MONEY Pensions

What Retirees Need to Know about the New Federal Pension Rules

Only a small percentage of retirees are directly affected by the new rule. But future legislation may lead to more pension cutbacks.

The last-minute deal to allow retiree pension benefit cuts as part of the federal spending bill for 2015 passed by Congress last week has set off shock waves in the U.S. retirement system.

Buried in the $1.1 trillion “Cromnibus” legislation signed this week by President Barack Obama was a provision that aims to head off a looming implosion of multiemployer pension plans—traditional defined benefit plans jointly funded by groups of employers. The pension reforms affect only retirees in struggling multiemployer pension plans, but any retiree living on a defined benefit pension could rightly wonder: Am I next?

“Even people who aren’t impacted directly by this would have to ask themselves: If they’re doing that, what’s to stop them from doing it to me?” says Jeff Snyder, vice president of Cammack Retirement Group, a consulting and investment advisory firm that works with retirement plans.

The answer: plenty. Private sector pensions are governed by the Employee Retirement Income Security Act (ERISA), which prevents cuts for retirees in most cases. The new legislation doesn’t affect private sector workers in single-employer plans. Workers and retirees in public sector pension plans also are not affected by the law.

Here are answers to some of the key questions workers and retirees should be asking in the legislation’s wake.

Q: Cutting benefits for people who already are retired seems unfair. Why was this done?

A: Proponents argue it was better to preserve some pension benefit for workers in the most troubled plans rather than letting plans collapse. The multiemployer plans are backstopped by the Pension Benefit Guaranty Corp (PBGC), the federally sponsored agency that insures private sector pensions. The multiemployer fund was on track to run out of money within 10 years—a date that could be hastened if healthy companies withdraw from their plans. If the multiemployer backup system had been allowed to collapse, pensioners would have been left with no benefit.

Opponents, including AARP and the Pension Rights Center, argued that cutting benefits for current retirees was draconian and established a bad precedent.

Q: Who will be affected by the new law? If I have a traditional pension, should I worry?

A: Only pensioners in multiemployer plans are at risk, and even there, the risk is limited to retirees in “red zone” plans—those that are severely underfunded. Of the 10 million participants in multiemployer plans, perhaps 1 million will see some cuts. The new law also prohibits any cuts for beneficiaries over age 80, or who receive a disability pension.

Q: What will be the size of the cuts?

A: That is up to plan trustees. However, the maximum cuts permitted under the law are dramatic. Many retirees in these troubled plans were well-paid union workers who receive substantial pension benefits. For a retiree with 25 years of service and a $25,000 annual benefit, the maximum annual cut permitted under the law is $13,200, according to a cutback calculator at the Pension Rights Center’s website.

The cuts must be approved by a majority of all the active and retired workers in a plan (not just a majority of those who vote).

Q: How do I determine if I’m at risk?

A: Plan sponsors are required to send out an annual funding notice indicating the funding status of your program. Plans in the red zone must send workers a “critical status alert.” If you’re in doubt, Snyder suggests, “just call your retirement plan administrator,” Snyder says. “Simply ask, if you have cause for concern. Is your plan underfunded?”

The U.S. Department of Labor’s website maintains a list of plans on the critical list.

Q: How quickly would the cuts be made?

A: If a plan’s trustees decide to make cuts, a notice would be sent to workers. Snyder says implementation would take at least six months, and might require “a year or more.”

Q: Am I safe if I am in a single employer pension plan?

A: When the PBGC takes over a private sector single employer plan, about 85% of beneficiaries receive the full amount of their promised benefit. The maximum benefit paid by PBGC this year is $59,320.

Q: Does this law make it more likely that we’ll see efforts to cut other retiree benefits?

A: That will depend on the political climate in Washington, and in statehouses across the country. In a previous column I argued that the midterm elections results boost the odds of attacks on public sector pensions, Social Security and Medicare.

Sadly, the Cromnibus deal should serve as a warning that full pension benefits aren’t a sure thing anymore. So having a Plan B makes sense. “If you have a defined benefit pension, great,” Snyder says. “But you should still be putting money away to make sure you have something to rely on in the future.”

Read next: This Is the Toughest Threat to Boomers’ Retirement Plans

MONEY Social Security

The Right Way to Claim Social Security Widow’s Benefits

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

Q. I am 61 and was divorced from my husband two years ago after more than 16 years of marriage. He died a few months ago at 72 and had been receiving Social Security benefits of $1,663 a month. I am working part-time, earning $13,000 a year, and want to continue doing so. According to the Social Security calculator, my own retirement benefit would be $1,028 a month if I claim at age 62, $1,364 at age 66 (my full retirement age), or $1,800 at age 70. If I claim a (reduced) widow’s survivor benefit before age 66, I expect to receive $1,314 a month if I file now at age 61½ or $1,347 at age 62.

Can I apply just for my survivor’s benefits now, continue to work, apply for Medicare at age 65, and at age 70 file for my own benefits? Also, while receiving survivor’s benefits, would I need to apply for my own benefits at age 66 and suspend it until age 70; or can I continue to collect survivor’s benefits, with no need to apply and suspend at 66, and change to my own benefits at 70? — Elizabeth

A. This is an incredibly well-informed query, so, first off, kudos to Elizabeth for doing her homework and doing such a good job looking out for herself. The details she provides are essential for figuring out her best Social Security claiming choice.

The simple answer to her question—whether to claim survivor’s benefits now—is “Yes.” The reasons for this illustrate the complexity of individual retirement benefits, as well as the way benefits interact, which can increase or reduce your Social Security income. This is a key issue for women, who tend to outlive their spouses and file the lion’s share of survivor claims.

The rules for widow’s (or survivor’s) benefits are different from spousal benefits, which involve claims on a current or divorced spouse. Survivor’s benefits may be taken as early as age 60, while spousal benefits normally can’t begin until age 62. Both benefits are lowered if you claim early, but the percentage reductions differ. That’s because survivors can claim up to six years before reaching their full retirement age (FRA), which is 66 for current claimants, compared with just four years for early spousal claims.

Another key difference is that survivor benefits do not trigger deeming when taken prior to full retirement age, which can be a real headache. If you are eligible to file for a spousal benefit and do so before age 66, Social Security will deem you to be also filing for your own retirement benefit. It does not pay two benefits at the same time but will give you an amount roughly equal to the greater of the two benefits. Further, once your retirement benefit has been triggered early, it will be permanently reduced.

The good news is that deeming does not apply to survivor benefits. So Elizabeth can file for a widow’s benefit right away and not trigger a claim for her own retirement benefit. Because it’s likely her retirement benefit will be higher at age 70 than her widow’s benefit, she should plan on taking the widow’s benefit as soon as possible. At age 70, she can switch to her retirement benefit .

She is correct that she will be hit with an early filing reduction. But given the small increases she would receive if she waited, the benefit of deferring is outweighed by the gains of claiming now. That’s because she will get more years of benefits, so the cumulative amount of income will be greater.

The modest earnings she receives won’t be a factor either. “Since her earnings are below the 2014 annual earning limits, she could qualify for widows benefits beginning this month with no loss of benefits due to the earnings test,” says James Nesbitt, a Social Security claims representative for nearly 40 years who now provides benefits counseling for High Falls Advisors in Rochester, NY.

“Depending on her past work history, her continued contributions into the Social Security system by working may have the effect of increasing her monthly benefit amount,” he adds. “The online retirement calculator on Social Security’s website will allow for future earnings to be used in estimating benefits.”

Elizabeth should set up an appointment now at a local Social Security office in order to begin receiving benefits as soon as possible, Nesbitt adds. If she files for her survivor benefit before age 65, Social Security should automatically enroll her in Medicare.

Further, Nesbitt notes, the precise amount of her survivor’s benefit depends on when her late husband filed early for his retirement benefit. This, like much else about Social Security, can be very complicated. But if his $1,663 benefit was the result of an early retirement filing, her actual survivor’s benefit could end up being much higher than she estimates. She should review this possibility when she meets with the agency to file her claim.

Lastly, she should not file and suspend her own retirement benefit but simply collect her survivor’s benefit and then claim her own retirement benefit at age 70. “Once a retirement claim has been filed at 66, albeit suspended, the amount of the widow’s benefit will be calculated as if she is [also] receiving the retirement benefit,” Bennett notes. “A ‘file and suspend’ would reduce or possibly eliminate the widow’s benefit.”

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: The Best Way to Tap Your IRA in Retirement

MONEY retirement income

Junk Bond Selloff Is a Warning for Retirees Who Reached for Yield

Risky assets have paid off well the past few years. But tremors in the junk bond market signal time for a gut check.

In July, Federal Reserve Chief Janet Yellen warned of the “stretched” values of junk bonds. Few seemed to care, and among the unconcerned were millions of retirees who had reached for these bonds’ higher yields in order to maintain their lifestyle. Now, a reckoning may be at hand.

Yellen’s mid-summer warning on asset prices was reminiscent of the former Fed chief Alan Greenspan’s “irrational exuberance” comment regarding stock prices in 1996. Few listened then, either. It turns out that the Greenspan warning was way early. But the dotcom collapse hit later with devastating results.

Yellen’s remarks may be timelier. High-risk, high-yield corporate bond prices have been falling amid the strongest selling in 18 months. Since June, investors have pulled $22 billion out of the market and prices have dropped 8%. The pace of the decline has quickened since October.

The junk bond selloff began in the energy sector, where oil prices recently hitting a five-year low set off alarms about the future profits—and ability to make bond payments—of some energy companies. In the past month, the selling has spread throughout the junk-bond universe, as mutual fund managers have had to sell to meet redemptions and as worries about further losses in a possibly stalling global economy have gathered steam.

The broad decline means that junk bond investors have little or no gain to show for the risks they have been taking this year. Investors may have collected generous interest payments, and so not really felt the sting of the selloff. But the value of their bonds has fallen from, say, $1,000 to $920. The risk is that prices fall further and, in a period of global economic weakness, that issuers default on their interest payments.

Retirees have been reaching for yield in junk bonds and other relatively risky assets since the financial crisis, which presumably is partly what prompted Yellen’s warning last summer. It’s hard to place blame with retirees. The 10-year Treasury bond yield fell below 2% for a while and remains deeply depressed by historical standards. By stepping up to the higher risks of junk bonds, retirees could get 5% or more and live like it was 10 years ago. Many also flocked to dividend-paying stocks.

So far, taking these risks has generally worked out. Junk bonds returned 7.44% last year and 15.8% in 2012, according to Barclays, as reported in The Wall Street Journal. Meanwhile, stocks have been on a tear. But the backup in junk bond prices this fall should serve as a warning: Companies that pay a high yield on their bonds—and many that pay a fat stock dividend—do so because they are at greater risk of defaulting or going bust. That’s the downside of reaching for yield, and it doesn’t go away even in a diversified mutual fund.

 

MONEY retirement income

Why Workers Undervalue Traditional Pension Plans

Gold egg in nest in dark
Simon Katzer—Getty Images

Lifetime income is the hottest button in the retirement industry. So why do workers prefer a 401(k) to a traditional pension?

Despite many drawbacks, the 401(k) plan is our most prized employee benefit other than health care, new research shows. More than half of workers value this savings plan even above a traditional pension that guarantees income for life.

Some 61% of workers with at least $10,000 in investments say that, after health care, an employer-sponsored savings plan is their most important benefit, according to a Wells Fargo/Gallup Investor poll. This is followed by 23% of workers naming paid time off, 5% naming life insurance, and 4% naming stock options. Some 52% say they prefer a 401(k) plan to a traditional pension.

These findings come as new flaws in our 401(k)-based retirement system surface on a regular basis. Plans are still riddled with expenses and hidden fees, though in general expenses have been going down. Too many workers don’t contribute enough and lose out by borrowing from their plans or taking early distributions. Most people don’t know how to make a lump sum last through 20 or 30 years of retirement. And the common rule of withdrawing 4% a year is an imperfect strategy.

The biggest flaw of all may be that most 401(k) plans do not provide a guaranteed lifetime income stream. This issue has gotten loads of attention since the financial crisis, which laid waste to the dreams of millions of folks that had planned to retire at just the wrong moment. Many were forced to sell shares when the market was hitting bottom and suffered permanent, devastating losses.

Policymakers are now feverishly looking for seamless and cost-effective ways for retirees to convert part of their 401(k) plan to an insurance product like an immediate annuity, which would provide guaranteed lifetime income in addition to Social Security and give retirees a stable base to meet monthly expenses for as long as they live. Such a conversion feature would fill the income hole left by employers that have been all but eliminating traditional pensions since the 1980s.

With growing acknowledgement that lifetime income is critical, and largely missing from most workers’ plans, it seems odd that so many workers would value a 401(k) over a traditional pension. This may be because guaranteed income doesn’t seem so important while you are still at work or, as has lately been the case, the stock market is rising at a rapid pace. It may also be that the 401(k) is the only savings plan many young workers have ever known, and they value having control over their assets.

Seven in 10 workers have access to a 401(k) plan and 96% of those contribute regularly, the poll found. Some 86% enjoy an employer match and 81% say the match is very important in helping to save for retirement. The 401(k) is now so ingrained that 77% in the poll favor automatic enrollment and 66% favor automatic escalation of contributions. Four in 10 even want their employer to make age-appropriate investments for them, which speaks to the soaring popularity of automatically adjusting target-date mutual funds.

Read next: How Your Earnings Record Affects Your Social Security

MONEY Pensions

Congress’ No-Bailout Pension Plan Is No Solution for Retirees

The cuts to promised benefits for current retirees would roll back a landmark law protecting pensions—and opens the door to further cutbacks.

Wall Street banks, automakers and insurance giants got bailouts during the economic meltdown that started in 2008. But when it comes to the pensions of retired truck drivers, construction workers and mine workers, it seems that enough is enough.

The $1.1 trillion omnibus spending bill moving through Congress this week adopts “Solutions Not Bailouts,” a plan to shore up struggling multiemployer pension funds—traditional defined benefit plans jointly funded by groups of employers in industries like construction, trucking, mining and food retailing.

A bailout, it is not. The centerpiece is a provision that would open the door to cutting current beneficiaries’ benefits, a retirement policy taboo and a potential disaster for retirees on fixed incomes.

Developed by the National Coordinating Committee for Multiemployer Plans (NCCMP), a coalition of multiemployer pension plan sponsors and some major unions, the plan addresses a looming implosion of multiemployer pension plans. Ten million workers are covered by these plans, with 1.5 million of them in roughly 200 plans that are in danger of failing over the next two decades. Two large plans are believed to be much closer to failure—the Teamsters’ Central States fund and the United Mine Workers of America fund.

The central premise is that Congress won’t—and shouldn’t—prop up the multiemployer system.

“The bottom line is, we’ve been told since the start of this process that there isn’t going to be a bailout—Congress is tired of bailouts,” says Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans (NCCMP).

The problem is partly structural. Multiemployer pension plans were thought to be safer than single employer plans, owing to the pooling of risk. As a result, the level of Pension Benefit Guaranty Corporation (PBGC) insurance protection behind the multiemployer plans is lower. But many industries in the system have seen declining employment and have a growing proportion of retirees to workers paying into the pension funds. And many of the pension funds still have not fully recovered from the hits they took in the 2008-2009 market meltdown.

These problems pose a major threat to the PBGC. The agency reported recently that the deficit in its multiemployer program rose to $42.2 billion in the fiscal year ending Sept. 30, up from $8.3 billion the previous year. If big plans fail, the entire multiemployer system would be at risk of collapse.

The fix moving through Congress would revise the Employee Retirement Income Security Act (ERISA) to grant plan trustees broad powers to cut retired workers’ benefits if they can show that would prolong the life of the plan. That would mark a major change from current law, which calls for retirees to be paid full benefits unless plan assets are exhausted; then, the PBGC steps in to pay benefits, albeit at a much lower level. The bill also would increase PBGC premiums paid by sponsors, from $13 to $26 per year.

The legislation does prohibit benefit cuts for vested retirees over 80, and limited protections for retirees over 75—but that leaves plenty of younger retirees vulnerable to cuts. And although workers and retirees would get to vote on the changes, pension advocates worry that the interests of workers would overwhelm those of retirees. (Active workers rightly worry about the future of their plans, and many already are sacrificing through higher contributions and benefit cuts.)

The big problem here is that the plan fails to put retirees at the head of the line for protection. When changes of this type must be made, they should be phased in over a long period of time, giving workers time to adjust their plans before retirement. For example, the Social Security benefit cuts eneacted in 1983 were phased in over 20 years and didn’t start kicking in until 1990.

“It’s a cruel irony that in the year we’re celebrating the 40th anniversary year of ERISA, Congress is trying to reverse its most significant protections,” said Karen Friedman, executive vice president of the Pension Rights Center (PRC), an advocacy group that has been battling with NCCMP on some of the proposed changes to retired workers’ benefits.

Friedman’s organization, AARP and other advocates reject the idea that solvency problems 10 to 15 years away require such severe measures. They have pushed alternative approaches to the problem; one that is included in the deal, DeFrehn says, is an increase in PBGC premiums paid by sponsors, from $13 to $26 per year. Advocates also have called for other new revenue sources, such as low-interest loans to PBGC by the once-bailed-out big banks and investment firms.

There are no easy answers here. But cutting the benefits of today’s retirees should be the last solution we try—not the first.

Read next: 401(k)s Are Still a Problem, But They’re Getting Better

MONEY retirement planning

3 Predictions for 2015 You’re Sure to Hear—and Why You Should Ignore Them

Crystal ball predictions
Len DeLessio—Getty Images

Now's the time when market pundits pull out their crystal balls for the year ahead. Gaze if you must, but don't lose sight of your long-term goals.

Tis the season for…predictions! As the year draws to a close, pundits, journalists, and other gazers into the future will be spouting prognostications of what lies ahead for the economy and the financial markets. Should you act on them?

The short answer is no.

Although there are exceptions, most year-ahead forecasts and predictions are, well, the polite word is hogwash. But since now is the time when all upstanding financial journalists are expected to tell readers what’s in store for next year, I’ll oblige with my tongue-somewhat-in-cheek predictions of three predictions you’re likely to hear, if you haven’t already. I’ll then explain why you shouldn’t factor these or any other prognostications into your retirement planning, and recommend what you should do instead.

Prediction #1: Dozens of surveys will sound the alarm that Americans are headed for a retirement castastrophe, or worse. You know the type of surveys I’m talking about, the ones typically issued by financial services companies warning that Americans are woefully unprepared for post-career life and/or have no idea of the right way to plan for retirement. They’ve become a staple of the retirement-planning landscape, designed less to inform than grab headlines and send you scurrying into the arms of a financial adviser who, for a price, will help you avert the coming disaster.

Don’t waste your time reading this pap. Spend it instead on practical steps to improve your retirement prospects, starting with a year-end retirement-planning check-up. You can do that in about 15 minutes or so by plugging info about your income, savings, and investments into this retirement income calculator. You’ll immediately get an estimate of your chances of being able to maintain your standard of living if you continue along your current path. If the odds look uncomfortably slim, you can easily see how saving more, investing differently, or putting off retirement a few years might improve them.

Prediction #2: Wall Street sages will predict that stock prices will climb to new highs in 2015…and other market seers will assure us that prices will fall. Such predictions are already coming in. For example, go to Research Magazine‘s December issue and you’ll find First Pacific Advisors’ Bob Rodriguez warning that the market could easily be 20% or 30% lower next year and AFAM Capital’s John Buckingham saying stocks will be higher, perhaps 10% to 12%, if not more. Who’ll be right? Who knows? Maybe the market will collapse and rebound sharply and they’ll both be right. Or perhaps it will remain flat and they’ll both be wrong.

The point is that such forecasts should not figure into your retirement investing strategy. Rather, you should create a mix of stocks and bonds based on your risk tolerance and goals and, aside from periodic rebalancing, largely stick to it regardless of what the market is doing or what investment advisers are saying it will do.

Prediction #3: The bond market will flop. No, seriously, this time for real. Pundits and investment pros alike have been predicting a bond-market crash since at least 2010. And, on the face of it, the gloomy outlook makes sense. Yields have been extraordinarily low for years and remain depressed, with 10-year Treasurys recently yielding just 2.3%. When yields rise, bond prices will fall.

The problem is we don’t know when yields will climb, nor how high. Past predictions of bond bubble trouble haven’t panned out very well. With the exception of last year, when the broad bond market lost 2%, bonds have posted 4%-or-better gains every calendar year since 2009. As of early December, the broad bond market was up nearly 6% year to date. If recent strong job gains kick the economy into overdrive, we could see higher rates next year. But as a recent Vanguard analysis shows, despite their low yields, bonds remain an effective way to diversify and hedge against stock-market risk.

So by all means check out what the various seers, sages, and soothsayers have to say about the year ahead. You might glean the stray insight or at least get a few laughs. But don’t take them too seriously—or, most important, let them divert you from your long-term plan.

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 retirement planning

You’ll Never Guess Who’s Saving the Most For Retirement

rhinestone studded piggy bank
Robert George Young—Getty Images

As Americans delay retirement, they are saving more for their later years.

Americans with investment accounts grew a lot richer last year thanks to the booming stock market—but the 65-plus crowd enjoyed the biggest increase in savings for retirement of any age group.

Total U.S. household investable assets (liquid net worth, not including housing wealth) surged 16% to $41.2 trillion in 2013, according to a report published Wednesday by financial research firm Hearts & Wallets. That far exceeded annual gains that ranged from 5% to 12% in the post-Recession years of 2009 to 2012.

But when it came to retirement savings, older investors saw the biggest gains in IRA and 401(k) assets: Retirement assets for people age 65-74 rose from $2.3 trillion to $3.5 trillion in 2014, a new high.

What’s fueling the growth? Well, a lot of people 65 and older aren’t retiring. So they’re still socking away money for their nonworking years. Meanwhile, others who have quit work are finding they don’t need as much as they thought, so they continue to save, according to Lynn Walters from Hearts & Wallets.

As attitudes about working later in life change, so does the terminology of what people are saving for, Walters says. Rather than retirement, Americans are saving for a “lifestyle choice” in their later years. According to the study, most households ages 55-64 do not consider retirement a near-term option. Four out of five have not stopped full-time work. Says Walters: “The goal is to have enough money for the lifestyle you want when you’re older, not just quitting work.”

Read next: Woulda, Coulda, Shoulda: What You Can Learn From the Top 3 Pre-Retirement Mistakes

MONEY 401(k)s

401(k)s Are Still a Problem, But They’re Getting Better

Employers are providing more and better choices and driving down fees as they come to grips with their place in the retirement equation.

As 401(k) plans have emerged as most people’s primary retirement savings account, the employers who sponsor these plans generally have beefed up investment choices and driven down fees, new research shows. Small plans remain the most inefficient by a wide margin.

The typical 401(k) plan has 25 investment options, up from 20 in 2006, and the average worker in a plan has annual plan costs equal to 0.53% of assets, down from 0.65% of assets in 2009, according to a study from BrightScope and the Investment Company Institute.

These findings suggest that after years of dumping traditional pensions and trying to avoid the role of retirement planner for workers, companies have on some level accepted their critical place in the retirement security equation. Change has come slowly. But the BrightScope/ICI study shows positive momentum in key areas.

Expense ratios are down by every measure: total plan cost, average participant cost, and average cost of invested dollars. Volumes of research show that costs are a key variable in long-term rates of return. That is why low-cost index funds, most often championed by Vanguard’s John Bogle, have become investor favorites and 401(k) plan staples. These funds account for a quarter of all 401(k) plan assets, the study shows.

Meanwhile, investment options have increased in a way that makes sense. The broadened choice is largely the result of adding target-date mutual funds, possibly the most innovative financial product for individuals in the past 20 years. These are one-stop investments that provide diversification and automatically shift to a more conservative asset allocation as you near retirement. Nearly 70% of plans now offer them, up from less than 30% in 2006, and in many plans they are the default option.

For those in small plans, though, the news isn’t so good. Expenses remain high: In plans with fewer than $1 million in assets, the average expense ratio for domestic equity mutual funds is 0.95%, versus 0.48% for plans with more than $1 billion in assets. Small plans are also far less likely to include an employer matching contribution: Just 75% of plans with fewer than $10 million in assets provide a match, vs. 97% of plans with more than $100 million in assets. Small plans are also less likely to automatically enroll new employees.

The most common match is 50 cents on the dollar up to 6% of annual pay, followed closely by a dollar-for-dollar match on up to 6% of pay.

One area with clear room for improvement is the default contribution rate in plans that automatically enroll new hires. Nearly 60% of these plans set the rate at just 3% of pay and 14% set it at 2% of pay. Only 12% had a default contribution rate of at least 5% of pay. Most advisers say you should contribute at least enough to get the full company match, which is often 6% of pay, and contribute even more if possible. Your savings goal, including the company match, should be 10% to 15% of pay.

The venerable 401(k) still has many problems as a primary retirement savings vehicle. Too many people don’t contribute enough, don’t diversify, and don’t repay loans from the plans; too many take early distributions and try to time the market. 401(k) plans don’t readily provide guaranteed retirement income, though that is changing, and because you don’t know how long you’ll live you have to err on the conservative side and save like crazy.

But we are headed the right direction, which is good, because for better or worse the 401(k) is how America saves.

Get answers to your 401(k) questions in the Ultimate Retirement Guide:
How Should I Invest My 401(k)?
Which Is Better for Me, Roth or Regular?
What If I Need My 401(k) Money Before I Retire?

 

MONEY Social Security

The Hidden Pitfalls of Collecting Social Security Benefits from Your Ex

Q. I have spoken with seven people at the Social Security Administration and gotten five different answers to my question. I want to draw Social Security from my ex-husband of 30 years at my present age, 62. I know that is not my full retirement age, and I would receive a reduced benefit. I also want to wait until full retirement age, 66, to draw from my Social Security benefit and receive it in full without reduction. Can I do this? —Sandra

A. This sounds like a sensible plan but unfortunately, when it comes to Social Security rules, logic doesn’t always carry the day. In this case, your plan conflicts with the agency’s so-called “deeming” rules, which apply to people who apply for spousal benefits—whether they are married or divorced—before they reach full retirement age.

Before we get to the problems with deeming, let’s quickly review the basics. If you were 66 and filed a divorce spousal claim, you would collect the highest possible spousal benefit—50% of the amount your ex-husband is entitled to at his full retirement age. It isn’t necessary for your ex to have filed for his own benefits at 66 for you to receive half of this amount. In fact, he doesn’t even need to have reached age 66. That’s just the reference point for determining spousal benefits.

Since you’re filing early, however, you won’t get half of his benefits. The percentages can be confusing, so here’s an example from the agency’s explanation of benefit reductions for early retirement. If your ex-husband’s benefit at full retirement age was $1,000 a month, your “full” divorce spousal payout at age 66 would be 50%, or $500. If you file at age 62, that amount will be reduced by 30% of $500, or $150. The payout you get, therefore, comes to $350 ($500 minus $150), or 35% of his benefit.

There are a few other rules for receiving divorce spousal benefits. You cannot be married to someone else. And if your former husband has not yet filed for his own Social Security retirement benefit, you must be divorced for at least two years to claim an ex-spousal benefit.

Now for the deeming pitfalls. If you meet these tests and file for a divorce spousal benefit before reaching full retirement age, Social Security deems you to be simultaneously filing for a reduced retirement benefit based on your own earnings record. The agency will look at the amount of each award and will pay you an amount that is equal to the greater of the two.

Since your spousal filing has also triggered a claim based on your own work history, you cannot then wait until full retirement age to file for your own benefits. In other words, your own retirement benefit will be reduced for the rest of your life. Logical or not, those are the rules.

There’s no simple solution to the deeming problem, but you do have some choices. Figuring out the best option depends on many factors, including the levels of Social Security benefits that you and your ex-husband can receive, as well as your overall financial situation. Do you absolutely need to begin collecting some Social Security benefits at age 62, or can you afford to wait? You should also consider whether you’re in good health and how long you think you may live.

Your first choice is to do nothing until you turn 66, which is the full retirement age for someone who is now 62. Once you hit that milestone, deeming no longer applies. At that time, you could collect your unreduced divorce spousal benefit and suspend your own benefit for up to four years till age 70. Thanks to delayed retirement credits, your benefit will rise by 8% a year, plus the rate of inflation, each year between age 66 and 70. (Your spousal benefit remains the same, except for the inflation increase.) So, even if your divorce spousal benefit is greater than your retirement benefit at age 66, this may no longer be the case when you turn 70.

But if you need the money now, your best choice may be to file for reduced benefits. If your reduced divorce spousal benefit is higher than your own reduced retirement benefit, you have another option. At 66, you could suspend your own benefit and receive only your excess divorce spousal benefit—the amount by which your ex-spousal benefit exceeds your retirement benefit. It probably won’t be much. Still, suspending your benefit will allow it to rise until age 70, though it will be lower than you would have otherwise received because of early claiming. If these increases provide more income than your divorce spousal benefit, this move may be worth considering.

Variation of these choices include filing early at age 63, 64, or 65. You can also consider how delayed retirement credits would affect your decision if you filed at age 67, 68, or 69. In the end, you’ll need to do the math to compare the potential benefits of delaying vs. claiming now. Or you may want to get help from a financial adviser.

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: This New Retirement Income Solution May Be Headed for Your 401(k)

MONEY 401(k)s

This New Retirement Income Solution May Be Headed for Your 401(k)

Target-date mutual funds in 401(k)s can now add an annuity feature, which will provide lifetime income in retirement.

The stunningly popular target-date mutual fund is getting a facelift that promises to cement it as the premier one-stop retirement plan. By adding an automatic lifetime income component, these funds may now take you from cradle to grave.

Last month the federal government blessed new guidelines, on the heels of initial guidance last summer, which together allow savers to seamlessly convert 401(k) assets into guaranteed lifetime income. Specifically, the IRS and the Treasury Department will allow target-date mutual funds in 401(k) plans to invest in immediate or deferred fixed annuities. Plan sponsors can choose to make these target-date funds the default option, meaning workers would have to opt out if they preferred other investments.

Target-date funds are widely considered one of the most innovative investment products of the past 20 years. They automatically shift to a more conservative asset allocation as you age, starting with around 90% stocks when you are young and moving to around 50% stocks at age 65. By simplifying diversification and asset allocation, target-date funds have become 401(k) stalwarts.

They have broad appeal and are a big factor in the rising participation rate of workers, and of younger workers in particular. Nearly half of all 401(k) contributions go into target-date funds, a figure that will hit 63% by 2018, Cerulli Associates projects. By then, Vanguard estimates that 58% of its plan participants and 80% of new plan entrants will be entirely in target-date funds. In all, these funds hold about $1 trillion.

The annuity feature stands to make them even more popular by closing an important loop in the retirement equation. Now, at age 65 or so, a worker may retire with a portion of their 401(k) automatically positioned to kick off monthly income with no threat of running out of money. In simple terms, a target-date fund that has moved from stocks to bonds as you near retirement may now move from bonds to fixed annuities at retirement, easing concerns about outliving your money and being able to meet fixed expenses.

Policymakers have been working towards this kind of solution for the past several years, but have hit a variety of stumbling blocks, including tax and eligibility issues and others having to do with a plan sponsor’s liability for any guarantees or promises it makes through its 401(k) investment options. There are still implementation problems to be worked out, so few plans are likely to add annuities right away. But the new federal guidelines clarify the rules for employers and pave the way for broader acceptance of both immediate and deferred fixed annuities in 401(k) plans. And a guaranteed lifetime income stream is something that workers are clearly looking for in retirement.

More on 401(k)s from Money’s Ultimate Retirement Guide:

Why is a 401(k) such a good deal?

How should I invest in my 401(k)?

What if I need my 401(k) money before I retire?

Read next: Flunking Retirement Readiness, and What to Do About It

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