MONEY Savings

5 Signs You Will Become a Millionaire

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Martin Barraud—Getty Images

A million isn't what it used to be. But it's not bad, and here's how you get there.

A million bucks isn’t what it used to be. When your father, or maybe you, set that savings goal in 1980 it was like shooting for $3 million today. Still, millionaire status is nothing to sniff at—and new research suggests that a broad swath of millennials and Gen-Xers are on the right track.

The “emerging affluent” class, as defined in the latest Fidelity Millionaire Outlook study, has many of the same habits and traits as today’s millionaires and multimillionaires. You are in this class if you are 21 to 49 years of age with at least $100,000 of annual household income and $50,000 to $250,000 in investable assets. Fidelity found this group has five key points in common with today’s millionaires:

  • Lucrative career: The emerging affluent are largely pursuing careers in information technology, finance and accounting—much like many of today’s millionaires did years ago. They may be at a low level now, but they have time to climb the corporate ladder.
  • High income: The median household income of this emerging class is $125,000, more than double the median U.S. household income. That suggests they have more room to save now and are on track to earn and save even more.
  • Self-starters: Eight in 10 among the emerging affluent have built assets on their own, or added to those they inherited, which is also true of millionaires and multimillionaires.
  • Long-term focus: Three in four among the emerging affluent have a long-term approach to investments. Like the more established wealthy, this group stays with its investment regimen through all markets rather than try to time the market for short-term gains.
  • Appropriate aggressiveness: Similar to multimillionaires, the emerging affluent display a willingness to invest in riskier, high-growth assets for superior long-term returns.

Becoming a millionaire shouldn’t be difficult for millennials. All it takes is discipline and an early start. If you begin with $10,000 at age 25 and save $5,500 a year in an IRA that grows 6% a year, you will have $1 million at age 65. If you save in a 401(k) plan that matches half your contributions, you’ll amass nearly $1.5 million. That’s with no inheritance or other savings. Such sums may sound big to a young adult making little money. But if they save just $3,000 a year for seven years and then boost it to $7,500 a year, they will reach $1 million by age 65.

An emerging affluent who already has up to $250,000 and a big income can do this without breaking a sweat. They should be shooting far higher—to at least $3 million by 2050, just to keep pace with what $1 million buys today (assuming 3% annual inflation). But they will need $6 million in 2050 to have the purchasing power of $1 million back in 1980, when your father could rightly claim that a million dollars would make him rich.

Read next: What’s Your Best Path to $1 Million?

MONEY Longevity

The New Rules for Making Your Money Last in Retirement

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Murat Giray/Getty Images

In today's longevity economy, retirement as we know it is disappearing. Here's what to do now.

Are you ready to live to age 95—or beyond?

It’s a real possibility. For an upper-middle-class couple age 65 today, there’s a 43% chance that one or both will reach at least age 95, according to the latest data from the Society of Actuaries.

Living longer is a good thing, of course. But there’s a downside—increasing longevity may mean the end of retirement as we know it.

Problem is, a long lifetime in retirement is a huge financial challenge. As Laura Carstensen, head of Stanford Center on Longevity, said in a recent presentation, “Most people can’t save enough in 40 years of working to support themselves for 30 or more years of not working. Nor can society provide enough in terms of pensions to support nonworking people that long.” Instead, Carstensen argues, we need to move toward a longer, more flexible working life.

Carstensen is hardly alone here. Alicia Munnell, head of the Center for Retirement Research at Boston College and a co-author of “Falling Short: The Coming Retirement Crisis and What to Do About It”, has long warned about the nation’s lack of retirement preparedness. Following the Great Recession, Munnell has pounded away at the reality that continuing to work is the only feasible strategy for many people if they wish to have any hope of affording even modestly comfortable retirements.

For many retiring Baby Boomers, the notion of working longer has appeal—not only for the additional income but as a way of staying involved and giving back. That’s what spurred Marc Freedman, founder of Encore.org, to encourage older workers to use their skills for social purpose. Chris Farrell, a Money contributor, captures this movement in his recent book, “Unretirement: How Baby Boomers are Changing the Way We Think About Work, Community, and the Good Life.”

Still, to afford a longer life, Americans will have to rethink their savings and withdrawal methods too. Right now, most retirement calculators default to no more than a 30-year time horizon. What if you want to keep your retirement income going past age 95? Fidelity’s planners suggest three alternatives that can help:

*Stay on the job longer. Say you are a 65-year old woman who earned $100,000 a year, and you have a $1 million portfolio. You’ll also receive a $30,000 Social Security benefit ($2,500 a month) and you plan to withdraw an initial $50,000 a year from your portfolio. All told, you’ll have $80,000, or 80% of your pre-retirement income. If inflation averages 2%, and the portfolio grows by 4%, your savings will likely last for 25 years, or until age 90. After that, odds are the money will run out.

But if you instead work four more years, until age 69, and keep saving 15% of your income, your portfolio will grow to $1,240,000. That would be enough to provide income for eight more years—until age 98.

*Postpone Social Security. Another move is to work two more years and defer claiming Social Security till age 67, which means your monthly benefit will rise from $2,500 to $2,850. That would replace 35% of her income, instead of 30%, and her portfolio would need replace just 45% of your pre-retirement earnings vs 50%. By age 67, your portfolio will total $1,110,000, which will deliver retirement income till age 98.

*Consider an annuity. You could purchase an immediate annuity, which would give you a lifetime stream of income. The trade-off, of course, is that your money is locked up and payments will cease when you die (unless you add a joint-and-survivor option, which would reduce your payout). Many advisers suggest using only a portion of your portfolio to buy an annuity—you might aim to cover your essential expenses with a guaranteed income stream, which would include Social Security.

A 65-year-old woman who invested $200,000 in an immediate annuity with a 2% annual inflation adjustment would receive guaranteed monthly payments of about $870 a month, or $10,440 a year, according to Income Solutions. Added to Social Security, this income would replace roughly 40% of a $100,000 salary, which will allow the rest of the portfolio to keep growing longer.

But make no mistake. This is a big decision, and many investment experts oppose locking up money in an annuity, given today’s low interest rates. But longevity investing raises the appeal of guaranteed streams of income, and annuity payouts will become more attractive if and when interest rates slowly rise toward historical norms.

Philip Moeller is an expert on retirement, aging, and health. He is the co-author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: The Suddenly Hot Job Market for Workers Over 50

MONEY retirement planning

How to Balance Spending and Safety in Retirement

piggy banks shot in an aerial view with "+" and "-" slots on top of them
Roberto A. Sanchez—Getty Images

Every retirement withdrawal method has its pros and cons. Understanding the differences will help you tap your assets in the way that's best for you.

You’ve saved for years. You’ve built a sizable nest egg. And, finally, you’ve retired. Now, how do you withdraw from your savings so your money lasts as long as you do? Is there a technique, a procedure, a product that will keep you safe?

Unfortunately, there is no perfect answer to this question. Every available solution has its strengths and its weaknesses. Only by understanding the possible approaches, then mixing them together into a personal solution, will you be able to move forward with an enjoyable retirement that balances both spending and safety.

Let’s start with one of the simplest and most popular withdrawal approaches: spending a fixed amount from your portfolio annually. Typically this is adjusted for inflation, so the nominal amount grows over time but sustains the same lifestyle from year to year. If the amount you start with, in year one of your retirement, is 4% of your portfolio, then this is the classic 4% rule.

The advantages of this withdrawal method are that it is relatively simple to implement, and it has been researched extensively. Statistics for the survival probabilities of your portfolio, given a certain time span and asset allocation, are readily available. This strategy seems reliable—you know exactly how much you can spend each year. Until your money runs out. Studies based on historical data show your savings might last for 30 years. But history may not repeat. And fixed withdrawals are inflexible; what if your spending needs change from year to year?

Instead, you could withdraw a fixed percentage of your portfolio annually, say 5%. This is often called an “endowment” approach. The advantage of this is that it automatically builds some flexibility into your withdrawals based on market performance. If the market goes up, your fixed percentage will be a larger sum. If the market goes down, it will be smaller. Even better, you will never run out of money! Because you are withdrawing only a percent of your portfolio, it can never be wiped out. But it could get very small! And your available income will fluctuate, perhaps dramatically, from year to year.

Another approach to variable withdrawals is to base the amount on your life expectancy. (One source for this data is the IRS RMD tables.) Each year you could withdraw the inverse of your life expectancy in years. So if your life expectancy is 30 years, you’d withdraw 1/30, or about 3.3%, in the current year. You will never run out of money, but, again, there is no guarantee exactly how much money you’ll have in your final years. It’s possible you’ll wind up with smaller withdrawals in early retirement and larger withdrawals later, when you aren’t as able to enjoy them.

What if you want more certainty? Annuities appear to solve most of the problems with fixed or variable withdrawals. With an annuity, you give an insurance company some or all of your assets, and, in exchange, they pay you a monthly amount for life. Assuming the company stays solvent, this eliminates the possibility of outliving your assets.

Annuities are good for consistent income. But that’s also their chief drawback: they’re inflexible. If you die early, you will leave a lot of money on the table. If you have an emergency and need a lump sum, you probably can’t get it. Finally, many annuities are not adjusted for inflation. Those that are tend to be very expensive. And inflation can be a large variable over long time spans.

What about income for early retirement? It’s unwise to draw down your assets in the beginning years, when there are decades of uncertainty looming ahead. The goal should be to preserve net worth until you are farther down the road. If your assets are large enough, or the markets are strong enough, you can live off the annual interest, dividends, and growth. If not, you may need to work part-time, supplementing your investment income.

Every retirement withdrawal technique has drawbacks. Some require active management. Some can run out of money. Some don’t maintain your lifestyle. Some can’t handle emergency expenses or preserve principal for heirs. Some may be eroded by inflation.

That’s why I believe most of us are going to construct a flexible, “hybrid” system for living off our assets in retirement. We’ll pick and choose from the available options, combining the benefits, while trying to minimize the liabilities and preserve our flexibility.

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com.

For more help calculating your needs in retirement:
The One Retirement Question You Must Get Right
How to Figure Out Your Real Cost of Living in Retirement
4 Secrets of Financial Freedom

MONEY Social Security

Why We Make Irrational Decisions About Social Security Benefits

piggy bank and hourglass
iStock

Everyone tends to over-weigh a sure gain compared with a slightly riskier gain, even if the expected value of the certain gain is lower.

Financial professionals often recommend that you wait until full retirement or even later before applying for social security benefits. An individual who’d receive $1,000 per month at full retirement age would get a mere $750 by claiming early at age 62. And that same person could get as much as $1,320 per month by waiting until age 70. For many Americans, it appears to make a lot of sense to wait.

As a general rule of thumb, if you expect to live beyond your late 70s, waiting until at least full retirement might be the smart choice. According to the Social Security Administration, a man reaching 65 today can expect to live until 84.3. And a woman turning 65 can expect to live until age 86.6. Given that one out of every four 65-year olds today lives past age 90, you’d assume that most folks would hang on until full retirement before applying for benefits.

That assumption would be wrong, however. In practice, many Americans seem to be ignoring the data. According to The New York Times, 41% of men and 46% of women choose to take their benefits at 62 — the earliest age possible. Why aren’t they listening to the experts?

Your Social Security and your brain

Obviously, there are some very rational reasons for claiming your benefits at 62. For example, you might have some serious health concerns. Or you may just really need the money. Sometimes real life is more complicated than insurance data and actuarial tables.

There might be another powerful reason that people aren’t even aware of, however. According to psychological research, we are all hardwired to lock in certain gains, even if such a decision has a lower expected value. In other words, our psychology could be leading us to make suboptimal financial choices when it comes to social security.

The price of certainty

The underlying principle involved here, which was highlighted in the work of Daniel Kahneman and Amos Tversky, is called the “certainty effect.” This idea is actually quite easy to understand. Essentially, everyone tends to over-weigh a sure gain compared with a slightly riskier gain, even if the expected value of the certain gain is lower.

Here’s an illustration of how it works. Suppose there are two options. Option 1 gives you a chance to win $9,500 with 100% certainty. Option 2, on the other hand, provides you with the opportunity to win $10,000 with 97% certainty, though there’s a 3% chance you will win nothing.

Even though the expected value of Option 2 is higher ($9,700 compared to $9,500), the “certainty effect” would predict that more individuals would choose Option 1 than Option 2. According to Kahneman:

People are averse to risk when they consider prospects with a substantial chance to achieve a large gain. They are willing to accept less than the expected value of a gamble to lock in a sure gain.

A team of academics recently tested this theory, and reported their findings in a paper titled “Risk preferences and aging: The ‘Certainty Effect’ in older adults’ decision making“. They discovered that “older adults were more likely than younger adults to select the sure-thing option when it was available — even if it had a lower expect value.” In other words, they not only found evidence supporting the “certainty effect,” they found that older adults were moresusceptible to it than younger ones. The overall conclusion of the study is very instructive:

… [W]hen it comes to the important decision whether to claim social security benefits at the earliest retirement age (i.e., 62 years old) and receive a sure but lower-dollar payout (i.e., up to 20% less) versus a higher-dollar payout a few years later at full (between 65–67 years old) or after full retirement age (at 70 years age at the latest, with a benefit increase between 4% and 8% for each year after full retirement age until age 70) at the risk of not being alive, older adults might sub-optimally go for the sure payout at the earliest possible age rather than delaying their retirement benefits; thus, permanently reducing their benefits.

Clearly, our instincts can inadvertently lead us astray on financial matters. As Jason Zweig notes in his classic book Your Money and Your Brain, “[I]nvestors habitually are their own worst enemies, even when they know better.” When deciding when to apply for social security benefits, it might be wise to remember how our brains are wired. Otherwise, you could be leaving a lot of money on the table.

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MONEY retirement income

Forget About Retirement Planning for Millennials

piggy bank with locks for earrings
YAY Media AS—Alamy

The goal of achieving financial independence is more appealing than the idea of saving for a retirement that's decades away.

When it comes to millennials and money, many financial planners are focusing on the wrong issue.

The retirement advice most financial professionals provide was designed for Baby Boomers. Gen Y’s situation, however, looks nothing like this 30-year-old norm.

Few members of Gen Y get excited about the idea of working for the next 40 to 50 years, doing all the heavy lifting when it comes to ensuring they’ll have enough savings for the future, and then retiring to a life of no work and no purpose shortly before expiring.

Yet traditional retirement planning asks people to do just that. This doesn’t make sense for millennials — but that doesn’t mean they should throw their financial security to the wind and have no plan at all, either.

Instead, we planners should shift the focus from the nebulous concept of “retirement” to something concrete and accessible. It should be something that millennials can take real action to achieve in the short-term, not something that won’t matter for 40 years.

We should focus on preparing Gen Y for financial independence.

What Is Financial Independence?

Financial independence refers to a situation where an individual can generate enough income to pay all expenses for the rest of his or her life. Typically, that refers to passive income that comes from savings and investments, but it might also come from a side business, real estate assets, or royalties from past work.

Financial independence frees individuals from the obligation to work a particular job in order to secure a specific paycheck. It’s possible when you’re in your 20s to start building the income streams that will meet your needs for life and help you reach independence. Creating a side job that earns $500 a month today could build to provide $1,000 a month in a few years and $2,000 a month in five or 10 years.

Don’t believe it? You must not get around the blogosphere much.

Financial bloggers — not advisers or planners — have been championing this concept for years. The idea of financial independence is gaining traction thanks to bloggers popularizing it — and succeeding at it themselves.

One example: Mr. Money Mustache, a financial blog run by a man who reached financial independence in his 30s. By investing 50% to 75% of his income during his working career in his 20s and early 30s, he reached financial independence before 40.

Other bloggers have reached financial independence by building and selling a business or investing in multiple real estate properties that generate monthly income.

But the most popular way is probably the most accessible: save huge percentages of income. Bloggers, even the ones not as Internet-famous as Mr. Money Mustache, frequently report saving anywhere between 30% and 70% or more of their income. The majority of this group then invests that money in inexpensive, passively-managed index funds.

They don’t need $1 million to $3 million in the bank when they’re 63 years old. Instead, they may need to reach an investment goal of $250,000 or $500,000 in assets before they can start withdrawing 3-4%, because along with other income streams this is enough to cover their expenses each year for life.

Why Financial Independence Is the Financial Planning Answer for Gen Y

Financial independence makes sense for Gen Y because it’s more realistic, and it’s something that people don’t have to wait until they’re 60 or 70 years old to achieve.

Building income streams allows individuals to achieve financial independence within years, if those income streams are sound and stable. Even working toward financial independence via saving and investing can be accomplished in a fraction of the time it normally takes people to achieve retirement goals. Invest 50% of your income, for example, and you’ll reach financial independence in 17 years; save 75% and you’ll be there in 7 years.

And financial independence allows you to experience the kind of freedom that “retirement” does not. Free from the obligation of working a job because it’s necessary to pay bills allows financially independent people to explore new work, projects, businesses, and opportunities. It enables individuals to try new hobbies or go new places that old age and ill health may eliminate in traditional retirement after a decades-long working career.

We shouldn’t focus on traditional retirement planning for millennials. Instead, let’s give them the tools and knowledge they need to reach financial independence.

———-

Alan Moore, CFP, is the co-founder of the XY Planning Network, where he helps advisers create fee-only financial planning firms that specialize in working with Generation X & Generation Y clients.

MONEY retirement income

Simple Steps to Avoid Outliving Your Money in Retirement

Nearly all workers say guaranteed lifetime income is important in retirement. Yet few are doing anything about it.

The slow switch from defined-benefit to defined-contribution retirement plans has been under way for three decades. But only now are workers starting to fully appreciate the impact.

The vast majority of Americans say that having a guaranteed monthly check for the rest of their lives is important, according to a TIAA-CREF lifetime income survey. Nearly half say securing enough guaranteed income to cover monthly expenses should be the top goal of their retirement plan.

Just a year ago, only one third believed guaranteed income should be their top priority. Meanwhile, more Americans now say they would accept bigger risks and smaller returns in exchange for guaranteed income, the survey found.

Few saw this coming in the 1980s, when companies began to abandon their traditional pensions in favor of 401(k) savings plans. The thought was that the 401(k) would complement the guaranteed income from a traditional pension—not supplant it. Today the only guaranteed income most Americans will enjoy in retirement comes from Social Security. Meanwhile, the majority of workers keep the bulk of their liquid savings in a 401(k) plan. And they must manage those distributions throughout retirement, while trying not to run out of money before they pass away.

This new reality is just now hitting a generation that figured their 401(k) plan would grow so big that making the money last in retirement would be fairly simple. But for most it didn’t work out that way—and now they are searching for answers. Guaranteed lifetime income, once a staple of old age for many Americans, has become an elusive grail.

One big problem is that workers typically do not understand how to convert savings into a lifetime stream of income, and they generally do not trust the annuity products available to them. While 84% say lifetime income is important only 14% have bought an annuity, TIAA-CREF found. Fixed annuities through a high-quality insurance company are among the simplest ways to purchase guaranteed lifetime income.

With this gap in mind, policymakers and employers have been taking steps to make it easier and more palatable for 401(k) plan participants to convert some or all of their plan assets to an income stream. Yet 44% of Americans have no idea if their plan offers a lifetime income option. Some 62% have never tried to calculate lifetime income from their current level of savings.

Fortunately, it’s getting easier to figure out the amount of income your 401(k) is likely to provide. For starters, check with your benefits department and ask if your employer has, or is considering, an option that will convert savings into a lifetime annuity. If so, and you’re close to retirement, you can get an estimate of the amount of income it may provide.

There are also online tools for do-it-yourself annuity shoppers.You can get quotes for immediate and deferred annuities at immediateannuites.com. And for pre-retirees, you can get an idea of how far your savings will go by plugging in your age and savings on BlackRock’s CoRi calculator. Currently, BlackRock estimates that a 58-year-old with $1 million in savings and who retires at 65 will be able to purchase $51,600 of annual guaranteed lifetime income.

Annuities come in many varieties—and some have a checkered past, while others may be linked to high fees and hard sales pitches. But immediate and deferred fixed annuities are fairly straightforward and offer the most direct way to secure lifetime income. Typically advisers recommend that you put only a portion of your income into one. (For more on annuities, click here.)

If an annuity sounds right for you, consider moving slowly. If interest rates move up the second half of the year, as many expect, you’ll get more income for your dollars by waiting.

Read next: The Right Way to Tap Income in Retirement

MONEY bonds

This Guy Knows the Secret to Beating Low Interest Rates

Jeffrey Gundlach, star bond investor and head of DoubleLine Capital
Brendan McDermid—Reuters Jeffrey Gundlach, star bond investor and head of DoubleLine Capital

Jeffrey Gundlach, the 'new bond king,' is standing against the crowd—and so far this year, he's been spot on.

In the early days of 2015, few people have been more alone—and right—about bonds than Jeffrey Gundlach. That doesn’t mean the whole year will go his way. But fixed-income investors should probably lend an ear to his contrarian view.

Gundlach is the founder and chief investment officer of DoubleLine Capital. Forbes recently crowned him “the new bond king” for his ability to stand against the crowd and rack up big gains. Gundlach was betting on lower rates in 2011 when reigning bond king Bill Gross was betting the other way. Gundlach proved right. Gross was later forced out at PIMCO, the giant asset manager he had founded—and a new king ascended the throne.

Today, Gundlach is at it again. While almost all of Wall Street has been forecasting higher bond yields, he has been predicting another year of falling yields and solid returns. Economists generally expect the 10-year Treasury bond yield to rise to 2.5% to 3%, from about 1.7% now. Gundlach believes we’re headed below (maybe well below) the record low yield of 1.38%, giving bondholders another year of returns in excess of the interest payments they collect.

Why should you listen? Just a month ago the T-bond yield stood at 2.2%, and most economists were forecasting a rise to 3.25% or higher. So while Gundlach has been on target, racking up gains, others have been scrambling to adjust.

Interest rates have been falling pretty much nonstop since 1981, when Justin Timberlake was a newborn and Blondie was a hit maker. They will reverse at some point, and with the Fed signaling its first short-term funds hike since the recession (after midyear) a lot of pros figured this would be the year. That may yet prove to be the case—and if it is, investing for income will turn out to be a dangerous game.

Bond prices fall when yields rise. In normal times, an orderly decline in bond prices isn’t such a big deal. But with yields so low there isn’t a lot of cushion. Even a modest decline in prices would overwhelm the income from a bond yielding less than 2%. In recent years, income investors have flocked to riskier but higher yielding junk bonds and bond substitutes like real estate investment trusts, master limited partnerships and preferred shares. All of those now look priced for low returns this year—and if yields move higher losses are not out of the question.

For that reason, most experts say income investors should be diligent about diversification and stick with the highest quality credit. They advise staying away from long-term bonds, which are most sensitive to swings in interest rates. Bonds that mature in about five years appear to be the sweet spot. A fund like Vanguard Total Bond Market would help with this approach with a 2.5% yield, high-quality holdings, and an average maturity of 5.6 years. Another widely advised approach is dividend-paying stocks through an ETF like iShares Select Dividend. You can collect around 3% in income and, with the economy looking healthy, could see share prices move up as well.

If Gundlach is right, though, you may do better in long-term bonds, REITs that do not own shopping malls, and maybe even junk bonds. His contrarian view is largely based on weak oil prices, which tamp down inflation worries, and on slowing economies and ultra-low bond yields overseas, which make the T-bond yield look fat. A strong dollar helps his case.

A year ago, Gundlach correctly predicted falling yields, weakness in junk bonds, and the end of the Fed’s bond-buying program. So far this year, he’s been right on rates again. So maybe the bond market isn’t as dangerous as it seems, and income investors can eke out another good year.

MONEY Ask the Expert

How To Tame The Unexpected Costs of Medicare

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

Q: I got my annual notice from Social Security this week for 2015 and was surprised to find out that the Medicare premiums for me and my wife were going up for this year because of the amount of money I made in 2013. I did not know Medicare premiums were adjusted based on income. I am 71. Is there anything I can do? – Norman Medlen

A: You won’t be able to change your premiums for this year, but there are moves that can help lower your future costs.

First, though, realize that your confusion is understandable. Many people don’t know that Medicare premiums are calculated based on income, says Nicole Duritz, vice president of Health and Family Education and Outreach for AARP. Some people even believe that Medicare, which most Americans are eligible to receive when they turn 65, is completely free. It’s true that most people don’t pay for Medicare Part A, which covers hospitalization, but that’s because they have contributed to Medicare throughout their careers through payroll taxes.

But your income determines how much you pay for Medicare Part B, which covers routine medical care, including doctor visits and outpatient services, such as physical therapy and X-rays. Under the rules, your income can include a salary from working, as well as proceeds from the sale of a house or withdrawals from a portfolio.

Granted, the income thresholds are relatively high. If an individual earns $85,000 or less, or a married couple earns $170,000 or less, the premium is $104.90 a month. People earning more than $85,000, or a couple earning more than $170,000, will pay $146.90 to $335.70 a month depending on their income. Only an estimated 5% of Medicare recipients pay more than the basic $104.90 level. The premiums are deducted from your Social Security check.

Premiums for Medicare Part D, which is for prescription drug coverage, are also income-based, which add anywhere from $12.30 to $70.80 a month to the premiums charged by the plan you select.

Still, there’s good news: your premiums are re-evaluated each year based on your most recent tax return. So if the money you received was a one-time windfall, your premiums will drop back down the following year.

To make sure your premiums stay affordable, do some advance planning, says Rich Paul, president of investment advisory firm Richard W. Paul and Associates. That’s especially true if you think you may have more windfalls ahead. “It’s not just your Medicare premiums that will go up—the additional income may bump you into a higher tax bracket and your income taxes will go up too,” says Paul.

For example, if you are converting a traditional IRA to a Roth, consider spreading the amounts over several years. That way, you won’t have a large one-time jump in your income. Or make a large charitable contribution at the same time as you convert, since the deduction will offset some of your tax bill.

In addition to the premiums, the size of Medicare’s out-of-pocket costs surprises many people, says Duritz. Medicare Part B covers roughly about 80% of your medical bills, but you have to pay the other 20%, including deductibles, co-insurance and co-pays. And unlike many employer plans, Medicare doesn’t cover some major medical expenses, including glasses and dental work.

To cover those gaps, many people opt for a Medicare supplemental plan or Medicare Advantage. How much you pay depends on where you live and the status of your health, in addition to your income. “If you’re healthy, you won’t incur the same costs as someone with a chronic condition because you don’t need as much care or medication,” says Duritz.

Fortunately, there are a number of ways you can lower costs. She suggests getting regular health screenings to catch any problems early, exercising and maintaining healthy weight. If you are on medications, talk to your doctor about lower-cost options. “It doesn’t have to be a generic—it could just be an older brand name,” says Duritz. “We have had people cut their prescription drug costs by $1,000 or more using alternative medications.”

It’s also important to reevaluate your Medicare plans during annual open enrollment, which runs from October 15th to December 7th. Plans and costs change every year—and your medical needs may change too.

For help finding the best options, try AARP’s “doughnut hole” calculator—named for the gap in prescription drug coverage under Medicare Part D—to find suggested drug alternatives to discuss with your doctor. AARP’s Medicare Health Care Cost calculator will estimate your overall Medicare costs and suggest ways to minimize your spending. And AARP’s Question and Answer tool walks you through all the costs of Medicare and how it works. With this information, you’ll have a better idea of the costs to expect from Medicare.

More on Medicare from Money’s Ultimate Retirement Guide:

What is Medicare?

What is Medigap insurance?

How do I select a Medigap policy?

Read next: So You’re Retired! Now What?

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MONEY Social Security

Why You Should Celebrate Social Security’s 75th Anniversary

In this Oct. 4, 1950 file photo, Ida May Fuller, 76, displays a Social Security check for $41.30 that she received at her home in Ludlow Vt. On Jan. 31, 1940, Fuller received the country's first Social Security check for $22.54. By the time she died in 1975 at age 100, she had received nearly $23,000 in benefits.
AES—AP In this Oct. 4, 1950 photo, Ida May Fuller, 76, displays a Social Security check for $41.30 that she received at her home in Ludlow Vt. On Jan. 31, 1940, Fuller received the country's first Social Security check for $22.54. By the time she died in 1975 at age 100, she had received nearly $23,000 in benefits.

Social Security has been under almost constant attack since day one. But in the 75 years since its first benefit checks went out, the program has transformed retirement.

Surely, Social Security is important enough to merit multiple anniversaries.

So it is that over the weekend we celebrated 75 years of monthly benefit checks. The agency sent its very first on January 31, 1940, to one Ida May Fuller in the amount of $22.54. (That’s $372.81 in 2014 dollars for members of the Good Old Days Club.)

Aficionados may recall that Social Security’s formal 75th anniversary was held five years ago to mark enactment of the program in 1935, during the first of Franklin Delano Roosevelt’s unprecedented four presidential terms.

And some sticklers out there might note that you already missed the chance to raise a glass with me in January 2012. That was 75 years after the agency’s first lump-sum payment, made to a Cleveland streetcar worker named Ernest Ackerman.

The 17¢ Ackerman received isn’t much even by today’s inflated standards, but it represented a most impressive return. Ackerman, as it happened, retired one day after Social Security began and had a nickel withheld from his check. His payment less than two years later represented a return of 240%. That was a real 17¢ too, since benefits weren’t taxed back then.

Controversial From the Start

Whether we’re tooting the horn for Social Security’s 75th, 77th, or 80th anniversary, it’s worth noting that these are hard-won celebrations—the program has pretty much been under attack the entire time.

When he first proposed Social Security, FDR received blistering critiques from political and social-policy scolds, who denounced what they saw as redistribution of wealth and the creation of a large bureaucracy. The biggest threat may have been posed by Louisiana Senator Huey Long, known as The Kingfish, who was campaigning for the White House on his own populist plan. Long held up Senate funding for the new program for seven months, but before his attacks could derail Social Security, he was assassinated.

Fast-forward to today, and the battle continues. The program’s disability trust fund is projected to run out of reserves next year. Once the Republicans assumed control of the House of Representatives this year, they wasted little time in approving a measure trying to put Social Security reform back on the table as a precondition to shoring up program funding. This has placed the incomes of millions of disabled Americans at risk in another Washington game of political chicken.

In 2010, President Obama compared attacks on Social Security to those aimed at his signature health care law, the Affordable Care Act. Obamacare has been the subject of one major U.S. Supreme Court decision, and there’s another significant ruling scheduled soon. Three lawsuits about Social Security managed to reach the high court, and the constitutionality of Social Security was not decided until May 24, 1937. So we can look forward to popping the cork on the 80th anniversary of that milestone.

Meanwhile, the Social Security Administration continues to do what it does best—spend enormous amounts of money on a program that now far exceeds the dreams of its creators. Today the agency collects payroll taxes from 210 million workers. It pays out well north of $800 billion in annual benefits to some 60 million retired and disabled beneficiaries. And it remains a financial lifeline to older Americans, providing 90% or more of the income of 22% of elderly couples and 47% of elderly singles.

An Expanding Program

Along the way, Social Security has changed greatly since it first began. (To document its evolution, the agency even has a website with its official history, as well as an official historian and a dedicated web page saluting past occupants of the job.)

In 1939, moving beyond its initial focus on workers’ retirements, the program began making payments to their spouses, children, and survivors. The monthly payment of benefits began in 1940 (let’s have another tip of the hat to Ida May). A major boost in benefits was approved in 1950 and again in 1952, and disability benefits were added in subsequent years. In 1962 the age of early retirement was lowered to 62.

One of the biggest changes was the creation of Medicare in 1965, which Social Security was made responsible for administering. In the early 1970s, the agency took over another new program called Supplemental Security Income, providing benefits to qualifying low-income persons, which has since become enormous in its own right.

Annual cost-of-living adjustments, or COLAs, were added in 1972 and have had an enormous effect helping retirees maintain their standard of living. Recent proposals to change the way the COLA is calculated have triggered a new wave of attacks, with some critics claiming seniors deserve more protection and others saying the current formula is too generous.

Amendments to shore up Social Security’s financing were enacted in 1977 and, on a larger scale, in 1983. That last reform established today’s current rules for retirement ages and the start of federal taxation of Social Security benefits.

In 2000, the Retirement Earnings Test was changed so that people who reached retirement age would no longer see benefits reduced if their work wages exceeded certain levels. “This was a historic change in the Social Security retirement program,” the Social Security website states. “From the beginning of Social Security in 1935, retirement benefits have been conditional on the requirement that the beneficiary be substantially retired.”

Given today’s contentious mood in Congress, the 2000 amendments may have been historic for another reason: They passed without a single dissenting vote in either house of Congress.

America’s Gatekeeper

Finally, beyond its importance in providing retirement benefits, Social Security’s greatest impact has evolved through its role as the near-official gatekeeper of human arrivals and departures—and many of the life milestones along the way.

Is there a parent or grandparent who has not at some point sought inspiration or validation in the agency’s annual list of most popular baby names, which goes all the way back to 1880?

Occupying the less-popular departure lounge is the ominously titled Social Security Death Index, which keeps records of people with Social Security numbers who have passed on. Now approaching 100 million names, the database is widely used by genealogical websites. (The SSA itself does not offer it to the public.) Social Security data is also relied on by researchers analyzing trends in marriage, income and longevity.

Since those first checks to Ida May Fuller, Social Security has become an essential safety net and an important resource for all Americans. And for all its flaws, millions of elderly and disabled Americans depend on it. Younger workers should be able to trust that Social Security will be there for them as well. That’s the message that Congress should take to heart on this anniversary.

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

Read next: How Social Security Calculates Your Benefits

MONEY retirement planning

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

two gold eggs
GP Kidd—Getty Images

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

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

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

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

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

The Drag of Taxes

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

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

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

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

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

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

Check Your Time Horizon

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

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

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

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

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

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

Diversify, Tax-wise

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

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

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

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

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

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

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