MONEY Ask the Expert

How to Max Out Social Security Benefits for Your Family

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

Q. Does the family maximum benefit (FMB) apply only to one spouse’s individual’s work history or to both spouses in a family? That is, assume two high-earning spouses both delay claiming a benefit till, say, 70. Would the FMB rules limit their overall family benefits? Or does the FMB include just the overall family benefits derived from the earnings record of one particular worker? —Steve

A: Kudos to Steve for not only knowing about the family maximum benefit but having the savvy to ask how it applies to two-earner households. The short answer here is that Social Security tends to favor, not penalize, two-earner households in terms of their FMBs.

To get everyone else up to speed, the FMB limits the amount of Social Security benefits that can be paid on a person’s earnings record to family members—a spouse, survivors, children, even parents. (Benefits paid to a divorced spouse do not fall under the FMB rules.) The amount may include your individual retirement benefit plus any auxiliary benefits (payouts to those family members) that are based on that earnings record.

Fair warning: the FMB is far from user-friendly. Few Social Security rules are as mind-bendingly complex as the FMB and its cousin, the combined family maximum (CFM). And Social Security has a lot of complex rules. Unfortunately, you need to do your homework to claim all the family benefits you are entitled to receive.

To address Steve’s question, these FMB calculations may be based on the combined earnings records of both spouses. More about this in a bit, but first, here are the basics for an individual beneficiary.

The ABCs of the FMB

The FMB usually ranges from 150% to 187% of what’s called the worker’s primary insurance amount (PIA). This is the retirement benefit a person would be entitled to receive at his or her full retirement age. Even if you wait until 70 to claim your benefit, it won’t increase the FMB based on your earnings record.

Now, I try to explain Social Security’s rules as simply as possible—but there are times when the system’s complexity needs to be seen to be believed. So, here is the four-part formula used in 2015 to determine the FMB for an individual worker:

(a) 150% of the first $1,056 of the worker’s PIA, plus

(b) 272% of the worker’s PIA over $1,056 through $1,524, plus

(c) 134% of the worker’s PIA over $1,524 through $1,987, plus

(d) 175% of the worker’s PIA over $1,987.

Let’s use these rules for determining the FMB of a worker with a PIA of $2,000. It will be $3,500, which equals (a) $1,584 plus (b) $1,273 plus (c) $620 plus (d) $23. The difference between $3,500 and $2,000 is $1,500—that’s the amount of auxiliary benefits that can go to your family. Got that?

And here’s a key point that trips up many people: Even if the worker claimed Social Security early, which means his benefits were lower than the value of his PIA, it would not change the $1,500 limit on auxiliary benefits. However, when the worker dies, the entire $3,500, which includes the PIA amount, becomes available in auxiliary benefits.

It’s quite common for family claims to exceed the FMB cap. When this happens, anyone claiming on his record (except the worker) would see their benefits proportionately reduced until the total no longer exceeded the FMB. If, say, those claimed auxiliary benefits actually totaled $3,000, or double the allowable $1,500, all auxiliary beneficiaries would see their benefits cut in half.

How CFM Can Boosts Benefits

Enter the combined family maximum (CFM). This formula can substantially increase auxiliary benefits to dependents of married couples who both have work records—typically multiple children of retired or deceased beneficiaries.

The children can be up to 19 years old if they are still in elementary or secondary school (and older if they are disabled and became so before age 22). Because each child is eligible for a benefit of 50% or even 75% percent of a parent’s work PIA, even having only two qualifying auxiliary beneficiaries—say a spouse and a child, or two children—can bring the FMB into play.

But with the CFM, the FMBs of each earner in the household can be combined to effectively raise the benefits to children that might otherwise would be limited by the FMB of just one parent. Under its rules, Social Security is charged with determining the claiming situation that produces the most cumulative benefits to all auxiliary beneficiaries.

Using our earlier example, let’s assume we now have two workers, each with PIAs of $2,000 and FMB’s of $3,500. A qualifying child would still be limited to a benefit linked to the FMB of a single parent. But the CFM used to determine the size of the family’s benefits “pool” has now doubled to $7,000 a month, permitting total auxiliary benefits of up to $3,000.

Well, they would have totaled this much—except there’s another Social Security rule that puts a cap on the CFM. For 2015, that cap is $4,912. Subtracting one of the $2,000 PIAs from this amount leaves us with up to $2,912 in auxiliary benefits for this family. That’s not $3,000 but almost.

So it’s quite possible that three, four, or possibly more children would get their full child benefits in this household. Even if they totaled 200% of one parent’s FMB, they would add up to a smaller percentage of the household’s CFM, and either wouldn’t trigger benefit reductions, or at least much small ones.

And if eligible children live in a household where one or both of their parents also has a divorced or deceased spouse, even more work records can come into play. This is complicated stuff, as borne out in some thought-twisting illustrations provided by the agency.

Before moving ahead with family benefit claims, I recommend making a face-to-face appointment at your local Social Security office. Bring printouts of your own earnings records, which you can obtain by opening an online account for each person whose earnings record is involved. I’d also print out the contents of the Social Security rules, which are linked in today’s answer, or at the very least, write down their web addresses so the Social Security representative can access them.

Good luck!

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: Why Social Security Rules Are Making Inequality Worse

MONEY Ask the Expert

The Surefire Way Not to Lose Money on Your Bond Investments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MONEY retirement income

Here’s the Retirement Income Mistake Most Americans Are Making

money with "guaranteed" stamps on it
Andrew Unangst—Getty Images

Retirees want steady income yet few buy annuities—probably because they don't understand how they work. Here's a plain-English guide.

A recent TIAA-CREF survey found that 84% of Americans want guaranteed monthly income in retirement, yet only 14% have actually bought an annuity. One reason may be that most people don’t really understand how the damn things work. Here’s a plain-English explanation.

People preparing for retirement like the concept of an annuity: an investment that generates income you can count on as long as you live no matter how badly the financial markets are misbehaving. But they’re less than enthusiastic when it comes to purchasing them. Economists call this disconnect “the annuity puzzle.”

There are any number of possible explanations for this puzzle. Some people are turned off by the lofty fees some annuities charge. Others may simply prefer following the 4% rule or withdrawing money from their savings on an “as needed” basis. But I can’t help but think that some of the reluctance to “annuitize” is because many people don’t have a clue about how annuities work.

If you think you might want more assured income than Social Security alone will provide, but the blue fog that surrounds annuities is holding you back, here’s a (relatively) simple, (mostly) non-technical explanation of what goes on under the hood of an immediate annuity.

Steady Lifetime Payout

Imagine for a moment that you and a bunch of your friends, all age 65, would like at least some of your savings to generate steady income that you can rely on throughout retirement. So you all decide to kick in the same amount of money—say, $100,000—to an investment account. For monthly income, you then divide among the group whatever money your pooled funds earn that month.

You also agree, however, to return a portion of each group member’s original principal every month so that you have more than just investment earnings to spend. Since you want to be sure this money lasts even if you live beyond life expectancy, however, you’re careful not to tap into the principal too deeply each month.

Then you and your fellow retirees set one more condition: Each time someone in your little group dies, the monthly investment gains and share of principal that would have gone to that person is split among the remaining members. This amounts to an extra bit of income that no one in the group would have been able to get by investing on his or her own.

The scenario I’ve described pretty much explains how an immediate annuity—or an income or payout annuity as it’s sometimes known—works, with some important differences.

To begin with, people can’t create immediate annuities on their own. You need an insurance company to create an annuity (although you may end up buying the annuity from a broker, financial planner or other adviser, or from your bank.) Another difference: the example above involved a small group of people of the same age investing the same amount of money. In fact, insurers’ annuities are purchased by thousands of people of different ages (although they tend to be older) investing a range of sums.

And while the monthly payments the group received in the scenarios above could vary from month to month based on investment earnings and whether or not someone died, an insurer’s immediate annuity states in advance how much you’ll receive each month (although some immediate annuities may increase their payments based on the inflation rate or other factors). Insurers are able to tell you how much you’ll receive because they hire actuaries to project how many annuity owners will die each year, and the companies’ investment analysts forecast investment returns.

An Income Boost

But what really differentiates an immediate annuity from the example above is that no group of people pooling their assets can guarantee that they’ll receive a scheduled payment as long as they live. Investment returns could plummet. The group members could distribute too much principal early on, requiring a reduction in payments later to avoid running out of money. Or maybe enough hardy members live so long that the pool of assets simply runs dry while they’re still alive.

When insurers set payment levels for an immediate annuity, by contrast, state regulators require that they set aside reserves to assure they can make scheduled payments even if their actuaries’ and investment analysts’ projections are off.

That’s not to say that an insurer can’t fail. But such failures are rare. And you can largely protect yourself against that small possibility by diversifying—i.e., spreading your money among annuities from several insurers—sticking to insurers with high financial-strength ratings and limiting the amount you invest with any single insurance company to the maximum coverage provided by your state’s insurance guaranty association.

In short, an immediate, or payout, annuity gives you more current income than you could generate on your own taking comparable investing risk plus a very high level of assurance that the income will continue as long as you live. (You can also opt for payments to continue as long as either you or your spouse is alive.)

That assurance comes with a condition: You give up access to the money you invest in an immediate annuity. (Some annuities allow you to get at least some of your investment but you’ll receive a lower payment and erode the benefit of buying an annuity in the first place.) There’s simple way to deal with that condition, though: invest only a portion of your assets in an immediate annuity and leave the rest in a portfolio of stocks, bonds and cash.

Bottom line: If you would like to have a reliable source of lifetime income beyond what you’ll get from Social Security, it makes sense to at least think about putting some (but not all) of your savings in an immediate annuity. You can go to an annuity calculator like the one in RDR’s Retirement Toolbox to see how much income you might receive given your age, gender and the amount you’re willing to invest.

This explanation is probably more than any sane person wants to know about annuities. But if you for whatever reason have an appetite to delve even deeper into the world of annuities, I suggest you take a look at this paper by Wharton professor David Babbel and BYU prof Craig Merrill. And then consider whether a comprehensive retirement income plan that combines Social Security, an immediate annuity and a portfolio of stock and bond funds is right for you.

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

More From RealDealRetirement.com

Should You Bet Your Retirement On Warren Buffett?

Are You Paying Your Adviser Too Much?

Should You Take Social Security Early And Invest It—Or Claim Later For a Higher Benefit?

For an upcoming story, MONEY wants to hear from Boomers about how they approach money in romantic relationships. We want to know when you and your partner had the money talk and what questions you both raised; if you’re not partnered up, we want to hear what financial criteria you think are important for people to consider as they approach a new relationship. We’ll be in touch for more information if we’re considering your story for publication.

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.

150320_MIL_Withdrawals
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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 401(k)s

How to Build a $1 Million Retirement Plan

$100 bricks and mortar
Money (photo illustration)—Getty Images(2)

The number of savers with seven-figure workplace retirement plans has doubled over the past two years. Here's how you can become one of them.

The 401(k) was born in 1981 as an obscure IRS regulation that let workers set aside pretax money to supplement their pensions. More than three decades later, this workplace plan has become America’s No. 1 way to save. According to a 2013 Gallup survey, 65% of those earning $75,000 or more expect their 401(k)s, IRAs, and other savings to be a major source of income in retirement. Only 34% say the same for a pension.

Thirty-plus years is also roughly how long you’ll prep for retirement (assuming you don’t get serious until you’ve been on the job a few years). So we’re finally seeing how the first generation of savers with access to a 401(k) throughout their careers is making out. For an elite few, the answer is “very well.” The stock market’s recent winning streak has not only pushed the average 401(k) plan balance to a record high, but also boosted the ranks of a new breed of retirement investor: the 401(k) millionaire.

Seven-figure 401(k)s are still rare—less than 1% of today’s 52 million 401(k) savers have one, reports the Employee Benefit Research Institute (EBRI)—but growing fast. At Fidelity Investments, one of the largest 401(k) plan providers, the number of million-dollar-plus 401(k)s has more than doubled since 2012, topping 72,000 at the end of 2014. Schwab reports a similar trend. And those tallies don’t count the two-career couples whose combined 401(k)s are worth $1 million.

Workers with high salaries have a leg up, for sure. But not all members of the seven-figure club are in because they make big bucks. At Fidelity thousands earning less than $150,000 a year have passed the million-dollar mark. “You don’t have to make a million to save a million in your 401(k),” says Meghan Murphy, a director at Fidelity.

You do have to do all the little things right, from setting and sticking to a high savings rate to picking a suitable stock and bond allocation as you go along. To join this exclusive club, you need to study the masters: folks who have made it, as well as savers who are poised to do the same. What you’ll learn are these secrets for building a $1 million 401(k).

1) Play the Long Game

Fidelity’s crop of 401(k) millionaires have contributed an above-average 14% of their pay to a 401(k) over their careers, and they’ve been at it for a long time. Most are over 50, with the average age 60.

Those habits are crucial with a 401(k), and here’s why: Compounding—earning money on your reinvested earnings as well as on your original savings—is the “secret sauce” to make it to a million. “Compounding gives you a big boost toward the end that can carry you to the finish line,” says Catherine Golladay, head of Schwab’s 401(k) participant services. And with a 401(k), you pay no taxes on your investment income until you make withdrawals, putting even more money to work.

You can save $18,000 in a 401(k) in 2015; $24,000 if you’re 50 or older. While generous, those caps make playing catch-up tough to do in a plan alone. You need years of steady saving to build up the kind of balance that will get a big boost from compounding in the home stretch.

Here’s how to do it:

Make time your ally. Someone who earns $50,000 a year at age 30, gets 2% raises, and puts away 14% of pay on average will have $547,000 by age 55—a hefty sum that with continued contributions will double to $1.1 million by 65, assuming 6% annualized returns. Do the same starting at age 35, and you’ll reach $812,000 at 65.

Yet saving aggressively from the get-go is a tall order. You may need several years to get your savings rate up to the max. Stick with it. Increase your contribution rate with every raise. And picking up part-time or freelance work and earmarking the money for retirement can push you over the top.

Milk your employer. For Fidelity 401(k) millionaires, employer matches accounted for a third of total plan contributions. You should squirrel away as much of the boss’s cash as you can.

According to HR association WorldatWork, at a third of companies 50% of workers don’t contribute enough to the company 401(k) plans to get the full match. That’s a missed opportunity to collect free money. A full 80% of 401(k) plans offer a match, most commonly 50¢ for each $1 you contribute, up to 6% of your salary, but dollar-for-dollar matches are a close second.

Broaden your horizons. As the graphic below shows, power-saving in your forties or fifties may bump you up against your 401(k)’s annual limits. “If you get a late start, in order to hit the $1 million mark, you will need to contribute extra savings into a brokerage account,” says Dirk Quayle, president of NextCapital, which provides portfolio-management software to 401(k) plans.

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2) Act Like a Company Lifer

The Fidelity 401(k) millionaires have spent an average of 34 years with the same employer. That kind of staying power is nearly unheard-of these days. The average job tenure with the same employer is five years, according to the Bureau of Labor Statistics. Only half of workers over age 55 have logged 10 or more years with the same company. But even if you can’t spend your career at one place—and job switching is often the best way to boost your pay—you can mimic the ways steady employment builds up your retirement plan.

Here’s how to do it:

Consider your 401(k) untouchable. A fifth of 401(k) savers borrowed against their plan in 2013, according to EBRI. It’s tempting to tap your 401(k) for a big-ticket expense, such as buying a home. Trouble is, you may shortchange your future. According to a Fidelity survey, five years after taking a loan, 40% of 401(k) borrowers were saving less; 15% had stopped altogether. “There are no do-overs in retirement,” says Donna Nadler, a certified financial planner at Capital Management Group in New York.

Even worse is cashing out your 401(k) when you leave your job; that triggers income taxes as well as a 10% penalty if you’re under age 59½. A survey by benefits consultant Aon Hewitt found that 42% of workers who left their jobs in 2011 took their 401(k) in cash. Young workers were even more likely to do so. As you can see in the graphic below, siphoning off a chunk of your savings shaves off years of growth. “If you pocket the money, it means starting your retirement saving all over again,” says Nadler.

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Money

Resist the urge to borrow and roll your old plan into your new 401(k) or an IRA when you switch jobs. Or let inertia work in your favor. As long as your 401(k) is worth $5,000 or more, you can leave it behind at your old plan.

Fill in the gaps. Another problem with switching jobs is that you may have to wait to get into the 401(k). Waiting periods have shrunk: Today two-thirds of plans allow you to enroll in a 401(k) on day one, up from 57% five years ago, according to the Plan Sponsor Council of America. Still, the rest make you cool your heels for three months to a year. Meanwhile, 40% of plans require you to be on the job six months or more before you get matching contributions.

When you face a gap, keep saving, either in a taxable account or in a traditional or Roth IRA (if you qualify). Also, keep in mind that more than 60% of plans don’t allow you to keep the company match until you’ve been on the job for a specific number of years, typically three to five. If you’re close to vesting, sticking around can add thousands to your retirement savings.

Put a price on your benefits. A generous 401(k) match and friendly vesting can be a lucrative part of your compensation. The match added about $4,600 a year to Fidelity’s 401(k) millionaire accounts. All else being equal, seek out a generous retirement plan when you’re looking for a new job. In the absence of one, negotiate higher pay to make up for the missing match. If you face a long waiting period, ask for a signing bonus.

3) Keep Faith in Stocks

Research into millionaires by the Spectrem Group finds a greater willingness to take reasonable risks in stocks. True to form, Fidelity’s supersavers have 75% of their assets in stocks on average, vs. 66% for the typical 401(k) saver. That hefty equity stake has helped 401(k) millionaires hit seven figures, especially during the bull market that began in 2009.

What’s right for you will depend in part on your risk tolerance and what else you own outside your 401(k) plan. What’s more, you may not get the recent bull market turbo-boost that today’s 401(k) millionaires enjoyed. With rising interest rates expected to weigh on financial markets, analysts are projecting single-digit stock gains over the next decade. Still, those returns should beat what you’ll get from bonds and cash. And that commitment to stocks is crucial for making it to the million-dollar mark.

MONEY retirement planning

The Growing Divide Between the Retirement Elite and Everyone Else

empty and full transparent piggy banks
iStock

Americans are on track to replace 60% of income, but only one in five pre-retirees report good health. That's likely to prove costly.

There’s a growing retirement savings gap between workers with 401(k)s and those without.

Overall the typical American worker is on track to replace about 58% of current pay through savings at retirement. That’s according to a new Lifetime Income Score study, by Empower Retirement, which calculated the income workers are on track to receive from retirement plans and other financial assets, as well as Social Security benefits.

“Those who have workplace plans like 401(k)s aren’t doing too badly, but there’s a big savings deficit for those who don’t have them,” says Empower president Ed Murphy. (Formed through a recent merger, Empower combines the retirement services of Putnam, Great-West and J.P. Morgan.)

Those with access to a 401(k) or other retirement plan had lifetime income scores of 74%, while those lacked plans had an average score of just 42%. It’s one reason this year’s overall score of 58% is a slight dip from last year’s score of 61% .

Living well on just 58% of current income is certainly possible—many retirees are doing just fine at that level. But financial planners typical suggest aiming for a 75% to 80% replacement rate to leave room for unexpected costs. And for many workers, it’s possible to close the savings gap by stepping up 401(k) contributions by staying on the job longer.

But truth is, most workers end up retiring well before age 65, and few have enough saved by that point. The least prepared workers, some 32% of those surveyed, were on track to receive just 38% of their income in retirement, which would be largely Social Security benefits.

By contrast, an elite group of workers, some 20%, are on track to replace 143% of their current income, Empower found. And it’s not just those pulling down high salaries. “The key success factors were access to a 401(k) and consistently saving 10% of pay, not income,” Murphy says.

Access to a financial adviser also made a big difference in whether workers were on track to a comfortable retirement income. Those who worked with a pro were on track to replace 82% of income vs 55% for those without. And for those with a formal retirement plan, their lifetime income score hit 87% vs the average 58%.

For all retirement savers, however, health care costs are a looming problem. Only 21% of those ages 60 to 65 reported having none of six major medical issues, such as diabetes or tobacco use. For the typical 65-year-old couple, health care expenses, including Medicare premiums and out-of-pocket costs, might reach $220,000 over the course of retirement, according to a Fidelity analysis. Those in worse health can expect to pay far higher costs, which means you should plan to save even more.

Here are other key findings from the Empower study:

  • Nearly two-thirds of workers lack confidence about their ability to cover health care costs in retirement
  • Some 75% say they have little or no concern about job security, vs. 60% in 2012.
  • Some 72% of workers are somewhat interested or very interested in guaranteed income options, such as annuities.
  • The percentage of workers considering delaying retirement is falling—some 30% now vs. 41% from a peak in 2012.
  • Many are hoarding cash, which accounts for 35% of retirement plan assets. For those without advisers, that allocation is a steep 55%.

Clearly, estimating your retirement income is crucial to achieving your financial goals—and studies have shown that going through that exercise can help spur saving. More 401(k) plans are offering tools and other guidance to help savers estimate their retirement income and help you choose the right stock and bond allocation. For those who aren’t participating in a 401(k) plan, try the T. Rowe Price retirement income calculator, which is free.

MONEY Pensions

Here’s a New Reason to Think Twice About Trading In Your Pension

More workers are being offered lump-sum pension buyouts. But the information packets they receive leave out crucial details, a GAO study finds.

If you are due a pension from a former employer, there is a good chance you were or soon will be offered a lump-sum payment in exchange for giving up that guaranteed monthly check for life.

Should you take it? Probably not, but making a smart decision depends on a complex set of assumptions about future interest rates, possible rates of market returns and your longevity. It is a tough analysis unless you have an actuarial background.

Unfortunately, employers are not providing enough information.

That is the conclusion of a recent review by the U.S. Government Accountability Office of 11 lump-sum-offer information packets provided to beneficiaries by pension plan sponsors.

The key failings included unclear comparisons of the lump sum’s value compared with the value of lifetime pension payouts. Also lacking were many of the explanations of mortality factors and interest rates used to calculate the lump sums.

Even more worrisome was missing information about the insurance guarantees that probably would be available to participants from the Pension Benefit Guarantee Corp in the event of a sponsor default.

That is a major problem because fear of pension failure is one of the biggest factors driving participants to accept lump-sum offers. Having PBGC insurance is like having your bank deposits guaranteed by the Federal Deposit Insurance Corp; if a plan fails, most workers receive 100% of the benefits they have earned up to that point.

The GAO did find that the packets were in compliance with the Internal Revenue Service rules on disclosures to employees. However, it urged the U.S. Department of Labor to tighten reporting requirements on lump-sum offers and to work with other federal agencies to clarify the guidance sponsors should be providing.

Better information certainly would be helpful to beneficiaries as the lump-sum trend continues to grow.

Private sector pension plans are trying to lower their risk that recipients will live longer and therefore collect more than the actuaries originally planned.

Twenty-two percent of sponsors say they are “very likely” to make lump-sum offers to former, vested workers this year, up from 14% in 2014, according to a study by Aon Hewitt, the employee benefit consulting firm.

But better information alone is not likely to lead to better decisions,” says Norman Stein, a law professor at Drexel University and an expert on pension law.

Beneficiaries often make up their minds based on emotional factors like fear of a pension plan default or the appeal of getting a large pile of cash up front, says Steve Vernon, an actuary and consulting research scholar at the Stanford Center on Longevity.

In most cases, beneficiaries will come out ahead by sticking with a monthly check from a pension, but you should evaluate the lump-sum offer against such factors as your likely life expectancy and other sources of guaranteed income (Social Security or a spouse’s pension).

Some beneficiaries accept lump sums expecting to get better returns by investing the proceeds. But an apples-to-apples comparison requires measuring the rate of return used to calculate your lump sum against risk-free investments like certificates of deposit or Treasuries. After all, most private-sector pensions are a guaranteed income source backed by the U.S. government.

You could also take the lump sum and buy an annuity, but these commercial products typically will generate 10% to 30% less income than your pension, Vernon says.

“A good measure of the lump sum offer is to calculate how much it would cost you to buy that annuity from an insurance company,” he says.

You can get an estimate of a lump-sum conversion at ImmediateAnnuities.com. Vanguard offers an annuity marketplace for its customers.

But Vernon has a more basic way to think about a lump-sum decision.

“Just the fact that employers call this ‘pension risk transfer’ should give you pause,” he says. “These big corporations want to transfer mortality and interest risk to you because they don’t want it.

“Ask yourself: ‘Why should I take something my employer doesn’t want?'”

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

MONEY retirement planning

Why Your Empty Nest May Be Hazardous to Your Retirement

150317_RET_CutSpending
Alamy—© Mode Images / Alamy

You may want to live a little when your kids leave home. But what you do with that money can make or break your retirement, a new study finds.

How well prepared you are for retirement may come down to one simple question: what do you do with money that once would have been spent on your kids?

In recent years, two common models of retirement preparedness in America have begun to draw vastly different pictures. The optimal savings model, which looks at accumulated savings, concludes that only 8% of pre-retirees have insufficient resources to retire comfortably. The income replacement model, which looks at the level of income that savings will generate, concludes half the working age population is in deep trouble.

These two models incorporate many different assumptions, which is why they can reach contradictory conclusions. For one thing, the optimal savings model assumes savings are held in something like a 401(k) plan and drawn down over time. The income replacement model assumes savings are converted to lifetime income through an annuity at retirement.

Accounting for these and many other differences, researchers at the Center for Retirement Research at Boston College have concluded that the key variable in retirement readiness is empty nest spending patterns. “If households consume less once their kids leave home, they have a more modest target to replace and they save more between the emptying of the nest and retirement,” the authors write. This creates a financial comfort level that those who spend the same amount—most likely on themselves—have greater difficulty achieving.

When the more conservative empty nest spending assumptions of the optimal savings model are applied to the income replacement model, the level of retirement preparedness is similarly optimistic. What the paper cannot answer, however, is which model accurately reflects the way empty nesters behave.

“Do parents cut back on consumption when kids leave, or do they spend the slack in their budgets?” the authors write. “No one really knows the answers.” How households react when kids leave the fold is not well understood, they say.

Yet that’s a problem for academics. You can control the way you act. The upshot is that if you resist the temptation to spend instead of save the money your kids were costing you, retirement readiness may be at your fingertips.

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

MONEY Social Security

Why Social Security Benefit Rules Are Making Inequality Worse

Laurence Kotlikoff, an economics professor at Boston University.
Jodi Hilton—The New York Times/Redux Laurence Kotlikoff, an economics professor at Boston University

Benefit rules are so complex that a new book on claiming strategies has become a best-seller. Here’s how to get it right.

If you find Social Security rules bewildering, don’t feel too bad; so do Social Security experts. As Boston University economics professor Larry Kotlikoff points out, the 2,728 Social Security rules, if you print them out, are longer than the federal tax code. Little wonder his new book explaining to how to max out Social Security benefits—Get What’s Yours, co-authored with MONEY contributor Philip Moeller and PBS journalist Paul Solman—landed on the New York Times and Amazon best-seller lists. Kotlikoff recently spoke to MONEY about the program’s shortcomings and the best way to claim benefits.

Q: Why are Social Security rules so maddeningly complicated?

A: The system was designed decades ago by older white males who may have had their own interests somewhat at heart. In any case, it awards benefits unfairly. Single people are at a disadvantage to married couples, who have more types of benefits available to them. Married couples with two earners are at a disadvantage to those with one earner. The disabled are also treated unfairly.

Worse, whether you get all the benefits you are entitled to is a random process. It all depends on whether you understand the complex system, and you get the right information from customer representatives, who aren’t well trained. Americans are leaving billions on the table as a result. But higher-income people are better able to take advantage of Social Security’s claiming options. This worsens economic inequality.

Q: You’re an advocate for entitlement reform, yet you’re also encouraging Americans to max out their benefits. Isn’t that contradictory?

A: I want to expose inequities wherever they are. I’ve written about the nation’s generational inequities [“The Coming Generational Storm“], and the expropriation of money that should go to our kids because of the ballooning costs of these programs. But Social Security rules are a disgrace and unfair to people of all ages. No one should get more benefits just because they know the rules.

Q: Given the program’s funding problems, should younger Americans count on Social Security?

A: The system is 33% unfunded, according to the last trustees’ report. So somebody has to pay to fix it. My co-authors and I don’t agree on how to fix things—there’s a debate about solutions in the book. I explain my preferred solution at the Purple Social Security Plan.

Still, I think people 55 and older will get their full benefits. It’s too difficult politically to change their treatment. Younger people will likely receive something, but they’ll probably pay for it with higher taxes.

Q: What is the biggest mistake people make when they claim?

A: For many households, the problem is claiming benefits too early. If you wait to claim till age 70, you can increase your benefits by 76%, compared with starting at age 62, the earliest age you can claim. By delaying, you have an opportunity to tap a source of guaranteed inflation-proof income at an incredibly low price. That said, many people can’t afford to wait, since they have no other means of support.

Q: Many financial planners recommend claiming based on your “break-even” age—how long it will take for higher benefits claimed at a later age to exceed what you’d get by claiming early at 62.

A: This is a fundamental misunderstanding. People mistakenly look at Social Security as an investment, and they try to figure out the break-even point, when they’ll make their money back. They don’t understand the economics of working longer, or how to value the extra income you get by waiting.

Social Security is insurance—an inexpensive, safe payout—not an investment. You don’t look at your homeowners’ insurance on a break-even basis. You look at the worst-case scenario, which is your house burned down, you have no place to live, and the insurance is there when you need it. The worst-case scenario here is living to 100 and running out of money well before then.

Q: Have you figured out your own Social Security claiming strategy?

In my case, it’s relatively straightforward—I can just look at my own book, and I don’t need to use my claiming software (MaximizeMySocialSecurity). I’m 64, and I’m older than my ex-wife and my fiancée. They’ll both be able to claim spousal benefits on my earnings record. I’m going to wait till age 70, and then collect my benefit.

Read next: The 3 Secrets to Maxing Out Social Security Spousal Benefits

MONEY Ask the Expert

The 3 Secrets to Maxing out Social Security Spousal Benefits

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

Q: My wife was born in 1950 and will be 65 this year; I was born in 1953 and will be 62. As I have earned more in my lifetime, my Social Security benefit is estimated to be larger than hers at full retirement age. But her spousal benefit would be less than half of her individual retirement benefit. When the younger spouse has a higher estimated benefit, what are some strategies to explore? —Jack

A: If there’s one set of rules worth understanding, it’s spousal benefits. Every year, couples leave literally billions of dollars on the table because they make the wrong claiming choices. Here are three secrets to getting this claim right, and how they apply to your situation:

1. To get spousal benefits, the primary earner must file for retirement benefits first. Spousal benefits can equal as much as half of the amount the person would receive in individual Social Security benefits at full retirement age (FRA). For anyone born in 1943 through 1954, FRA is 66; it will gradually rise to 67 for people born in 1960 or later.

2. If you file for a spousal benefit before your FRA, you will end up with a smaller amount. You can file as early as age 62 but if you do, you will be hit with benefit reductions. Retirement benefits will rise each month they are deferred between FRA and age 70. Spousal benefits peak at FRA, so there is no reason to defer claiming them past that point.

An early filing will also trigger a Social Security provision called deeming—this means the agency considers you to be filing both for your individual retirement benefit and you spousal benefit. You will be paid an amount roughly equal to the greater of the two benefits. But you lose the opportunity to get increases for delayed claiming on your individual benefits. This is a bad deal.

3. Use a file-and-suspend strategy. If both spouses defer claiming until FRA, the higher-earning spouse can file and suspend benefits then. This way, the lower-earning spouse can file for spousal benefits, allowing his or her individual retirement benefit to grow due to delayed retirement credits. Then you can each file for maximum retirement benefits at age 70.

So what’s the right approach for you? If you both defer filing, you can file and suspend your benefit at age 66. This will enable your spouse, who will have turned 69, to file for her maximum spousal benefit. Meanwhile, she can continue to allow her individual benefit to grow due to delayed credits up to age 70

Alternatively, your wife can file and suspend at 69, allowing you to file for your maximum spousal benefit at 66 and collect it for four years, while deferring your own retirement benefit until 70. Even though you are the higher earner. this strategy seems likely to maximize your family’s total benefits.

There’s another advantage to waiting until 70: if you die before your wife, she will receive a widow’s benefit that will equal your maximum retirement benefit. (She can only collect the greater of her retirement or widow’s benefit.)

Of course, choosing the best spousal claiming strategy for a couple depends on many factors, including relative ages, finances and health. This is something married partners need to talk about.

Best of luck!

Philip Moeller is an expert on retirement, aging, and health. He is the co-author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: New Rules for Making Your Money Last in Retirement

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