MONEY retirement planning

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

Crystal ball predictions
Len DeLessio—Getty Images

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

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

The short answer is no.

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

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

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

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

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

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

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

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

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

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MONEY retirement planning

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

rhinestone studded piggy bank
Robert George Young—Getty Images

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

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

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

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

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

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

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

MONEY 401(k)s

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

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

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

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

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

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

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

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

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

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

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

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

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

 

MONEY Social Security

The Hidden Pitfalls of Collecting Social Security Benefits from Your Ex

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

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

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

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

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

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

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

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

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

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

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

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

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

MONEY 401(k)s

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

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

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

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

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

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

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

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

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

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

How should I invest in my 401(k)?

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

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

MONEY Social Security

This Letter Can Be Worth $1 Million

envelope with $100 bills
Steven Puetzer—Getty Images

Paper Social Security statements are back. Here’s how to use that information to plan smarter.

This fall the Social Security Administration began mailing out benefit statements for the first time since 2011. It’s crucial information, especially if you’re poised to move to your beach condo in Boca soon. “For many upper-middle-class couples, those benefits can be worth as much as $1 million over the course of your retirement,” says Chris Jones, chief investment officer of 401(k) adviser Financial Engines.

To save money, Social Security had been directing people to its website for benefits information. After a backlash, the agency resumed mailings to most workers reaching landmark birthdays—ages 40, 45, and so on. Of course, you don’t need to wait for a paper statement to find out how your benefit stacks up. For an estimate, simply sign up online.

YOURThat’s well worth doing if you’re within a few years of retirement. Your future Social Security income is key to determining if your financial strategy is on track. Then take these steps.

Proofread it. Make sure your earnings history is accurate. “If Social Security doesn’t have an earnings record for a particular year, there will be a zero, which may reduce your benefit,” says Boston University economics professor Laurence Kotlikoff, who heads MaximizeMySocialSecurity.com, an online benefits calculator.

Set your target. Your statement will have the income you can expect at three different retirement ages, assuming you keep working at your current salary. But you have far more options for when to start collecting benefits. If you are single, have never married, and don’t plan to work in retirement, your choice will be straightforward most of the time. Your main decision is whether to delay filing, which will boost your benefit by 6% to 8% a year up until the maximum at age 70. Financial Engines and AARP have free online tools that let you compare your annual and lifetime benefits based on the age you claim.

Plot the best strategy. If you’ve ever been married, your choices are more complex. “Your claiming strategy can be the biggest retirement decision you’ll make,” says Jones. Coordinating benefits with your spouse the right way can add as much as $250,000 to your lifetime Social Security income, according to Financial Engines. That’s why you may want to pay for a calculator that allows you to add more variables, such as working in retirement or a wide age gap in your marriage. MaximizeMySocialSecurity.com ($40) and SocialSecuritySolutions.com (starts at $20) both do that.

Get a reality check. Once you have a rough idea of your future benefit, plug that number into a retirement-income calculator, such as the tool at T. Rowe Price. You’ll see if your payouts, plus your portfolio withdrawals, are enough to ensure a comfortable retirement. If not, use the tool to see how saving more or working longer can help, or consult an adviser. Given the dollars at stake, devising a smart Social Security strategy can be well worth a fee.

MONEY retirement income

The Search for Income in Retirement

Why we may be focusing too much on our nest egg and not enough on cash flow.

There are three components to retirement planning: accumulation, investment, and managing for income. And while we are usually more fixated on “the number” on our balance sheet, the bigger challenge is ensuring that a retirement portfolio can generate enough steady money as we live out our days.

In a recent academic panel hosted by the Defined Contribution Institutional Investment Association (DCIIA), professors Michael Finke of Texas Tech and Stephen Zeldes of Columbia University illustrated the challenge of getting into an income mindset by discussing what’s known as the “annuity puzzle.”

If people were to take their 401(k)s and convert them into annuities, they would get a lifetime income stream. And yet very few people actually annuitize, in part because they don’t want to lose control over their hard-earned savings. “Getting people to start thinking about their retirement in an income stream instead of a lump sum is a big problem,” Finke told the audience.

Also at play is the phenomenon of present bias, whereby half a million dollars today sounds a lot better than, say, $2,500 a month for the rest of your life. This is a major knowledge gap that needs to be addressed. A new survey of more than 1,000 Americans aged 60-75 with at least $100,000 conducted for the American College of Financial Services found that of all of the issues of financial literacy, respondents were least informed about how to use annuities as an income strategy. When asked to choose between taking an annuity over a lump sum from a defined benefit plan in order to meet basic living expenses, less than half agreed that the annuity was the better choice.

Granted, annuities are complicated products. In the past, they got a bad rap for not having death benefits and otherwise misleading investors, but the industry has evolved, and there are now so many different options that it would be quite an undertaking to wade through and understand them all. And annuities aren’t the only way to generate income. Another option people might want to consider is a real estate investment that can throw off consistent revenues from rent. The point is to start thinking more not just about accumulating money but about how you can make that money work for you by turning it into an income-producing asset.

In the meantime, academics like Zeldes are working on how to make annuitization more appealing. In a paper published in the Journal of Public Economics in August 2014, Zeldes and colleagues suggest that people are more likely to annuitize if they can do so with only part of their nest egg, and even a partial annuity can be better than no annuity at all. Zeldes also found that people prefer an extra “bonus” payment during one month of the year, which means that they essentially want their annuity to seem less annuity-like. I’m all for product innovation, but in this case I think we’d be better off learning the value of a steady stream—especially over a fake “bonus.”

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

Read more about annuities in the Ultimate Retirement Guide:
What is an immediate annuity?
What is a longevity annuity?
How do I know if buying an annuity is right for me?

MONEY retirement income

The Powerful (and Expensive) Allure of Guaranteed Retirement Income

141203_RET_Guaranteed
D. Hurst—Alamy

Workers may never regain their appetite for measured risk in the wake of the Great Recession, new research shows.

People have always loved a sure thing. But certainty has commanded a higher premium since the Great Recession. Five years into a recovery—and with stocks having tripled from the bottom—workers overwhelmingly say they prefer investments with a guarantee to those with higher growth potential and the possibility of losing value, new research shows.

Such is the lasting impact of a dramatic market downdraft. The S&P 500 plunged 53% in 2007-2009, among the sharpest declines in history. Housing collapsed as well. Yet the S&P 500 long ago regained all the ground it had lost. Housing has been recovering as well.

Still, in an Allianz poll of workers aged 18 to 55, 78% said they preferred lower certain returns than higher returns with risk. Specifically, they chose a hypothetical product with a 4% annual return and no risk of losing money over a product with an 8% annual return and the risk of losing money in a down market. Guarantees make retirees happy.

This reluctance to embrace risk, or at least the urge to dial it way back, may be appropriate for those on the cusp of retirement. But for the vast majority of workers, reaching retirement security without the superior long-term return of stocks would prove a tall order. Asked what would prevent them from putting new cash into a retirement savings account, 40% cited fear of market uncertainty and another 22% cited today’s low interest rates, suggesting that fixed income is the preferred investment of most workers. Here’s what workers would do with new cash, according to Allianz:

  • 39% would invest in a product that caps gains at 10% and limits losses to 10%.
  • 19% would invest in a product with 3% growth potential and no risk of loss.
  • 19% would invest in a savings account earning little or no interest.
  • 12% would hold their extra cash and wait for the market to correct before investing.
  • 11% would invest in a product with high growth potential and no protection from loss.

These results jibe with other findings in the poll, including the top two concerns of pre-retirees: fear of not being able to cover day-to-day expenses and outliving their money. These fears drive them to favor low-risk investments. One product line gaining favor is annuities. Some 41% in the poll said purchasing such an insurance product, locking in guaranteed lifetime income, was one of the smartest things they could do when they are five to 10 years away from retiring.

Lifetime income has become a hot topic. With the erosion of traditional pensions, Social Security is the only sure thing that most of today’s workers have in terms of a reliable income stream that will never run out. Against this backdrop, individuals have been more open to annuities and policymakers, asset managers and financial planners have been searching for ways to build annuities into employer-sponsored defined-contribution plans.

Doing so would address what may be our biggest need in the post defined-benefits world and one that workers want badly enough to forgo the stock market’s better long-run track record.

More from Money’s Ultimate Retirement Guide:

How do I know if buying an annuity is right for me?

What annuity payout options do I have?

How can I get rid of an annuity I no longer want?

MONEY retirement income

5 Retirement Investing Pitches You Should Ignore

Egg in cup tilted to look like fish swimming toward hook
Ramón Espelt Photography—Getty Images/Flickr

If a financial adviser tries to sell you on one of these investment vehicles, don't take the bait.

You’re probably already wise to many schemes designed to separate you from your money—emails from Nigerian princes, phishing scams, and the like. But does your BS detector go off when confronted with slick come-ons for perfectly legal but dubious investments? To see, check out these five pitches that are often targeted to people investing for retirement.

1. “What you need is a self-directed IRA.” If the people pushing self-directed IRAs recommended that you self-direct your IRA dough into low-cost index funds, I’d urge you to sign on. But the companies and advisers pushing self-directed IRAs typically tout them as a way to invest your retirement dollars in “alternative” or “nontraditional” investments that can range from cattle and fishing rights to restaurant franchises and bankruptcy claims, all in the name of diversification. “Di-worse-ification” is more likely. State securities regulators even warn that some promoters may step over the line into illicit investments or activities.

If you’ve got a huge retirement stash and want to take a flier with a teensy-weensy percentage of it in legal-but-exotic alternatives, fine. Good luck with it. But if you’re dealing with money you’ll be relying on to get you through retirement, stick with a good old, if slightly boring, diversified portfolio of stocks and bonds.

2. “I can get you high yields safely!” Given today’s low interest rates, who wouldn’t take this bait? Problem is, the combination of high yields and low risk is an oxymoron. Fatter yields and higher returns always come with greater risk, even if that risk isn’t apparent or is being downplayed by the person peddling the investment. Which means pushing the envelope for more yield can backfire. Just think back to 2008, when investors got burned in auction-rate securities, bank loan funds. and other investments that were marketed as cash equivalents.

When it comes to the portion of your savings that you must have ready access to and don’t want to put at risk, you need to play it safe. So resist the siren song of tempting yields offered by private investment notes, promissory notes, commercial mortgage notes, and the like and limit yourself to top-paying FDIC-insured savings accounts and short-term CDs. Granted, they’re not yielding much, but at least you won’t be in for any nasty surprises.

3. “Don’t risk your money on the volatile stock market—buy gold.” The gold fanatics haven’t been out in force lately because the stock market has been doing so well, up an annualized 20% or so for the past three years. But the gold bugs will resurface big time once stocks hit an extended period of turbulence or experience a major 2008-style meltdown. That’s when you’ll hear phrases like “nothing holds its value like gold” and “gold provides a safe haven against stock market volatility.”

When you hear those lines, remember this. Gold can fluctuate just as wildly as stocks. Gold recently traded at around $1,200 an ounce. Which means anyone who bought gold three years ago at a price of $1,700 an ounce is sitting on a loss of almost 30%. There may be other reasons to put a bit of your savings in gold—diversification, a hedge against inflation, or a weak dollar (although I’m not a big gold fan even for these reasons). But if it’s stability of principal you seek, gold is not where you’ll find it.

4. “For retirement peace of mind, buy yourself guaranteed income.” There’s actually a lot of truth to this statement. Research shows that retirees who get a monthly check for life from a traditional pension are more content than those who have the same level of wealth but only a 401(k). The problem is that many of the people touting the virtues of guaranteed income are often peddling variable annuities with income riders that can carry bloated fees of 2% to 3% a year, and are devilishly complicated to boot.

If you would like more guaranteed lifetime income than Social Security alone will provide, consider putting a portion of your savings into a type of annuity that’s easier to understand, less costly, and that you can comparison shop for on your own: an immediate annuity. Then invest the remainder of your nest egg in a mix of stocks and bonds that can provide additional income, plus long-term growth.

5. Forget bonds—you can live off stock dividends! Unfortunately, it’s not just wrong-headed advisers who spout the line that dividend-paying stocks are a reasonable substitute these days to bonds. Many of my compadres in the financial press also create the impression that putting more money into dividend stocks is an acceptable way to generate extra income now that bond yields are so low. Granted, bond yields are anemic. And when interest rates rise (whenever that may be), bond prices will take a hit, with longer-maturity bonds getting whacked more than short- to intermediate-term issues.

But none of that means that dividend-paying stocks are less risky than bonds. Stocks that pay dividends are still stocks, and thus far more volatile than bonds. If you doubt that, consider this: From its high in May 2007 to its low in March 2009, the iShares Select Dividend ETF lost more than 60% of its value compared to just over 50% for the broad stock market. That’s an extreme case. But the point is that dividends or no, stocks have a much bigger downside potential than bonds.

So by all means include dividend stocks as part of the stock allocation in your portfolio. But don’t let anyone sell you on the idea that dividend stocks can be a substitute for bonds.

More From RealDealRetirement.com:

The Smart Way To Double Your Nest Egg in 10 Years
How Smart An Investor Are You? Take This Quiz
How To Build A $1 Million IRA

 

MONEY Social Security

Why Social Security Suddenly Changed Its Benefits Withdrawal Rule

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

Q: I retired in 2009 to care for an ailing parent who has since passed away. I took Social Security at age 62, when the law allowed claimants to pay back their Social Security and receive the highest benefits at age 70. Since that time the law has changed and repayment can only be made in the first year. Do you know of any proposal to change the current rules for those who signed up under the old law? —Sandra

A: As Sandra correctly notes, Social Security changed its benefits withdrawal policy in December 2010, after she had retired under its prior rules—and it’s one of the most unusual policy shifts that the agency has enacted. Consider that Social Security, which often gets dinged for slow response time, made this change lightning fast. What’s more, the new policy seems to have little to do with the needs of beneficiaries like Sandra and everything to do with the agency being surprised—and perhaps chagrined—that people were paying attention to its often arcane rules and actually taking advantage of them.

Under the old policy, people who had begun receiving benefits could, at any time, pay back everything they’d received and effectively wipe clean their benefit history. By resetting their benefit record this way, people who took reduced retirement benefits early would be able to file later for much higher monthly payments. For people born between 1943 and 1954, for example, retirement benefits at age 70 are 76% higher than those taken at age 62.

Few people paid much attention to this rule until a growing group of financial planners and Social Security experts began highlighting the possible gains of withdrawing benefits and delaying claiming. As the word spread, journalists began to write about these rules for an even wider audience.

Social Security, which previously had no problem with the rule when few were using it, changed its mind as more and more people began withdrawing their benefits. Suddenly, without an extended period for evaluation or debate, the agency issued a final rule limiting the benefit withdrawal option—and it took effect immediately. If the public wanted to comment, it would be able to do so only after the rule was changed. By comparison, the decision to raise the official retirement age in the program from 66 to 67 was enacted in 1983—37 years before it will take effect in the year 2020.

Here’s what the agency said at the time it changed its rules on withdrawing benefits:

“The agency is changing its withdrawal policy because recent media articles have promoted the use of the current policy as a means for retired beneficiaries to acquire an ‘interest-free loan.’ However, this ‘free loan’ costs the Social Security Trust Fund the use of money during the period the beneficiary is receiving benefits with the intent of later withdrawing the application and the interest earned on these funds. The processing of these withdrawal applications is also a poor use of the agency’s limited administrative resources in a time of fiscal austerity—resources that could be better used to serve the millions of Americans who need Social Security’s services.”

Further, in making the shift to a one-year withdrawal period, the agency explained that the policy was designed to reduce the value of the option so few people would use it. Today, by the way, the agency supports delaying retirement much more than it used to.

Of course, telling people to delay claiming is of little help to people like Sandra, who retired under the old rule and was caught by the sudden policy shift. Is there any likelihood that the rule could be changed to accommodate this group? Not really, says James Nesbitt, a Social Security claims representative for nearly 40 years who is now providing benefits expertise for High Falls Advisors in Rochester, NY. “Unfortunately,” he says, “this change did not contain any grandfathering provision. I am not aware of any pending actions within Congress or Social Security that would extend grandfather rights to those who were disadvantaged by this change.”

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

More on Social Security:

How to protect your retirement income from Social Security mistakes

Here’s how Social Security will cut your benefits if you retire early

Will Social Security be enough to retire on?

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