MONEY retirement income

3 Retirement-Crushing Unforeseen Circumstances

thunderstorm on golf course
Derris Lanier

And what do about them.

Planning for retirement is a challenge for everyone because you have to find money to set aside in savings, invest that money well, and then figure out how to make ends meet once you stop working. Even when everything goes right, retirement planning isn’t easy, but the real test comes when unforeseen circumstances might ruin all of your plans.

Fortunately, you can deal with the unexpected rather than letting it crush your retirement hopes. Let’s take a closer look at three of the most common problems that people have trouble foreseeing and what you can do to avoid them or handle them when they come up.

1. Having to retire before you expected.
There’s a big gap between how long most people expect to work and how long they actually do work. The reason is simple: Unforeseen circumstances come up that prevent you from working into your 60s or beyond. In some cases, a health condition stands in the way of being able to stay in your job. For others, corporate moves lead your employer to cut back on staffing, and high-priced older employees often find themselves the first to go. Even if you’re fortunate enough to get a severance package, it might not last long enough to get you to the age you expected to retire.

The first thing to do when you have to retire unexpectedly is to look at your actual and potential income and expenses, working to maximize money coming in and cutting unnecessary costs. Getting part-time work is sometimes an option to help supplement income from investments or other sources, and looking at whether Social Security or other pension income might be available to you before full retirement age is worth the effort.

After you have a handle on what you’re taking in and what you’re spending, the next step is to figure out a longer-term strategy to make ends meet on your new budget. If you have enough, you’re good to go. If not, you can look at some of the resources for retirees on limited incomes can use to help make ends meet until more typical retirement benefits become available.

2. Dealing with a badly timed stock market drop.
Everyone understands the stock market rises and falls in cycles over the years. Yet when it comes time to plan for retirement, this basic fact can be very hard to deal with. If the market drops right after you retire, you could find yourself with a far smaller retirement nest egg than you had expected.

There are several ways you can address this risk. One is to use specialized financial instruments designed to provide money later in your retirement, ensuring a basic income even if your money doesn’t go as far as you had expected. For instance, a deferred income annuity allows you to pay a premium now in exchange for a guarantee of future payments from an insurance company once you reach a certain age.

Also, easing back on your stock market exposure as you age can help insulate your assets from a falling market. As you’ll see below, though, there are sometimes reasons for keeping the portion of your money in stocks higher than you might think. Still, if you’re willing to give up some potential future growth — and you have the assets to do so — then being slightly more conservative can offer a good solution to any unforeseen market moves that could put you in dire straits.

3. Not having the income you’d expected to get from your investments.
Recently, many retirees have found that they can’t generate the income they need from their savings. Bank products pay almost no interest, and it’s hard to do much better in traditional fixed-income investments like bonds.

There are ways to get more income from your investments, but you have to be careful about how much you rely on them. In recent years, many investors have shifted into dividend-paying stocks, with superior yields compared to bonds, bank CDs, and savings accounts. After six years of a bull market, though, some investors have forgotten just how hard stocks can fall. For that reason, shifting entirely into risky investments just to get more income isn’t a smart way to go. Nevertheless, a diversified mix of income investments that includes not just bonds, but also dividend-paying stocks, real-estate investment trusts, royalty trusts, and other niche investment assets can limit your risk while giving you the income you need.

Retiring well takes effort, and dealing with unforeseen circumstances makes it even harder. Nevertheless, with some forethought, you can put yourself in the best position possible to deal with unexpected surprises and come out on top.

Read next: 4 Ways to Bridge the Retirement Income Gap

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MONEY retirement income

4 Ways to Bridge the Retirement Income Gap

Gregory Reid; prop styling by Renee Flugge

Think you can't afford to delay taking Social Security once you retire? These steps can help.

If you’re on the verge of retirement, you’ve probably heard this Social Security advice: Delay claiming your benefit as long as possible, and it will increase by 7% to 8% each year you wait.

Great idea, except for one problem. Once you retire, how do you come up with enough money to live on until benefits kick in? Two-thirds of workers file before full retirement age—currently 66—and only about 2% wait until 70, when benefits max out.

The good news is that you can make waiting easier, assuming you have money saved up or have other sources of cash. Even if you defer claiming your benefit for only a year or two, you’ll permanently boost your income and financial security. Here are four strategies for delaying.

Work … Just a Little

Because Social Security will come to only a fraction of your salary—typically $20,000 to $25,000 if you retire at $100,000 a year—you need work only a fraction of the time to replace it. Some companies have phased-retirement programs letting older workers cut their hours; if your employer doesn’t, maybe you can negotiate a schedule light enough to feel like retirement. Want a change? Start exploring part-time opportunities in new fields, suggests psychologist Robert Delamontagne, author of The Retiring Mind.

The upside is not just financial. “For many people,” says Delamontagne, “working part-time, especially if you are highly engaged, can increase health and happiness.”

Go Halfway

If you’re married, both of you can delay claiming retirement benefits on your own work records at the same time that one of you receives Social Security money—payments that can be equal to half of what the other spouse would be due at full retirement age.

To do this, follow what’s known as a file-and-suspend strategy, says Jim Blankenship, a planner in New Berlin, Ill. At full retirement age, the higher-earning spouse files for benefits, then suspends payments. Then the other spouse files for spousal benefits. If the primary earner is due, say, $2,500 a month at full retirement age, the spouse would receive $1,250. Meanwhile, the eventual monthly retirement benefits for each spouse—based on his or her own earnings—would continue to grow until he or she starts taking checks or reaches age 70. Wait until you’re both at full retirement age to do this, or your benefits will be trimmed.

Use the free Social Security calculator at FinancialEngines.com to see how this would work for you, or pay up for customized guidance at MaximizeMySocialSecurity.com ($40) or at SocialSecuritySolutions.com (starts at $20).

Take Bigger Withdrawls

Ideally, you would minimize the odds of exhausting your portfolio in retirement by limiting your initial annual withdrawal to 3% to 5% of your savings (then adjusting for inflation). If that’s not an option, you might try the riskier strategy of starting at a higher rate, then lowering it once you claim benefits.

Although this approach may seem counterintuitive, the longer you wait to claim, the lower your chances of running out of money—as long as you keep your inflation-adjusted income level until you claim, says Morningstar’s head of retirement research, David Blanchett. The gains to be had from a higher monthly benefit more than offset the increased drain on your portfolio (see the chart at left). But before you try this strategy, Blanchett advises testing it with a Social Security calculator or consulting a financial planner.

Start With Your 401(k)

Whatever your withdrawal rate, take advantage of your low tax bracket before Social Security and mandatory withdrawals from retirement accounts kick in. Pull money from your pretax accounts, such as your 401(k) or traditional IRA, where most of your investments likely sit, says Baylor University finance professor William Reichenstein, a principal at Social Security Solutions.

His reasoning: After age 70½ you’ll have to take required minimum distributions from those pretax accounts. Added to your Social Security checks, those RMDs may generate more income than you need—and more taxes. (For married couples filing jointly and making over $32,000, up to 85% of Social Security benefits are taxed.) By withdrawing pretax money in your sixties, before you have to, you’ll have smaller RMDs later, an easier time controlling your income, and a portfolio that—because you’ll lose less of it to taxes—is more likely to last you in retirement.

Read next:This Is the Maximum Benefit You Can Get from Social Security

Money
MONEY Social Security

This Is the Maximum Benefit You Can Get from Social Security

If you're fortunate enough to earn a hefty salary throughout your career, a Social Security jackpot awaits.

If Social Security had a lottery jackpot, it would go to the small number of persons who collect the absolutely highest retirement benefits allowed under agency rules.

How high are the hurdles to claiming the maximum amount? Pretty darn high. A worker needs to have wage earnings large enough to equal or exceed the agency’s annual ceiling on earnings subject to payroll taxes for at least 35 years.

The earnings ceiling this year is $118,500. And that number has nearly doubled in the past 20 years from $60,000 in 1995.

Social Security bases your benefits on your highest 35 years of earnings after adjusting each year’s earnings to reflect wage inflation. In other words, your top 35 years, as documented via your payroll stubs, may not be your top 35 once they’re adjusted for wage inflation. Still, you can be certain that if you’ve earned at or above the annual payroll-tax ceiling for at least 35 years—lucky you!—a benefits bonanza awaits.

The size of that benefit check will also depend on wage inflation. This year’s top monthly benefit at 66, or full retirement age (which is the benchmark the agency uses), is $2,663 ($31,956 a year). By contrast, the average Social Security payout is a more modest $1,287 ($15,444 a year).

If you wait until age 70 to claim, delayed retirement credits will boost your payment to $3,515 in today’s dollars ($42,182 a year). The actual amount you’d receive in four years also would include accumulated cost of living adjustments.

If you haven’t already done so, open an online Social Security account to access the agency’s record of your earnings each year. By comparing what you have earned each year to that year’s earnings ceiling, you can see how close you are to being eligible for the benefit jackpot. For the uber-geeky, Social Security provides each year’s top benefit and the average inflation-indexed wages used in its calculations.

Clearly, few workers qualify for the highest payout. While claiming ages are rising, fewer than 2% of all Social Security beneficiaries wait to file for benefits until age 70, when they reach their maximum level.

The maximum benefit payouts in future years will depend on how much wage inflation there has been. This will determine the new ceiling for earnings on which payroll taxes must be paid, which in turn will drive a new jackpot number.

Even so, we do know that the top benefit won’t change much next year. Rates of general inflation have been so low that some people think the annual cost-of-living adjustment for 2016 benefits will be very small or even zero. Of course, you may be comforted that this also means your benefit dollars are not being eroded by inflation.

And if you’ve earned enough money to qualify for the highest payout, odds are you’re not too worried anyway about missing out on a few more benefit dollars.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: Are Social Security Benefits Taxable?

MONEY retirement planning

3 Ways to Boost the Odds Your Savings Will Last a Lifetime

watering can watering a topiary piggy bank
Sarina Finkelstein (photo illustration)—Getty Images (2)

Ease your worries about running out of money in retirement by making these relatively simple moves.

A recent report by the Insured Retirement Institute shows that only 27% of baby boomers are very confident they will have enough money to see them through retirement. That fear is justified when you combine overall low levels of savings with forecasts for low investment returns in the years ahead. Still, there are ways to improve your retirement income prospects. Here are three relatively simple steps you should consider.

1. Get the most out of Social Security. Even though we’re living longer, 62 is still the most popular age for claiming Social Security, according to a Government Accountability Office report. But by taking benefits earlier rather than later, you may end up collecting a lot less than you otherwise could over your lifetime, putting teven more strain on your nest egg to maintain your standard of living.

Here’s a quick summary of what you need to know: Every year you delay claiming benefits between age 62 and 70, your payment rises roughly 7% to 8%, and that’s before inflation adjustments. If you’re married, you and your spouse may be able to ramp up your potential lifetime benefit even more than individuals can by adopting any of a number of claiming strategies.

One example: If a 62-year-old man who earns $100,000 a year and his 60-year-old wife who makes $60,000 both start taking benefits at 62, they might collect a projected $1.1 million or so in lifetime benefits, according to Financial Engines’ Social Security calculator. But if the wife starts taking her own benefit at 64, the husband files a “restricted application” at age 66 to take spousal benefits and the husband then files for his own benefit at age 70, they can potentially increase the amount they’ll collect over their joint lifetimes by almost $300,000.

Given the money at stake and the complexity of the Social Security system, you’ll want to rev up a good Social Security calculator or work with an adviser who knows the ins and outs of the Social Security program before you sign up for benefits.

2. Buy guaranteed lifetime income you can begin collecting immediately. If you decide you want more assured income than Social Security and any pensions alone might generate, you may want to consider devoting some of your savings to an immediate annuity. Essentially, you invest a lump sum with an insurer in return for monthly payments you’ll receive for as long as you live, even if the financial markets perform abysmally.

Today, for example, a 65-year-old man who puts $100,000 into an immediate annuity might receive about $550 a month for life, while a 65-year-old woman would would get roughly $515 a month and a 65-year-old couple (man and woman) would receive about $425 a month as long as either is alive. (This annuity calculator can estimate how you might receive for different amounts of money and different ages.)

The downside is that you agree to give up access to your money, so it’s not available for emergencies or to leave to heirs. (Some annuities provide various degrees of access to principal, but they typically pay less at least initially and often come with onerous fees.) Which is why even if you decide an immediate annuity is right for you, you want to be sure you have plenty of other savings invested in stocks, bonds and cash equivalents that can provide capital growth to maintain purchasing power and provide extra cash should you need it for emergencies and such.

3. Buy lifetime income you can collect in the future. If you don’t feel the need to turn savings into guaranteed income early in retirement but you worry you might run short of income late in life if your investments fare poorly or you simply overspend, you may be a candidate for a relatively new arrival on the annuity scene: a longevity, or deferred income, annuity. Like an immediate annuity, a longevity annuity provides income for life, except that you don’t start collecting payments until, say, 10 or 20 years down the road. So, for example, a 65-year-old man who invests $25,000 in a longevity annuity today, might receive $320 a month for life starting at 75 or $1,070 a month if he waits until age 85 to start taking payments. The idea is that you put up less money upfront than you would with an immediate annuity—leaving more of your savings for current spending—and by waiting to collect you receive a hefty payment in the future.

The rub? You could end up collecting nothing or very little if you die before the payments start or soon thereafter. (Some longevity annuities have a cash refund feature that gives your beneficiary any portion of your original investment you didn’t collect in payments before dying, but the payment is much lower.) This annuity calculator can show what size payment a longevity annuity might make based on the amount you invest, your age when you make the investment and the number of years you wait before collecting payments.

Buying a longevity annuity with money from a 401(k), IRA or similar account was pretty much a non-starter until recently because of regs generally requiring minimum distributions starting at age 70 1/2. But as long as the longevity annuity is designated a QLAC (Qualifying Longevity Annuity Contract) under new Treasury Department rules, you can invest up to $125,000 or 25% of your 401(k) or IRA account balance without having to worry about minimum withdrawals on that amount as long as your payments start no later than age 85. Just a handful of insurers offer QLACs today, but if the longevity annuity concept catches on, that number should grow.

There are other things you can and should do to make your savings last, ranging from smart lifestyle planning so you have a better idea of the expenses you’ll face in retirement to being more judicious about how much you pull from your nest egg each year. But the three steps above are certainly a good place to start.

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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Your 3 Biggest Questions About Social Security Answered

MONEY Social Security

How to Choose the Social Security Claiming Age That’s Right for You

Getty Images

More people are catching on to the benefits of delaying Social Security. But the real issue isn't when everyone else claims—it's finding the strategy that fits your goals.

Retirement experts have been pounding the drums for years about deferring Social Security benefits and allowing them to grow until claimed at age 66 or even as late as 70. Yet average retirement ages have moved little—most people continue to file at or near age 62, the earliest that standard retirement benefits can be claimed, Social Security data show.

Now, thanks to some new research by the Center for Retirement Research at Boston College, this puzzling contradiction has been solved. It turns out that people are aware of the benefits of delayed filing and, in fact, have been claiming later for many years.

Why the discrepancy in these numbers? In its analysis, Social Security looks at when people file for retirement benefits and does a year-by-year calculation of average claiming ages. This approach works fine during periods of stable population growth, but not so much today.

Social Security’s method fails to account for the soaring numbers of Baby Boomers reaching retirement age. For example, nearly 900,000 men turned 62 in the year 1997, while in 2013, roughly 1.4 million men did so. Even so, a smaller percentage of 62-year-old men filed for Social Security in 2013 than in earlier years. But because the number of 62-year-old retirees make up such a big share of all claims, the average age has remained largely unchanged.

To get a better picture of claiming trends, the Center also used a lifecycle analysis. Instead of tracking the ages of everyone who began benefits in a certain year, such as 2013, it calculated the claiming ages of everyone by the year in which they were born. Looking at this so-called “cohort” data, it became clear that average claiming ages actually had increased far more than people thought.

In 2013, for example, 42% of men and nearly 48% who claimed that year were 62 years old. But only 36% of men and nearly 40% of women who turned 62 in 2013 actually filed for Social Security. “The cohort data reveal that the claiming picture has really changed,” the Center said.

I am cheered by these new findings. People should consider deferring their Social Security benefits and see how doing so would affect their retirement plan. But the key word in that sentence is “plan.” You need one, and it should include figuring out the best Social Security strategy for you, not what’s best for other retirees. Here are the steps to get there:

  • Compare the tax benefits. Our hearts tell us that preserving 401(k) dollars in our nest eggs is essential. But when it comes to spending down those assets in order to delay claiming Social Security, the deferral strategy looks very good. Between the ages of 62 and 70, Social Security retirement benefits rise 7% to 8% a year. They are adjusted upward each year to account for inflation. They are guaranteed by Uncle Sam. Federal taxes are never levied on more than 85 cents of each dollar of Social Security benefits, and most states don’t tax them at all. Compare these terms with 401(k) gains and taxation, and then decide which dollars are most worth preserving.
  • Assess the cost of early claiming. Social Security benefits claimed before Full Retirement Age (66 for people now nearing retirement) are hit with early claiming reductions and, if you are still working, subject to at least temporary benefit reductions caused by the Earnings Test.
  • Weigh the Medicare impact. If you have a health savings account (HSA) through employer group insurance and are eligible for Medicare, filing for Social Security will force you to take Part A of Medicare. It’s normally free but the consequences are not: the filing will force you to drop out of your HSA.
  • Consider longevity risk. Review your family health history, complete an online longevity survey, and estimate your probable lifespan. What does this number say about how long your retirement funds need to last and when you should begin taking Social Security?
  • Think about your family. Will you still have school-age children at home when you turn 62? If so, filing early for Social Security may allow your kids to claim benefits based on your earnings record. This is one case when filing early may put more money in your pocket.
  • Plan for your spouse. Survivor’s benefits are keyed to the Social Security benefits received by the deceased spouse. So, the longer a spouse waits to claim, the higher their partner’s survivor benefit will be. This is a real issue for millions of women who survive their husbands and whose own retirement benefits are smaller than their husbands because they have earned less money in their lives.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: How the Social Security Earnings Test Could Wipe Out Your Income

MONEY retirement planning

The 5 Best Free Online Retirement Calculators

Calculator
Charlie Surbey—Gallery Stock

To be sure you'll reach your retirement goals, you've got to run some numbers. These 5 tools can help you get started.

If you want to be serious about retirement, you’ve got to crunch some numbers. Otherwise, you can’t really tell amidst the ups and downs of the economy and the market whether you’re on track toward an acceptable post-career lifestyle. These five tools, all free, can help improve your planning and your prospects. You’ll find links to all five in RDR’s Retirement Toolbox.

1. Retirement Income Calculator This T. Rowe Price tool allows you to provide detailed information about your finances—how your savings are invested, pension and Social Security payments, income from part-time work, if any, etc.—so you can come away with a nuanced sense of your retirement readiness. Once you know where you stand, you can then run alternative scenarios to see how you might improve your prospects. If you’ve already retired, this tool will help you determine whether your current level of spending is sustainable throughout retirement or whether you need to tighten your belt.

Rather than estimating the size nest egg you’ll need in retirement as many calculators do, this tool focuses on sustainable income. Specifically, you enter the amount of income you expect you’ll need in retirement (say, 80% of pre-retirement salary) and the tool uses Monte Carlo simulations to estimate the likelihood that the resources you’re projected to accumulate (or have already accumulated if you’re retired) will generate sufficient income throughout retirement. Generally, you want to see a success rate of at least 80%. If you fall short of that level, you can see how changing different aspects of your finances—saving more, spending less, cutting investment fees, etc.—might improve your chances of success. Revving up this calculator every year or so and making small tweaks as needed can prevent you from falling behind in your planning and help you avoid having to make dramatic and painful adjustments to your lifestyle later in life.

2. Risk Questionnaire—Allocation Tool One of the most important aspects of setting an investing strategy is choosing a stocks-bonds mix that jibes with your appetite for risk. Invest too aggressively, and you may end up selling stocks in a panic when the market dives. Invest too conservatively, and you may not earn the returns you need to achieve your goals. This questionnaire from Vanguard can guide you to an appropriate stocks-bonds allocation. Just answer 11 questions designed to probe, among other things, your investing habits and how you might react to major market setbacks, and you’ll receive a suggested mix of stocks and bonds (and, in some cases, cash). Click on the “other allocations link,” and you’ll get stats showing how your recommended portfolio as well as ones more aggressive and conservative have performed on average and in good and bad markets since 1926.

3. Retirement Income Planner (and Retirement Budget Worksheet) Estimating that you’ll need 80% or so your pre-retirement income after you retire may be okay for establishing a savings target during your career. But once you’re within 10 or so years of retiring, you want to get a better handle on what your actual retirement expenses might be. This interactive retirement budget sheet, which you’ll find within Fidelity’s Retirement Income Planner tool, will help you do just that. It not only has slots for 49 different expense items, ranging from cable and internet fees to health care and travel; it also allows you to check a box next to each expense designating whether it’s essential. The tool then provides a tally of all your expenses, plus a breakdown of essential vs discretionary ones. This can give you a sense of how much wiggle room you have to pare expenses if necessary, plus show you which areas are prime candidates for cuts. Of course, no level of detail will be able to sure 100% accuracy. But that’s not the goal. The point is to make the best estimate you can and then refine your budget (and your actual spending) as needed as you go along.

4. Financial Engines’ Social Security Calculator One of the single most important decisions retirees face is when to claim Social Security. Unfortunately, many retirees don’t give this issue the serious thought it deserves, and just take benefits as soon as they can (age 62) or soon thereafter. That can be a costly mistake. Each year you postpone benefits between age 62 and 70, your payment increases about 7% to 8%, dramatically boosting the amount you may collect during your lifetime. By taking advantage of a number of different claiming strategies, married couples may be able to boost their potential lifetime benefit several hundred thousand dollars.

Which is why in the years leading up to retirement, it’s a good idea to check out Financial Engines’ Social Security calculator. You just enter such information as your age, current income, the age at which you expect to begin collecting Social Security. The tool will then estimate the amount you’ll collect in today’s dollars over your lifetime if you claim benefits as planned—and show how much more you might collect by claiming at a different age. If you’re married, the tool will show how you and your spouse might maximize lifetime benefits by better coordinating when each of you claims. Another nifty feature: you can see how the projections changed depending on whether your life expectancy exceeds or falls short of average.

While this tool is a good way to start thinking about how and when you might claim Social Security benefits, the amount of money at stake is large enough that you may want to hire an adviser to help you with this decision or go to a Social Security claiming service, such as Maximize My Social Security or Social Security Solutions, that, for a fee, will help you devise a strategy.

5. Will You Have Enough To Retire? I know that no matter what I or anyone else says, some people simply aren’t going to spend more than a minute with any tool. If you’re one of those people—or you just want a quick update to see if you’re on the path to a secure retirement—this tool is for you.

Just enter your age, the age you expect to exit your job, the amount, if any, you have saved so far, the percentage of income you’re saving each year and the tool will immediately estimate the amount you’ll need at retirement and the amount you’re projected to have. At a glance, you can quickly see whether you’re likely to have an adequate nest egg if you continue on your current path. If it appears you’re falling short, you can see how your chances improve by, say, saving a higher percentage of pay or delaying retirement a few years (or both). My only gripe about this tool: I wish it couched its estimates in sustainable annual income in retirement rather than giving you your retirement “number.”

Are there other worthwhile free tools that can help you better plan for retirement? Sure, you’ll find at least a dozen more listed in RDR’s Retirement Toolbox, including one that will show you how much guaranteed lifetime income a specific sum of savings might generate, another that can help you decide between a traditional and Roth IRA and one that can help you compare the cost of living in different cities.

But to create an overall retirement strategy and monitor it to make sure you stay on track, you can start with these five.

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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This Is a Horrible Realization About Retirement

losing-money
Getty Images

This might make you lose hope entirely

Retire at 65? Yeah, right.

Multiple surveys reveal that Americans are getting increasingly jaded about their prospects for enjoying a relaxing retirement, so much so that many are throwing in the towel and not even bothering to plan for it at all.

According to a survey of 2,000 Americans conducted for Allianz Life, 84% of them characterize the idea of a retirement where they can do what they want as a “fantasy.”

A second study, this one from the TransAmerica Center for Retirement Studies, also finds that one in five Americans thinks they’ll have to keep punching the clock until they literally can’t work anymore, and 37% expect wages earned from working to be part of their “retirement” income. More than 80% of workers who have already hit the 60-year milestone expect to work past 65, already are or don’t plan to retire at all.

“Retirement has become a transition,” Catherine Collinson, president of the TransAmerica Center, said in a statement.

About two-thirds of Gen X’ers and half of Baby Boomers responding to the Allianz survey think the amount they’re expected to save will be impossible to reach.

Of the two groups, Generation X is the more cynical by far, even though they’re the ones with more time to plan for their retirements. (They’re also the group likely to have higher expenses, though, with obligations like mortgages like kids’ college funds and mortgages that aren’t on Boomers’ radar anymore.)

Only 10% of TransAmerica survey respondents who are in their 40s are “very” confident in their ability to live comfortably in retirement, and more than half of those in their 50s admitted to just guessing how much money they’ll need in retirement. More than two-thirds of Gen X’ers responding to the Allianz survey say they’ll never have enough money to retire, and more than 40% say it’s “useless to plan for retirement when everything is so uncertain.” More than half say they “just don’t think about putting money away for the future”

“Their hands-off approach to planning and preparation is alarming,” Allianz Life vice president of Consumer Insights Katie Libbe said in a statement accompanying the release of the survey.

That’s bad news. Gen X’s reputation for pessimism and angst is on full display in this survey, Libbe points out, and these character traits threaten to undermine their financial future.

Generation Y is more engaged, but they’re not doing so hot, either. The TransAmerica survey finds that young adults don’t have great expectations for retirement, either. More than 80% are worried that Social Security might not be there for them, and more than half aren’t counting on it to provide retirement income for them at all.

The good news is about two-thirds of twenty-somethings are already saving for retirement, but they might not be going about it in the most effective way, given that 37% say they know “nothing” about how they should be allocating their assets.

Still, their longer time horizon gives millennials the best shot at saving for a comfortable retirement, Collinson points out. “They can grow their nest eggs over four to five decades and enjoy the compounding of their investments over time,” she points out.

 

 

MONEY Ask the Expert

How the Social Security Earnings Test Could Wipe Out Your Income

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

Q: My wife and I had an appointment with Social Security today—she is 72, and I just turned 62. I know my benefits will be reduced by filing early at 62 but doing so would enable my wife to collect spousal benefits. She didn’t work enough to qualify for her own benefits, so I figured this would be the best way to maximize our benefits. But it turns out that I earn too much to get any benefits myself and, because of this, my wife can’t get any benefits, either! Everything I researched indicated that I would only be hit with a reduction while she would receive the spousal benefits. This whole system is just too complicated to really understand. —Lou

A: Lou has run into Social Security’s Earnings Test. These rules may seem benign, but as he found out, there are hidden snags that can seriously derail your retirement dreams.

The Earnings Test applies to people who take benefits before what’s called Full Retirement Age. This is 66 for most people now and gradually rises to age 67 for people born in 1960 and later years.

If you take benefits before your FRA, they will be reduced if you continue to work and your wage earnings are above two thresholds in 2015—$15,720 or, in the year you reach FRA, $41,880. These amounts are adjusted upward each year as average wages rise.

If you earn more than $15,720, your Social Security retirement benefits are reduced by $1 for every $2 your wage income exceeds that limit. For the higher income test, the reduction is $1 in benefits for every $3 you earn above $41,880.

As Lou found out, his income is so far above $15,720 that he cannot receive any Social Security benefits whatsoever. In its consumer notices, Social Security emphasizes that benefits forfeited by the Earnings Test are not truly lost. When a person who takes early retirement benefits reaches FRA, the agency will automatically restore the lost income by permanently increasing his or her monthly payment to make up the difference.

Well, that’s better than nothing. And perhaps Lou would have settled for a lower, postponed benefit – claiming at 62 reduces your payout by 25% vs filing at FRA—if it meant his wife could begin receiving spousal benefits.

But she won’t.

There’s no mention of this in the agency’s online explanation of the effects of the Earnings Test. But the agency brochure, How Work Affects Your Benefits, includes this eye-opener:

“If other family members get benefits based on your work, your earnings from work you do after you start getting retirement benefits could reduce their benefits, too.”

So, not only does Lou earn too much money to get any benefits for himself, he also he earns too much money for his wife to qualify to receive any spousal benefits at all, as he discovered.

Lou doesn’t have any school-age children at home. But if he did, their benefits based on his earnings record would also be wiped out by the Earnings Test.

Here’s a sample provided by a Social Security spokesman that shows how the Earnings Test can affect family-member benefits.

“Mr. Doe is entitled to a Social Security retirement benefit of $378 [a month]. His wife and child are each entitled to a benefit of $160. Mr. Doe worked and had excess earnings of $2,094. These earnings are charged against the total monthly family benefit of $698 ($378 plus (2 x $160)). Therefore, no benefits are payable to the family for January through March (3 x $698 = $2,094).”

Got that? In this example, the test cancels out benefits for part of the year. In Lou’s case, of course, the benefits are wiped out for the entire year.

Under the rules, Lou’s lost benefits would be restored when he reaches his FRA in four years, as I mentioned earlier. And his wife’s lost spousal benefits would be restored as well, when she is 76.

But Lou and his wife are better off waiting four years to file, or at least until his earnings no longer cancel out their benefits. At 66, he can file and suspend his benefits. This will entitle his wife to a full spousal benefit equal to half his retirement benefit. He then can defer his own benefit for up to four years, allowing it to increase by an inflation-adjusted 8% a year.

I feel for Lou, and I fully agree with him that the system is too complex for the vast majority of Americans to understand. At the very least, the family-wide impact of the Earnings Test should be prominently featured in all Social Security materials mentioning this rule.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: This Little-Known Pension Rule May Slash Your Social Security Benefit

 

MONEY retirement planning

1 out of 3 of Workers Expect Their Living Standard to Fall in Retirement

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But you don't have to be among the disappointed. Here's how to get retirement saving right.

One third of workers expect their standard of living to decline in retirement—and the closer you are to retiring, the more likely you are to feel that way, new research shows.

That’s not too surprising, given the relatively modest amounts savers have stashed away. The median household savings for workers of all ages is just $63,000, according to the 16th Annual Transamerica Retirement Survey of Workers. The savings breakdown by age looks like this: for workers in their 20s, a median $16,000; 30s, $45,000; 40s, $63,000; 50s, $117,000; and 60s, $172,000.

Those on the cusp of retirement, workers ages 50 and older, have the most reason to feel dour—after all, they took the biggest hits to their account balances and have less time to make up for it. If you managed to hang on, you probably at least recovered your losses. But many had to sell, or were scared into doing so, while asset prices were depressed. And even you did not sell, you gave up half a decade of growth at a critical moment.

Despite holding student loans and having the least amount of faith in Social Security, workers under 40 are most optimistic, according to the survey. That’s probably because they began saving early. Among those in their 20s, 67% have begun saving—at a median age of 22. Among those in their 30s, 76% have begun saving at a median age of 25. Nearly a third are saving more than 10% of their income.

Workers in their 50s and 60s are also saving aggressively, the survey found. But they started later—at age 35. And with such a short period before retiring they are also more likely to say they will rely on Social Security and expect to work past age 65 or never stop working.

Interestingly, the younger you are the more likely you are to believe that you will need to support a family member (other than your spouse) in retirement. You are also more likely to believe you will require such financial support yourself. Some 40% of workers in their 20s expect to provide such support.

By contrast, that expectation was shared by only 34% of those in their 30s, 21% of those in their 40s, 16% of those in their 50s and 14% of those in their 60s. A similar pattern exists for those who expect to need support themselves—19% of workers in their 20s, but only 5% of those in their 60s.

Workers are also looking beyond the traditional three-legged stool of retirement security, which was based on the combination of Social Security, pension and personal savings. Those three resources are still ranked as the most important sources of retirement income, but workers now are also counting on continued employment (37%), home equity (13%), and an inheritance (11%), the survey found.

Asked how much they need save to retire comfortably, the median response was $1 million—a goal that’s out of reach for most, given current savings levels. Strikingly, though, more than half said that $1 million figure was just a guess. About a third said they’d need $2 million. Just one in 10 said they used a retirement calculator to come up with their number.

As those answers suggest, most workers (67%) say they don’t know as much as they should about investing. Indeed, only 26% have a basic understanding and 30% have no understanding of asset allocation principles—the right mix of stocks and bonds that will give you diversification across countries and industry sectors. Meanwhile, the youngest workers are the most likely to invest in conservative securities like bonds and money market accounts, even though they have the most time to ride out the bumps of the stock market and capture better long-term gains.

Across age groups, the most frequently cited retirement aspiration by a wide margin is travel, followed by spending time with family and pursuing hobbies. Among older workers, one in 10 say they love their work so much that their dream is to be able stay with it even in their retirement years. That’s twice the rate of younger workers who feel that way. Among workers of all ages, the most frequently cited fear is outliving savings, followed closely by declining health that requires expensive long-term care.

To boost your chances of retiring comfortably and achieving your goals, Transamerica suggests:

  • Start saving as early as possible and save consistently over time. Avoid taking loans and early withdrawals from retirement accounts.
  • In choosing a job, consider retirement benefits as part of total compensation.
  • Enroll in your employer-sponsored retirement plan. Take full advantage of the match and defer as much as possible.
  • Calculate retirement savings needs. Factor in living expenses, healthcare, government benefits and long-term care.
  • Make catch-up contributions to your 401(k) or IRA if you are past 50

Read next: Answer These 10 Questions to See If You’re on Track for Retirement

MONEY Social Security

This Little-Known Pension Rule May Slash Your Social Security Benefit

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If you are covered by a public sector pension, you may not get the Social Security payout you're expecting.

Some U.S. workers who have paid into the Social Security system are in for a rude awakening when the checks start coming: Their benefits could be chopped up to $413 per month.

That is the maximum potential cut for 2015 stemming from the Windfall Elimination Provision (WEP), a little-understood rule that was signed into law in 1983 to prevent double-dipping from both Social Security and public sector pensions. A sister rule called the Government Pension Offset (GPO) can result in even sharper cuts to spousal and survivor benefits.

WEP affected about 1.5 million Social Security beneficiaries in 2012, and another 568,000 were hit by the GPO, according to the U.S. Social Security Administration (SSA). Most of those affected are teachers and employees of state and local government.

These two safeguards often come as big news to retirees. Until 2005, no law required that affected employees be informed by their employers. Even now, the law only requires employers to inform new workers of the possible impact on Social Security benefits earned in other jobs.

The Social Security Administration’s statement of benefits has included a generic description of the possible impact of WEP and GPO since 2007; for workers who are affected, the statement includes a link is included to an online tool where the impact on the individual can be calculated. People who have worked only in jobs not covered by Social Security get a letter indicating that they are not eligible.

Many retirees perceive the two rules as grossly unfair. Opponents have been pushing for repeal, so far to no effect.

Why WEP?

To understand the issue, you need to understand how Social Security benefits are distributed across the wealth spectrum of wage-earners.

The program uses a progressive formula that aims to return the highest amount to the lowest-earning workers—the same idea that drives our system of income tax brackets.

It is a complex formula, but here is the upshot: Without the WEP, a worker who had just 20 years of employment covered by Social Security, rather than 30, would be in position to get a much higher return because of those brackets.

Where is the double dip? The years in a job covered by a pension instead of Social Security.

“If you had worked in non-covered employment for a significant portion of your career, there should be a shared burden between the pension you receive from that period of your employment and from Social Security in providing your benefit,” says SSA Chief Actuary Stephen C. Goss. “Just because a person worked only a portion of their career with Social Security-covered employment, they should not be benefiting by getting a higher rate of return.”

If you are already receiving a qualifying pension when you file for Social Security, then the WEP formula kicks in immediately. The SSA asks a question about non-covered pensions when you file for benefits, and it also has access to the Internal Revenue Service Form 1099-R, which shows income from pensions and other retirement income.

If your pension payments start after you file, the adjustment will occur then.

If you have 30 years of Social Security-covered employment, no WEP is applied. From 30 to 20 years, a sliding WEP scale is applied. Below 20 years, your benefit would drop even more. (For more information, click here.)

How does this affect your checks? The SSA offers this example: A person whose annual Social Security statement projects a $1,400 monthly benefit could get just $1,000, due to the WEP.

Your maximum loss is set at 50% of whatever you receive from your separate pension, so if that is relatively small, the WEP effect will be minimal.

You can still earn credits for delayed filing, and you will still get Social Security’s annual cost-of-living adjustment for inflation, but the WEP will still affect your initial benefit.

The WEP formula also affects spousal and dependent benefits during your lifetime. However, if your spouse receives a survivor benefit after your death, it is reset to the original amount.

Can you do anything to avoid getting whacked by WEP? Working longer in a Social Security-covered job before retiring might help. Remember, you are immune to the provision if you have 30 years of what Social Security defines as “substantial earnings” in covered work. That amounts to $22,050 for 2015.

So if you have 25 years, try to work another five, says Jim Blankenship, a financial planner who specializes in Social Security benefits. “That’s money in your pocket.”

Read next: The Pitfalls of Claiming Social Security in a Common-Law Marriage

Update: This story was updated to reflect that Social Security Administration gives little advance warning to beneficiaries, instead of no advance warning, and a description of Social Security benefits statements was added.

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