are rolling over to a mutual fund or brokerage company, the cardinal rule is to make sure your new provider does not earn back the bonus by parking you in high-cost active mutual funds or managed portfolio services.

“It’s a free lunch, but not if you yield to the temptations,” says Mitch Tuchman, managing director of Rebalance IRA, a wealth management firm that offers low-cost IRA portfolio management. “You have to avoid falling prey to the sirens of active management.”

Instead, manage your portfolio yourself by creating a portfolio of inexpensive passive index funds or exchange traded funds, which are available through their providers’ brokerage services.

To illustrate, he suggested a portfolio of four Vanguard ETFs whose fees are each below 20 basis points: Total U.S. Stock Market, Total International stocks, Total Bond Market and Total International Bond.

You can view Tuchman’s sample portfolios here.

Read next: 5 Signs You Will Become a Millionaire

MONEY Savings

5 Signs You Will Become a Millionaire

150304_EM_MILLIONAIRES
Martin Barraud—Getty Images

A million isn't what it used to be. But it's not bad, and here's how you get there.

A million bucks isn’t what it used to be. When your father, or maybe you, set that savings goal in 1980 it was like shooting for $3 million today. Still, millionaire status is nothing to sniff at—and new research suggests that a broad swath of millennials and Gen-Xers are on the right track.

The “emerging affluent” class, as defined in the latest Fidelity Millionaire Outlook study, has many of the same habits and traits as today’s millionaires and multimillionaires. You are in this class if you are 21 to 49 years of age with at least $100,000 of annual household income and $50,000 to $250,000 in investable assets. Fidelity found this group has five key points in common with today’s millionaires:

  • Lucrative career: The emerging affluent are largely pursuing careers in information technology, finance and accounting—much like many of today’s millionaires did years ago. They may be at a low level now, but they have time to climb the corporate ladder.
  • High income: The median household income of this emerging class is $125,000, more than double the median U.S. household income. That suggests they have more room to save now and are on track to earn and save even more.
  • Self-starters: Eight in 10 among the emerging affluent have built assets on their own, or added to those they inherited, which is also true of millionaires and multimillionaires.
  • Long-term focus: Three in four among the emerging affluent have a long-term approach to investments. Like the more established wealthy, this group stays with its investment regimen through all markets rather than try to time the market for short-term gains.
  • Appropriate aggressiveness: Similar to multimillionaires, the emerging affluent display a willingness to invest in riskier, high-growth assets for superior long-term returns.

Becoming a millionaire shouldn’t be difficult for millennials. All it takes is discipline and an early start. If you begin with $10,000 at age 25 and save $5,500 a year in an IRA that grows 6% a year, you will have $1 million at age 65. If you save in a 401(k) plan that matches half your contributions, you’ll amass nearly $1.5 million. That’s with no inheritance or other savings. Such sums may sound big to a young adult making little money. But if they save just $3,000 a year for seven years and then boost it to $7,500 a year, they will reach $1 million by age 65.

An emerging affluent who already has up to $250,000 and a big income can do this without breaking a sweat. They should be shooting far higher—to at least $3 million by 2050, just to keep pace with what $1 million buys today (assuming 3% annual inflation). But they will need $6 million in 2050 to have the purchasing power of $1 million back in 1980, when your father could rightly claim that a million dollars would make him rich.

Read next: What’s Your Best Path to $1 Million?

MONEY financial advisers

Proposed Retiree Safeguard Is Long Overdue

businessman putting money into his suit jacket pocket
Jan Stromme—Getty Images

The financial-advice regulations pushed by the Obama administration will save retirees, on average, an estimated $12,000.

When you are planning for retirement and ask for advice, whose interest should come first — yours or the financial expert you ask for help?

That is the question at the heart of a Washington debate over the unsexy-sounding term “fiduciary standard.” Simply put, it is a legal responsibility requiring an adviser to put the best interest of a client ahead of all else.

The issue has been kicking around Washington ever since the financial crisis, and it took a dramatic turn on Monday when President Barack Obama gave a very public embrace to an expanded set of fiduciary rules. In a speech at AARP, the president endorsed rules proposed by the Department of Labor that would require everyone giving retirement investment advice to adhere to a fiduciary standard.

The president’s decision to embrace and elevate fiduciary reform into a major policy move is huge.

“The White House knows that this is the most significant action it can take to promote retirement security without legislation,” said Cristina Martin Firvida, director of financial security and consumer affairs at AARP, which has been pushing for adoption of the new fiduciary rules.

Today, financial planning advice comes in two flavors. Registered investment advisors (RIAs) are required to meet a fiduciary standard. Most everyone else you would encounter in this sphere — stockbrokers, broker-dealer representatives and people who sell financial products for banks or insurance companies — adhere to a weaker standard where they are allowed to put themselves first.

“Most people don’t know the difference,” said Christopher Jones, chief investment officer of Financial Engines, a large RIA firm that provides fiduciary financial advice to workers in 401(k) plans.

The difference can be huge for your retirement outcome. A report issued this month by the President’s Council of Economic Advisers found that retirement savers receiving conflicted advice earn about 1 percentage point less in returns, with an aggregate loss of $17 billion annually.

The report pays special attention to the huge market of rollovers from workplace 401(k)s to individual retirement accounts — transfers which often occur when workers retire. Nine of 10 new IRAs are rollovers, according to the Investment Company Institute mutual fund trade group. The CEA report estimates that $300 billion is rolled over annually, and the figures are accelerating along with baby-boom-generation retirements.

The CEA report estimates a worker receiving conflicted advice would lose about 12% of the account’s value over a 30-year period of drawdowns. Since the average IRA rollover for near-retirees is just over $100,000, that translates into a $12,000 loss.

What constitutes conflicted advice? Plan sponsors — employers — have a fiduciary responsibility to act in participants’ best interest. But many small 401(k) plans hire plan recordkeepers and advisers who are not fiduciaries. They are free to pitch expensive mutual funds and annuity products, and industry data consistently shows that small plans have higher cost and lower rates of return than big, well-managed plans.

The rollover market also is rife with abuse, often starting with the advice to roll over in the first place. Participants in well-constructed, low-fee 401(k)s most often would do better leaving their money where it is at retirement; IRA expenses run 0.25 to 0.30 percentage points higher than 401(k)s, according to the U.S. Government Accountability Office. Yet the big mutual fund companies blitz savers with cash come-ons, and, as I wrote recently, very few of their “advisers” ask customers the basic questions that would determine whether a rollover is in order.

The industry makes the Orwellian argument that a fiduciary standard will make it impossible for the industry to offer cost-effective assistance to the middle class. But that argument ignores the innovations in technology and business practices that already are shaking up the industry with low-cost advice options.

How effective will the new rules be? The devil will be in the details. Any changes are still a little far off: TheDepartment of Labor is expected to publish the new rules in a few months — a timetable that already is under attack by industry opponents as lacking a duly deliberative process.

Enough, already. This debate has been kicking around since the financial crisis, and an expanded fiduciary is long overdue.

MONEY Markets

What the Greek Crisis Means for Your Money

Global markets seem safe enough for now, but a so-called “Grexit” could have unpredictable effects.

As government officials in Greece and the rest of the European Union continue to haggle over the terms of its bailout agreement, you may be wondering: Does this have anything to do with me?

If you are investing in a retirement account like a 401(k) or an IRA, the answer is likely “yes.” About a third of holdings in a fairly typical target-date mutual fund, like Vanguard Target Retirement 2035, are in foreign stocks. Funds like this, which hold a mix of stocks and bonds, are popular choices in 401(k)s.

Of those foreign stocks, only a small number are Greek companies. Vanguard Total International Stock (which the 2035 fund holds), for example, has only about 0.1% of assets in Greek companies. But about 20% of the foreign holdings in a typical target date fund are in euro-member countries, and if Greece leaves the euro, that could affect the whole continent.

What’s the worst that could happen? For one, investors and citizens in some troubled economies like Spain and Italy could start pulling their euros out of banks. Also, borrowing costs could go up, and that could hurt economic growth and weigh down stock prices. And if fear of European instability drives investors to seek out safe assets like U.S. Treasuries, then bond yields and interest rates could keep staying at their unusually low levels.

There are some market watchers who see a potential upside to the conflict over Greece, however.

“If you believe the euro is an average of its currencies, it could actually rise if Greece leaves,” says BMO Private Bank chief investment officer Jack Ablin. A higher euro would make European stocks more valuable in dollar terms.

Additionally, he says, if Athens is thrown into pandemonium, then it’s actually less likely other countries will want to follow Greece out of the currency union.

The Greek situation will also have an impact on the bond market. If fear of European instability drives investors to seek out safe assets like U.S. Treasuries, then many bond funds will do well, and yields and interest rates would stay at their unusually low levels.

Perhaps the most insidious thing right now, says Ablin, is uncertainty. Again, a Greek exit from the euro would be unprecedented, and that makes the effect unpredictable—and potentially very scary for the global market. So investors would be wise to keep in mind the possibility of “black swans,” a term coined by statistician Nassim Taleb to describe market events that seem unimaginable (like black swans used to be) until they actually occur.

MONEY retirement income

Simple Steps to Avoid Outliving Your Money in Retirement

Nearly all workers say guaranteed lifetime income is important in retirement. Yet few are doing anything about it.

The slow switch from defined-benefit to defined-contribution retirement plans has been under way for three decades. But only now are workers starting to fully appreciate the impact.

The vast majority of Americans say that having a guaranteed monthly check for the rest of their lives is important, according to a TIAA-CREF lifetime income survey. Nearly half say securing enough guaranteed income to cover monthly expenses should be the top goal of their retirement plan.

Just a year ago, only one third believed guaranteed income should be their top priority. Meanwhile, more Americans now say they would accept bigger risks and smaller returns in exchange for guaranteed income, the survey found.

Few saw this coming in the 1980s, when companies began to abandon their traditional pensions in favor of 401(k) savings plans. The thought was that the 401(k) would complement the guaranteed income from a traditional pension—not supplant it. Today the only guaranteed income most Americans will enjoy in retirement comes from Social Security. Meanwhile, the majority of workers keep the bulk of their liquid savings in a 401(k) plan. And they must manage those distributions throughout retirement, while trying not to run out of money before they pass away.

This new reality is just now hitting a generation that figured their 401(k) plan would grow so big that making the money last in retirement would be fairly simple. But for most it didn’t work out that way—and now they are searching for answers. Guaranteed lifetime income, once a staple of old age for many Americans, has become an elusive grail.

One big problem is that workers typically do not understand how to convert savings into a lifetime stream of income, and they generally do not trust the annuity products available to them. While 84% say lifetime income is important only 14% have bought an annuity, TIAA-CREF found. Fixed annuities through a high-quality insurance company are among the simplest ways to purchase guaranteed lifetime income.

With this gap in mind, policymakers and employers have been taking steps to make it easier and more palatable for 401(k) plan participants to convert some or all of their plan assets to an income stream. Yet 44% of Americans have no idea if their plan offers a lifetime income option. Some 62% have never tried to calculate lifetime income from their current level of savings.

Fortunately, it’s getting easier to figure out the amount of income your 401(k) is likely to provide. For starters, check with your benefits department and ask if your employer has, or is considering, an option that will convert savings into a lifetime annuity. If so, and you’re close to retirement, you can get an estimate of the amount of income it may provide.

There are also online tools for do-it-yourself annuity shoppers.You can get quotes for immediate and deferred annuities at immediateannuites.com. And for pre-retirees, you can get an idea of how far your savings will go by plugging in your age and savings on BlackRock’s CoRi calculator. Currently, BlackRock estimates that a 58-year-old with $1 million in savings and who retires at 65 will be able to purchase $51,600 of annual guaranteed lifetime income.

Annuities come in many varieties—and some have a checkered past, while others may be linked to high fees and hard sales pitches. But immediate and deferred fixed annuities are fairly straightforward and offer the most direct way to secure lifetime income. Typically advisers recommend that you put only a portion of your income into one. (For more on annuities, click here.)

If an annuity sounds right for you, consider moving slowly. If interest rates move up the second half of the year, as many expect, you’ll get more income for your dollars by waiting.

Read next: The Right Way to Tap Income in Retirement

MONEY retirement planning

Why You Should Think Twice Before Choosing a Roth IRA or Roth 401(k)

two gold eggs
GP Kidd—Getty Images

Sure, Roth plans let your savings grow tax free. But if you're nearing retirement, a traditional pre-tax account may be the best choice.

Even assuming a Republican Congress doesn’t go along with the tax hikes President Obama has proposed, the mere fact that talk of higher taxes is in the air could very well make Roth IRAs and Roth 401(k)s even more popular than they already are. But is that necessarily a good thing?

For years, the conventional wisdom held that you were better off saving for retirement in a Roth IRA or Roth 401(k) rather than the traditional versions, provided you expect to face a higher tax rate in retirement than when you make the contribution. This makes sense because you would be paying tax at a lower rate upfront and avoiding a higher tax bill down the road when you withdraw your contribution and earnings tax-free.

Lately, however, it seems more people are challenging this view, and suggesting that you may still be better off in a Roth even if you end up in a lower tax rate when you withdraw the money in retirement. For example, T. Rowe Price released research last year showing not only that a Roth IRA or Roth 401(k) could generate more income in retirement than a traditional account for people who drop to a lower tax rate; it also showed that even older savers—people in their 50s and early 60s—who fall into a lower marginal tax rate in retirement could come out ahead with a Roth.

But while this can be true—and there may also be other good reasons to fund a Roth—it’s hardly a given. So if you think you may end up dropping into a lower marginal tax rate in retirement, you should be aware of a few important caveats before doing a Roth, especially if you’re nearing retirement age.

The Drag of Taxes

For example, according to T. Rowe Price’s analysis a 55-year-old in the 33% tax bracket today who retires at age 65 would receive 9% more retirement income by making a contribution to a Roth 401(k) or Roth IRA instead of a traditional account, even if he slipped into the 28% tax bracket upon retiring.

How is that possible? Let’s assume this 55-year-old has the choice of contributing $24,000 (the 2015 maximum for someone 50 or older) to a Roth 401(k) or a traditional 401(k). If he does the Roth and the $24,000 grows in a diversified mix of stocks and bonds at 7% a year, he would have $47,212 tax-free after 10 years.

If, on the other hand, he puts the $24,000 into a traditional 401(k) that returns 7% annually, he also would have $47,212 after 10 years. But assuming he drops to a 28% tax rate at retirement, he would owe $13,219 in taxes at withdrawal, leaving him with $33,993 after tax.

But the $24,000 he puts into the traditional 401(k) also gets him a tax deduction, which at a 33% pre-retirement tax rate effectively frees up $7,920 he can invest in a separate taxable account. If that account also earns 7% a year, after 10 years the 55-year-old would end up with $2,361 more in the traditional 401(k) plus the taxable account than he would with the Roth.

But wait. He must also pay taxes on gains in the taxable side account. Assuming he pays tax each year at a 33% rate before retiring, that would effectively reduce his after-tax return in the taxable account from 7% to roughly 4.7%, giving him a total after-tax balance in the traditional 401(k) plus side account of $694 less than the Roth.

In short, it’s the drag of taxes on the money invested in the taxable side account that allows the Roth to come out ahead. Or, to put it another way, the Roth wins out in this scenario because it effectively shelters more of your money from taxes than a traditional 401(k) plus the separate taxable account.

Check Your Time Horizon

But anyone, young or old, hoping to capitalize on this advantage by choosing a Roth 401(k) or Roth IRA over a traditional account needs to be aware of two things.

First, as this example shows, the advantage the Roth gets from this tax-drag effect is relatively small. It can take many years for the Roth to build a meaningful edge in cases where someone slips into a lower marginal tax rate in retirement. In the example above, the Roth account is ahead by only 1.5% after 10 years. And if that 55-year-old were to drop from a 33% tax rate to a 25% rate in retirement, the Roth account would actually still be behind by about 1.5% after 10 years.

So for the 55-year-old to get that extra 9% of retirement income, the T. Rowe Price analysis assumes that the contribution made at age 55 not only stays invested until retirement at 65, but is withdrawn gradually over the course of 30 years (and earns a 6% annual return during that time). Which means at least some of the funds must remain invested in the Roth as long as 40 years.

The second caveat is that to take full advantage of the Roth’s tax-shelter benefits, you must contribute the maximum allowed or something close to it—specifically, enough so that you would be unable to match the aftertax Roth contribution by putting the pretax equivalent into a traditional account.

For example, had the 55-year-old in the scenario above been investing, say, $10,000 in the Roth instead of the maximum $24,000, he could have simply invested the entire pretax equivalent of his Roth contribution ($14,925 in the 33% tax bracket) in the traditional account instead of splitting his money between the traditional account and the separate taxable account. Doing so would eliminate the tax drag of the taxable account as well as the Roth’s 9% income advantage. Indeed the Roth account would provide 7% less after-tax income over 30 years than the traditional 401(k).

The upshot: Unless you’re willing to make the maximum contribution to a Roth IRA or 401(k) or an amount approaching that limit, dropping into a lower tax bracket in retirement could do away with much, if not all, of the expected advantage of going with a Roth. (The Roth might still come out ahead over a very long time since you can avoid required minimum distributions).

Diversify, Tax-wise

There are plenty of compelling reasons to choose a Roth IRA or Roth 401(k), even if you’re unsure what tax rate you’ll face in retirement. For example, I’ve long been an advocate of “tax diversification.” By having money in both Roth and traditional accounts you can diversify your tax exposure, so not every cent of your retirement savings is taxed at whatever tax rate some future Congress sets on ordinary income.

And since (under current law, at least) there are no required distributions from a Roth IRA starting after age 70 ½, money in a Roth IRA can compound tax-free the rest of your life, after which you can pass it on as a tax-free legacy to your heirs. Roth IRA distributions also won’t trigger taxes on your Social Security benefits, as can sometimes happen with withdrawals from a regular IRA or 401(k).

Bottom line: Before doing a Roth IRA or Roth 401(k), take the time run a few scenarios on a calculator like those in RDR’s Retirement Toolbox using different pre- and post-retirement tax rates. Such an exercise is even more important if you think you might face a lower marginal tax rate in retirement, and absolutely crucial if you’re nearing retirement age.

But above all, don’t assume that just because Roth withdrawals can be tax-free that Roths are automatically the better deal.

[Note: This version has been revised to make it clear that the scenario with the hypothetical 55-year-old compares a Roth 401(k) vs. a traditional 401(k), not a traditional IRA.]

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.

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MONEY retirement planning

Why Women Are Less Prepared Than Men for Retirement

Women outpace men when it comes to saving, but they need to be more aggressive in their investing.

Part of me hates investment advice specifically geared towards women. I’ve looked at enough studies on sex differences—and the studies of the studies on sex differences—to know that making generalizations about human behavior based on sex chromosomes is bad science and that much of what we attribute to hardwired differences is probably culturally determined by the reinforcement of stereotype.

So I’m going to stick to the numbers to try and figure out if, as is usually portrayed, women are actually less prepared for retirement—and why. One helpful metric is the data collected from IRA plan administrators across the country by the Employment Benefit Research Institute (EBRI.) The study found that although men and women contribute almost the same to their IRAs on average—$3,995 for women and $4,023 for men in 2012—men wind up with much larger nest eggs over time. The average IRA balance for men in 2012, the latest year for which data is available, was $136,718 for men and only $75,140 for women.

And when it comes to 401(k)s, women are even more diligent savers than men, despite earning lower incomes on average. Data from Vanguard’s 2014 How America Saves study, a report on the 401(k) plans it administers, shows that women are more likely to enroll when sign up is voluntary, and at all salary levels they tend to contribute a higher percentage of their income to their plans. But among women earning higher salaries, their account balances lag those of their male counterparts.

It seems women are often falling short when it comes to the way they invest. At a recent conference on women and wealth, Sue Thompson, a managing director at Black Rock, cited results from their 2013 Global Investor Pulse survey that showed that only 26% of female respondents felt comfortable investing in the stock market compared to 44% of male respondents. Women are less likely to take on risk to increase returns, Thompson suggested. Considering women’s increased longevity, this caution can leave them unprepared for retirement.

Women historically have tended to outlive men by several years, and life expectancies are increasing. A man reaching age 65 today can expect to live, on average, until age 84.3 while a woman can expect to live until 86.6, according to the Social Security Administration. Better-educated people typically live longer than the averages. For upper-middle-class couples age 65 today, there’s a 43% chance that one or both will survive to at least age 95, according to the Society of Actuaries. And that surviving spouse is usually the woman.

To build the portfolio necessary to last through two or three decades of retirement, women should be putting more into stocks, not less, since equities offer the best shot at delivering inflation-beating growth. The goal is to learn to balance the risks and rewards of equities—and that’s something female professional money managers seem to excel at. Some surveys have shown that hedge fund managers who are women outperform their male counterparts because they don’t take on excessive risk. They also tend to trade less often; frequent trading has been shown to drag down performance, in part because of higher costs.

Given that the biggest risk facing women retirees is outliving their savings, they need to grow their investments as much as possible in the first few decades of savings. If it makes women uncomfortable to allocate the vast majority, if not all, of their portfolio to equities in those critical early years, they should remind themselves that even more so than men they have the benefit of a longer time horizon in which to ride out market ups and downs. And we should take inspiration from the female professional money managers in how to take calculated risks in order to reap the full benefits of higher returns.

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: How to Boost Returns When Interest Rates Totally Stink

MONEY retirement planning

Why Obama’s Proposals Just Might Help Middle Class Retirement Security

150122_RET_ObamaHelpRet
Andrew Harrer—Bloomberg via Getty Images U.S. President Barack Obama delivering the State of the Union address to a joint session of Congress at the Capitol in Washington, D.C., U.S., on Tuesday, Jan. 20, 2015.

Congress probably won't pass an auto IRA, and Social Security is being ignored. But the retirement crisis is finally getting attention.

Remember Mitt Romney’s huge IRA? During the 2012 campaign, we learned that the governor managed to amass $20 million to $100 million in an individual retirement account, much more than anyone could accumulate under the contribution limit rules without some unusual investments and appreciation.

Romney’s IRA found its way, indirectly, into a broader set of retirement policy reforms unveiled in President Obama’s State of the Union proposals on Tuesday.

The president proposed scaling back the tax deductibility of mega-IRAs to help pay for other changes designed to bolster middle class retirement security. I found plenty to like in the proposals, with one big exception: the failure to endorse a bold plan to expand Social Security.

Yes, that is just another idea with no chance in this Congress, but Democrats should give it a strong embrace, especially in the wake of the House’s adoption of rules this month that could set the stage for cuts in disability benefits.

The administration signaled its general opposition to the House plan, but has not spelled out its own.

Instead, Obama listed proposals, starting with “auto-IRAs,” whereby employers with more than 10 employees who have no retirement plans of their own would be required to automatically enroll their workers in an IRA. Workers could opt out, but automatic features in 401(k) plans already have shown this kind of behavioral nudge will be a winner. The president also proposed tax credits to offset the start-up costs for businesses.

The auto-IRA would be a more full version of the “myRA” accounts already launched by the administration. Both are structured like Roth IRAs, accepting post-tax contributions that accumulate toward tax-free withdrawals in retirement. Both accounts take aim at a critical problem—the lack of retirement savings among low-income households.

The president wants to offset the costs of auto-IRAs by capping contributions to 401(k)s and IRAs. The cap would be determined using a formula tied to current interest rates; currently, it would kick in when balances hit $3.4 million. If rates rose, the cap would be somewhat lower—for example, $2.7 million if rates rose to historical norms.

The argument here is that IRAs were never meant for such large accumulations; the Government Accountability Office (GAO) looked into mega-IRAs after the 2012 election, and reported back to Congress that a small number of account holders had indeed amassed very large balances, “likely by investing in assets unavailable to most investors—initially valued very low and offering disproportionately high potential investment returns if successful.”

The report estimated that 37,000 Americans have IRAs with balances ranging from $3 million to $5 million; fewer than 10,000 had balances over $5 million.

Finally, the White House proposed opening employer retirement plans to more part-time workers. Currently, plan sponsors can exclude employees working fewer than 1,000 hours per year, no matter how long they have been with the company. The proposal would require sponsors to open their plans to workers who have been with them for at least 500 hours per year for three years.

These ideas might seem dead on arrival in the Republican-controlled Congress. But the White House proposals add momentum to a growing populist movement around the country to focus on middle class retirement security.

As noted here last week, Illinois just became the first state to implement an innovative automatic retirement savings plan similar to the auto-IRA, and more than half the states are considering similar ideas.

These savings programs are sensible ideas, but their impact will not be huge. That is because the households they target lack the resources to sock away enough money to generate accumulations that can make a real difference at retirement.

Expanding Social Security offers a more sure, and efficient, path to bolstering retirement security of lower-income households. If Obama wants to go down in the history books as a strong supporter of the middle class, he has got to start making the case for Social Security expansion—and time is getting short.

Read next: Why Illinois May Become a National Model for Retirement Saving

MONEY retirement planning

4 Tips to Plan for Retirement in an Upside-Down World

upside down rollercoaster
GeoStills—Alamy

The economic outlook appears a lot dicier these days. These moves will keep your retirement portfolio on course.

Gyrating stock values, slumping oil prices, turmoil in foreign currency markets, predictions of slow growth or even deflation abroad…Suddenly, the outlook for the global economy and financial markets looks far different—and much dicier—than just a few months ago. So how do you plan for retirement in a world turned upside down? Read on.

The roller coaster dips and dives of stock prices have dominated the headlines lately. But the bigger issue is this: If we are indeed entering a low-yield slow-growth global economy, how should you fine-tune your retirement planning to adapt to the anemic investment returns that may lie ahead?

We’re talking about a significant adjustment. For example, Vanguard’s most recent economic and investing outlook projects that U.S. stocks will gain an annualized 7% or so over the next 10 years, while bonds will average about 2.5%. That’s a long way from the long-term average of 10% or so for stocks and roughly 5% for bonds.

Granted, projections aren’t certainties. And returns in some years will beat the average. But it still makes sense to bring your retirement planning in line with the new realities we may face. Below are four ways to do just that.

1. Resist the impulse to load up on stocks. This may not be much of a challenge now because the market’s been so scary lately. But once stocks settle down, a larger equity stake may seem like a plausible way to boost the size of your nest egg or the retirement income it throws off, especially if more stable alternatives like bonds and CDs continue to pay paltry yields.

That would be a mistake. Although stock returns are expected to be lower, they’ll still come with gut-wrenching volatility. So you don’t want to ratchet up your stock allocation, only to end up selling in a panic during a financial-crisis-style meltdown. Nor do you want to lard your portfolio with arcane investments that may offer the prospect of outsize returns but come with latent pitfalls.

Fact is, aside from taking more risk, there’s really not much you can do to pump up gains, especially in a slow-growth environment. Trying to do so can cause more harm than good. The right move: Set a mix of stocks and bonds that’s in synch with your risk tolerance and that’s reasonable given how long you intend to keep your money invested and, except for periodic rebalancing, stick to it.

2. Get creative about saving. Saving has always been key to building a nest egg. But it’s even more crucial in a low-return world where you can’t count as much on compounding returns to snowball your retirement account balances. So whether it’s increasing the percentage of salary you devote to your 401(k), contributing to a traditional or Roth IRA in addition to your company’s plan, signing up for a mutual fund’s automatic investing plan or setting up a commitment device to force yourself to save more, it’s crucial that you find ways to save as much as you can.

The payoff can be substantial. A 35-year-old who earns $50,000 a year, gets 2% annual raises and contributes 10% of salary to a 401(k) that earns 6% a year would have about $505,000 at 65. Increase that savings rate to 12%, and the age-65 balance grows to roughly $606,000. Up the savings rate to 15%—the level generally recommended by retirement experts—and the balance swells to $757,000.

3. Carefully monitor retirement spending. In more generous investment environments, many retirees relied on the 4% rule to fund their spending needs—that is, they withdrew 4% of their nest egg’s value the first year of retirement and increased that draw by inflation each year to maintain purchasing power. Following that regimen provided reasonable assurance that one’s savings would last at least 30 years. Given lower anticipated returns in the future, however, many pros warn that retirees may have to scale back that initial withdrawal to 3%—and even then there’s no guarantee of not running short.

No system is perfect. Start with too high a withdrawal rate, and you may run through your savings too soon. Too low a rate may leave you with a big stash of cash late in life, which means you might have unnecessarily stinted earlier in retirement.

A better strategy: Start with a realistic withdrawal rate—say, somewhere between 3% and 4%—and then monitor your progress every year or so by plugging your current account balances and spending into a good retirement income calculator that will estimate the probability that your money will last throughout retirement. If the chances start falling, you can cut back spending a bit. If they’re on the rise, you can loosen the purse strings. By making small adjustments periodically, you’ll be able to avoid wrenching changes in your retirement lifestyle, and avoid running out of dough too soon or ending up with more than you need late in life when you may not be able to enjoy it.

4. Put the squeeze on fees. You can’t control the returns the market delivers. But if returns are depressed in the years ahead, paying less in investment fees will at least increase the portion of those gains you pocket.

Fortunately, reducing investment costs is fairly simple. By sticking to broad index funds and ETFs, you can easily cut expenses to less than 1% a year. And without too much effort you can get fees down to 0.5% a year or less. If you prefer to have an adviser manage your portfolio, you may even be able to find one who’ll do so for about 0.5% a year or less. Over the course of a long career and retirement, such savings can dramatically improve your post-career prospects. For example, reducing annual expenses from 1.5% to 0.5% could increase your sustainable income in retirement by upwards of 40%.

Who knows, maybe the prognosticators will be wrong and the financial markets will deliver higher-than-anticipated returns. But if you adopt the four moves I’ve outlined above, you’ll do better either way.

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.

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Why Confidence May Be Your Biggest Financial Risk in Retirement

portrait of aging woman
F. Antolín Hernández—Getty Images

Seniors lose ability to sort out financial decisions but hold on to the confidence they can get it right.

You think it’s tough managing your 401(k) now, just wait until you are 80 and not quite as sharp as you once were—or still believe yourself to be.

Cognitive decline in humans is a fact. It starts before you are 30 but picks up speed around age 60. A slow decline in the ability to think clearly wasn’t an issue years ago, before the longevity revolution extended life expectancy beyond 90 years. But now we’re making key financial decisions way past our brain’s peak.

Managing a nest egg in old age is the most pressing area of financial concern, owing to the broad shift away from guaranteed-income traditional pensions and toward do-it-yourself 401(k) plans. Older people must consider complicated issues surrounding asset allocation and draw-down rates. They also must navigate an array of mundane decisions on things like budgets, tax management, and just choosing the right cable package. Some will have to vet fraudulent sales pitches.

About 15% of adults 65 and older have what’s called mild cognitive impairment—a condition characterized by memory problems well beyond those associated with normal aging. They are at clear risk of making poor money decisions, and this is usually clear to family who can intervene. Less clear is when normal decline becomes an issue. But it happens to almost everyone.

Normal age-related cognitive decline has a noticeable effect on financial decision making, the Center for Retirement Research at Boston College, finds in a new paper. Researchers have followed the same set of retirees since 1997 and documented their declining ability to think through issues. Despite measurable cognitive decline, however, these retirees (age 82 on average) demonstrated little loss of confidence in their knowledge of finance and almost no loss of confidence in their ability to manage their financial affairs.

Critically, the survey found, more than half who experience significant cognitive decline remain confident in their money know-how and continue to manage their finances rather than seek help from family or a professional adviser. “Older individuals… fail to recognize the detrimental effect of declining cognition and financial literacy on their decision-making ability,” the study concludes. “Given the increasing dependence of retirees on 401(k)/IRA savings, cognitive decline will likely have an increasingly significant adverse effect on the well-being of the elderly.”

Not everyone believes this is a disaster in the making. Practice and experience that come with age may offset much of the adverse impact from slipping brainpower, say researchers at the Columbia Business School. They acknowledge inevitable cognitive decline. But they conclude that much of its effect can be countered in later life if problems and decisions remain familiar. It’s mainly new territory—say mobile banking or peer-to-peer lending—that prove dangerously confusing.

In this view, elders may be just fine making their own financial decisions so long as terms and features don’t change much. They will be well served by experience and muscle memory—and helped further by smart, simplified options like target-date mutual funds and index funds as their main retirement account choices. The problem is that nothing ever really stays the same. Seniors who recognize the unfamiliar and seek trusted advice have a better shot at keeping their finances safe throughout retirement.

Read next: Why Your Employer May Be Your Best Financial Adviser

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