MONEY Pensions

How To Be a Millionaire — and Not Even Know It

Book whose pages are hundred dollar bills
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A financial adviser explains to two teachers why they don't need a lot of money in the bank to be rich.

Mr. and Mrs. Rodrigues, 65 and 66 years old, were in my office. Their plan was to retire later this year. But they were worried.

“Our friends are retiring with Social Security, lump sum rollovers, and large investment accounts,” said Mr. Rodrigues, a school teacher from the North Shore of Boston. “All my wife and I will get is a lousy pension.”

Mr. Rodrigues continued: “A teacher’s pay is mediocre compared to what our friends earn in the private sector. We know that when we start our career. But with retirement staring us in the face, and no more regular paycheck, I’m worried.”

Public school teachers are among the worst-paid professionals in America – if you look at their paycheck alone. But when it comes to retirement packages, they have some of the best financial security in the country.

For private sector employees, the responsibility of managing retirement income sits largely on their shoulders. Sure, Social Security will provide a portion of many people’s retirement income, but for most, it is up to the retiree to figure out how to pull money from IRAs, 401(k)s, investment accounts, and/or bank accounts to support their lifestyle each year. Throughout retirement, many worry about running out of money or the possibility of their investments’ losing value.

Teachers, on the other hand, have a much larger safety net.

Both of the Rodrigueses worked as high school teachers for more than 30 years. Each was due a life-only pension of $60,000 upon retirement. That totaled a guaranteed lifetime income of $10,000 per month, or $120,000 per year. When one of them dies, the decedent’s pension will end, but the survivor will continue receiving his or her own $60,000 income.

The Rodrigueses told me they needed about $85,000 a year.

Surely their pension would cover their income needs.* And since the two both teach and live in Massachusetts, their pension will be exempt from state tax.

As for their balance sheet, they had no mortgage, no credit card debts, and no car payments. They had a $350,000 home, $18,000 cash in the bank, and a $134,000 investment account.

But as far as the Rodrigueses were concerned, they hadn’t saved enough.

“All my friends boast about the size of the 401(k)s they rolled over to IRAs,” Mr. Rodrigues said. “Some of them say they have more than $1 million for retirement.”

It was time to show the couple that their retirement situation wasn’t so gloomy – especially considering what their private-sector friends would need in assets to create the same income stream.

“What if I told you that your financial situation is better than most Americans?” I asked.

They thought I was joking.

Their friends, I explained, would need about $1.7 million to match their $120,000 pension income for life.

To explain my case, I pulled out a report on annuities that addressed the question of how much money a person would need at age 65 to generate a certain number of dollars in annual income.

Here’s an abbreviated version of the answer:

Annual Pension Lump Sum Needed
$48,000 $700,539
$60,000 $876,886
$75,000 $1,100,736

If you work in the private sector, are you a little jealous? If you’re a teacher, do you feel a little richer?

The Rodrigues were shocked. Soon Mr. Rodrigues calmed down and Mrs. Rodrigues smiled. Their jealousy was replaced with a renewed appreciation for the decades of service they provided to the local community.

Whether your pension is $30,000, $60,000 or $90,000, consider the amount of money that’s needed to guarantee your income. It’s probably far more than you think. And it’s not impacted by the stock market, interest rates, and world economic issues.

With a guaranteed income and the likelihood of state tax exemption on their pension, Mr. and Mrs. Rodrigues felt like royalty. After all, they had just learned that they were millionaires.

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* The survivor’s $60,000 pension, of course, would be less than the $85,000 annual income the two of them say they’ll need. A few strategies to address this: (1) Expect a reduced spending need in a one-person household. (2) Draw income from the couple’s other assets. (3) Downsize and use the net proceeds from the house’s sale to supplement spending needs. (4) Select the survivor option for their pensions, rather than the life-only option. They would have a reduced monthly income check while they are both living, yet upon one of their deaths the survivor would receive a reduced survivor monthly pension benefit along with his or her own pension.
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Marc S. Freedman, CFP, is president and CEO of Freedman Financial in Peabody, Mass. He has been delivering financial planning advice to mass affluent Baby Boomers for more than two decades. He is the author of Retiring for the GENIUS, and he is host of “Dollars & Sense,” a weekly radio show on North Shore 104.9 in Beverly, Mass.

MONEY working in retirement

Here’s the Best Way to Rescue Your Retirement and Find Happiness Too

A second career can provide income as well as meaning. This advice from retirement expert Chris Farrell can help you plan your next venture.

Chris Farrell has a hot retirement investing tip for you, but it’s not a stock or bond.

Farrell wants you to invest in yourself. In his new book, Unretirement (Bloomsbury Press), he argues that developing skills that can help you earn income well past traditional retirement age offers a better return on investment than any financial instrument—and it can help transform the economy as it continues to heal from the Great Recession.

Farrell is senior economics contributor at public radio’s Marketplace, a contributing editor at Bloomberg Businessweek and a columnist for the Minneapolis Star Tribune. In a recent interview, I asked him to describe his vision of unretirement.

Q: How do you define “unretirement”?

“Unretirement” is about the financial impact of working longer. If you can work well into your 60s, even earning just a part-time income through a bridge job or contract work, you’ll make so much more in the course of a year than you could from saving.

That changes the financial picture—and not just income. You also don’t have to tap your retirement nest egg during those years, and you might be able to add to it. And it allows you to realistically wait to claim Social Security between age 66 and 70, depending on your health and personal circumstances.

Q: What are the essential tools and strategies for people trying to figure out how to unretire? Where should they begin?

The most important thing is to begin by asking yourself what it is you want to be doing—what kind of work. Do informational interviews with people. The real asset that older workers have is their networks—the people who have known them over the years. Talk with them to find out if you need to add new skills.

Don’t romanticize any particular idea—research it. Think about how you can take your existing skills and move into a different sector of the economy with those.

Q: One of the biggest obstacles facing older workers is age bias. Are employers adapting to help older people keep working longer?

The only evidence I’ve seen of that is at companies that face very tight labor markets—typically technology businesses. It’s also true for the nursing profession. For the rest of the economy, I’ve been to conference after conference focused on older workers, where employers wring their hands about all the brain power walking out the door. They’re sincere, but when they go back to the office they really aren’t motivated to do anything about it because the labor market isn’t strong enough

Q: If that’s the case, how will unretirement be able to take hold as a trend?

The economy is getting better, and labor markets are tightening. But this also will be driven by grassroots change. Many leading-edge boomers are negotiating their own deals, starting businesses or setting themselves up for self-employment with a portfolio of part-time jobs. It’s very do-it-yourself.

And attitudes are changing—there will be enormous pressure from society as people push for this. They’re going to be saying, “We’re pretty well educated, and healthier than we were before, and the numbers don’t work for us to go down to Florida or Arizona and retire—and we actually don’t want to do that.”

Q: There’s a great debate under way over whether we are headed for a crisis in retirement security or not. What’s your view?

I don’t think there will be a retirement crisis if we continue to work longer. But we’re going to want to do it with jobs that provide meaning rather than those that make people just miserable enough that they have to continue to work.

One thing that upsets me is that we have a conflation of financial stresses facing the middle class and pretending that the middle class will be in poverty in retirement—and that’s just not true. There is a group that is really vulnerable—they’ve worked all their lives for companies that don’t provide retirement or health insurance benefits. That is the really vulnerable group.

I think two-thirds of our society will be fine, but for this other group, it’s not about investing in a 401(k), because they simply don’t have the money. For them, Social Security will be the entire retirement plan.

Q: That suggests we will need to beef up Social Security, at least for the lowest-income retirees.

Absolutely. If a majority of us are healthy and continue to work and pay into the Social Security system, we will become a wealthier society—and we will be able to afford to be more generous with Social Security.

Chris Farrell’s write columns on second careers for NextAvenue.com, which also appear on Money.com; you can find his articles here.

MONEY retirement income

5 Tips For Tapping Your Nest Egg

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Getty Images—Getty Images

Forget those complex portfolio withdrawal schemes. Here are simple moves for making your money last a lifetime.

It used to be that if you wanted your nest egg to carry you through 30 or more years of retirement, you followed the 4% rule: you withdrew 4% of the value of your savings the first year of retirement and adjusted that dollar amount annually for inflation to maintain purchasing power. But that standard—which was never really as simple as it seemed— has come under a cloud.

So what’s replacing it?

Depends on whom you ask. Some research suggests that if you really want to avoid running out of money in your dotage, you might have to scale back that initial withdrawal to 3%. Vanguard, on the other hand, recently laid out a system that starts with an initial withdrawal rate—which could be 4% or some other rate—and then allows withdrawals to fluctuate within a range based on the previous year’s spending.

JP Morgan Asset Management has also weighed in. After contending in a recent paper that the 4% rule is broken, the firm went on to describe what it refers to as a “dynamic decumulation model” that, while comprehensive, I think would be beyond the abilities of most individual investors to put into practice.

So if you’re a retiree or near-retiree, how can you draw enough savings from your nest egg to live on, yet not so much you run out of dough too soon or so little that you end up sitting on a big pile of assets in your dotage?

Here are my five tips:

Tip #1: Chill. That’s right, relax. No system, no matter how sophisticated, will be able to tell you precisely how much you can safely withdraw from your nest egg. There are just too many things that can happen over the course of a long retirement—markets can go kerflooey, inflation can spike, your spending could rise or fall dramatically in some years, etc. So while you certainly want to monitor withdrawals and your nest egg’s balance, obsessing over them won’t help, could hurt and will make your retirement less enjoyable.

Tip #2: Create a retirement budget. You don’t have be accurate down to the dollar. You just want to have a good idea of the costs you’ll be facing when you initially retire, as well as which expenses might be going away down the road (such as the mortgage or car loan you’ll be paying off).

Ideally, you’ll also want to separate those expenses into two categories—essential and discretionary—so you’ll know how much you can realistically cut back spending should you need to later on. You can do this budgeting with a pencil and paper. But if you use an online tool like Fidelity’s Retirement Income Planner or Vanguard’s Retirement Expenses Worksheet—both of which you’ll find in the Retirement Income section of Real Deal Retirement’s Retirement Toolboxyou’ll find it easier to factor in the inevitable changes into your budget as you age.

Tip #3: Take a hard look at Social Security. The major questions here: When should you claim benefits? At 62, the earliest you’re eligible? At full retirement age (which is 66 for most people nearing retirement today)? And how might you and your spouse coordinate your claiming to maximize your benefit?

Generally, it pays to postpone benefits as your monthly payment rises 7% to 8% (even before increases for inflation) each year you delay between ages 62 and 70 (after 70 you get nothing extra for holding off). But the right move, especially for married couples, will depend on a variety of factors, including how badly you need the money now, whether you have savings that can carry you if you wait to claim and, in the case of married couples, your age and your wife’s age and your earnings.

Best course: Check out one of the growing number of calculators and services that allow you to run different claiming scenarios. T. Rowe Price’s Social Security Benefits Evaluator will run various scenarios free; the Social Security Solutions service makes a recommendation for a fee that ranges from $20 to $250. You’ll find both in the Retirement Toolbox.

Tip #4: Consider an immediate annuity. If you’ll be getting enough assured income to cover most or all of your essential expenses from Social Security and other sources, such as a pension, you may not want or need an annuity. But if you’d like to have more income that you can count on no matter how long you live and regardless of how the markets fare, then you may want to at least think about an annuity. But not just any annuity. I’m talking about an immediate annuity, the type where you hand over a sum to an insurance company (even though you may actually buy the annuity through another investment firm), and the insurer guarantees you (and your spouse, if you wish) a payment for life.

To maximize your monthly payment, you must give up access to the money you devote to an anuity. So even if you decide an annuity makes sense for you, you shouldn’t put all or probably even most your savings into one. You’ll want to have plenty of other money invested in a portfolio of stocks and bonds that can provide long-term growth, and that you can tap if needed for emergencies and such. To learn more about how immediate annuities work, you can click here. And to see how much lifetime income an immediate annuity might provide, you can go to the How Much Guaranteed Income Can You Get? calculator.

Tip #5: Stay flexible. Now to the question of how much you can draw from your savings. If you’re like most people, an initial withdrawal rate of 3% won’t come close to giving you the income you’ll need. Start at 5%, however, and the chances of running out of money substantially increase. So you’re probably looking at an initial withdrawal of 4% to 5%.

Whatever initial withdrawal you start with, be prepared to change it as your needs, market conditions and your nest egg’s value change. If the market has been on a roll and your savings balance soars, you may be able to boost withdrawals. If, on the other hand, a market setback puts a big dent in your savings, you may want to scale back a bit. The idea is to make small adjustments so that you don’t spend so freely that you deplete your savings too soon—or stint so much that you have a huge nest egg late in life (and you realize too late that you could have spent large and enjoyed yourself more early on).

My suggestion: Every year or so go to a retirement calculator like the ones in Real Deal Retirement’s Retirement Toobox and plug in your current financial information. This will give you a sense of whether you can stick to your current level of withdrawals—or whether you need to scale back or (if you’re lucky) give yourself a raise.

MORE FROM REAL DEAL RETIREMENT

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MONEY Social Security

Here’s How to Handle Social Security’s Trickiest Claiming Rule

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Cavan Images—Getty Images

Your spouse and other family members may depend on Social Security benefits. But their income may be limited by the family benefit "ceiling"—unless you plan now.

Social Security benefits include a surprising array of payments beyond your own retirement benefit. As I wrote last week, these so-called auxiliary benefits, which are geared to your earnings record, may provide income to your spouse (or former spouse), your children and even your parents. If you’re disabled, yet another set of Social Security benefits to your present and former family members may kick in.

This is, overall, a good deal. (And it’s a reason why delaying your own benefits is a thoughtful way to increase benefits to your loved ones.) But there is a big, big catch—it’s called the Family Maximum Benefit (FMB). This rule limits total Social Security payments to you and any eligible family members to a percentage of your own Social Security benefit. And it’s arguably one of the most tricky aspects of figuring out the best Social Security claiming strategy for you and your family.

Basically the FMB limits total payments to you and eligible family members to a total of 150% to 187% of the payments you alone would receive. It thus sets a ceiling on total family benefits—often, a very low ceiling. Here’s how it works:

Let’s say your spouse applies for spousal benefits based on your earnings and the payout is equal to 50% of your retirement benefit. Already we’re up to 150% of your retirement benefit. Now let’s say you have other family members who qualify for benefits—perhaps dependent children—who add another 150%, for a total of 200% on top of your payout. In all, these payments would cost Social Security 300% of your benefit.

This is where the the FMB ceiling comes in. If your FMB is 175% of your retirement benefit, then the rule will require the agency to reduce everyone’s benefit (except yours, which cannot be reduced) to a total of 75% of your benefit. Your family members will have to take nearly a two-thirds’ haircut in their benefits.

For those who want to get deeper into Social Security math—the rest of you can skip ahead—the FMB ceiling is based on what’s called your Primary Insurance Amount (PIA). This is the monthly retirement benefit you would receive if you started payments at what’s known as the Full Retirement Age (FRA), which is age 66 for those born between 1943 and 1954. (The FRA then will rise by two months a year for those born between 1955 and 1959, finally settling at 67 for anyone born in 1960 or later.) If your PIA is projected to be $2,500 in a few years, and you’re using this number for making auxiliary benefit decisions, here’s the way this year’s FMB formula would work:

  • 150% of the first $1,042 of your PIA (or $1,563);
  • 272% of the PIA between $1,042 through $1,505 (or $1,259);
  • 134% of the PIA over $1,505 through $1,962 (or $612); and,
  • 175% of the PIA over $1,962 (or $942).

The sum of these four numbers—$4,376—is the FMB for monthly benefits for all Social Security claims based on your earnings record. It equals 175% of your PIA. There is a separate formula covering FMBs for disabled persons, and it can produce very small benefits for lower-income claimants.

Is there a way around the FMB ceiling? Yes, but only if your family is flexible. Since the FMB limits apply to total benefits being collected on your earnings record in a given year, consider staggering the timing of your family’s claims. That way, they may be able to stay under the ceiling.

Here’s one example: Say you have a spouse and younger children who qualify for benefits. If your FMB would seriously reduce all these benefits, it might be best for your husband or wife to hold off on claiming the spousal benefit and take the child benefits only. The amount of money your family receives might not drop much, if at all. And the child benefits likely will expire anyway when the kids are older. Your spouse can make a claim at a later date, when the benefit also may have risen in value, depending on your age and the age of your significant other. Clearly, when it comes to strategizing benefits, Social Security is a family affair.

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.

MONEY Ask the Expert

How To Tap Your IRA When You Really Need the Money

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Robert A. Di Ieso, Jr.

Q: I am 52 and recently lost my job. I have a fairly large IRA. I was thinking of taking a “rule 72(t)” distribution for income and shifting some of those IRA assets to my Roth IRA, paying the tax now while I’m unemployed and most likely at a lower tax rate. What do you think of this strategy? – Mark, Ft. Lauderdale, FL

A: It’s a workable strategy, but it’s one that’s very complex and may cost you a big chunk of your retirement savings, says Ed Slott, a CPA and founder of IRAhelp.com.

Because your IRA is meant to provide income in retirement, the IRS strongly encourages you to save it for that by imposing a 10% withdrawal penalty (on top of income taxes) if you tap the money before you reach age 59 ½. There are several exceptions that allow you to avoid the penalty, such as incurring steep medical bills, paying for higher education or a down payment on a first home. (Unemployment is not included.)

The exception that you’re considering is known as rule 72(t), after the IRS section code that spells it out, and anyone can use this strategy to avoid the 10% penalty if you follow the requirements precisely. You must take the money out on a specific schedule in regular increments and stick with that payment schedule for five years, or until you reach age 59 ½, whichever is longer. Deviate from this program, and you’ll have to pay the penalty on all money withdrawn from the IRA, plus interest. (The formal, less catchy name of this strategy is the Substantially Equal Periodic Payment, or SEPP, rule.)

The IRS gives you three different methods to calculate your payment amount: required minimum distribution, fixed amortization and fixed annuitization. Several sites, including 72t.net, Dinkytown and CalcXML, offer tools if you want to run scenarios. Generally, the amortization method will gives you the highest income, says Slott. But it’s a good idea to consult a tax professional to see which one is best for you.

If you do use the 72(t) method, and want to shift some of your traditional IRA assets to a Roth, consider first dividing your current account into two—that way, you can convert only a portion of the money. But you must do so before you set up the 72(t) plan. If you later decide that you no longer need the distributions, you can’t contribute 72(t) income into another IRA or put it into a Roth. Your best option would be to save it in a taxable fund. “Then the money will be there if you need it down the road,” says Slott.

Does it make sense to take 72(t) distributions? Only as a last resort. It is true that you’ll pay less in income tax while you’re unemployed. But at age 52, you’ll be taking distributions for seven and a half years, which is a long time to commit to the payout plan. If you get a job during that period, the income from the 72(t) distribution could push you into a higher tax bracket. Slott suggests checking into a home equity loan—or even taking some money out of your IRA up front and paying the 10% penalty, rather than withdrawing the bulk of the account. “Your retirement money is the result of years of saving,” says Slott. “If you take out big chunks now, you might not have enough lifetime to replace it.”

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

MONEY Social Security

Maximize Your Social Security Benefits…By Not Freaking Out

Seniors doing yoga on the beach
Lyn Balzer and Tony Perkins—Getty Images

A financial planner explains why, when it comes to retirement income, being patient can pay off in a big way.

About a month ago, a client walked into our office and announced that he had decided to take his retirement package being offered at work. We had to work out a number of issues related to his company’s retirement benefits. Finally, when the subject of Social Security came up, my client said, “I want to start taking the benefit as soon as I can, before they stop it.”

His opinion of Social Security is common. Many retirees believe that Social Security may run out or that Congress may legislate away their benefit.

We pushed back on this. First, the actuarial analysis shows the Social Security fund is pretty secure; it is Medicare that we all need to be worried about. Second, we feel that for a current retiree, the benefit amount is fairly safe; the only possible changes might involve a lower increase in the annual benefit. We agree with most experts that making changes to current benefits is a non-starter.

Our client was persuaded. Then he asked us a question we hear a lot: “When should I start taking Social Security, at age 66 or 70?”

The answer is not straightforward. If our client — let’s call him Jack — started taking Social Security at age 66, he’d receive a monthly benefit of $2,430. But your initial benefit increases the longer you postpone taking it, until you reach age 70. If Jack delayed taking the benefit until he turned 70, the initial amount would be $3,680, or 52% more per month.

Since Jack has other forms of retirement income, he doesn’t need the monthly check as soon as possible to live on. Instead, Jack’s goal is to get as much back from Uncle Sam as possible.

If Jack started his benefit at age 66, he would receive approximately $116,700 by age 70. (He’d actually get more, since benefits are adjusted annually for inflation. But for the sake of simplicity, I am ignoring inflation and other complicating factors.)

If he waited until age 70, he would be receiving $1,250 more per month, but he wouldn’t have received any money over the prior four years. It would take around 94 months to recoup the $116,700 he did not earn by waiting.

In other words, Jack would have an eight-year breakeven point if he waited until 70. If Jack dies before age 78, he would have received more by taking the benefit at age 66; if he lives past 78, he would be better off to wait until age 70. Federal life expectancy tables say a male 65 years old has a life expectancy of age 82. So if Jack has average health, the odds suggest he should wait until age 70 to take his benefit.

Jack’s wife — we’ll call her Jill — is 65, and has been retired for a couple of years. Jill’s Social Security projection looks like $2,120 monthly at age 66 or $3,200 at age 70. Jill’s breakeven also projects to be at age 78, yet her life expectancy is age 85, so the odds that she will be better off waiting until age 70 are greater than Jack’s.

But they both shouldn’t necessarily wait until 70 to take their benefits. Why? Because Social Security offers married couples a spousal benefit option.

This takes us into a different kind of strategy with our clients, something advisers call “file and suspend.”

It is possible to start taking a spousal benefit at age 66 (as long as your spouse has filed for his or her own benefit amount) and let your personal benefit increase to the maximum amount at age 70. The strategy is to have both spouses wait until 70 to take their own benefit, but for the spouse with the lower benefit amount to take a spousal benefit from age 66 up to age 70. For this to work, the spouse with the higher benefit amount needs to file for his or her benefit—then suspend receiving his or her own benefit until age 70.

For Jack and Jill, the file and suspend would work as follows: Jack, the spouse with the higher benefit, files for benefits at age 66, then immediately requests the benefits be suspended; that’s “file and suspend.” Then at age 70, he requests his benefits, which would be approximately $3,680 a month.

Jill files for her spousal benefit at age 66. This allows her to delay her own benefit while collecting a spousal benefit of around $1,250 a month. Then at age 70, she cancels the spousal benefit in order to collect her full benefit of $3,200 a month.

This scenario would provide them an added benefit of almost $60,000 in those first 4 years!

All Social Security scenarios have a breakeven age, so it is important to take an honest look at your health when evaluating all your options. The most important factor is your own cash flow need when you retire. If Social Security is going to be one’s sole source of income in retirement, waiting until age 70 is probably not an option.

But for those who can, delaying benefits is a useful tool. Outliving your money in your 80s or 90s is a real possibility. Postponing Social Security to allow for the highest possible benefit can mitigate that longevity risk.

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Scott Leonard, CFP, is the owner of Navigoe, a registered investment adviser with offices in Nevada and California. Author of The Liberated CEO, published by Wiley in 2014, Leonard was able to run his business, originally established in 1996, while taking his family on a two-year sailing trip from Florida to New Caledoniain the south Pacific Ocean. He is a speaker on investment and wealth management issues.

MONEY Social Security

What’s Missing in Your New Social Security Benefits Statement

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iStock

Many workers will start receiving Social Security benefits statements again. Just don't expect to see much discussion of inflation's impact on your payout.

The Social Security Administration will be mailing annual benefit statements for the first time in three years to some American workers. That’s good news, because the statements provide a useful projection of what you can expect to receive in benefits at various retirement ages, if you become widowed or suffer a disability that prevents you from working.

But if you do receive a statement next month, it is important to know how to interpret the benefit projections. They are likely somewhat smaller than the dollar amount you will receive when you actually claim benefits, because they are expressed in today’s dollars—before adjustment for inflation.

That is a good way to help future retirees understand their Social Security benefits in the context of today’s economy—both in terms of purchasing power, and how it compares with current take-home pay. “For someone who is 50 years old, this approach allows us to provide an illustration of their benefits that are in dollars comparable to people they might know today getting benefits,” says Stephen Goss, Social Security’s chief actuary. “It helps people understand their benefit relative to today’s standard of living.”

In part, the idea here is to keep Social Security out of the business of forecasting future inflation scenarios in the statement that might—or might not—pan out. The statement also provides a starting point for workers to consider the impact of delayed filing.

“It provides valuable information about how delaying when you start your benefit between 62 and 70 will increase the monthly amount for the rest of your life—an important fact for workers to consider,” says Virginia Reno, vice president for income security at the National Academy of Social Insurance.

Unfortunately, the annual statement is silent when it comes to putting context around the specific benefit amounts. The document’s only reference to inflation is a caveat that the benefit figures presented are estimates. The actual number, it explains, could be affected by changes in your earnings over time, any changes to benefits Congress might enact, and by cost-of-living increases after you start getting benefits.

And the unadjusted expression of benefits can create glitches in retirement plans if you do not put the right context around them. Financial planners don’t always get it right, says William Meyer, co-founder of Social Security Solutions, a company that trains advisers and markets a Social Security claiming decision software tool.

“Most advisers do a horrible job coming up with expected returns. They choose the wrong ones or over-estimate,” he says, adding that some financial planning software tools simply apply a single discount rate (the current value of a future sum of money) to all asset classes: stocks, bonds and Social Security. What’s needed, he says, is a differentiated calculation of how Social Security benefits are likely to grow in dollar terms by the time you retire, compared with other assets.

“Take someone who is 54 years old today—and her statement says she can expect a $1,500 monthly benefit 13 years from now when she is at her full retirement age of 67,” says William Reichenstein, Meyer’s partner and a professor of investment management at Baylor University. “If inflation runs 2% every year between now and then, that’s a cumulative inflation of 30%, so her benefit will be $1,950—but prices will be 30 percent higher, too.

“But if I show you that number, you might think ‘I don’t need to save anything—I’ll be rich.’ A much better approach for that person is to ask herself if she can live on $1,500 a month. If not, she better think about saving.”

About those annual benefit statements: the Social Security Administration stopped mailing most paper statements in 2011 in response to budget pressures, saving $70 million annually. Instead, the agency has been trying to get people to create “My Social Security” accounts at its website, which allows workers to download electronic versions of the statement. The move prompted an outcry from some critics, who argue that the mailed statement provides an invaluable reminder each year to workers of what they can expect to get back from payroll taxes in the future.

Hence the reversal. Social Security announced last spring that it is re-starting mailings in September at five-year intervals to workers who have not signed up for online accounts. The statements will be sent to workers at ages 25, 30, 35, 40, 45, 50, 55 and 60.

MONEY retirement planning

Get These 4 Big Things Right to Retire in Comfort

Senior woman relaxing in hammock
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By focusing on a few essentials, you can keep your retirement strategy on track—and reduce stress too.

Take a look at financial websites or switch on a cable TV program and you get the impression that smart retirement planning requires you to stay constantly attuned to every wiggle in the economy and the stock market—and act on it: dump one investment, buy another, re-jigger your entire portfolio…do something, anything, to react to the latest buzz. This, of course, is nonsense.

In a constantly shifting global economy, there are far too many things going on for any person—any organization for that matter—to keep tabs on, evaluate and integrate into a master retirement plan. And then do it over and over again as conditions inevitably shift. It’s just not realistic.

Even if you could stay on top of the overwhelming amount of financial information, it’s still not always clear how best to react to news. For example, a good GDP report can be a plus for stocks if investors take it as a sign that a recovery is gaining traction—or bad if it stirs fears that interest rates will rise causing stock prices to soften.

So given the complexity of today’s financial world, what can you do to better assure you’ll have a secure and comfortable retirement? My advice: Focus on getting these four Big Things right.

1. Set a target—but make sure it’s the correct one. Generally, you’ll do better at any activity—career, health, sports—if you have a goal. Retirement is no exception. The Employee Benefit Research Institute’s latest Retirement Confidence Survey notes that people who’ve tried to calculate their retirement savings needs are more likely to feel very confident about affording a comfortable retirement than those who don’t.

Over the years, however, the target of choice seems to have become Your Number—or the specific amount of money you’ll need to fund a comfortable retirement. But Your Number isn’t a very good benchmark. It gives a false sense of precision, and can often be so big and daunting that it discourages people from saving at all. (What’s the point if I have zero saved and need $1,378,050?)

A better barometer: Keep track of the percentage of your pre-retirement income you’re on pace to replace both from Social Security and draws from your retirement savings. Granted, this figure isn’t exact either. Experts generally say that to maintain your standard of living you should try to replace anywhere from 70% to 90% of your income just prior to retirement. But it’s a number you can more easily get your head around, and more easily translate to an actual lifestyle. Many 401(k) plans include tools that allow you to see how you’re doing on this metric. If yours doesn’t, try the Retirement Income Calculator in RDR’s Retirement Toolbox.

2. Save at a reasonable rate. If you’re still in career mode, setting aside a sufficient amount each year in a 401(k) or other retirement accounts is the single most important thing you can do to improve your retirement prospects. What’s sufficient? I’d say 15% of salary is a good target. But if you can’t manage that, try starting at 10% and working your way up. Employer matching funds count toward that savings figure, so be sure to take full advantage of any employer largesse.

Once you reach retirement, tending your nest egg and managing the amount you spend is key. You don’t want to spend so much that you delete your savings early on; nor do you want to be so miserly that you leave this mortal coil with a big pile of cash behind you.

3. Invest like a smart layman, not a dumb pro. I’m being a bit facetious here to make a point. Professional investors and money managers are not dumb. But many of them do things that I consider dumb, like jumping from one market sector to another in a vain attempt to outguess the market or trading so often that they rack up transaction costs that depress returns.

The smart layman, on the other hand, knows that the two best ways to invest retirement savings are to set an overall mix of stocks and bonds that best reflects your appetite for risk, and then stick to low-cost investments that allow you to pocket more of the returns your savings earn. For guidance on creating a stocks-bonds blend that will generate the returns you’ll need without subjecting you to more downside risk than you can handle, you can check out this Investor Questionnaire.

4. Monitor how you’re doing, but don’t obsess about it. Retirement planning is a long-term proposition. So while you definitely want to be sure you’re making progress toward accumulating the savings you’ll need—or, if you’ve already retired, that you’ll be able to maintain your standard of living—don’t over do it. Re-assessing your progress once or twice a year by going to a retirement income calculator like the one highlighted in RDR’s Retirement Toolbox is probably sufficient.

Constant check-ups may make you more likely to tinker with (or, worse yet, dramatically overhaul) your investments or your plans. This urge to make changes is especially strong during periods of upheaval in the economy and the markets. And changes made on the fly or precipitated by an emotional reaction to duress often do more harm than good.

That said, there can be times when adjustments are called for. But when they are, you’ll typically do better by making small changes and then later re-assessing whether you need to do more rather than going with a dramatic move that could knock you even farther off course.

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MONEY Social Security

How to Claim Social Security Without Shortchanging Your Spouse

Deciding when to take Social Security can have a big impact on your family's income. Here's what you need to know.

When it comes to claiming Social Security, millions of people make this huge mistake: overlooking the impact on their family’s income.

Many people don’t realize that Social Security pays a host of benefits beyond your individual retirement income. The program may also pay so-called auxiliary benefits to your spouse, your children and even your parents. A separate program may provide auxiliary benefits if you become disabled, and, in some cases, if you are divorced or if you have passed away. The amount of these benefits is tied to your earnings record—the wages you’ve earned over a lifetime during which you’ve forked over Social Security payroll taxes—and your decision on when to file your claim.

To make the best choices about when to claim Social Security, anyone who is, or was, married, and especially those with children, needs to consider not only their own retirement benefits but also benefits that might be available to family members. This is especially true of survivor benefits.

Let me give you an example. (I wish it was simple but very little about Social Security is simple.) Say you’re 62 and your wife is 58. You’ve heard that delaying Social Security will raise your income but you want the benefits now, so you begin looking into the process of claiming them.

If you file for benefits at 62 (the earliest claiming age unless you’re disabled or a surviving spouse), they will be reduced by 25% from what you could get at full retirement age, which is 66 for people now approaching retirement. What’s more, that payout would be a whopping 76% less than if you waited until age 70 to file. To use convenient numbers, if your benefit at 66 would be $1,000 a month, you would get only $750 a month if you filed at age 62 but $1,320 a month if you waited until age 70.

Perhaps you’re okay with receiving lower income, if you start getting it sooner. But how about your family members? These reductions would also apply to their auxiliary benefits.

The most dramatic impact of early claiming decisions affects widows. Husbands are overwhelmingly likely to begin taking their retirement benefits before their full retirement age, according to Social Security data. Yet husbands are likely to die several years before their wives, statistics show, which leaves many widows struggling on small incomes.

Granted, many women have salary records of their own, and as their wages have increased over the past 30 years, so have Social Security benefits. But many women now reaching retirement age have not accumulated Social Security benefits equal to that earned by their husbands.

That inequality is a real problem for widows. While they both are alive, each spouse can collect his or her own Social Security benefit. But after one dies, the surviving spouse can only collect the greater of the two benefits. This is likely to be the husband’s benefit, even if it’s been reduced because he filed for it early.

As a result, millions of widows in this country are receiving reduced survivor benefits based on their late husband’s earnings record. Had he waited to file, their survivor benefits would have been higher—much higher in many cases.

The trend is so pronounced that the agency devised a special way of calculating benefits to try and ease its impact. It’s called the Retirement Insurance Benefit Limit, or RIB-LIM in the agency’s acronym-crazy jargon. It’s also known as the Widow(er)’s Limit.

When you make the decision when to claim Social Security, make sure it’s in the best interest of everyone in the family. To really understand this decision, you’ll need to know about Social Security’s family maximum benefits. Tune in next week to learn how they work.

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.

MONEY retirement planning

The One Retirement Question You Must Get Right

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Figuring out how big a nest egg you need is a huge financial planning challenge. Here are some helpful tips from an expert who retired at 50.

How much money do you need to retire? This is one of the most difficult questions in all of financial planning. Countless words are written, endless fees are charged, and plenty of sleep is lost, just trying to answer it!

But I’ll tell you a secret—a truth that none in financial services and few in the financial media will admit. We don’t know how much you need to retire! Beyond some broad ranges that have worked in the past, it’s practically impossible to calculate the precise amount of money needed to carry you through a retirement lasting decades or more into the future.

Why? Because, in addition to predicting a host of smaller factors, computing how much you need to retire requires pinning down two huge and essentially unknowable variables: the length of your life, and the real return on your investments. (That’s the actual return, after inflation.)

If you misjudge your life expectancy by even a few years, you could potentially die broke, or with tens of thousands of unspent dollars on the table. If you misgauge your real rate of return by just 1% (and the pros miss it by more than that, all the time), the error in a half-million dollar portfolio over a 30-year retirement will be about $175,000—one-third of the starting value, and a lot of money to go missing!

So there can be no precise answer to this question. And, yet, you must answer it, in some fashion, if you don’t want to go on working forever. So where do you begin?

As I’ve written before, knowing your expenses is an essential first step to retirement planning. You simply must know what it costs you to live each month, in order to get any sense for what you must save to retire.

From that monthly expense number you can subtract any guaranteed, inflation-adjusted income that you are certain to receive in retirement: Social Security for many of us, pensions for a fortunate few, and annuities for those who buy them.

Your remaining expenses must be funded from your investment portfolio. The traditional approach has been the 4% Rule, which states that you can withdraw 4% of your portfolio in the first year, then adjust that withdrawal amount for inflation each year, without fear of running out over the course of a 30-year retirement. However, some experts say this rule is too optimistic for the current difficult economic times, with low interest rates and high market valuations. On the other hand, if you retire in better economic times, or if you choose to annuitize your assets, the rule might be too conservative. (You can find online tools that will let you see the impact of using different economic assumptions—I mention three of the best retirement calculators in this article.)

Boiling down all the research papers, case studies, and opinions that I have read on this topic—and I read about it nearly every day—I can tell you this: The safe withdrawal rates from your retirement savings probably range from about 5% on the optimistic side to about 3% on the conservative side.

That means, for example, if your living expenses not covered by guaranteed inflation-adjusted income were $3,000 a month in retirement, then you would need between $720,000 in savings on the optimistic side, to $1.2 million on the conservative side, to provide for your lifestyle over a several-decade retirement.

Thus if your savings were in that range you could consider retiring. But there is more to it than that, especially for an early retiree. You would also need to factor in the risk that you would run low, and your ability to do something about it. That risk would be a function of the economic environment you retire into, and the longevity factors in your family. The ability to do something about it would be a function of your age and health at retirement, your professional skills, and your lifestyle flexibility.

In the end, there is no simple answer to the question “Do I have enough to retire?” But, there is a range of possibilities, based on historical data and your own risks and capabilities. And, even after you’ve made the retirement decision, you still need to assess and drive your retirement, especially in the early years. So, once you’ve started on the retirement journey, don’t fall asleep at the wheel!

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.

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