MONEY 401k plans

The Secrets to Making a $1 Million Retirement Stash Last

door opening with Franklin $100 staring through the crack
Sarina Finkelstein (photo illustration)—Getty Images (2)

More and more Americans are on target to save seven figures. The next challenge is managing that money once you reach retirement.

More than three decades after the creation of the 401(k), this workplace plan has become the No. 1 way for Americans to save for retirement. And save they have. The average plan balance has hit a record high, and the number of million-dollar-plus 401(k)s has more than doubled since 2012.

In the first part of this four-part series, we laid out what you need to do to build a $1 million 401(k) plan. We also shared lessons from 401(k) millionaires in the making. In this second installment, you’ll learn how to manage that enviable nest egg once you hit retirement.

Dial Back On Stocks

A bear market at the start of retirement could put a permanent dent in your income. Retiring with a 55% stock/45% bond portfolio in 2000, at the start of a bear market, meant reducing your withdrawals by 25% just to maintain your odds of not running out of money, according to research by T. Rowe Price.

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Money

That’s why financial adviser Rick Ferri, head of Portfolio Solutions, recommends shifting to a 30% stock and 70% bond portfolio at the outset of retirement. As the graphic below shows, that mix would have fallen far less during the 2007–09 bear market, while giving up just a little potential return. “The 30/70 allocation is the center of gravity between risk and return—it avoids big losses while still providing growth,” Ferri says.

Financial adviser Michael Kitces and American College professor of retirement income Wade Pfau go one step further. They suggest starting with a similar 30% stock/70% bond allocation and then gradually increasing your stock holdings. “This approach creates more sustainable income in retirement,” says Pfau.

That said, if you have a pension or other guaranteed source of income, or feel confident you can manage a market plunge, you may do fine with a larger stake in stocks.

Know When to Say Goodbye

You’re at the finish line with a seven-figure 401(k). Now you need to turn that lump sum into a lasting income, something that even dedicated do-it-yourselfers may want help with. When it comes to that kind of advice, your workplace plan may not be up to the task.

In fact, most retirees eventually roll over 401(k) money into an IRA—a 2013 report from the General Accountability Office found that 50% of savings from participants 60 and older remained in employer plans one year after leaving, but only 20% was there five years later.

Here’s how to do it:

Give your plan a shot. Even if your first instinct is to roll over your 401(k), you may find compelling reasons to leave your money where it is, such as low costs (no more than 0.5% of assets) and advice. “It can often make sense to stay with your 401(k) if it has good, low-fee options,” says Jim Ludwick, a financial adviser in Odenton, Md.

More than a third of 401(k)s have automatic withdrawal options, according to Aon Hewitt. The plan might transfer an amount you specify to your bank every month. A smaller percentage offer financial advice or other retirement income services. (For a managed account, you might pay 0.4% to 1% of your balance.) Especially if your finances aren’t complex, there’s no reason to rush for the exit.

Leave for something better. With an IRA, you have a wider array of investment choices, more options for getting advice, and perhaps lower fees. Plus, consolidating accounts in one place will make it easier to monitor your money.

But be cautious with your rollover, since many in the financial services industry are peddling costly investments, such as variable annuities or other insurance products, to new retirees. “Everyone and their uncle will want your IRA rollover,” says Brooklyn financial adviser Tom Fredrickson. You will most likely do best with a diversified portfolio at a low-fee brokerage or fund group. What’s more, new online services are making advice more affordable than ever.

Go Slow to Make It Last

A $1 million nest egg sounds like a lot of money—and it is. If you have stashed $1 million in your 401(k), you have amassed five times more than the average 60-year-old who has saved for 20 years.

But being a millionaire is no guarantee that you can live large in retirement. “These days the notion of a millionaire is actually kind of quaint,” says Fredrickson.

Why $1 million isn’t what it once was. Using a standard 4% withdrawal rate, your $1 million portfolio will give you an income of just $40,000 in your first year of retirement. (In following years you can adjust that for inflation.) Assuming you also receive $27,000 annually from Social Security (a typical amount for an upper-middle-class couple), you’ll end up with a total retirement income of $67,000.

In many areas of the country, you can live quite comfortably on that. But it may be a lot less than your pre-retirement salary. And as the graphic below shows, taking out more severely cuts your chances of seeing that $1 million last.

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Money

What your real goal should be. To avoid a sharp decline in your standard of living, focus on hitting the right multiple of your pre-retirement income. A useful rule of thumb is to put away 12 times your salary by the time you stop working. Check your progress with an online tool, such as the retirement income calculator at T. Rowe Price.

Why high earners need to aim higher. Anyone earning more will need to save even more, since Social Security will make up less of your income, says Wharton finance professor Richard Marston. A couple earning $200,000 should put away 15.5 times salary. At that level, $3 million is the new $1 million.

MONEY early retirement

5 Ways to Know If You’re on Track to Retire Early

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David Madison/Getty

More than any numerical calculation, your financial behaviors are a reliable indicator for early retirement.

Interested in retiring early? How do you know if you’re on track? The usual answer is a financial formula: A given amount of savings, plus some investment return, equals a certain lifestyle, for a certain number of years. It’s simple math. Or is it?

In fact, it’s extremely difficult to predict your financial trajectory far into the future. Numbers can be deceiving. How about a different approach? These five career and financial behaviors may be the best indicator for whether you’re on track to retire early.

Do you love your work?
It might seem ironic to begin a discussion of early retirement with whether or not you like your job. After all, isn’t the point of retirement to stop working? Yet, in my experience, the only way to create the value needed to acquire the assets to retire early is to be great at what you do. And it’s hard to be great at something if you don’t love it. How else will you be motivated to put in the hours required for learning, practice, and mastery? Even in retirement, you may not want to stop being productive. But you’ll have the opportunity to do it in your own way, on your own schedule.

Do you value your time more than things?
Another prerequisite for early financial independence is valuing your free time more than owning things. Many modern professionals could retire in their 50’s if they saved more of their income rather than spending it. But temptations abound, and the instant gratification of another purchase is easier to taste than freedom a decade hence.

Ask yourself whether the things in your life are worth the years of labor you trade for them. Expensive houses, cars, and vacations are big-ticket items that can drain away earnings. Taking on debt to pay for them compounds the problem. We all need some luxuries. But requiring the best in everything is a financial burden. Valuing your time more than things will keep you from that trap.

Are you saving at least 30% of your salary?
There are few absolutes in the early retirement equation. High earnings are nice. A frugal lifestyle is helpful. But, when you really dig into the math, what matters most is your savings rate—the amount of your earnings, as a percent, that you save instead of consuming. That single number captures all the relevant factors for financial independence: how much you make, spend, and invest. It’s the single most important numerical factor in whether you can retire early, and it’s independent of your salary.

If you save at the often-recommended rate of only 10%, it will be about 40 years before you can retire. But accelerating that process is possible. It all depends on your resources and motivation. I saved approximately one-third of my salary, plus bonuses, during the peak earning years. That allowed me to retire at age 50 If you’re able to save 50% of your earnings, you could retire in less than 15 years!

How do you achieve those high savings rates? Increase your earnings by self-improvement. Cultivate a healthy, low-cost lifestyle with free fun and a few carefully chosen luxuries. Max out retirement savings and get company matches.

Do you track your financial “vitals”?
Every early retiree that I know got there in part because they quantify and track things. Rocket science is not required: If you can make a list of numbers and add them, you have most of the math skills needed for early retirement. Here are three vital financial signs to watch:

  • Monthly expenses reflect your lifestyle back to you: Are your daily spending decisions taking you towards financial freedom, or further away?
  • Quarterly net worth tracks your progress to financial independence: Are you growing your assets, or digging yourself into debt?
  • Annual portfolio return measures your investing skill: Are you matching the broad market return? (That’s good enough for early retirement.) If not, try a low-cost, passive indexing approach.

Do you have a potentially profitable passion?
Here’s a secret about early retirement: Like much of life, it’s risky. If you need a perfectly predictable, secure existence, then keep your job. But most early retirees aren’t leaving their career to lie on the beach or play golf full time. Most of them are setting off to pursue other passions. And many of those pursuits have income potential. Whether it’s blogging, guiding, or volunteering at a nonprofit, anybody with extensive experience, who is serving others, will generate value. Oftentimes that winds up paying, which reduces the risk of early retirement.

More than any calculation, your financial behaviors are a reliable indicator for early retirement. I’ve just reviewed five important ones. With these behaviors in place, relax and enjoy the ride. Find happiness every day in meaningful work and prudent living. That will lead to financial freedom, on a schedule that is right for you.

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com.

For more help calculating your needs in retirement:
The One Retirement Question You Must Get Right
How to Figure Out Your Real Cost of Living in Retirement
4 Secrets of Financial Freedom

TIME

This Is How Long It Will Be Before You Can Retire

Stop working at 55? Fat chance

First, the good news: After creeping up incrementally since the 1980s, the average retirement age seems to have leveled off — at least, for men. The bad news: It’s probably later than you want to hear, and women’s average retirement age will probably continue to rise.

New research from the Center for Retirement Research at Boston College says that, as of 2013, the average retirement age for men was 64, and roughly 62 for women.

Alicia Munnell, director of the Center for Retirement Research and author of the new study, says financial incentives to delay drawing Social Security, the shift from pensions to 401(k)s and the unavailability of Medicare until the age of 65 all are part of the reason behind the increase.

The recession and its aftermath yielded two more counterbalancing trends: Many older Americans delayed retirement after their 401(k)s shrunk, but others who were laid off had a hard time reentering the workforce.

This isn’t the situation any longer, Munnell says. “By 2015, the cyclical effects have worn off,” she says. “The impact of the various factors that contributed towards working longer… largely have played themselves out,” she says.

At least, this is the case for men. “Male labor force participation has leveled off and, consequently, so has the average retirement age,” Munnell says.

Things are a little different for working women, whose historical retirement trends vary from men’s because women didn’t start entering the workforce in large numbers until the second half of the 20th century.

“Women’s [labor force] participation seems to have increased,” Munnell says. “This upward shift in the curves is reflected in the recent upward trend in the average retirement age.”

And this trajectory towards a later retirement is likely to continue, at least for a while, she says. “I think that it will continue to increase until it becomes very close to the average for men.”

But aside from the chance to earn a bigger Social Security benefit and shore up your nest egg, Munnell says there are advantages to the economy if more people keep working longer, calling this an “unambiguously positive” trend.

“The more people who are working, the bigger the GDP pie and the more output available for both workers and retirees,” she says.

MONEY retirement planning

How to Balance Spending and Safety in Retirement

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Roberto A. Sanchez—Getty Images

Every retirement withdrawal method has its pros and cons. Understanding the differences will help you tap your assets in the way that's best for you.

You’ve saved for years. You’ve built a sizable nest egg. And, finally, you’ve retired. Now, how do you withdraw from your savings so your money lasts as long as you do? Is there a technique, a procedure, a product that will keep you safe?

Unfortunately, there is no perfect answer to this question. Every available solution has its strengths and its weaknesses. Only by understanding the possible approaches, then mixing them together into a personal solution, will you be able to move forward with an enjoyable retirement that balances both spending and safety.

Let’s start with one of the simplest and most popular withdrawal approaches: spending a fixed amount from your portfolio annually. Typically this is adjusted for inflation, so the nominal amount grows over time but sustains the same lifestyle from year to year. If the amount you start with, in year one of your retirement, is 4% of your portfolio, then this is the classic 4% rule.

The advantages of this withdrawal method are that it is relatively simple to implement, and it has been researched extensively. Statistics for the survival probabilities of your portfolio, given a certain time span and asset allocation, are readily available. This strategy seems reliable—you know exactly how much you can spend each year. Until your money runs out. Studies based on historical data show your savings might last for 30 years. But history may not repeat. And fixed withdrawals are inflexible; what if your spending needs change from year to year?

Instead, you could withdraw a fixed percentage of your portfolio annually, say 5%. This is often called an “endowment” approach. The advantage of this is that it automatically builds some flexibility into your withdrawals based on market performance. If the market goes up, your fixed percentage will be a larger sum. If the market goes down, it will be smaller. Even better, you will never run out of money! Because you are withdrawing only a percent of your portfolio, it can never be wiped out. But it could get very small! And your available income will fluctuate, perhaps dramatically, from year to year.

Another approach to variable withdrawals is to base the amount on your life expectancy. (One source for this data is the IRS RMD tables.) Each year you could withdraw the inverse of your life expectancy in years. So if your life expectancy is 30 years, you’d withdraw 1/30, or about 3.3%, in the current year. You will never run out of money, but, again, there is no guarantee exactly how much money you’ll have in your final years. It’s possible you’ll wind up with smaller withdrawals in early retirement and larger withdrawals later, when you aren’t as able to enjoy them.

What if you want more certainty? Annuities appear to solve most of the problems with fixed or variable withdrawals. With an annuity, you give an insurance company some or all of your assets, and, in exchange, they pay you a monthly amount for life. Assuming the company stays solvent, this eliminates the possibility of outliving your assets.

Annuities are good for consistent income. But that’s also their chief drawback: they’re inflexible. If you die early, you will leave a lot of money on the table. If you have an emergency and need a lump sum, you probably can’t get it. Finally, many annuities are not adjusted for inflation. Those that are tend to be very expensive. And inflation can be a large variable over long time spans.

What about income for early retirement? It’s unwise to draw down your assets in the beginning years, when there are decades of uncertainty looming ahead. The goal should be to preserve net worth until you are farther down the road. If your assets are large enough, or the markets are strong enough, you can live off the annual interest, dividends, and growth. If not, you may need to work part-time, supplementing your investment income.

Every retirement withdrawal technique has drawbacks. Some require active management. Some can run out of money. Some don’t maintain your lifestyle. Some can’t handle emergency expenses or preserve principal for heirs. Some may be eroded by inflation.

That’s why I believe most of us are going to construct a flexible, “hybrid” system for living off our assets in retirement. We’ll pick and choose from the available options, combining the benefits, while trying to minimize the liabilities and preserve our flexibility.

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com.

For more help calculating your needs in retirement:
The One Retirement Question You Must Get Right
How to Figure Out Your Real Cost of Living in Retirement
4 Secrets of Financial Freedom

MONEY early retirement

Get These 3 Variables Right and Retire Earlier

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Chris Clor/Getty Images

Most people overestimate what they'll need to live comfortably in retirement. The more realistic you are, the sooner you might be able to kick back.

How do you know if you can retire? Despite all the attention given to your retirement “number”—your total savings—there are several other important variables that go into the retirement equation. If you want an accurate estimate for when you could retire, you must choose reasonable values for each one of them. Get these numbers wrong, either too optimistic or too pessimistic, and it could throw off your retirement calculations by years.

In my experience, people tend to be overly pessimistic about their retirement variables. Maybe it’s all the “bad” news about retirement. Or maybe it’s an abundance of caution around this critical life decision. But if you can be realistic about these numbers without being reckless, you can potentially accelerate your retirement and the freedom it brings.

Even if you have a financial adviser, it’s a good idea to become familiar with the key retirement variables yourself. Yes, some math is required, but it’s pretty simple. And there are easy-to-use retirement calculators that can handle the details for you. So let’s take a look at these important retirement parameters.

1. Living expenses. It’s common to assume that your retirement living expenses will be a fixed percent of your pre-retirement income. But if your lifestyle is unique in any way, especially if you’re a diligent saver, these income-based estimates can be wildly inaccurate. The best way to know your expenses is to actually track them yourself. One expert says you can retire on less than 60% of your working income, which is consistent with my personal experience.

And the news about expenses gets better: The typical retirement calculation automatically increases your living expenses every year by the rate of inflation. That sounds reasonable at first glance. Yet research shows that most people’s expenses decline as they age. Studies show decreases from 16% to as much as 40% over the stages of retirement. Even with higher health-care costs, you simply can’t consume as much at 80 as you did at 60.

2. Inflation rate. Inflation remains a critical retirement variable, because it can influence your fixed living expenses and the real returns on your investments. Many fear higher inflation in the future. Pundits have been expecting it for more than a decade. Although conditions might favor higher inflation down the road, nobody knows for sure when or how it will arrive. In my opinion, trying to plan for extreme inflation is not sensible. And many retirees, myself included, experience a personal inflation rate that is below the government’s official rate, proving that you have some control over how inflation impacts your life.

3. Tax rate. Taxes are one of the most feared and loathed factors in retirement. Yet in my experience as a middle-income retiree, taxes aren’t as big a deal as they are made out to be by those with an agenda for your money (or your vote). In the lower tax brackets, income taxes are just another expense, and not a particularly large one. When calculating taxes for retirement, be especially careful to distinguish between effective and marginal tax rates. Your effective tax rate is your total tax divided by your income. Your marginal rate is the amount of tax you pay on your last dollar of income. That’s a function of your tax bracket and is nearly always much higher than your effective rate.

Most retirement calculators use an effective rate, but that isn’t always clear. If you mistakenly enter a marginal rate into a retirement calculator, you will grossly overestimate your tax liability and underestimate your available retirement income. For example, my marginal tax rate in my peak earning years was 28%; now that I’m retired, my effective tax rate has been around 6%. Big difference!

So there is room for optimism on some key retirement variables. But retirement planning is an exercise in reality, and the reality of the stock and bond markets right now is more negative than positive. Investment returns are one retirement variable where you cannot afford to be overly optimistic, or you could run out of money in your later years. Many experts point to current low interest rates and high market valuations as indicators that we must plan for lower returns going forward. How much should you scale back your expectations? That’s anybody’s guess, but I’m seeing estimates of from 2%-4% below the long term averages for stock returns.

Retirement analysis can be difficult and perplexing. A good retirement calculator can condense all the variables into a single view of your financial trajectory. For the most accurate picture, choose realistic values. Don’t lengthen your journey to retirement with excessive assumptions for living expenses, inflation, or tax rates. But don’t get overly confident about investment returns, either. A realistic analysis will increase your odds of working and saving the right amount, before you make the leap to retirement.

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com.

Read next: Retirement Calculators Are Wrong But You Need One Anyway

MONEY early retirement

How Managing ‘Lifestyle Inflation’ Can Help You Retire Early

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Getty

Before you sign up for that seemingly cheap financial commitment, calculate how much it will really cost you. It's a lot more than you think.

What, exactly, is a “lifestyle”? We’re all chasing a better one, but what does that mean on a day-to-day basis? Well, in financial terms, your lifestyle is reflected most clearly in your recurring expenses: the financial obligations that you commit to each month and that seem necessary to support your way of living.

We’re talking here about essentials like housing, groceries, transportation, insurance, utilities, and taxes. And we’re also talking about a variety of discretionary expenses such as entertainment, memberships, subscriptions, maintenance plans, and personal services.

Look at the list above: Can you cut back in any of these areas without affecting the quality of your life? Whether your goal is building wealth, retiring early, or just making your dollars go farther, controlling your living expenses will pay huge dividends.

Recurring expenses are especially important—and insidious—for a number of reasons. For starters, these expenses are often automatic. They hit your bank account like clockwork every month while your attention is elsewhere. Unless you track your expenses or balance your account, you may not even notice them. But each one costs you, and unless you take action, they will go on forever.

Businesses love recurring charges, which represent steady income at very low cost. So companies are skilled at making these expenses easy for you to add on impulse—often requiring a simple consent or web form—but hard to stop unless you pick up the phone or send a written cancellation. Even the most ethical companies have little incentive to help you minimize your monthly charges. Their policies and procedures are necessarily oriented to persuading you to tack on new ones. So it’s up to you to be vigilant.

Relying on the Rule of 300

Recurring expenses may seem small or insignificant, but, from the perspective of retirement or financial independence, they are all substantial. Why? Because of what I call the Rule of 300: “The amount of money you must save to meet a monthly expense in retirement is approximately 300 times that expense.”

Where does that factor of 300 come from? It stems, simply, from two multipliers. The first, 12, is easy to understand: To convert a monthly expense to an annual one, you must multiply by the 12 months in a year. The second multiplier comes from the well-known “4% rule” for withdrawal from retirement savings. (That rule is under attack as possibly too optimistic, but that only makes the need to control recurring expenses even stronger.) The 4% rule is another way of saying you need to save 25 times your annual expenses to retire safely. So 25 is the second multiplier. Combine these two multipliers, 12 times 25, and you get my “Rule of 300” for the amount you must save to cover a monthly expense in retirement.

For example: Say you commit to a seemingly insignificant $30-per-month membership. A dollar a day sounds cheap, and you think you’ll enjoy the convenience. But, once you stop working, you’ll need to have saved $30 times 300—or $9,000—to pay for that membership from your investments! Yes, believe it or not, a mere “dollar a day” expense actually represents about $9,000 in required retirement savings. How long will it take you to save that much? And is it worth it?

Don’t get me wrong. It’s really important to enjoy life. I’m a big fan of occasional splurges, fun treats along the road to financial independence. I’d be the last one to deny the simple joy of an occasional latte, the delight of opening a new book, the excitement of an evening on the town. But these are all one-time expenses: They don’t inflate your lifestyle. And you can easily reduce or eliminate them, if needed. No phone calls, negotiations, or transaction costs required.

Recurring expenses, even small ones, deserve serious consideration before you sign on the bottom line. I set a very high bar for committing to any new recurring expenses and recommend you do the same. Before you decide that a regular financial commitment sounds “cheap,” multiply it by 300, then picture how much work it will take for you to save that number.

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com. This column appears monthly.

More from Darrow Kirkpatrick:
The Single Most Important Thing You Can Do to Achieve Financial Success
The One Retirement Question You Must Get Right
How to Figure Out Your Real Cost of Living in Retirement

 

MONEY Ask the Expert

Here’s How Social Security Will Cut Your Benefits If You Retire Early

man holding calculator in front of his head
Oppenheim Bernhard—Getty Images

Whether you retire early or later, it's important to understand how Social Security calculates your benefits.

Q: I am 60 and planning on withdrawing Social Security when 62. Due to a medical condition, I am not making $16.00 an hour anymore but only making $9.00. Do you know how income level is calculated on early retirement? Thank you.

A. Social Security retirement benefits normally may be taken as early as age 62, but your income will be substantially higher if you can afford to wait. If you are entitled to, say, a $1,500 monthly benefit at age 66, you might get only $1,125 if you began benefits at age 62. Defer claiming until age 70, when benefits reach their maximum levels, and you might receive $1,980 a month.

Still, most older Americans are like you—they can’t afford to wait. Some 43% of women and 38% of men claimed benefits in 2012 at the age of 62, according to a Social Security report. Another 49% of women and 53% of men took benefits between ages 63 and 66. Just 3% of women and 4% of men took benefits at ages 67 and later, when payouts are highest.

Why are people taking Social Security early? The report didn’t ask people why they claimed benefits. But academic research suggests that the reasons are pretty much what you might expect—retirees need the money, and they also worry about leaving benefits on the table if they defer them. There is also strong evidence that most Americans are not fully aware of the advantage of delaying benefits. A study last June sponsored by Nationwide found that 40% of early claimants later regretted their decisions.

So before you quit working, it’s important to understand Social Security’s benefits formula. To calculate your payout, Social Security counts up to 35 of your highest earning years. It only includes what are called covered wages—salaries in jobs subject to Social Security payroll taxes. Generally, you must have covered earnings in at least 40 calendar quarters at any time during your working life to qualify for retirement benefits.

The agency adjusts each year of your covered earnings to reflect subsequent wage inflation. Without that adjustment, workers who earned most of their pay earlier in their careers would be shortchanged compared with those who earned more later, when wage inflation has caused salary levels to rise.

Once the agency adjusts all of your earnings, it adds up your 35 highest-paid years, then uses the monthly average of these earnings (after indexing for inflation) to determine your benefits. If you don’t have 35 years of covered earnings, Social Security will use a “zero” for any missing year, and this will drag down your benefits. On the flip side, if you keep working after you claim, the agency will automatically increase your benefits if you earn an annual salary high enough to qualify as one of your top 35 years.

The figures below show how Social Security calculated average retirement benefits as of the end of 2012 for four categories of worker pay: minimum wage, 75% of the average wage, average wage, and 150% of the average wage. (The agency pulls average wages each year from W-2 tax forms and uses this information in the indexing process that helps determine benefits.)

  • Worker at minimum wage: The monthly benefit at 62 is $686 and, at age 66 is $915.50. The maximum monthly family benefits based on this worker’s earnings record (including spousal and other auxiliary benefits) is $1,396.50.
  • Worker at 75% of average wage: The monthly benefit at 62 is $975 and, at age 66 is $1,300.40. The maximum monthly family benefits based on this worker’s earnings record (including spousal and other auxiliary benefits) is $2,381.20.
  • Worker at average wage: The monthly benefit at 62 is $1,187 and, at age 66 is $1,583.20. The maximum monthly family benefits based on this worker’s earnings record (including spousal and other auxiliary benefits) is $2,927.40.
  • Worker at 150% of average wage: The monthly benefit at 62 is $1,535 and, at age 66 is $2,047. The maximum monthly family benefits based on this worker’s earnings record (including spousal and other auxiliary benefits) is $3.582.80.

In short, claiming at age 62 means you’ll receive lower benefits compared with waiting till full retirement age. But given a lifetime earnings history and Social Security’s wage indexing, receiving a lower wage for your last few working years will not make a big difference to your retirement income.

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

Related:

How does Social Security work?

When can I start collecting Social Security benefits?

Why should I wait past age 62 to start collecting benefits?

MONEY early retirement

The Most Important Move to Make If You Want to Retire Early

Small birdhouse
Michael Blann—Getty Images

Housing is the most dangerous expense for those seeking financial freedom. Here's what you can do to control those costs.

Looking to achieve financial independence and retire sooner? A top priority should be to control expenses—especially your major living expenses like housing, food, transportation, health care, and recreation. We’ll focus on the rest of these spending categories in future columns, but for now let’s take a look at housing—the single largest expense for many, and one that can all too easily sabotage your journey to financial freedom.

Housing-related decisions will impact your financial independence by years, if not decades. Homes are a downright dangerous expense variable, because price tags are high, leverage (borrowing) is usually required, and various financial “experts” with their own agendas are usually involved. And houses expose our vanities, tempting us to spend for the approval of others, instead of in our own best interests. Losses of tens of thousands of dollars are routine in real estate, and can completely derail your savings plan.

Even when you don’t suffer an outright loss, changing homes is expensive. I moved around in my 20’s, had few possessions, and rented, so the cost of relocating was minimal. Then I married, we bought our first house, and had a child. Our next move was punishing: We were forced to sell our house at a steep loss, and, because of all our new stuff, we had to hire professional movers for the first time. When we finally bought a house again, we stayed put for nearly 17 years. In retrospect, that long time in one place was an enormous help in growing our assets and retiring early.

How much does it cost to change homes? By the time you add up the costs of selling, relocating, buying again, and settling in, you can easily spend $20,000, or more. According to Zillow, closing costs to a home buyer run from 2% to 5% of the purchase price. The seller doesn’t have mortgage-related costs but is likely paying a realtor commission as high as 6% or 7%. Then there are moving costs, and the inevitable shakedown costs with any new home: painting, carpets and curtains, repairs, supplies and furnishings, and basic improvements to suit your lifestyle.

In short, changing homes is frightfully expensive, and will probably eat up most of the average family’s potential savings for several years running.

Of course there are scenarios like career moves, where you don’t have the luxury of staying in place. But anytime the choice to move is yours, stop and consider the expenses. The worst possible choice would be an optional move into a larger house that you don’t really need. You are taking on a big one-time expense, plus a bigger ongoing mortgage and maintenance obligation. If more space is truly necessary, consider instead modifying your current home: When our son reached the later teen years, we renovated a larger downstairs room so he could have more space.

Once you’re in your home, be smart about home improvement projects, especially those you can’t do cheaply yourself. Trying to create the “perfect” home is an uphill battle, at best. Borrowing to improve your home is an especially bad idea, in my opinion. You can spend vast sums of money without measurably improving your quality of life. And old assumptions about getting that money back when you sell are outdated. For 2014, Remodeling Magazine reports that the average cost-value ratio for 35 representative home improvement projects stood at just about 66%. In other words, you don’t make money when you sell: rather, you only get about two-thirds of your money back! Financially speaking, that’s a lousy investment.

Lastly, while there are situations where it makes sense, on paper, to hold a mortgage, for those truly dedicated to financial independence, the disadvantages of debt often outweigh the benefits. In general, pay off your mortgage as soon as possible. Using extra income to pay down a mortgage loan can be a solid investment in today’s low-return environment. We paid off our mortgage years before retiring, and the peace of mind was invaluable. Now, in retirement, we rent instead of own. It’s a flexible, economical, and low-hassle lifestyle.

In short, maintaining a home will be one of your largest life expenses. Pay careful attention to your housing decisions if you’re serious about financial freedom!

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com. This column appears monthly.

More from Darrow Kirkpatrick:

The Single Most Important Thing You Can Do to Achieve Financial Success

The One Retirement Question You Must Get Right

How to Figure Out Your Real Cost of Living in Retirement

Read next: 3 Little Mistakes That Can Sink Your Retirement

MONEY retirement age

How to Know When It’s Time to Retire

Birthday candles
Fuse—Getty Images

I’ve long argued that one’s quality of life should be a principal factor in deciding when to retire. At the same time, however, financial considerations can’t be ignored. With this in mind, here are three rules of thumb to help you decide whether you’ve reached the perfect age to retire.

1. Have you saved enough money?

The “multiply by-25″ rule is a popular tool that retirement experts encourage people to use to estimate whether they’ve saved enough money to stop working and, at least hopefully, begin a life of leisure.

Here’s how it works: Multiply your desired annual income in retirement, less projected annual Social Security benefits, by 25. If your savings are greater than that, then you’re in good shape. If not, then you may not be financially ready to retire.

For example, let’s say that Bob and Mary Jane estimate they’ll spend $40,000 a year in retirement. Using the rule of 25, they’ll need savings of $1 million.

A slightly different iteration of this is the “multiply by-300″ rule. This is the same thing, but it focuses on months instead of years — that is, take your average monthly expenditures, minus your monthly Social Security check, and multiply that by 300.

If your savings are greater than that, then you’re all set. If not, then you might want to continue working for a few more years.

2. Will you have enough income?

This question is related to the first one, but it attacks the issue from a slightly different angle. As such, it also has its own rule of thumb: the 4% rule.

This rule holds that you can safely withdraw 4% from your portfolio every year and still be confident it will last through retirement. Thus, to determine if you’ll have enough income in retirement, multiply your portfolio by 4% and then add in your projected annual Social Security benefits — to learn one potential problem with this rule, click here.

If the sum of these two numbers is enough to cover your expenses, then you’re ready to retire. If not, then it may behoove you to put off retirement for a while longer, as doing so should allow your portfolio to continue growing. It will also give your Social Security benefits time to accrue delayed retirement credits.

3. Is your portfolio properly allocated?

Finally, determining if you’re ready to retire isn’t just about how much you’ve saved, it’s also about how your savings are allocated into various asset classes — namely, stocks and bonds.

To be ready for retirement, you want to make sure that your assets are invested in as safe of a way as possible. To do so, it’s smart to steer your portfolio increasingly toward fixed-income investments like bonds as you approach your desired retirement age.

Experts use the following rule to determine the proper allocation: “The percentage of your portfolio invested in bonds should equal your age.” Thus, if you’re 60 years old, then 60% of your portfolio should be in bonds and 40% in stocks. If you’re 55, then the split is 55% to 45%, respectively.

While this may seem like it has less to do with the timing of retirement than the former two rules, the reality is that it’s of equal importance. As my colleague Morgan Housel has discussed in the past, one of investors’ biggest mistakes is to underestimate the volatility in the stock market. According to Morgan’s research, stocks fall by an average of 10% once every 11 months.

Suffice it to say, a drop of this magnitude would have a material impact on both of the preceding rules, as a 10% decline in your stock holdings would equate to a much smaller income under the 4% rule and, as a corollary, it would call for a delayed retirement date under the multiply by-25 rule.

And the impact of this would be even more exaggerated if the lions’ share of your assets were still in stocks as opposed to bonds. Consequently, the culmination of your strategy to bring your portfolio into accord with this final rule is a key step in determining the perfect age at which you’re ready to pull the trigger and actually retire.

MONEY Social Security

The Social Security Mistake Even Its Reps Are Making

The rules surrounding claiming requirements are so complicated that the official source of information doesn't always get them right. Here's some guidance that will save you money—and keep you from settling for bad advice.

Claiming Social Security benefits is an exercise in timing. Benefits are pegged to what the agency calls your Full Retirement Age, or FRA, 66 for those now near retirement. Claim too early—or too late—and you could be out truly big bucks.

First, there are early retirement reductions. For example, if you file at the earliest claiming age of 62, your benefits will be reduced by up to 25 percent. Early claiming reductions are even greater for spousal benefits: up to 30 percent if a spouse files at 62 versus 66.

The agency also has rules affecting the maximum benefits that qualifying family members may receive based on a person’s earnings record. So if a worker files early, the whole family stands to lose benefits.

The effects of early claiming don’t end there. If a person files for spousal benefits before reaching their FRA, Social Security deems them to be filing at the same time for their own retirement benefits. They will receive the greater of the two amounts, but will not be able to file a restricted application for just the spousal benefit.

Further, they will not be able to suspend their own retirement benefit and take advantage of Social Security’s delayed retirement credits, which add 8% a year to someone’s benefits, adjusted for inflation, between the ages of 66 and 70.

When someone has reached their FRA, however, such deeming no longer applies. The claimant can file for just the retirement or spousal benefit, receiving its full value while letting the second benefit rise in value until they switch to it at a later date.

These are complicated rules. Even if you understand them, Social Security representatives may not, or there may be communications and misunderstandings.

That’s what happened to Steve Hirsh, from Ridgeland, Miss. After reaching his FRA, Hirsh filed for his retirement benefit. His wife, who is younger, has not reached her FRA and has not yet filed for any benefit. The couple’s plan, Steve wrote, is for his wife to claim a spousal benefit at age 66, which would equal half of Steve’s benefit at his FRA.

At the same time, she would suspend her own retirement benefit for four years. Then, when she turned 70, she would stop receiving spousal benefits and begin taking her own retirement benefits, which would have risen during four years of delayed retirement credits and reached their maximum amount.

Steve’s plan is sound, but he said that Social Security didn’t see it that way. “I have been told repeatedly by various Social Security reps that she cannot file for the spousal option because her [earnings] base is more than half of mine,” he wrote to me via email. In other words, her retirement benefit from her own work record would be larger than her spousal benefit from Steve’s work history. “Is the Social Security office correct that we can’t do this because of the relative values of our full base amounts?”

Steve got bad advice from Social Security. Repeatedly. The relative values of a couple’s Social Security earnings can come into play if either spouse files for benefits before reaching FRA and is deemed to be filing for multiple benefits. But deeming ends at FRA, and the relative values of a couple’s covered earnings does not restrict their ability to collect a benefit.

I asked Steve to take another crack at Social Security, and he did. This time, the agency got it right. He sent me the agency’s response, which said in part, “Please note that deemed filing is not applicable for a claimant who is full retirement age (FRA). If an individual is FRA, he or she can file for a spousal benefit and delay filing for his or her own retirement benefit until a later time.”

Steve was delighted. “This will make a significant difference in our overall retirement strategy,” he said.

Beyond congratulating him for being persistent, we should read this as a cautionary tale. Even the official source of Social Security information can make mistakes, and what you don’t know can hurt you. So, do your homework and understand Social Security benefits. If Steve and his wife had taken the agency’s earlier responses at face value, they would have lost a lot of retirement income.

Philip Moeller is an expert on retirement, aging, and health. He is an award-winning business journalist and a research fellow at the Sloan Center on Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

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