MONEY retirement planning

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

two gold eggs
GP Kidd—Getty Images

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

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

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

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

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

The Drag of Taxes

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

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

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

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

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

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

Check Your Time Horizon

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

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

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

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

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

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

Diversify, Tax-wise

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

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

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

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

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

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

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MONEY Social Security

The Best Way to Claim Social Security After Losing a Spouse

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

Q. My husband recently passed away at age 65. I’ll be 62 in July, and I’m working full time. I went to the Social Security office and was told I could file for survivor benefits now, but would lose most of the income since my salary is about $37,000 a year. They told me to wait as long as possible to start collecting. My own Social Security benefits would be about $1,200 per month at 62, but since I’ll keep working, I will forfeit most of it. I don’t want to give up most of the benefits. But if there’s money I can collect until I turn 66, I’d like to get it. —Deanna

A. Please accept my condolences at the loss of your husband. I am so sorry. As for your Social Security situation, let me explain a few things that I hope will make your decision clearer.

First off, it’s true that the Earnings Test will reduce any benefits you receive before what’s called your Full Retirement Age (66 for you). However, these benefit reductions are only temporary—you do not forfeit this income. When you reach 66, any amounts lost by the Earnings Test will be restored to you in the form of higher benefit payments.

The real consequence of taking benefits “early”—before your FRA—is that the amount you receive will be reduced. There are different early reduction amounts for retirement benefits and widow’s benefits.

That said, you can file for a reduced retirement benefit at 62 and then switch to your widow’s benefit at 66, when it will reach its maximum value to you. This makes sense if you are sure that your widow’s benefit will always be larger than your own retirement benefit; more on that in moment.

One caveat: if you take your retirement benefits early, the restoration of Earnings Test reductions probably will be lost to you once you switch later to a widow’s benefit. But if the widow’s benefit is larger anyway, this should not bother you.

To find out more precisely what you’ll get in retirement benefits, set up an online account at Social Security—you’ll see the income you’ll receive at different claiming ages. To get the comparable values of your survivor’s benefit as a widow, however, you will need to get help from a Social Security representative.

Once you see those numbers, it could change your thinking. For example, what if your own retirement benefit is larger than your widow’s benefit? It could happen, especially if you defer claiming until age 70 and earn delayed retirement credits. In that scenario, you would do better to claim your widow’s benefit—and perhaps even take it early if you need the money. You can then switch to your retirement benefit at age 70.

These claiming choices can be very complicated. Economist Larry Kotlikoff, who is a friend and co-author of my new book on Social Security, developed a good software program, Maximize My Social Security ($40), which can take all your variables and plot your best claiming strategy. But I’m not trying to sell his software, believe me; there are other programs you can check out, which are mentioned here. Some are free, but paying a small fee for a comprehensive program may be worth it, when you consider the thousands of benefit dollars that are at stake.

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

Read next: What You Need to Know About Social Security Survivor’s Benefits

MONEY Second Career

Why the New Boomerang Workers Are Rehired Retirees

hand holding boomerang
Dragan Nikolic—iStock

How to go back to work in retirement where you had a full-time job.

You’ve no doubt heard about boomerang kids who return to their parents’ homes in their 20s (maybe you have one). But there’s a growing group of boomerangers who are typically in their 60s: retirees who return to work part-time or on a contract basis at the same employers where they formerly had full-time jobs.

If you’ll be looking for work during retirement, you might want to consider avoiding a job search and becoming one.

Employers That Rehire Their Retirees

A handful of employers have formal programs to rehire their retirees. The one at Aerospace Corp., which provides technical analysis and assessments for national security and commercial space programs, is called Retiree Casual. The company’s roughly 3,700 employees are mostly engineers, scientists and technicians, and Aerospace is glad to bring back some who’ve retired.

“With all the knowledge these people have, we get to call on them for their expertise,” says Charlotte Lazar-Morrison, vice president of human resources at Aerospace, which is based in El Secundo, Calif. “The casuals are part of our culture.”

The roughly 300 Aerospace casuals (love that term, don’t you?) can work up to 1,000 hours a year and don’t accrue any more benefits (the company’s retirees already get health insurance). Most earn the salary they did before, pro-rated to their part-time status, of course.

Why Aerospace Corp. Brings Back ‘Casuals’

The “casuals” program lets Aerospace management have a kind of just-in-time staffing system. “It allows us to us to keep people at the ready when we need them,” says Lazar-Morrison.

Ronald Thompson joined Aerospace’s casuals in 2002, after retiring at age 64. He’d worked for the company full-time since 1964, in program management, system engineering, system integration and test and operations support to the Department of Defense. “It’s a really good way to transition to retirement,” he says. “You need both the physical and mental stimulation to keep you young.”

Thompson worked up to the 1,000-hour limit for the first couple of years. Now that he’s in his mid-70s, he’s cutting back to about 10 hours a week, mostly mentoring younger Aerospace employees. I asked Thompson when he planned to stop working. “I guess my measure is when people won’t listen to me anymore,” he laughed. “That will happen.”

At MITRE Corporation, a not-for-profit that operates research and development centers sponsored by the federal government, about 400 of its 7,400 employees are in an optional, flexible “part-time-on-call” phased retirement program. These part-timers can withdraw money from MITRE’s retirement plan while they’re working.

Why Some Employers Don’t Have Rehiring Programs

Why don’t most employers do what Aerospace and MITRE do?

For one thing, it takes a considerable investment in resources to set up a program for former retirees. So the ones who can most afford it are those with skilled workforces who offer customers specialized knowledge.

For another, some employers are wary of getting trapped by complex labor and tax rules. For example, the Internal Revenue Service generally requires firms with retirement plans to delay rehiring retirees for at least six months after they’ve left.

But benefits experts believe boomeranging can make a lot of sense for retirees and the employers where they had worked full-time.

“I think this is really logical away to go back to work, so there is a lot of potential growth if it is made easy,” says Anna Rappaport, a half-century Fellow of the Society of Actuaries and head of her own firm, Anna Rappaport Consulting. “The legal issues need to be clarified and made easy.”

Outsourcing to Bring Retirees In

A growing number of companies are outsourcing the task to bring in some of their retirees. The independent consulting firm YourEncore, created by Procter & Gamble and Eli Lilly, acts as a matchmaker between corporations looking for experts to parachute in and handle pressing problems and skilled “unretirees” wanting an occasional challenge and part-time income. YourEncore has more than 8,000 experts in its network; 65 percent with advanced degrees.

Blue Cross/Blue Shield of America’s “Blue Bring Back” program lets managers request a retired former employee if there’s a project or temporary assignment requiring someone who knows the company’s culture and procedures. Kelly Outsourcing and Consulting Group manages the program.

Tim Driver, head of RetirementJobs.com, plans on getting into the business of making it easier for employers to re-employ their retirees. His research shows that this type of program works best for companies needing ready access to talent with unique, hard-to-find skills and flexible schedules, such as insurance claims adjusters. When a storm hits, Driver says, insurers need to quickly dispatch trained property-damage adjusters who are knowledgeable about their claims processes and policies.

“It’s an attractive approach for companies that want to have people accessible but not on their books [as full-time employees],” he says.

The option of participating in an formal outsourcing arrangement is likely to grow with the aging of the baby boom population and their embrace of Unretirement. In the meantime, this kind of work deal “will be mostly ad hoc,” says David Delong, president of the consulting firm Smart Workforce Strategies.

How to Get Yourself Retired in Retirement

How can you get a part-time gig with your former employer when you retire?

Delong recommends broaching the topic while you’re still on the job. (My dad always used to say that six months after you leave an employer, people start forgetting you; they’ve moved on and have figured out how to get along without you.)

“Raise the idea with the boss,” says Delong. “Don’t assume they wouldn’t be interested in having you back part-time. The worst they can do is say, ‘no.’”

Taking a job with your former employer in your Unretirement can be a win-win situation for you and your once-and-future boss. After all, you have the knowledge and the skills to do the job well and the employer knows who you are and what you can do.

I suspect this kind of boomerang arrangement will become a bigger slice of a boomer movement toward flexible, part-time work in retirement.

Chris Farrell is senior economics contributor for American Public Media’s Marketplace and author of the new book Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community, and The Good Life. He writes twice a month about the personal finance and entrepreneurial start-up implications of Unretirement, and the lessons people learn as they search for meaning and income. Send your queries to him at cfarrell@mpr.org or @cfarrellecon on Twitter.

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MONEY Social Security

What You Need to Know About Social Security Survivor Benefits

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

Q. My husband is 10 years 4 months older than me. He began drawing his Social Security benefits at 65 and 10 months. I will be 62 next month. My benefits will be less than his since he was the larger wage earner. Based on statistics, I am likely to outlive him. We don’t need my benefits now so we could wait. But since it’s likely he will pass away first, and I will get his benefits because they are higher, is there any reason to wait to draw my benefits? —Lynda

A. First off, I hope you both live forever. But in the interest of being practical, you need to choose the Social Security strategy that will give you the highest amount of income over both your lifetimes, based on your expectations for longevity. Here’s what to consider:

If, as you say, your husband’s Social Security benefits are much larger than your own, then you will be receiving spousal benefits while he is still alive and survivor benefits after he dies. So you and your husband should figure out the strategy that will provide the best balance of current and future income.

Your spousal benefits will be 30% larger if you wait to take them until 66, which is what Social Security defines as Full Retirement Age (FRA) for you. (This age will rise from 66 to 67 for people born after 1954.)

So your decision is whether to take reduced spousal benefits at 62 or wait four years to take them at age 66. I don’t know what these different amounts might be, but you and your husband can figure them out by signing up for online Social Security accounts that will let you see your projected benefits.

Your maximum spousal benefit at age 66 will be half of what’s called your husband’s Primary Insurance Amount, or PIA. This is half of what he was entitled to receive at his FRA, and from your description, it sounds like that’s when he began taking benefits.

For example, let’s assume your spousal benefit at age 66 will be $1,000 a month. Then, at 62 you will receive only $700 a month, because of the 30% early filing reduction. Even at a reduced level, this will total $8,400 a year, or $33,600 from age 62 to 66. If you waited until age 66 and thus qualified for the larger spousal benefit, you would be getting $300 more each month.

Given these amounts, it would take you 112 months to recoup the $33,600 you would have received by taking benefits early. Your husband would need to live to more than age 86 for this deferral strategy to just break even in unadjusted terms. And this doesn’t reflect what economists call the present value adjustment of getting that $33,600 many years earlier than your full spousal benefit.

Your survivor benefit will be the actual benefit your husband was receiving when he dies, or in your case twice your spousal benefit. So you would want to contact Social Security and switch to this higher benefit as soon as possible after his death.

By the way, if your husband had deferred his retirement benefit from his FRA to age 70, his benefit would have been roughly 31.2% higher than he actually received. So, your widow’s benefit would have been even higher.

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

Read next: How to Use Social Security’s ‘File and Suspend” Option

MONEY retirement planning

5 Ways to Tell If You’re Really Ready to Retire

150114_RET_ReadyToRetire
Robert George Young—Ocean/Corbis

You'll have a much better shot at success in retirement if you evaluate your needs—financial and otherwise—before you say goodbye to your job.

Think it’s about time to call it a career? Great. But before you say “Hasta la vista, baby!” to your job, I suggest you go over the five items in my Are You Really Ready To Retire? checklist.

Just to be clear: I’m not talking about “ready to retire” in the sense that you’ll flip out if if have to deal with your egomaniac of a boss one more day. I mean you’re ready in the sense of being financially, socially, and emotionally prepared to make the transition to your post-career life. That’s important to know because if you exit before you’re truly prepared, you may find yourself repeating another famous Schwarzenegger line: “I’ll be back.”

So before you say bye-bye to those steady paychecks, make sure:

1. You’ve thought seriously about how you’ll live in retirement. The planning you’ve done throughout your work life has probably focused mostly on the financial aspects of retirement: saving, investing, tending to your 401(k) and other retirement accounts. But now that you’re in the home stretch, you’ve also got to give some attention to lifestyle planning—that is, figuring out how you’ll live a satisfying and meaningful life when you no longer have a job to provide structure for each day.

Among the major questions you must answer: Do you plan to stay in your current digs, downsize to a new home, or maybe even relocate to a new area? And do you have a solid circle of friends and family that can provide companionship and support? (Research shows that retirees with a good network of friends were almost three times more likely to be happy than retirees who lacked such a network—as were those who had sex more frequently.) The Ready-2-Retire tool in RDR’s Retirement Toolbox can help you sort through such lifestyle issues.

2. You’ve made a retirement budget. Assuming you’ll need 80% or so of your pre-retirement income once you retire may be okay for planning when you’re decades from retirement. But once you’re within 10 or so years of retiring, you need a more realistic estimate of what you’ll spend. You need a retirement budget.

It doesn’t have to be accurate to the penny. But it should be as meticulous and accurate an accounting as possible of the actual costs you’ll face in retirement. If you do your budget with an online tool like Fidelity’s Retirement Income Planner or Vanguard’s Retirement Expenses Worksheet, you’ll more easily be able to compare your actual spending vs. projected spending and factor changes into your budget throughout retirement.

3. You’ve come up with a Social Security claiming strategy. A recent GAO report found that even with lifespans increasing, the majority of people still start taking Social Security benefits before their full retirement age. But that can be a mistake. Each year you delay between age 62 and 70, you boost the size of your benefit roughly 7% to 8%, which can dramatically increase the amount of money you receive over your lifetime. If you’re married, you may be able to boost the amount you and your spouse receive during your lives even more than singles by taking advantage of a variety of claiming strategies for couples.

To see how much you might benefit by delaying benefits or coordinating the timing of benefits with your spouse, check out tools like T. Rowe Price’s Social Security Benefits Evaluator and Financial Engines’ Social Security calculator.

4. You’ve created a plan for turning your savings into regular income. After years of growing your nest egg, you now have to figure out how to tap it for income that will sustain you throughout retirement. The challenge: Pull enough from your savings each year to provide the spending cash you need without going through your stash too soon, while also not drawing so little that you unnecessarily stint early in retirement and end up with a big pile of savings in your dotage when you can’t enjoy it.

One way to meet that challenge is to begin with a modest initial withdrawal—say, 3% to 4%—and then adjust that amount annually for inflation to maintain purchasing power. Another option is to devote a portion of your nest egg to an immediate annuity that can supplement the guaranteed income you’ll receive from Social Security as well as withdrawals from savings. Just know that over the course of a long retirement any number of things—market setbacks, unexpected expenses, higher-than-expected inflation—can wreak havoc with even the best-laid retirement income plans. So stay flexible and be ready to adjust your spending as conditions require.

5. You’ve confirmed you can actually afford to retire. This, of course, is the biggie. Do you actually have enough retirement resources to provide sufficient income to support the retirement lifestyle you envision? The only way to know is to crunch the numbers. You can do that by going to a good retirement income calculator and plugging in such information as your age, the value of your retirement savings, how your savings is divvied up among stocks, bonds and cash, the estimated monthly income you’ll require and how long you think you’ll need that money to last. (I recommend to age 95 or at least into your early 90s.)

Once you do that, the calculator will estimate the probability that your resources will generate your target income for as long as you need it. If that probability is lower than you can live with—and I’d say anything much below 80% is worrisome—you have several choices. You can scale back your lifestyle and spending, postpone retirement until your chances improve, or consider other adjustments such as working part-time in retirement, tapping home equity with a reverse mortgage, or even relocating to an area with lower living costs.

Bottom line: If you’re creative and resourceful, there are any number of ways you can make retirement work. But you’ll have a greater shot at success if you evaluate them before you actually leave your job.

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

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MONEY Social Security

How Couples Can Boost Their Social Security Income

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

Q. My wife and I started our Social Security benefits at age 62 in 2013, but we later realized that we needed more income. So, we are both going to look for jobs now. Can we stop our benefits if it looks like we are going to make more income than allowed, and start our benefits back at any time later? —Don

A. If you or your wife stop your benefits before either of you turn 66, you will simply be giving up Social Security income. The only way to increase your benefits is by suspending them at age 66, which is full retirement age (FRA) under Social Security rules; that age gradually rises to 67 for those born after 1954. At the point, filers can get higher income from delayed retirement credits by postponing claiming (more on that below).

That said, there are steps you can take to maximize your Social Security income. But the claiming rules for couples are a little complicated, so bear with me, as I walk you through the key decision points.

First, the basics. It is true that if you find new jobs, your additional income may temporarily reduce your Social Security benefits. If you go back to work in 2015, and either of you earns more than $15,720, Social Security will withhold $1 in benefits for every $2 above this earnings limit. (Make sure you understand how the Social Security defines earnings; here’s a brochure that includes this information.)

But these benefit reductions are not lost to you, just delayed. Once you reach FRA, they will be repaid to you in the form of a higher benefit that will last the rest of your life.

At age 66, the right to suspend benefits kicks in. During that time, the benefit will rise by 8% a year, plus the amount of any annual-cost-of-living adjustments. Claimants can restart the benefit at any time, but the delayed income credits max out after age 70, so there’s no advantage to waiting any longer than that.

The Pitfalls of Dual Benefits

You also need to consider the rules involving spousal benefits. Whether you realize it or not, one of you has already filed for these benefits. This is because both of you claimed your retirement benefits “early”—before reaching FRA.

The first spouse to file for retirement benefits will have been treated as filing only for those benefits. The filing by the first spouse enables the second spouse to claim spousal benefits. But that second spouse was “deemed” to be simultaneously entitled to dual benefits—their retirement and spousal benefits.

Very few married couples understand deeming, which ends at FRA. Because most people file for Social Security before reaching FRA, it’s worth going into some detail about the way it can affect benefits.

Under deeming, Social Security gives you benefits that are roughly the greater of the two benefits, spousal or retirement. If you were entitled to a spousal benefit of $1,000 at full retirement age, and an individual retirement benefit of $400, you would end up with about $700 at age 62—the $1,000 spousal benefit after the early retirement reduction. Of course, the agency has a more complicated way of arriving at the precise number. Here is a hypothetical example supplied by Social Security spokesperson Dorothy Clark:

“A person entitled to a reduced retirement benefit (RIB) on his or her own earnings and a reduced spousal benefit on his or her spouse’s record is dually entitled. The person will be paid on two separate records. The person will be paid the smaller benefit first on his or her own record plus the excess amount of the larger one on the spouse’s record totaling the higher amount.

“For example: A spouse at age 62 whose FRA is age 66 is entitled to a benefit of $1,000 before reduction. She is also entitled to a retirement benefit (RIB) of $400 before reduction. The full RIB is subtracted from the full spouse benefit. The excess ($600) is then reduced to $420. The RIB is reduced to $300. The total payable is $720, the sum of the reduced spouse excess and the reduced RIB. Additionally, since both payments are paid from the same trust fund, we will issue a combined payment.”

Although deeming ends at FRA, your benefits are permanently reduced by your decision to file early in 2013.

Suspending Benefits at 66

The spouse who was dually entitled to retirement and spousal benefits in 2013 has the choice of suspending his or her individual retirement benefit at age 66. But whether it makes sense to do this depends on the relative size of those benefits.

If your spousal benefit was greater than your retirement benefit, you can continue to receive the difference—the excess spousal benefit—after the retirement benefit is suspended. The suspended retirement benefit, meanwhile, will rise in value due to delayed retirement credits. Depending on the size of the retirement benefit, it may rise enough to surpass the amount of the dual benefit you were receiving. But if doesn’t, you should forget about suspending the retirement benefit at FRA—just continue to receive the dual benefit.

The spouse who was the first to file for retirement was, as I’ve explained, not considered dually eligible for two benefits. So if this spouse chooses to suspend benefits at FRA, he or she would be eligible to file for just a spousal benefit at that time. This would permit the retirement benefit to increase until it reaches the maximum amount at age 70. At this point, it would make sense to switch to that benefit, assuming it was larger than the spousal benefit.

Whether any of these scenarios make sense for you is, of course, depends on your need for current income and whether or not you can afford to defer Social Security benefits.

To figure out your best course of action, you can set up an account at “my Social Security” and run your actual benefit projections through Social Security’s calculators. (You also could plunk down $40 and get a wider range of claiming scenarios from Maximize My Social Security, a software program developed by economist Larry Kotlikoff, who is a co-author of our new book on Social Security.)

If this is all crystal clear to you, congratulations! Go to the head of the class! I still get confused by Social Security’s complicated rules and I write about them nearly every day.

Best of luck.

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

Read next: How Younger Spouses Can Get the Most from Social Security

MONEY second careers

How to Tap into Your Creativity to Build a Second Career

Jazz guitarist Bucky Pizzarelli, 89, at left, with Ed Laub, 62. JamesRicePhotography.com

Who says innovation peaks in your 20s? Some artists reach their prime in their 50s, 60s, 70s, and 80s.

When we lived in Bremerhaven, Germany in the early 1960s, my younger sister and I eagerly shared the Little House series of books by Laura Ingalls Wilder. The first one, Little House in the Big Woods, was published when the author was 65.

For the 50th anniversary of his class of 1825 at Bowdoin College, Henry Wadsworth Longfellow wrote a poem (Morituri Salutamus) which ran through a list of giants who did great work late in life—Cato, who learned Greek at 80, Chaucer, who penned The Canterbury Tales at 60, and Goethe, who completed Faust when “80 years were past.” Longfellow, then 68, exhorted his aging classmates to not lie down and fade. No, “something remains for us to do or dare,” he said.

For age is opportunity no less
Than youth itself, though in another dress,
And as the evening twilight fades away
The sky is filled with stars, invisible by day.

The assumption that creativity and gray hair is an oxymoron is a widely held stereotype. What’s more, the notion that creativity declines with age is deeply rooted, but it’s also deeply wrong. Anecdotal and scholarly evidence shows overwhelming that creativity doesn’t fade with age—or at least it doesn’t have to.

Launching Innovative Second Careers

University of Chicago economist David Galenson has taken a systematic look into the relationship between aging and innovation, discovering that many famous artists were at their creative best in their 60s, 70s and even 80s.

Galenson’s favorite example: artist Paul Cézanne, who died at 67 in 1906. Cézanne was always experimenting, always pushing his art, never satisfied. Thanks to his creative restlessness, the paintings of his last few years “would come to be considered his greatest contribution and would directly influence every important artistic development of the next generation,” wrote Galenson in Old Masters and Young Geniuses: The Two Life Cycles of Artistic Creativity.

The same holds for many others, including Matisse, Twain and Hitchcock.

“Every time we see a young person do something extraordinary, we say, ‘That’s a genius,’” Galenson remarked in an interview with Encore.org, a nonprofit helping people 50+ launch second acts for for the greater good. “Every time we see an old person do something extraordinary we say, ‘Isn’t that remarkable?’ Nobody had noticed how many of those old exceptions there are and how much they have in common.”

One of those “remarkable” people is Ed Laub, 62, a seven-string guitarist in New Jersey who plays with famed jazz guitarist Bucky Pizzarelli, 89. (Pizzarelli’s bass player is 95.) I caught up with Laub after a weekend gig in St. Louis and Denver and before the group took off to play in Miami.

Playing guitar is a second career for Laub. His grandfather was a founder of Allied Van Lines and Laub worked for some three decades in the business, alongside his father.

Laub started taking lessons from Pizzarelli when he was 16. When he neared 50, Laub realized that what he really wanted to do was play guitar full-time. His parents had passed away, so he sold the business in 2003 and began teaming up with Pizzarelli. They now perform about 100 times a year in all kinds of venues—auditoriums, jazz clubs, private parties and a regular gig at Shanghai Jazz, a Chinese restaurant/jazz club in Madison, N.J.

Laub told he me has used his business acumen to boost their pay. “What I found out is many creative types have no idea how to manage a business,” he said. “No matter how creative you are, if you do it for a living, it’s a business.”

Boomers Taking Career Risks

My suspicion is the old-aren’t-creative stereotype is a major factor behind the rise in self-employment among boomers. Many people in their 50s and 60s are eager to break away from their jobs if management won’t give them the opportunity to exercise their creative muscles.

Barbara Goldstein, 65, of San Jose, Calif., gets her creative juices flowing by promoting artists. She’s an independent consultant focused on public art planning with clients including the California cities of Pasadena and Palo Alto. “I have as many ideas, if not more, than I did in my 20s and 30s,” she said. “What happens over time is you learn things and you become much more effective in the work you do.”

Goldstein noted that with age, you realize if you want to get something done, you have to go for it—there’s no point in waiting because time is precious. To further broaden her horizons, Goldstein is a fellow at the Stanford Distinguished Careers Institute, a new, one-year program helping older professionals think through the next stage of their lives.

“If you’re always doing the same thing it’s hard to be creative,” she says. (Incidentally, if you know someone 60 or older who’s just now doing great encore career work, nominate him or her for Encore.org’s 2015 Purpose Prize.)

Economists Joseph Quinn of Boston College, Kevin Cahill of Analysis Group and Michael Giandrea of the Bureau of Labor Statistics have found a sizable jump in recent years in the percentage of people who are self-employed in their 50s and 60s. “Older workers exhibit a great deal of flexibility in their work decisions and appear willing to take on substantial risks later in life,” they wrote. And, I’d add, they’re creative.

What can you do to stay creative in your Unretirement years?

  • Don’t isolate yourself. Be willing to engage with people from diverse backgrounds and of different ages, as Goldstein does.
  • Try something new, experiment, take a leap. That’s what Laub did, going from moving van boss to professional guitarist.
  • Go back to school to pick up new skills.
  • And when someone disparages older people for their lack of creativity, tell them about Cezanne and Matisse.

With time, the Unretirement movement will demolish yet one more stereotype holding people back.

Chris Farrell is senior economics contributor for American Public Media’s Marketplace and author of the new book Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community, and The Good Life. He writes twice a month about the personal finance and entrepreneurial start-up implications of Unretirement, and the lessons people learn as they search for meaning and income. Send your queries to him at cfarrell@mpr.org or @cfarrellecon on Twitter.

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MONEY Social Security

Why Defending Social Security Needs to Be Next on Obama’s To-Do List

House Republicans voted to block a financial fix to Social Security's disability trust fund, which runs out of money in 2016. That would result in a 20% benefits cut.

Since the midterm elections, President Obama has taken decisive action on immigration reform, climate change and relations with Cuba. Now, the new Republican-controlled Congress has handed him another opportunity to act boldly—by leaving a legacy as a strong defender of Social Security.

House Republicans signaled this week that they are gearing up for a major clash over the country’s most important retirement program. In a surprise move, they adopted a rule on the first day of the new session that effectively forbids the House from approving any financial fix to the Social Security Disability Insurance (SSDI) program unless it is coupled with broader reforms. That would almost surely mean damaging benefit cuts for retirees struggling in the post-recession economy.

Republicans see an opening for benefit cuts in the SSDI trust fund. It is under severe financial pressure and on track to be exhausted at the end of 2016, when 11 million of the most vulnerable Americans would face benefit cuts on the order of 20%.

The rational solution is a reallocation of resources from Social Security’s Old-Age and Survivors Insurance Trust Fund (OASI). Such reallocations have been done 11 times in the past, and funds have flowed in both directions. Shifting just one-tenth of 1% from OASI to SSDI would extend the disability fund’s life to 2033.

Instead, House leaders appear to be maneuvering to push through an SSDI fix during the lame duck session following the 2016 elections. Such an 11th-hour package would likely impose cuts to the retirement program, including higher retirement ages and reduced annual cost-of-living adjustments. Legislators wouldn’t have to explain a vote for benefit cuts to their constituents before the elections, and might avoid accountability if changes to Social Security get tacked on to an omnibus spending bill or other yearend legislation.

“I don’t know why this had to be done on Day One,” said Cristina Martin Firvida, director of financial security at AARP. “It makes it much less likely that we’ll deal with the disability problem until the lame duck session—and that won’t provide a good result for American taxpayers.”

Critics say the disability program is rife with fraud, and out-of-work baby boomers too young for retirement benefits are freeloading by getting disability benefits. There’s no doubt that a program the size of SSDI is subject to some abuse, or that reform may be needed.

But SSDI’s real problems are less sensational. They include more baby boomers at an age when disability typically occurs and more women in the labor market eligible to receive benefits. Meanwhile, the increase in the full retirement age now under way, from 65 to 67, adds cost to SSDI, as disabled beneficiaries wait longer to shift into the retirement program.

This throwing down of the gauntlet should send a loud, clear signal to Democrats: It’s time to reclaim your legacy as the creators and defenders of Social Security. A small number of progressive Democrats have embraced proposals to expand benefits, funded by a gradual increase in payroll taxes and lifting the cap on covered earnings, but most Democrats have been spineless, mouthing platitudes about “keeping Social Security strong”—a pledge that could mean just about anything.

Expansion is not only doable financially—it has overwhelming public support. A poll released last fall by the National Academy of Social Insurance found that 72% of Americans think we should consider increasing benefits. Seventy-seven percent said they would be willing to pay higher taxes to finance expansion—a position embraced by 69% of Republicans, 76% of independents and 84% of Democrats.

Congressional Republicans are way out of step with Americans on this issue, and so is the White House. The administration has been all too willing to flirt with benefit cuts as it chased one illusory “grand bargain” after another.

But the unbound Obama now has an opportunity to stiffen and redefine his party’s resolve on Social Security. The president should propose expansion legislation. Democratic presidential and congressional candidates should run on Social Security expansion in 2016 and work to assure that reform isn’t tackled in an unaccountable lame duck vote.

In 2005 a young Democratic senator sized up Social Security politics during the debate over President George W. Bush’s plan to privatize the program:

“[People in power] use the word ‘reform’ when they mean ‘privatize,’ and they use ‘strengthen’ when they really mean ‘dismantle.’ They tell us there’s a crisis to get us all riled up so we’ll sit down and listen to their plan to privatize …

“Democrats are absolutely united in the need to strengthen Social Security and make it solvent for future generations. We know that, and we want that.”

That senator was Barack Obama of Illinois.

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

MONEY Social Security

How Younger Spouses Can Get the Most from Social Security

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

Q. I was born in 1953 and will turn 62 this August. My projected Social Security benefit is $1,488 at age 62 and $1,974 at 66. My total family benefit ceiling is $3,508. My wife was born in 1970 and has never paid Social Security payroll taxes. She will begin working part-time this year but will probably never earn enough credits to claim her own retirement benefit. Our daughters are 14 and nearly 13.

I’m figuring that it is most advantageous to start my benefit at 62. I’m wondering if I will receive the Family Maximum Benefit or a lesser amount? Is my spouse eligible to receive benefits by caring for our minor children under my benefit? If I visit a Social Security office, will I get accurate information? —Michael

A. Let me take your questions one at a time.

First, I’m betting my definition of “most advantageous” might differ from yours. To me, it’s not just about putting the most dollars in my pocket but about insuring myself against living to a very old age (so I don’t run out of money) and making sure my wife will have the largest possible benefit when I’m gone.

Because your wife is nearly 17 years younger than you— and women typically live longer than men anyway— she is likely to outlive you by at least 20 years. Because she has no earnings record to speak of, you need to think about how she can receive the highest possible income in her old age.

The most effective way for you to do this is to delay claiming Social Security until you’re 70 in 2023. Of course, it may be that your family needs immediate Social Security income. But if you can wait until 70, your retirement benefit will be 76% higher than at age 62 and 32% higher than at age 66. This is due to early retirement reductions for claims prior to your Full Retirement Age (FRA)—66 for you—and delayed retirement credits between age 66 and 70. And these percentages are in “real,” inflation-adjusted terms.

When you die, your wife stands to receive your entire benefit for the rest of her life. That’s likely to be essential income, since, as you’ve said, she’s unlikely to qualify for Social Security on her own earnings record. So, if it was me, I’d break a leg trying to make sure she would be getting the maximum retirement benefit for all of those years.

Now, with apologies for possibly treading on uncomfortable ground, if you are still alive in 2032, she may want to begin taking reduced spousal benefits when she is 62, which is also as soon as she can. The benefits would be higher if she waited until she reached her FRA, which in her case is age 67 (unless Congress raises the FRA, which is possible). This would be in the year 2037, when you would be 84.

Your remaining life expectancy, according to actuarial projections, will be only a few years at this point. And it’s a safe bet that your wife will immediately switch to a widow’s benefit when you pass away. So she is almost certainly going to receive more total spousal benefits by claiming reduced benefits early than by waiting five years to claim a larger benefit.

The Family Maximum Benefit (FMB) is the total amount of benefits that you and your family members are entitled to receive based on your earnings record. But these benefits will most likely come into play when you’re no longer around. The FMB will include a widow’s benefit to your wife and, if your kids are still minors or disabled, and in her care, children’s benefits.

As for the accuracy of information provided by Social Security, I have never seen an independent study of this matter. Not surprisingly, the agency defends its record for providing accurate information. But, with something like three million requests for help every week, even a 1% error rate would mean that 30,000 people would be misinformed each week. To avoid being one of them, I’d seek information from multiple Social Security sources—online, over the phone and in person.

Best of luck.

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

Read next: Here’s a Smart Strategy for Reducing Social Security Taxes

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MONEY retirement income

The Single Biggest Retirement Mistake

faucet pouring money into bottomless bucket
C.J. Burton—Corbis

Don't think of your retirement savings as one big bucket of money. Instead, divide up your assets.

The single biggest retirement mistake I see is that retirees don’t set aside funds for income during the early years of their retirement. They go directly from accumulating retirement funds to withdrawing them. And that can be a big problem.

Let me explain. The usual approach to retirement savings is to treat the client’s funds as if they are all in one pile. Under this method, the account is divvied up between stocks, bonds, and cash. A systematic monthly withdrawal begins to provide income, typically starting out at 4% of the client’s portfolio value for the first year. Each year afterward, the withdrawal amount is adjusted upward to match inflation.

This rate is considered by many advisers to be safe in terms of generating sustainable income over a two- or three-decade retirement. Unfortunately, it leaves many clients concerned about outliving their money. Let’s use 2008 as an example. At the time, I saw recent retirees who had $1,000,000 in their 401(k)s and who thought, based on the 4% formula, that they were set with $40,000 of annual income. Within the first year or two of their actual retirement, however, the market crashed and they were then drawing on a balance of $600,000. Most could not decrease their expenses, so they continued to withdraw $40,000 through the downturn, which was an actual withdrawal rate of almost 7%.Worse yet, the market crash caused retirees to lose confidence in their original plans. They pulled most, if not all, of their retirement funds out of the market, thus missing the ensuing recovery.

The compounding errors of higher-than-anticipated withdrawal rates and bad market-timing decisions doomed many to outliving their funds. This syndrome actually has a name: “sequence risk.” Academics are well aware of this risk, but few planners properly address the issue with clients and almost no individual investors are aware of the concept.

The problem can be alleviated by setting aside up to ten years’ worth of income at the inception of retirement. I address this problem with an approach called the Bucket Plan, which segments a retiree’s investible assets into three categories, or buckets.

Here is the breakdown:

  • The “Now” bucket is where the client’s operating cash, emergency funds and first-year retirement income reside. It will typically be a safe and liquid account such as a bank savings account, money market fund, or CD. These are the funds on which the client is willing to forgo a rate of return, in order to keep them safe and liquid. The amount allocated to the Now bucket will vary based on the clients assets and sources of income, but typically you would want to see no less than 12 months of living expenses here.
  • The “Soon” bucket has enough assets to cover up to ten years’ worth of income for the retiree. The Soon bucket is invested conservatively with little or no market risk. That way, we know we have ten years covered going into the plan regardless of what the stock market does.
  • The “Later” bucket funds income, and hopefully an increase in income, when the Soon bucket is exhausted. By then, the Later bucket has been invested uninterruptedly for at least 10 years. We reload another round of income into the Soon bucket, and the process starts all over again. The Later bucket is the appropriate place for capital market participation.

Financial planners have long used the analogies of an emergency fund and an accumulation/distribution fund. The real innovations here are the addition of the Soon bucket for near-term income and the method for communicating the concept to clients.

A client who was recently referred to me had the 4% systematic withdrawal that most financial advisers recommend. This did not seem to make him happy, though, since he could not see how his finances would last in the long run. He was not confident about what might happen if he needed more than the 4% income because of an emergency. He wondered whether there would be anything left over for his children to inherit. He was losing sleep and not enjoying his retirement at all.

I explained our Bucket Plan method. The Later bucket funding the Soon bucket made perfect sense to him. He also loved the idea of the Now bucket for emergencies and unexpected expenses. The real beauty of this approach is it gives retirees great peace of mind. They are much less likely to make bad market-timing decisions because a market correction will have no effect on their current income.

The bucket concept is simple to explain, and clients always understand the role their money is playing and why. Most importantly, they have the confidence to ride out market volatility because they know where their income is coming from. Sometimes simplicity can be quite sophisticated.

———-

Jeff Warnkin, CPA and CFP, of the JL Smith Group, specializes in holistic financial planning for pre-retired and retired residents of Ohio. He incorporates investments, insurance, taxes, and estate planning when building financial plans for clients’ retirement years. Warnkin has more than 25 years of experience in the financial services industry, and is life- and health-insurance licensed.

Read next: Here’s a Smart Strategy for Reducing Social Security Taxes

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