MONEY Retirement

The Surprising Reason Employers Want You to Save for Retirement

man fails to make a putt
PM Images—Getty Images

Companies have stepped up their game with better options and features. Still, savings lag.

Employers have come a long way in terms of helping workers save for retirement. They have beefed up financial education efforts, embraced automatic savings features, and moved toward relatively safe one-decision investment options like target-date mutual funds. Yet our retirement savings crisis persists and may be taking a toll on the economy.

Three in four large or mid-sized employers with a 401(k) plan say that insufficient personal savings is a top concern for their workforce, according to a report from Towers Watson. Four in five say poor savings will become an even bigger issue for their employees in the next three years, the report concludes.

Personal money problems are a big and growing distraction at the office. The Society for Human Resources Management found that 83% of HR professionals report that workers’ money issues are having a negative impact on productivity, showing up in absenteeism rates, stress, and diminished ability to focus.

This fallout is one reason more employers are stepping up their game and making it easier to save smart. Today, 25% of 401(k) plans have an automatic enrollment feature, up from 17% five years ago, Fidelity found. And about a third of annual employee contribution hikes come from auto increase. Meanwhile, Fidelity clients with all their savings in a target-date mutual fund have soared to 35% of plan participants from just 3% a decade ago.

Yet companies know they must do more. Only 12% in the Towers report said their employees know how much they need for a secure retirement; only 20% said employees are comfortable making investment decisions. In addition, 53% of employers are concerned that older workers will have to delay retirement. That presents its own set of workplace challenges as employers are left with fewer slots to reward and retain their best younger workers.

Further innovation in investment options may help. The big missing piece today is a plan choice that converts into simple and cost-efficient guaranteed lifetime income. For a lot of reasons, annuities and other potential solutions have been slow to catch on inside of defined-contribution plans. But the push is on.

Another approach may be educational efforts that reach employees where they want to be found. The vast majority of employers continue to lean on traditional and passive methods of education, including sending out confusing account statements and newsletters, holding boring group meetings, and hosting webcasts. Less than 10% of employers incorporate mobile technology or have tried games designed to motivate employees to save.

These approaches have proved especially useful among young workers, who as a group have begun to save far earlier than previous generations. Still, some important lessons are not getting through. About half of all employers offer tax-free growth through a Roth savings option in their plan, yet only 11% of workers take advantage of the feature, Towers found. This is where better financial education could help.

 

 

MONEY retirement planning

Why Detroit’s Pension Deal Is a Warning to Retirement Savers

The Renaissance Center city skyline and the Detroit River viewed from Milliken State Park, Detroit, Michigan.
In Detroit retirees face steep pension cuts, which raises big questions about the financial security of workers elsewhere. Ian Dagnall—Alamy

The Motor City is counting on the market to keep its pension promises—a lot like under-saved 401(k) plan participants.

Guaranteed lifetime income has become the obsession of retirees, policymakers and the financial industry. Yet as the public pension debacle in bankrupt Detroit shows, we may never find a solution that completely eliminates the risk of your money running out.

The judge in Detroit’s closely watched proceedings said the recent deal the city cut with its retirees bordered on “miraculous,” as reported in The New York Times. That may be. But the deal still left the city’s 32,000 current and future retirees with diminished benefits and no certainty that they won’t be asked to give up more down the road. Their fate is largely in the hands of the markets—as is the case for millions of workers saving in 401(k) plans, and even many of those still covered by a private pension.

The problem is that there is only so much money we are willing to throw at the retirement savings crisis, an issue that has been exacerbated by an economy that until recently was growing far below potential. Every leg of the retirement stool is underfunded, including private pensions, though they are in the best shape. Many public pensions are in deep trouble. Social Security is on course for a funding shortfall. Personal savings are abysmal.

When government revenue or corporate profits or personal income are too low to allow for setting aside enough money for the future, we can only hope that the markets bail us out. In Detroit’s case, pension managers are counting on average annual returns of 6.75% for the next 10 years. That might happen, and it’s a lower expected rate of return than many public pensions are counting on. But given that stocks have already had a nice run, and that the bond portion of any portfolio will almost certainly come up far short of that mark, it’s probably an optimistic target. That means the city will likely have to raise taxes or cut pension benefits at some later date.

Private pensions face similar math, which is why many companies have frozen their plans or dropped them. Still, those that remain are generally on more solid footing. Profits have been strong and regulators hold companies to a higher funding standard. But by some estimates such stalwarts as IBM, Caterpillar and Dow Chemical will need to pay extra attention to their pension funding in coming years. The equation became more difficult recently, now that the Society of Actuaries has updated its mortality tables, which added a couple years to the life expectancy of both men and women at age 65.

Individuals in self-directed savings plans, such as 401(k)s, face their own funding problems. Workers may not have done the retirement income math but, like many pension managers, they haven’t been putting away the money they’ll need, while hoping for strong market returns to make it all work out. If they stay invested, and stocks keep chugging higher, they may be fine. Otherwise they will have to save more going forward or plan on spending less later—the do-it-yourself equivalent of raising taxes or having their benefits cut.

The good news for individuals is that you can act now on your own—you don’t have to stand by while a committee of actuaries and accountants blows smoke around the issue and kicks the problem further down the road. Steps you can take immediately include saving at least 10% of everything you make. Aim for 15% if your kids are gone and the mortgage is paid. Make sure you get the full company match in your 401(k) and automatically escalate contributions each year.

Young workers, especially, need to act now. Those just starting out are far less likely to have a private pension and more likely to suffer from future Social Security cuts. Many seem to have got the message. Millennials expect employment income and personal savings to account for 58% of their retirement income, Bank of America Merrill Lynch found. That compares to just 35% for boomers.

But even with greater savings, guaranteed lifetime income can remain elusive. As life expectancies have stretched, and interest rates have remained low for nearly a generation, fixed-income annuities have become relatively expensive. Even the so-called safe withdrawal rate of 4% per year now strikes some experts as too high for peace of mind. The push is on to make 401(k) savings more easily convertible into lifetime income. That would help because the big insurers that stand behind the promise of lifetime income are a lot more reliable than a city like Detroit.

Read Next: Retirees Risk Blowing IRA Deadline and Paying Huge Penalties

MONEY Savings

Is Outliving Your Savings a Fate Worse Than Death?

Most people are worried about running short of cash in retirement, surveys show. But with a little planning, and a bit more saving, you can ease those anxieties.

When faced with the prospect of outliving their money, most people might toss and turn at night or obsess about where to slash their budgets.

Others have a more extreme reaction: wishing for early death.

“I can always put a bag over my head when the money runs out” was what Jeannine Hines’ husband told her when she asked what he planned to do if their cash ran out before they died.

“He would rather die than be left penniless,” says Hines, a 58-year-old piano teacher from Maryville, Tennessee.

Her husband has company. A new survey from Wells Fargo shows 22% of people say they would rather die early than not have enough cash to live comfortably in retirement.

Other surveys bear those numbers out. One by financial-services company Allianz of people in their late 40s found 77% worried more about outliving their money in retirement than death itself.

Of that survey’s respondents, those who are married with dependents are even more terrified, with 82% saying that running out of cash is a more chilling prospect than death.

“These are pretty sobering statistics,” says Joe Ready, director of Wells Fargo Institutional Retirement in Charlotte, North Carolina. “It speaks to the overwhelming stress people have about money.”

Financial planners like Rose Swanger of Advise Finance in Knoxville, Tennessee, hear about these extreme money fears all the time.

But Swanger says she does not believe people have an actual death wish; they just do not know what they will do if they outlive their cash. “So they get scared, and freeze up, and become irrational,” she says.

In one respect, collective despair is simply an acknowledgement of how much—or rather, how little—we are saving.

The Wells Fargo survey also discovered that 41% of those in their 50s are not putting anything aside for retirement, and 48% admit they will not have enough money to survive in their golden years.

Experts suggest taking a deep breath and refusing to let money fears overwhelm you. Social Security awaits in old age, and friends and family to help get you through lean times. And you can deploy multiple strategies to help prevent a penniless future.

SETTING GOALS

Instead of throwing up your hands, set a goal that is actually achievable

“Save a small amount, then a little more, and once it starts to add up, you will see your levels of stress and worry start to lower,” says Michael Norton, a Harvard Business School professor and co-author of the book “Happy Money: The Science of Smarter Spending.”

There are other ways to gain control of the situation.

“You may have to delay retirement by a couple of years, you may have to find ways to supplement your income, and you may have to reduce your standard of living both now and in retirement,” says Wells Fargo’s Ready. “All of those are ways of focusing on the reality of where you’re at, instead of just giving in to despair.”

But is this death wish that emerges in surveys really about us? Dig a little deeper into people’s anxieties about outliving their money, and you often find out it is all about the kids.

Parents feel like failures if they cannot leave an inheritance, and they certainly do not want to become financial burdens on their adult children.

“To a lot of people that’s a fate worse than dying,” says Norton.

So instead of worrying yourself into paralysis, let go of all that parental stress and anxiety.

You do not have to leave behind a huge estate; the kids will be fine. And if you have to lean on your family in old age? Hey, it is what humans have done for eons.

Our retirement challenges may be formidable, but they are certainly no reason to hope that death arrives any sooner than it has to.

More about retirement:

How much money will I need to save for retirement?

Can I afford to retire?

How should I invest my retirement money?

MONEY Social Security

How to Protect Your Retirement Income from Social Security Mistakes

pencil eraser
Ryan McVay—Getty Images

At the budget-strapped agency, reps may hand out incorrect information. Here's how our Social Security expert helped readers get the right answers.

Suspending your Social Security benefits as a way of boosting your retirement income can make sense in certain situations. But some readers who tried to follow this strategy say they have encountered problems from an unexpected source—Social Security representatives who either don’t understand how suspending benefits works or actually claim it can’t be done.

People who begin taking benefits between age 62 and their full retirement age (FRA)—66 for those born in 1943, rising to 67 for those born in 1960 or later—have the option of suspending benefits at their FRA. They can resume them at any time until benefits reach their peak at age 70. For those who defer Social Security benefits until age 70, your benefit will be 76% higher than if taken at 62, the earliest age that most people can begin claiming retirement benefits. Still, most people decide to take Social Security early because they need the money or cannot continue to work for medical reasons.

Even so, circumstances may change. Maybe a private pension kicks in, reducing the need for Social Security. Or your kids move out on their own, reducing household expenditures and the need for current income. Or maybe you simply want to walk back your decision to claim early, given the higher income you might receive by delaying—a survey last summer sponsored by Nationwide Financial found that nearly 40% of those who filed early for Social Security later regretted their move and wished they had waited. If so, suspending your benefits can be a smart strategy.

If you want to pursue this option, however, your first step is to become well informed—especially given the possibility you’ll encounter opposing views from Social Security representatives. That’s the problem one reader wrote me about:

“The agent at our Social Security office said he didn’t know anything about this and that I could check online at socialsecurity.gov and if I found out any additional information on this I could contact him and he would advise me someone I could call and get more information on this. I was shocked that he (a paid official Social Security agent) told me if I found out any additional information on this to come back to the office.”

As I told her, all the agent had to do was check his own web site to become informed. That doesn’t sound like too much to ask, does it?

While this agent did not know about suspending benefits, at least he didn’t provide the wrong information. Here’s an agent who did, according to another reader:

“We both are retired. I am 71 years old. My wife is 67 years old. I started taking Social Security benefits at 66 (my FRA) and my wife started taking early (reduced) benefits at 62 on her own income. We went to the Social Security Administration office today to sign up to stop my wife’s benefits for the next three years and start taking benefits at the age of 70. The SSA office says that we can do that but you have to pay back the total (large) amount that she received from the day she started taking benefits at 62. Without paying that large amount, they said, we cannot do that. We showed them the copy of your article and requested them to review it. We also requested that we would like the office supervisor also to review our case and your article. After reviewing your article, the SSA office supervisor told us that information in your article is incorrect.”

Now, I admit that being infallible is above my pay grade. But the right of this woman to suspend her benefits is not in question. And she doesn’t need to repay Social Security one penny of her earlier benefits. I urged the couple to do some homework and go back to their SSA office and try again:

Your wife can SUSPEND her benefit at any time between her FRA (age 66 in her case) and age 70. She does not have to repay anything that she had received in the past. But she will have to make sure she pays for any future Medicare premiums that had been deducted from her Social Security. The only time that repayment of prior benefits is required is if she WITHDREW her benefits entirely. However, this is only permitted within 12 months of when she began taking benefits, and this is not the case with her. Often, people get confused about whether they’re talking about SUSPENDING or WITHDRAWING benefits.

Here are the official descriptions of the suspension rules from the Social Security Program Operating Manual System (POMS):

GN 0249.100: Voluntary Suspensions

GN 0249.110: Conditions for Voluntary Suspension

Everyone makes mistakes, and Social Security’s rules are very complicated. Further, the Social Security Administration has been hammered by budget cuts, forced to reduce staff, and close many offices around the country, as a Senate report last summer documented. That’s still no excuse for providing people with wrong or misleading information. But it further reinforces the need for people to learn the agency’s basic rules so they can look out for themselves.

Social Security, by the way, agrees. “If the situations you described are indeed accurate, they are unacceptable and we apologize for providing any misinformation,” agency spokeswoman Dorothy Clark said. “While our programs are complex, the vast majority of our employees provide accurate information. However, when we learn of these situations, we take action to correct the errors and provide further employee training.”

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.

More on Social Security:

Here’s a quick guide to fixing Social Security

How Social Security will cut your benefits if you retire early

This little-known Social Security strategy can boost your retirement income

MONEY retirement income

Retirees Risk Blowing IRA Deadline and Paying Huge Penalties

Egg timer
Esben Emborg—Getty Images

With just seven weeks left in the year, most IRA owners required to pull money out have not yet done so.

Two-thirds of IRA owners required to take money out of their account by Dec. 31 have yet to fulfill the obligation, new research by Fidelity shows. Now, with the year-end in sight, and thoughts pivoting to holiday shopping and get-togethers, legions of senior savers risk getting distracted–and socked with a punishing tax penalty.

IRA owners often wait until late in the year to pull out their required minimum distributions. Especially at a time when interest rates are low and the stock market has been rising, leaving your money in an IRA as long as possible makes sense. Some retirees may also be reluctant to take distributions for fear of spending the money and running short over time.

But blowing the annual deadline can be costly. The IRS sets a schedule of required minimum distributions, or RMDs, to keep savers from deferring taxes indefinitely. After reaching age 70 1/2, IRA owners must begin to take money out of their account each year and pay income tax on the amount. Failure to pull money out triggers a hefty penalty equal to 50% of the amount you were supposed to take out of the account.

Among 750,000 IRA accounts where distributions are required, 68% have yet to take the full amount and 56% have yet to take anything at all, Fidelity found. These IRA owners should begin the process now to avoid end-of-year distractions and potential mistakes like using the wrong form or providing the wrong mailing address, which can take weeks to find and correct.

A report by the Treasury Inspector General estimated that as many as 250,000 IRA owners each year miss the deadline, failing to take required minimum distributions totaling about $350 million. That generates potential tax penalties totaling $175 million. The vast majority of those who fail to take their minimum distributions are thought to do so as part of an honest mistake, and previously the IRS hasn’t always been eager to sock seniors with a penalty. But the IRS began a crackdown on missed distributions a few years ago. Don’t look for leniency if you miss the deadline without a good reason, like protracted illness or a natural disaster.

Early each year, your financial institution should notify you of any required distributions you must take by year-end. If this is the first year you are taking a required distribution, you have until April 1 to do so, but then only until Dec. 31 every subsequent year. Once notified, you still need to initiate a distribution. A lot of people simply do not read their mail and fail to initiate action in time.

Among other reasons IRA owners miss the deadline:

  • Switching their account Institutions that open an account during the year are not required to notify new account holders of required minimum distributions until the following year.
  • Death Often there is confusion about inherited IRAs. The beneficiary must complete the deceased IRA owner’s distributions in the year of death. Non-spousal beneficiaries of any age must begin taking distributions in the year following the year that the IRA owner died—and no notice of this is required.

With the penalties so stiff and the IRS cracking down on missed mandatory distributions, this is a subject that seniors and their adult children should talk about. In general, financial talk between the generations makes seniors feel less anxious and more prepared anyway. Required distributions can be especially confusing, and the penalties may have the effect of taking away money that heirs stand to receive. So it’s in everyone’s interest to get it right. Consider putting mandatory distributions on autopilot with a firm that will make the calculation and send you the money on a schedule you choose.

Related:

How will my IRAs be taxed in retirement?

Are there any exceptions to the traditional IRA withdrawal rules?

When can I take money out of my IRA without penalty?

MONEY retirement planning

What Are the Biggest Surprises in Retirement? The Experts Weigh In

141106_RET_Surprise
David Clapp—Getty Images

Retirement is a major transition—and not just financially. Here are some lifestyle changes you may not be planning for.

The Great Recession served up some nasty financial surprises to people approaching retirement—the housing crash, job loss and shrunken 401(k)s, for starters.

But retirement can bring lifestyle surprises, too. It’s one of life’s biggest transitions, and a major leap into the unknown. Hoping to lessen the guesswork for people who aren’t there yet, I asked experts who work with people transitioning to retirement about the surprises they hear about most often.

“Time freedom” is a shock for many, says Richard Leider, an executive career coach and co-author of Life Reimagined: Discovering Your New Life Possibilities (Berrett-Koehler Publishers, 2013).

“Without the time structure of working, folks often go on autopilot, the default position of repeating old patterns,” he says. “However, there is no status in the status quo. So, at about the one-year mark, they realize that time is their most precious currency. Often a wake-up call—health, relationships, money or caregiving—forces reflection and helps them to say ‘no’ to the less important things that simply clutter up a life and ‘yes’ to the more important things that define a purposeful life. They choose fulfilling time.”

Wealth psychology expert Kathleen Burns Kingsbury also sees people struggling to structure their new lives. “One of the biggest surprises retirees face is the adjustment to not working full-time,” says Kingsbury, author of How to Give Financial Advice to Couples (McGraw-Hill, 2013). “While people typically fantasize about what life will be like without a job, the reality is sometimes it’s a bit of a shock to the system.

“Work provides structure, social connections and a sense of purpose. It is important for pre-retirees who are not going to work in retirement to consider how they will meet these needs outside of a work environment,” she adds.

Sometimes, that leads to greater spirituality, says Carol Orsborn, editor-in-chief of FiercewithAge.com and author of 21 books about the baby boomer generation.

“The heightened search for meaning in the face of mortality comes as no surprise,” she says. “The bigger surprise is that as it turns out, many of the things we most fear—loss of identity, erosion of ego, increased marginalization—hold the potential to transform aging into a spiritual path.

“Many retirees report that they are achieving levels of fulfillment, peace and joy not despite the things that happen to them as they age, but because of them. This transcends individual experience, with sufficient mass to constitute what is being termed ‘the conscious aging movement.’ “

Not that there aren’t earth-bound worries. “The biggest surprise is about money,” says Helen Dennis, a specialist in aging, employment and retirement. “This is true particularly among women who have earned a good income and find that eight or 10 years into retirement, they fear running short and need to change their lifestyle, all within an uncertain economy. Add to this their surprising initial discomfort in spending their retirement income without depositing a work-earned check.”

Changing housing needs also can surprise, especially for single retirees. “For single retirees, recognizing that their current home or location no longer ‘works’ is a common surprise,” says Jan Cullinane, author of The Single Woman’s Guide to Retirement (AARP/John Wiley, 2012). “Upon leaving a primary career, the daily social support built into a job is yanked away. Pairing that with becoming suddenly single through divorce or widowhood, the home that served them well may no longer be appropriate.”

For married couples, the surprise might be a desire to get away from one another. “Many retirees end up bored with too much free time and often discover, if they’re in a relationship, that they get on each other’s nerves and want some space and time apart,” says Dorian Mintzer, a coach and co-author of The Couple’s Retirement Puzzle: 10 Must-Have Conversations for Creating an Amazing New Life Together (Lincoln Street Press, 2012).

“They often haven’t thought about the role work played—providing structure, self-esteem, time together and time apart from a partner as well as connection engagement and purpose and meaning. Each partner may experience the transition differently, and they may be ‘out of sync’ with each other. For example, one may want to travel and the other wants to start an encore career.”

I received many more comments about retirement surprises than fit here. You can find thoughts from a broader array of experts on my website.

More on retirement:

Can I afford to retire?

Should I delay my retirement?

Should I work in retirement?

MONEY retirement income

Retirement Withdrawal Strategies That Can Pay Off Big

To figure out the right pace for your retirement withdrawals—and to avoid ending up in higher tax brackets—start planning before you stop working.

Having your own tax-deferred retirement account is a bit like having one of those self-titrating morphine buttons that hospitals use: Press it whenever you need quick relief.

But once you’re retired and able to tap your 401(k) or individual retirement account (IRA), it’s not easy to titrate your own doses of cash. Withdraw too much, and you use up your nest egg too quickly; too little, and you might unnecessarily crimp your retirement lifestyle.

Overlaying the how-much-is-enough question are several finer points of tax planning. Because you can decide how much money to pull out of a 401(k) or individual retirement account, and because those withdrawals are added to your taxable income, there are strategies that can help or hurt your bottom line.

That’s especially true for early retirees trying to decide when to start Social Security, how to pay for health care and more. Here are some money-saving withdrawal tips.

CURB TAXABLE INCOME

If you are buying your own health insurance via the Obamacare exchanges, keep your taxable income low to qualify for big subsidies, advises Neil Krishnaswamy, financial planner with Exencial Wealth Advisors in Plano, Texas.

“It’s a pretty substantial savings on premiums,” said Krishnaswamy.

Here’s an example using national averages from the calculator on the Kaiser Family Foundation web page. Two 62-year-old spouses with annual taxable income of $62,000 would receive a subsidy of $8,677 a year, against a national average premium of $14,567. If they took another $1,000 out of their tax-deferred account and raised their taxable income to $63,000, they would be disqualified from receiving a subsidy.

Not every case may be that dramatic, but it’s worth checking the income limits and available subsidies in your own state.

DELAY BENEFITS

If you retired early, consider taking out extra money to live on and delaying Social Security benefits until you are older. Withdrawing money from retirement savings hurts. You not only lose the savings, you lose future earnings on those savings. And in most cases, you have to pay income taxes on withdrawals from those tax-deferred accounts.

But Social Security benefits go up roughly 8% a year for every year you don’t claim them. And even after you claim them, they rise with the cost of living and are guaranteed for life. When you draw down your own savings to protect a bigger Social Security payment, tell yourself you are buying the cheapest and best annuity you can get.

PLAN IN ADVANCE

Plan ahead for mandatory withdrawals. In the year you turn 70 1/2, you have to begin drawing down your tax-deferred IRAs and 401(k) accounts and paying income taxes on those withdrawals. Unless you expect to be in the lowest tax bracket at the time, it makes sense to start withdrawing at least enough every year before then to “use up” the lower tax brackets.

For single people in 2014, you’re in a 10% or 15% marginal tax bracket until you make more than $36,000 a year. For married people filing jointly, that 15% bracket goes up to $73,800. It’s a lot better to pull out that money in your 60s and use up other savings to live on, than it is to save it all until you are 70 and then withdraw large chunks at higher interest rates.

GET A GOOD ACCOUNTANT

You may want to use early years of retirement to take the tax hit required to move money from a traditional IRA into a Roth IRA that will free you of future taxes on that money and its earnings.

You may pull a lot of money out of your account in one year and spend it over two or three years, to keep yourself qualified for subsidies in most years.

You may titrate your withdrawals to keep your Medicare premiums (also income linked) as low as possible.

The best way to optimize it all? Get an adviser or accountant who is comfortable with a spreadsheet and can pull all of these different considerations together.

Related:

When do I have to take money out of my 401(k)?

How will my IRA withdrawals be taxed in retirement?

Are my Social Security payouts taxed?

MONEY retirement income

The Creepy Truth About Life Settlements

Actress Betty White presents the late producer Bob Stewart with a posthumous Lifetime Achievement Award during the 40th annual Daytime Emmy Awards in Beverly Hills, California June 16, 2013.
Actress Betty White has pitched life settlements to seniors. Danny Moloshok—Reuters

A new novel revolves around a murderous life settlements investor. That's fiction. But these products have very real risks for buyers and sellers.

Selling your life insurance policy is right up there with taking out a reverse mortgage when it comes to retirement income sources that most people would be better off not tapping. But folks do it anyway, while paying little attention to the costs and, as a new novel points out, the risks of a policy landing in the wrong hands.

Selling a life policy for a relatively large sum—known as a life settlement—has gotten easier over the last decade. Hedge funds, private equity funds, insurers and pension funds dominate the market, which totals around $35 billion, up from $2 billion in 2002. Individuals are investing in them too, through securities that represent a fraction of a bundle of life settlements, sometimes called death bonds.

How Life Settlements Work

Those most likely to be offered a life settlement, formerly known as a viatical, are individuals with a universal life insurance policy they no longer need or can’t afford—or who simply don’t want to pay the premiums. A term life policy that converts to a universal policy may also have value. Policyholders sell their insurance for more than they’d get by surrendering the policy to their insurer. If you have a death benefit of $1 million, you might have $100,000 cash surrender value but manage to get $250,000 from a third-party investor. The investor assumes future premium payments and collects $1 million at your death.

Not a bad deal, assuming you’re comfortable with the fact that someone out there has a financial interest in your demise. You get a bigger payout for a policy you were going to give up anyway. Life policies with total face value in the tens of billions of dollars lapse every year, according to industry estimates. Many of those policies have value in the secondary market.

As part of their ad campaign, the life settlement industry has enlisted actress Betty White, who pitches these deals for “savvy senior citizens needing cash.” Heck, she’s more persuasive than Fred Thompson is about reverse mortgages. But don’t be easily swayed. Aging celebrities from Henry Winkler to Sally Field are pitching all sorts of elder products these days in what amounts to an encore career—not a genuine endorsement.

The Privacy Risk

Okay, so what are the downsides to life settlements? For policyholders seeking to raise money, the creepiest risk by far is that you sell your policy to Tony Soprano, who understands that the quicker you die, the greater his rate of return. This is the extreme case explored in a new novel by Ben Lieberman, The Carnage Account. The lead character is a Wall Street high roller who buys up life settlements and dispatches the people with the biggest policies. “Very few products on Wall Street have been immune to exploitation,” says Lieberman, noting the wave of subprime mortgages that blew up in the financial crisis. “The abuse can now hurt more than your property. Instead of losing your house you can lose your life.”

Of course, Lieberman is a novelist with an active imagination. Life settlements have been around since the AIDS crisis, and there has never been a known case of murder for quick payoff, says Darwin Bayston, CEO and president of the Life Insurance Settlement Association. There have been only three formal complaints of any kind about life settlements to national regulators in the last three years, he says.

Yet Lieberman, who has a long Wall Street background, finds the entry of cutthroat hedge fund managers more than a little unsettling. Policies with insurers or held by pension funds remain largely anonymous inside huge portfolios. Institutions base their settlement offers on average life expectancies, knowing some policies will pay early and some will pay late.

But in smaller and more actively managed pools investors may pick and choose life policies that promise a quicker payoff, based on things like depression and mental illness, or clues from medical staff as to the most “valuable” policies. Life settlement investors are also targeting an estimated $40 billion of death benefits that policyholders might sell to fund long-term care needs, spinning it as socially conscious investing. How else will these seniors pay for end-of-life care? “Instead of credit risk or prepayment risk we now evaluate longevity risk,” Lieberman says. “This began as a way to help terminally ill patients. Now it incorporates perfectly healthy people and presents a way to bet against human life.”

One former life settlements investor told me he has seen third-party portfolios of life policies fully disclosing the names of the insured parties, which is the basis for the success of Lieberman’s fictional Carnage Account. In his novel, a murderous hedge fund manager gets this information and speeds up the whole process. Again, that’s fiction. But even Bayston concedes that a determined life settlements investor could get the identities of the insured people whose long lives are bad for investment returns.

The Financial Risks

Now, let’s look at the non-fiction risks with life settlements. For sellers, they are considerable, and include giving up your policy too cheaply and paying dearly for the transaction, and possibly becoming ineligible to buy another policy. Always check the cash surrender value first. Do not be swayed by brokers putting on a hard sale. They stand to collect commissions of up to 30% of the settlement. If you are determined to quit paying premiums, rather than sell the policy consider letting the cash value fund future premiums until the cash is exhausted. That’s a much better deal for heirs if you pass away in the interim. You can sell the policy when the cash value has been depleted—and get more for it then.

For buyers, settlements are complex and illiquid, and they may not pay out for many years. Given these hidden risks, they generally do not make sense for individual investors. Wall Street, meanwhile, benefits from their huge fees and expected long-run annual returns of 12% or more. Perhaps more important, settlements offer returns with no correlation to the financial market, which can be attractive to sophisticated investors and institutions, such as pension funds.

The life settlements industry has leveled off since the financial crisis, in large part because policies are taking longer to pay, thanks to increasing longevity. That drives down returns. Underscoring this risk to investors: the Society of Actuaries recently published revised mortality rates showing that a 65-year-old can now expect to live two years longer than someone that age just 14 years ago. But investors have been edging back into the market the last couple years, drawn by more realistic return assumptions and an anticipated flood of life policies held by boomers who will need cash to pay for assisted living.

Only in a novel do life settlements investors manage longevity risk with a hit man. But there are good reasons to be careful nonetheless.

MONEY Social Security

Here’s a Quick Guide to Fixing Social Security

Band-Aid on Social Security card
John Kuczala—Getty Images

These changes could easily balance the program for the next 75 years. But reaching consensus on the mix of reforms is the real challenge.

Social Security likely will move back to center stage after this week’s elections. The program’s finances have eroded bit by bit for years, drawing calls for change every year. But nothing has been done. Now Congress could continue kicking this can down the road. Or it could decide to actually tackle the problem and change things, most likely as part of a broader look that also includes Medicare and Medicaid.

With favorable prospects for a Republican majority in both houses of Congress, stories already abound about raising the retirement age, changing the annual cost-of-living adjustment or raising the ceiling on earnings subject to the payroll tax.

AARP, the National Committee to Preserve Social Security & Medicare and other Social Security support groups have gone on the offensive. Far from just defending the program from cuts, they are speaking out aggressively about the merits of raising benefits

All of which makes a recent report from the Social Security Administration particularly timely. It reviews more than 120 ideas for changing Social Security and calculates how each would affect the program’s future finances. The report was overseen by Stephen C. Goss, chief actuary of the Social Security Administration. If any source is both informed and free from political spin, it is this one.

Within this list are enough changes to balance the program several times over during the next 75 years. But then, this has never been the issue. Rather, the contentious debate has been over the “right” mix of changes. And people have not been able to agree on that.

Here’s a quick guide to the reforms that would have the biggest impact, according to the report. It is tempting to just add up the financial impact of each change to see if they erase the Social Security shortfall. But, as the report notes, some reforms would affect others. So although the sum of impact of the changes will give you a ballpark estimate, the actual results are likely to be a bit different.

Cost-of-Living Adjustment (COLA). The annual cost-of-living adjustment to Social Security benefits (1.7% for 2015) has received lots of attention, primarily from a proposal to substitute a less-generous “chained” Consumer Price Index for the current inflation measure used to set the yearly change. Using the chained CPI would close 19% of the program’s projected shortfall. A more draconian measure—reducing the COLA by a percentage point from what it would otherwise be—would cut 61% of the shortfall all by itself. However, senior’s groups think the COLA should be increased to more accurately reflect the larger weight of health costs for older consumers. This proposal would raise the shortfall by 13%.

Monthly Benefits. Adjusting the complex formulas used to calculate benefits could make big dents in the shortfall. Right now, benefit increases are tied to changes in average wages. Linking them instead to general price inflation could cut as much as 90% of the system’s shortfall. That’s because wages historically have risen by more than the rate of inflation, so this change would effectively reduce the size of future benefit increases. There also are a slew of suggested sweeteners that would reduce the pain of smaller increases, although they tend not to add much to the shortfall.

Retirement Age. The normal retirement age for benefits is now 66 and set to rise to 67 in the year 2027. Raising it to 68 over a six-year period would shave 15% from the shortfall, while increasing it to 69 over 12 years would cut 35% off the long-term deficit. Raising the age to 70 over a shorter time period, and automatically adjusting it to reflect expected longevity gains, would cut the shortfall by an even larger 48%—but that’s only if the hike is combined with an increase in the earliest age for claiming benefits from 62 to 64. Reducing benefits to early retirees is strongly opposed by senior and labor groups who argue that workers in physically demanding jobs are often forced to retire early for health reasons.

Payroll Taxes and Covered Earnings. The system could be balanced by raising the payroll tax rate from its current level of 12.4% (paid half and half by employees and employers). There is a separate payroll tax for Medicare. Other proposals would raise the wage ceiling subject to payment taxes, which will rise to $118,500 in 2015. These suggestions would have large effects on program shortfalls. Simply eliminating the wage ceiling for employer payments would cut 50% from the projected 75-year deficit. Raising the ceiling so that 90% of earned wages are subject to Social Security taxes would cut 48% of the deficit. The stiffest medicine – raising the tax rate from 12.4% to 15.5%—would balance the program all by itself, and then some. On the flip side, a proposal to exempt people with more than 45 years of earnings from payroll taxes would widen the deficit by 11%. Such a change, advocates say, would improve retiree incomes and stop penalizing older workers, who must continue payroll taxes even thought their benefits do not rise as a result.

Trust Fund Investments. Social Security reserves are now invested in a special issue of U.S. Treasury Securities. Putting some of these funds into the stock market has long been a high priority of many conservatives, and strongly opposed by liberal groups. If 40% of trust funds were invested in stocks, and if they earned an annual return of 6.4%, after calculating the effects of inflation, this would close 21% of the program’s long-term funding shortfall. For comparison, the report assumed the long-term returns of the special issue of Treasury securities would be 2.9% a year, after inflation.

Getting the “right” mix of changes would be terrific, but enacting even a mediocre compromises next year would be far, far better. Think about a series of trade-offs. One side might get a later retirement age and reductions in the rate of future benefit growth, from changes to the COLA and annual wage base. The other side could get hefty hikes in payroll taxes for wealthier workers and more protection for lower-income, early retirees. Now if we could only get Congress to start the negotiations.

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

More on Social Security:

3 Smart Fixes for Social Security and Medicare

Social Security is the Best Deal

Can We Save Social Security?

MONEY Second Career

Finding the Perfect Balance Between Work and Fun in Retirement

Ranger with snowmobile, Yellowstone National Park, Wyoming.
Ranger with snowmobile, Yellowstone National Park, Wyoming. Blickwinkel—Alamy

These retirees found a way to spend all their time on pursuits they love.

“Damn the submarine. We’re the men of the Merchant Marine!” That singsong phrase woke me up every morning for seven months on my first ship, the SS San Francisco. I went to sea after graduating from college. For four years, I worked on ships, mostly tankers, steaming through the Suez and Panama canals, past the Rock of Gibraltar at midnight under a full moon, stopping in ports like Athens, Dubai, and Yokosuka. A number of my peers had similar adventures after college, including leading wilderness trips, tending bar, teaching English overseas and traveling around Europe picking up odd jobs. Ah, those were adventurous days before the desire for a career and family responsibilities took over.

Peter Millon is living the adventure, too—in his Unretirement, at age 69. Last year, he spent about 70 days skiing the slopes in Park City, Utah, when he wasn’t working four days a week for ‎Rennstall World Class Ski Preparation, repairing skis and waxing skis for racers. Essentially, he split his retirement time 50/50: working half-time and pursuing his passion the other half. In the off-season, Millon plays golf with his oldest son who lives in Salt Lake, fishes and takes target practice. Not bad.

Leading a Wealthy Life

A wealthy industrialist? A Wall Street master of the universe? A high-tech titan of business? Hardly. Millon isn’t wealthy, but he leads a wealthy life. “Do something you love, something for you,” he says. “Don’t do it for anyone else.”

Millon began his career working at a small ski maker in St. Peter, Minn. He then spent decades as a technical director at Salomon North America and its various competitors. During the real estate bubble years, Millon was selling high end appliances for the home, living in a townhouse in Massachusetts. Business tanked when the bubble burst, and he took advantage of an early retirement package. Three years ago, he sold the townhouse and moved to Utah where he was known in the ski community, picking up a condo on the cheap. These days, Millon lives comfortably off Social Security, some investments and the income from his part-time job.

The ‘World’s Oldest Intern’

John Kerr is living the 50/50 life in his Unretirement, too, working as park ranger in Yellowstone between May and September. He didn’t plan on becoming a ranger, though. Kerr had a four-decade career at WGBH as a marketing and fund raising executive, retiring at 65. “It took the shock of the change to rattle my bones a bit,” says John Kerr. “I had way too much energy and experience to sit around.”

His exploration took him out to Jackson Hole, Wyo., where Kerr has a small condo. While walking around Bozeman, Mont., he saw a sign for the Yellowstone National Foundation, which supports Yellowstone National Park. He walked in unannounced and from an off-hand remark during a conversation with the organization’s head, he learned it had an internship opening. Kerr applied and for the next year he was “world’s oldest intern,” talking to visitors about wolves.

Kerr became a Yellowstone ranger five months a year for the next nine years, living close to Jackson in the winters and using his time off to visit family. Now 76, he recently moved back to New England to be near family. Still, he expects next season he’ll return to Yellowstone. “It has been a great adventure,” he says.

Advice for Your Unretirement

When I asked Kerr and Millon what advice they’d give to others in their 60s and 70s eager for adventure, Kerr emphasized the importance of an open mind. “You have to have your eyes open and your ears flapping,” he chuckled. Millon suggested drawing on the relationships you’ve made over the years and the skills you’ve developed without trying to compete for the kind of job you had earlier in your career.

What I took away from both men is that the financial penalty of working fewer hours and doing more of what you love can be much less than you might think.

“The key is that when your interests align with your work, there is nothing from which to retire,” says Ross Levin, a certified financial planner and head of Accredited Investors in Edina, Minn. “We save money to ultimately create a lifestyle. If that lifestyle doesn’t need much money, then we need to save less.”

Think of it this way, says Levin: You earn $10,000 a year in your fulfilling work on a ski slope or in national park or down in the Florida Keys. That’s the equivalent of having $250,000 in investment assets, assuming the 4% withdrawal rule (a standard guideline for safely taking money out of retirement savings). A $20,000 income is the equivalent of $500,000 in assets, and so on.

Much of the conversation about prospects in the traditional retirement years often forgets how creative people are at coming up with solutions. Many Unretirees I’ve interviewed over the years have found they made significant cuts in expenses without slashing their standard of living.

So, if your career didn’t leave you with the kind of portfolio that pushes you into the ranks of the wealthy, that doesn’t mean you can’t construct a comparable lifestyle. The question is: What’s your adventure?

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 about Unretirement twice a month, focusing on the personal finance and entrepreneurial start-up implications and the lessons people learn as they search for meaning and income. Tell him about your experiences so he can address your questions in future columns. Send your queries to him at cfarrell@mpr.org. His twitter address is @cfarrellecon.

More from Next Avenue:

Doing Great Work After 60

Shifting From Full-Time to Part-Time Work

12 Takeaways From a Mini-Retirement

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