MONEY retirement planning

Money Makeover: Freelancers With a Toddler, No Plan, and No Cash to Spare

The Larsons
With 30-plus years to retirement, David and Ashlene Larson can afford to take more investing risk. Peter Bohler

Managing new businesses and a new baby left one young couple with little to save for retirement. Here's the advice they need to get their finances on track for the future.

David and Ashlene Larson know how important it is to save for retirement. The problem is they don’t have much cash to spare, as they are new parents—daughter Rosalie is 18 months—who are both starting new businesses. David, 33, took his sideline ­video-production company full-time in June, and Ashlene, 32, left her job at a PR firm in July to freelance.

The Larsons have more stable income than many self-employed workers, with $9,000 coming in monthly from two regular clients and twice that in a good month. But after payments for a mortgage, day care, car lease, and $25,000 in student loans—and after plowing some profits back into David’s growing business—they can put only $200 a month in Ashlene’s Roth IRA and $100 in a 529 savings plan for Rosalie’s college. Total savings rate: 3%. “It’s nerve-racking,” David says.

Meanwhile, they don’t know what to do with the $27,500 they’ve saved for retirement. Nor do they have any idea how to deploy the pile of savings bonds—worth $42,000 and earning 1.49%—that David’s grandparents gave him as a kid. “Our investments are all over the place,” says Ashlene.

Matt Morehead of Greenspring Wealth Management in Towson, Md., says that the Larsons’ overall allocation for retirement—73% stocks, 27% fixed income—is a tad conservative for their ages. But worse, Ashlene inadvertently has $15,000 in an old 401(k) invested in a 2025 target-date fund that will move to 50% bonds in 10 years, hampering its growth potential. Another concern: They have no cash in the bank. “The Larsons are stuck in the ‘foundation phase’ because they have debt and not enough emer­gency funds,” says Morehead. “They need to take care of those issues before sinking money into retirement.”

The Advice

Build in a shock absorber: Since they’re both self-employed, the Larsons should keep a reserve fund of at least nine months of expenses to prevent them from having to tap retirement funds if business slows, says Morehead. With basic costs of $6,000 a month, that’s $54,000.

David’s savings bonds are a good headstart, since these can be redeemed anytime without penalty—though taxes will drop their value to about $39,000. To make up the difference, the Larsons should redirect their $300 monthly retirement and college savings to a savings account. Plus, 40% of any monthly earnings over their base pay of $9,000 should go to the cash stash (another 35% to student loans, 25% to taxes).

Consolidate with the right target-date fund: David should open a Roth IRA for himself at a low-cost brokerage; Ashlene should move her accounts there too. Morehead suggests they go all in on Vanguard’s Target Retirement 2045 Fund time-stock symbol=VTIVX]. This bumps their stock stake to about 89% and gives them broad market exposure. Plus, the fund automatically rebalances until reaching a 50%/50% mix in 30 years. “This is a great way to invest for a young couple who don’t have time to monitor their portfolio,” Morehead says.

Beef up retirement savings: When their reserves are established, that 40% of additional income can go to their IRAs. Once they max out these regularly (each can put in $5,500 in 2015) or exceed the income limits ($193,000 modified AGI for couples filing jointly), Ashlene can open a SEP-IRA and David can start a 401(k). Only when they’re saving 15% of pay should they return to funding Rosalie’s 529. “You can always borrow for college,” says Morehead. “But you can’t borrow for retirement.”

Read more Money Makeovers:
Married 20-somethings with $135,000 in debt
4 kids, two jobs, and no time to plan
30 years old and already falling behind

MONEY retirement planning

Why Obama’s Proposals Just Might Help Middle Class Retirement Security

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U.S. President Barack Obama delivering the State of the Union address to a joint session of Congress at the Capitol in Washington, D.C., U.S., on Tuesday, Jan. 20, 2015. Andrew Harrer—Bloomberg via Getty Images

Congress probably won't pass an auto IRA, and Social Security is being ignored. But the retirement crisis is finally getting attention.

Remember Mitt Romney’s huge IRA? During the 2012 campaign, we learned that the governor managed to amass $20 million to $100 million in an individual retirement account, much more than anyone could accumulate under the contribution limit rules without some unusual investments and appreciation.

Romney’s IRA found its way, indirectly, into a broader set of retirement policy reforms unveiled in President Obama’s State of the Union proposals on Tuesday.

The president proposed scaling back the tax deductibility of mega-IRAs to help pay for other changes designed to bolster middle class retirement security. I found plenty to like in the proposals, with one big exception: the failure to endorse a bold plan to expand Social Security.

Yes, that is just another idea with no chance in this Congress, but Democrats should give it a strong embrace, especially in the wake of the House’s adoption of rules this month that could set the stage for cuts in disability benefits.

The administration signaled its general opposition to the House plan, but has not spelled out its own.

Instead, Obama listed proposals, starting with “auto-IRAs,” whereby employers with more than 10 employees who have no retirement plans of their own would be required to automatically enroll their workers in an IRA. Workers could opt out, but automatic features in 401(k) plans already have shown this kind of behavioral nudge will be a winner. The president also proposed tax credits to offset the start-up costs for businesses.

The auto-IRA would be a more full version of the “myRA” accounts already launched by the administration. Both are structured like Roth IRAs, accepting post-tax contributions that accumulate toward tax-free withdrawals in retirement. Both accounts take aim at a critical problem—the lack of retirement savings among low-income households.

The president wants to offset the costs of auto-IRAs by capping contributions to 401(k)s and IRAs. The cap would be determined using a formula tied to current interest rates; currently, it would kick in when balances hit $3.4 million. If rates rose, the cap would be somewhat lower—for example, $2.7 million if rates rose to historical norms.

The argument here is that IRAs were never meant for such large accumulations; the Government Accountability Office (GAO) looked into mega-IRAs after the 2012 election, and reported back to Congress that a small number of account holders had indeed amassed very large balances, “likely by investing in assets unavailable to most investors—initially valued very low and offering disproportionately high potential investment returns if successful.”

The report estimated that 37,000 Americans have IRAs with balances ranging from $3 million to $5 million; fewer than 10,000 had balances over $5 million.

Finally, the White House proposed opening employer retirement plans to more part-time workers. Currently, plan sponsors can exclude employees working fewer than 1,000 hours per year, no matter how long they have been with the company. The proposal would require sponsors to open their plans to workers who have been with them for at least 500 hours per year for three years.

These ideas might seem dead on arrival in the Republican-controlled Congress. But the White House proposals add momentum to a growing populist movement around the country to focus on middle class retirement security.

As noted here last week, Illinois just became the first state to implement an innovative automatic retirement savings plan similar to the auto-IRA, and more than half the states are considering similar ideas.

These savings programs are sensible ideas, but their impact will not be huge. That is because the households they target lack the resources to sock away enough money to generate accumulations that can make a real difference at retirement.

Expanding Social Security offers a more sure, and efficient, path to bolstering retirement security of lower-income households. If Obama wants to go down in the history books as a strong supporter of the middle class, he has got to start making the case for Social Security expansion—and time is getting short.

Read next: Why Illinois May Become a National Model for Retirement Saving

MONEY retirement planning

4 Tips to Plan for Retirement in an Upside-Down World

upside down rollercoaster
GeoStills—Alamy

The economic outlook appears a lot dicier these days. These moves will keep your retirement portfolio on course.

Gyrating stock values, slumping oil prices, turmoil in foreign currency markets, predictions of slow growth or even deflation abroad…Suddenly, the outlook for the global economy and financial markets looks far different—and much dicier—than just a few months ago. So how do you plan for retirement in a world turned upside down? Read on.

The roller coaster dips and dives of stock prices have dominated the headlines lately. But the bigger issue is this: If we are indeed entering a low-yield slow-growth global economy, how should you fine-tune your retirement planning to adapt to the anemic investment returns that may lie ahead?

We’re talking about a significant adjustment. For example, Vanguard’s most recent economic and investing outlook projects that U.S. stocks will gain an annualized 7% or so over the next 10 years, while bonds will average about 2.5%. That’s a long way from the long-term average of 10% or so for stocks and roughly 5% for bonds.

Granted, projections aren’t certainties. And returns in some years will beat the average. But it still makes sense to bring your retirement planning in line with the new realities we may face. Below are four ways to do just that.

1. Resist the impulse to load up on stocks. This may not be much of a challenge now because the market’s been so scary lately. But once stocks settle down, a larger equity stake may seem like a plausible way to boost the size of your nest egg or the retirement income it throws off, especially if more stable alternatives like bonds and CDs continue to pay paltry yields.

That would be a mistake. Although stock returns are expected to be lower, they’ll still come with gut-wrenching volatility. So you don’t want to ratchet up your stock allocation, only to end up selling in a panic during a financial-crisis-style meltdown. Nor do you want to lard your portfolio with arcane investments that may offer the prospect of outsize returns but come with latent pitfalls.

Fact is, aside from taking more risk, there’s really not much you can do to pump up gains, especially in a slow-growth environment. Trying to do so can cause more harm than good. The right move: Set a mix of stocks and bonds that’s in synch with your risk tolerance and that’s reasonable given how long you intend to keep your money invested and, except for periodic rebalancing, stick to it.

2. Get creative about saving. Saving has always been key to building a nest egg. But it’s even more crucial in a low-return world where you can’t count as much on compounding returns to snowball your retirement account balances. So whether it’s increasing the percentage of salary you devote to your 401(k), contributing to a traditional or Roth IRA in addition to your company’s plan, signing up for a mutual fund’s automatic investing plan or setting up a commitment device to force yourself to save more, it’s crucial that you find ways to save as much as you can.

The payoff can be substantial. A 35-year-old who earns $50,000 a year, gets 2% annual raises and contributes 10% of salary to a 401(k) that earns 6% a year would have about $505,000 at 65. Increase that savings rate to 12%, and the age-65 balance grows to roughly $606,000. Up the savings rate to 15%—the level generally recommended by retirement experts—and the balance swells to $757,000.

3. Carefully monitor retirement spending. In more generous investment environments, many retirees relied on the 4% rule to fund their spending needs—that is, they withdrew 4% of their nest egg’s value the first year of retirement and increased that draw by inflation each year to maintain purchasing power. Following that regimen provided reasonable assurance that one’s savings would last at least 30 years. Given lower anticipated returns in the future, however, many pros warn that retirees may have to scale back that initial withdrawal to 3%—and even then there’s no guarantee of not running short.

No system is perfect. Start with too high a withdrawal rate, and you may run through your savings too soon. Too low a rate may leave you with a big stash of cash late in life, which means you might have unnecessarily stinted earlier in retirement.

A better strategy: Start with a realistic withdrawal rate—say, somewhere between 3% and 4%—and then monitor your progress every year or so by plugging your current account balances and spending into a good retirement income calculator that will estimate the probability that your money will last throughout retirement. If the chances start falling, you can cut back spending a bit. If they’re on the rise, you can loosen the purse strings. By making small adjustments periodically, you’ll be able to avoid wrenching changes in your retirement lifestyle, and avoid running out of dough too soon or ending up with more than you need late in life when you may not be able to enjoy it.

4. Put the squeeze on fees. You can’t control the returns the market delivers. But if returns are depressed in the years ahead, paying less in investment fees will at least increase the portion of those gains you pocket.

Fortunately, reducing investment costs is fairly simple. By sticking to broad index funds and ETFs, you can easily cut expenses to less than 1% a year. And without too much effort you can get fees down to 0.5% a year or less. If you prefer to have an adviser manage your portfolio, you may even be able to find one who’ll do so for about 0.5% a year or less. Over the course of a long career and retirement, such savings can dramatically improve your post-career prospects. For example, reducing annual expenses from 1.5% to 0.5% could increase your sustainable income in retirement by upwards of 40%.

Who knows, maybe the prognosticators will be wrong and the financial markets will deliver higher-than-anticipated returns. But if you adopt the four moves I’ve outlined above, you’ll do better either way.

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 early retirement

Get These 3 Variables Right and Retire Earlier

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Chris Clor/Getty Images

Most people overestimate what they'll need to live comfortably in retirement. The more realistic you are, the sooner you might be able to kick back.

How do you know if you can retire? Despite all the attention given to your retirement “number”—your total savings—there are several other important variables that go into the retirement equation. If you want an accurate estimate for when you could retire, you must choose reasonable values for each one of them. Get these numbers wrong, either too optimistic or too pessimistic, and it could throw off your retirement calculations by years.

In my experience, people tend to be overly pessimistic about their retirement variables. Maybe it’s all the “bad” news about retirement. Or maybe it’s an abundance of caution around this critical life decision. But if you can be realistic about these numbers without being reckless, you can potentially accelerate your retirement and the freedom it brings.

Even if you have a financial adviser, it’s a good idea to become familiar with the key retirement variables yourself. Yes, some math is required, but it’s pretty simple. And there are easy-to-use retirement calculators that can handle the details for you. So let’s take a look at these important retirement parameters.

1. Living expenses. It’s common to assume that your retirement living expenses will be a fixed percent of your pre-retirement income. But if your lifestyle is unique in any way, especially if you’re a diligent saver, these income-based estimates can be wildly inaccurate. The best way to know your expenses is to actually track them yourself. One expert says you can retire on less than 60% of your working income, which is consistent with my personal experience.

And the news about expenses gets better: The typical retirement calculation automatically increases your living expenses every year by the rate of inflation. That sounds reasonable at first glance. Yet research shows that most people’s expenses decline as they age. Studies show decreases from 16% to as much as 40% over the stages of retirement. Even with higher health-care costs, you simply can’t consume as much at 80 as you did at 60.

2. Inflation rate. Inflation remains a critical retirement variable, because it can influence your fixed living expenses and the real returns on your investments. Many fear higher inflation in the future. Pundits have been expecting it for more than a decade. Although conditions might favor higher inflation down the road, nobody knows for sure when or how it will arrive. In my opinion, trying to plan for extreme inflation is not sensible. And many retirees, myself included, experience a personal inflation rate that is below the government’s official rate, proving that you have some control over how inflation impacts your life.

3. Tax rate. Taxes are one of the most feared and loathed factors in retirement. Yet in my experience as a middle-income retiree, taxes aren’t as big a deal as they are made out to be by those with an agenda for your money (or your vote). In the lower tax brackets, income taxes are just another expense, and not a particularly large one. When calculating taxes for retirement, be especially careful to distinguish between effective and marginal tax rates. Your effective tax rate is your total tax divided by your income. Your marginal rate is the amount of tax you pay on your last dollar of income. That’s a function of your tax bracket and is nearly always much higher than your effective rate.

Most retirement calculators use an effective rate, but that isn’t always clear. If you mistakenly enter a marginal rate into a retirement calculator, you will grossly overestimate your tax liability and underestimate your available retirement income. For example, my marginal tax rate in my peak earning years was 28%; now that I’m retired, my effective tax rate has been around 6%. Big difference!

So there is room for optimism on some key retirement variables. But retirement planning is an exercise in reality, and the reality of the stock and bond markets right now is more negative than positive. Investment returns are one retirement variable where you cannot afford to be overly optimistic, or you could run out of money in your later years. Many experts point to current low interest rates and high market valuations as indicators that we must plan for lower returns going forward. How much should you scale back your expectations? That’s anybody’s guess, but I’m seeing estimates of from 2%-4% below the long term averages for stock returns.

Retirement analysis can be difficult and perplexing. A good retirement calculator can condense all the variables into a single view of your financial trajectory. For the most accurate picture, choose realistic values. Don’t lengthen your journey to retirement with excessive assumptions for living expenses, inflation, or tax rates. But don’t get overly confident about investment returns, either. A realistic analysis will increase your odds of working and saving the right amount, before you make the leap to retirement.

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.

Read next: Retirement Calculators Are Wrong But You Need One Anyway

MONEY retirement planning

5 Ways to Tell If You’re Really Ready to Retire

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Robert George Young—Ocean/Corbis

You'll have a much better shot at success in retirement if you evaluate your needs—financial and otherwise—before you say goodbye to your job.

Think it’s about time to call it a career? Great. But before you say “Hasta la vista, baby!” to your job, I suggest you go over the five items in my Are You Really Ready To Retire? checklist.

Just to be clear: I’m not talking about “ready to retire” in the sense that you’ll flip out if if have to deal with your egomaniac of a boss one more day. I mean you’re ready in the sense of being financially, socially, and emotionally prepared to make the transition to your post-career life. That’s important to know because if you exit before you’re truly prepared, you may find yourself repeating another famous Schwarzenegger line: “I’ll be back.”

So before you say bye-bye to those steady paychecks, make sure:

1. You’ve thought seriously about how you’ll live in retirement. The planning you’ve done throughout your work life has probably focused mostly on the financial aspects of retirement: saving, investing, tending to your 401(k) and other retirement accounts. But now that you’re in the home stretch, you’ve also got to give some attention to lifestyle planning—that is, figuring out how you’ll live a satisfying and meaningful life when you no longer have a job to provide structure for each day.

Among the major questions you must answer: Do you plan to stay in your current digs, downsize to a new home, or maybe even relocate to a new area? And do you have a solid circle of friends and family that can provide companionship and support? (Research shows that retirees with a good network of friends were almost three times more likely to be happy than retirees who lacked such a network—as were those who had sex more frequently.) The Ready-2-Retire tool in RDR’s Retirement Toolbox can help you sort through such lifestyle issues.

2. You’ve made a retirement budget. Assuming you’ll need 80% or so of your pre-retirement income once you retire may be okay for planning when you’re decades from retirement. But once you’re within 10 or so years of retiring, you need a more realistic estimate of what you’ll spend. You need a retirement budget.

It doesn’t have to be accurate to the penny. But it should be as meticulous and accurate an accounting as possible of the actual costs you’ll face in retirement. If you do your budget with an online tool like Fidelity’s Retirement Income Planner or Vanguard’s Retirement Expenses Worksheet, you’ll more easily be able to compare your actual spending vs. projected spending and factor changes into your budget throughout retirement.

3. You’ve come up with a Social Security claiming strategy. A recent GAO report found that even with lifespans increasing, the majority of people still start taking Social Security benefits before their full retirement age. But that can be a mistake. Each year you delay between age 62 and 70, you boost the size of your benefit roughly 7% to 8%, which can dramatically increase the amount of money you receive over your lifetime. If you’re married, you may be able to boost the amount you and your spouse receive during your lives even more than singles by taking advantage of a variety of claiming strategies for couples.

To see how much you might benefit by delaying benefits or coordinating the timing of benefits with your spouse, check out tools like T. Rowe Price’s Social Security Benefits Evaluator and Financial Engines’ Social Security calculator.

4. You’ve created a plan for turning your savings into regular income. After years of growing your nest egg, you now have to figure out how to tap it for income that will sustain you throughout retirement. The challenge: Pull enough from your savings each year to provide the spending cash you need without going through your stash too soon, while also not drawing so little that you unnecessarily stint early in retirement and end up with a big pile of savings in your dotage when you can’t enjoy it.

One way to meet that challenge is to begin with a modest initial withdrawal—say, 3% to 4%—and then adjust that amount annually for inflation to maintain purchasing power. Another option is to devote a portion of your nest egg to an immediate annuity that can supplement the guaranteed income you’ll receive from Social Security as well as withdrawals from savings. Just know that over the course of a long retirement any number of things—market setbacks, unexpected expenses, higher-than-expected inflation—can wreak havoc with even the best-laid retirement income plans. So stay flexible and be ready to adjust your spending as conditions require.

5. You’ve confirmed you can actually afford to retire. This, of course, is the biggie. Do you actually have enough retirement resources to provide sufficient income to support the retirement lifestyle you envision? The only way to know is to crunch the numbers. You can do that by going to a good retirement income calculator and plugging in such information as your age, the value of your retirement savings, how your savings is divvied up among stocks, bonds and cash, the estimated monthly income you’ll require and how long you think you’ll need that money to last. (I recommend to age 95 or at least into your early 90s.)

Once you do that, the calculator will estimate the probability that your resources will generate your target income for as long as you need it. If that probability is lower than you can live with—and I’d say anything much below 80% is worrisome—you have several choices. You can scale back your lifestyle and spending, postpone retirement until your chances improve, or consider other adjustments such as working part-time in retirement, tapping home equity with a reverse mortgage, or even relocating to an area with lower living costs.

Bottom line: If you’re creative and resourceful, there are any number of ways you can make retirement work. But you’ll have a greater shot at success if you evaluate them before you actually leave your job.

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 Social Security

How Couples Can Boost Their Social Security Income

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

Q. My wife and I started our Social Security benefits at age 62 in 2013, but we later realized that we needed more income. So, we are both going to look for jobs now. Can we stop our benefits if it looks like we are going to make more income than allowed, and start our benefits back at any time later? —Don

A. If you or your wife stop your benefits before either of you turn 66, you will simply be giving up Social Security income. The only way to increase your benefits is by suspending them at age 66, which is full retirement age (FRA) under Social Security rules; that age gradually rises to 67 for those born after 1954. At the point, filers can get higher income from delayed retirement credits by postponing claiming (more on that below).

That said, there are steps you can take to maximize your Social Security income. But the claiming rules for couples are a little complicated, so bear with me, as I walk you through the key decision points.

First, the basics. It is true that if you find new jobs, your additional income may temporarily reduce your Social Security benefits. If you go back to work in 2015, and either of you earns more than $15,720, Social Security will withhold $1 in benefits for every $2 above this earnings limit. (Make sure you understand how the Social Security defines earnings; here’s a brochure that includes this information.)

But these benefit reductions are not lost to you, just delayed. Once you reach FRA, they will be repaid to you in the form of a higher benefit that will last the rest of your life.

At age 66, the right to suspend benefits kicks in. During that time, the benefit will rise by 8% a year, plus the amount of any annual-cost-of-living adjustments. Claimants can restart the benefit at any time, but the delayed income credits max out after age 70, so there’s no advantage to waiting any longer than that.

The Pitfalls of Dual Benefits

You also need to consider the rules involving spousal benefits. Whether you realize it or not, one of you has already filed for these benefits. This is because both of you claimed your retirement benefits “early”—before reaching FRA.

The first spouse to file for retirement benefits will have been treated as filing only for those benefits. The filing by the first spouse enables the second spouse to claim spousal benefits. But that second spouse was “deemed” to be simultaneously entitled to dual benefits—their retirement and spousal benefits.

Very few married couples understand deeming, which ends at FRA. Because most people file for Social Security before reaching FRA, it’s worth going into some detail about the way it can affect benefits.

Under deeming, Social Security gives you benefits that are roughly the greater of the two benefits, spousal or retirement. If you were entitled to a spousal benefit of $1,000 at full retirement age, and an individual retirement benefit of $400, you would end up with about $700 at age 62—the $1,000 spousal benefit after the early retirement reduction. Of course, the agency has a more complicated way of arriving at the precise number. Here is a hypothetical example supplied by Social Security spokesperson Dorothy Clark:

“A person entitled to a reduced retirement benefit (RIB) on his or her own earnings and a reduced spousal benefit on his or her spouse’s record is dually entitled. The person will be paid on two separate records. The person will be paid the smaller benefit first on his or her own record plus the excess amount of the larger one on the spouse’s record totaling the higher amount.

“For example: A spouse at age 62 whose FRA is age 66 is entitled to a benefit of $1,000 before reduction. She is also entitled to a retirement benefit (RIB) of $400 before reduction. The full RIB is subtracted from the full spouse benefit. The excess ($600) is then reduced to $420. The RIB is reduced to $300. The total payable is $720, the sum of the reduced spouse excess and the reduced RIB. Additionally, since both payments are paid from the same trust fund, we will issue a combined payment.”

Although deeming ends at FRA, your benefits are permanently reduced by your decision to file early in 2013.

Suspending Benefits at 66

The spouse who was dually entitled to retirement and spousal benefits in 2013 has the choice of suspending his or her individual retirement benefit at age 66. But whether it makes sense to do this depends on the relative size of those benefits.

If your spousal benefit was greater than your retirement benefit, you can continue to receive the difference—the excess spousal benefit—after the retirement benefit is suspended. The suspended retirement benefit, meanwhile, will rise in value due to delayed retirement credits. Depending on the size of the retirement benefit, it may rise enough to surpass the amount of the dual benefit you were receiving. But if doesn’t, you should forget about suspending the retirement benefit at FRA—just continue to receive the dual benefit.

The spouse who was the first to file for retirement was, as I’ve explained, not considered dually eligible for two benefits. So if this spouse chooses to suspend benefits at FRA, he or she would be eligible to file for just a spousal benefit at that time. This would permit the retirement benefit to increase until it reaches the maximum amount at age 70. At this point, it would make sense to switch to that benefit, assuming it was larger than the spousal benefit.

Whether any of these scenarios make sense for you is, of course, depends on your need for current income and whether or not you can afford to defer Social Security benefits.

To figure out your best course of action, you can set up an account at “my Social Security” and run your actual benefit projections through Social Security’s calculators. (You also could plunk down $40 and get a wider range of claiming scenarios from Maximize My Social Security, a software program developed by economist Larry Kotlikoff, who is a co-author of our new book on Social Security.)

If this is all crystal clear to you, congratulations! Go to the head of the class! I still get confused by Social Security’s complicated rules and I write about them nearly every day.

Best of luck.

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 Younger Spouses Can Get the Most from Social Security

MONEY retirement planning

5 Secrets to a Happy Retirement

Hammock underneath palm trees
Keep a smile on your face once your working years are over. Jason Hindley—Prop Styling by Keiko Tanaka

Sure, a fat nest egg and good health help. But there are less obvious ways to make sure your post-work life is a happy one.

Retirement ought to be a happy time. You can set your own schedule, take long vacations, and start spending all the money you’ve been saving.

And for many retirees that holds true. According to the Gallup-Healthways Well-Being Index, people tend to start life happy, only to see their sense of well-being decline in adulthood. No surprise there: Working long hours, raising a family, and saving for the future are high-stress pursuits.

Once you reach age 65, though, happiness picks up again, not peaking until age 85. In a recent survey of MONEY readers, 48% retirees reported being happier in retirement than expected; only 7% were disappointed.

How can you make sure you follow this blissful pattern? Financial security helps. And good health is crucial: In a recent survey 81% of retirees cited it as the most important ingredient for a happy retirement. Some of the other triggers are less obvious. Here’s what you can do to make your retirement a happy one.

1. Create a predictable paycheck. No doubt about it: More money makes you happier. Once you amass a comfortable nest egg, though, the effect weakens, says financial planner Wes Moss. For his recent book, You Can Retire Sooner Than You Think: The 5 Money Secrets of the Happiest Retirees, Moss surveyed 1,400 retirees in 46 states. The happiest ones had the highest net worths, but Moss found that money’s power to boost your mood diminished after $550,000.

“Once you reach a certain level, more money doesn’t buy a lot more happiness,” says Moss. Similar research based on the University of Michigan Health and Retirement Study found a dropoff in happiness with extreme wealth; after you’ve amassed some $3.5 million in riches, more money doesn’t increase your happiness as much.

Where your income comes from is just as important as how much savings you have, says Moss. Retirees with a predictable income—a pension, say, or rental properties—get more enjoyment from spending those dollars than they do using money from a 401(k) or an IRA.

Similarly, a Towers Watson happiness survey found that retirees who rely mostly on investments had the highest financial anxiety. Almost a third of retirees who get less than 25% of their income from a pension or annuity were worried about their financial future; of those who receive 50% or more of their income from such a predictable source, just under a quarter expressed the same anxiety.

You can engineer a steady income by buying an immediate fixed annuity. According to ImmediateAnnuities.com, a 65-year-old man who puts $100,000 into an immediate annuity today would collect about $500 a month throughout retirement.

2. Stick with what you know. People who work past 65 are happier than their fully retired peers—with a big asterisk. If you have no choice but to work, the results are the opposite. On a scale of 1 to 10, seniors who voluntarily pick up part-time work rate their happiness a 6.5 on average; that drops to 4.4 for those who are forced to take a part-time job.

The benefit of working isn’t just financial. It’s also a boon to your health—a key driver of retirement happiness. The physical activity and social connections a job provides are a good antidote to an unhealthy sedentary and lonely lifestyle, says medical doctor turned financial planner (and Money.com contributor) Carolyn McClanahan.

A 2009 study published in the Journal of Occupational Health Psychology found that retirees with part-time or temporary jobs have fewer major diseases, including high blood pressure and heart disease, than those who stop working altogether, even after factoring in their pre-retirement health.

Switching careers in retirement, though, isn’t as beneficial. Retirees who take jobs in their field reported the best mental health, says lead researcher Yujie Zhan of Canada’s Laurier University, perhaps because adapting to a new work environment and duties is stressful.

3. Find four hobbies. Busy retirees tend to be happier. But just how active do you have to be? Moss has put a number on it. He found that the happiest retirees engage in three to four activities regularly; the least happy, only one or two. “The happy retiree group had extraordinarily busy schedules,” he says. “I call it hobbies on steroids.”

For the biggest boost to your happiness, pick a hobby that’s social. The top pursuits of the happiest retirees include volunteering, travel, and golf; for the unhappiest, they’re reading, hunting, fishing, and writing. “The happiest people don’t do things in isolation,” says Moss.

That’s no surprise when you consider that people 65 and older get far more enjoyment out of socializing than younger people do.

4. Rent late in life. In retirement, as in your working years, owning a home brings you more joy than renting does. But as time goes on, that changes. Michael Finke, a professor of retirement and personal financial planning at Texas Tech University, analyzed the satisfaction of homeowners vs. that of renters from age 20 to 90-plus and found a drop late in life, particularly after homeowners hit their eighties.

The hassles of homeownership build as you age, Finke notes, and a house can be isolating. Most people want to stay put in retirement. Yet, says Finke, “you need to plan for a transition to living in an environment with more social interaction and less home responsibility.”

5. Keep your kids at arm’s length. Once you suddenly have a lot more time on your hands, your closest relationships can have a big impact on your mood. According to an analysis by Finke and Texas Tech researcher Nhat Hoang Ho, married retirees, particularly those who retire around the same time, report higher satisfaction than nonmarrieds—but only if the couple get along well. A poor relationship more than erases the positive effects of being married.

Children don’t make much of a difference, with one twist. Living within 10 miles of their kids leaves retirees less happy. “People overestimate the amount of satisfaction they get from their kids,” says Finke. The reason is unclear—could being a too accessible babysitter be the problem?

MONEY retirement planning

Why Your Dream Retirement City May Pose a Surprising Health Risk

Retirees walking outdoors in sunny weather
Mark Bowden—Getty Images

The destinations most popular with retirees have the most dangerous streets for people on foot.

One thing you won’t find in most reports on the best places to retire: a measure of pedestrian deaths. But it turns out that many sunny climates popular with retirees are where you’ll find the most perilous roadside shoulders, crossings and sidewalks in America.

The four most dangerous cities in the U.S. for pedestrians are located in Florida, according to a recent AARP Bulletin. The top 10 are all in the South or Southwest. Leading the pack is Orlando with 2.75 pedestrian deaths per 100,000 people each year, according to a report from Smart Growth America. Tampa has a higher rate of 2.97 per 100,000, but because it has more walkers than Orlando it ranks second on the group’s Pedestrian Danger Index.

By contrast, the sharply chillier cities Seattle, Pittsburgh and Boston rank 49, 50, and 51 on the list. All three have less than one pedestrian death per 100,000 each year. Nationally, the average is 1.56 pedestrian deaths per 100,000 people.

The Florida cities Jacksonville and Miami round out the top four most dangerous cities for pedestrians, followed by Memphis, Tenn., Birmingham, Ala., Houston, Tex., Atlanta, Ga., Phoenix, Ariz., and Charlotte, N.C. in the top 10. These and other warm cities often make the cut on popular lists of the best places to retire. (For MONEY’s best places to retire coverage, click here.)

Now you might be thinking that these cities are dangerous to pedestrians simply because they are laden with old fogies wandering into the streets. Not at all. The real explanation is that these sunbelt regions have generally enjoyed a huge growth spurt during the last 60 years, when city planning centered on the automobile. The least-friendly streets for pedestrians tend to be those with wide boulevards and faster-moving traffic designed to connect homes, shops and schools. More than half of all pedestrian deaths occur on such arterial roads.

Alarmed by the state’s rate of pedestrian deaths, Florida officials have been sponsoring awareness campaigns and promoting safer streets by putting in sidewalks and midpoint waiting areas, as well as slowing traffic. Pedestrians hit by a car traveling 20 miles per hour have a 90% survival rate; at 45 miles per hour, the survival rate drops to 35%. And nationally there is a push to make all streets safer for both walkers and cyclists by changing traffic designs, lengthening signal crossing times and other reforms.

When collisions happen, older people bear the highest risk. Adults aged 65 and older make up 13% of the population but account for 20% of pedestrian fatalities. Their fatality rate is 3.19 per 100,000, and past age 75 that rate rises to 3.96. Meanwhile, older people who survive are far more likely to have serious injury.

“The elderly don’t tolerate simple injuries very well,” Dr. John Promes, trauma medical director at Orlando Regional Medical Center, told AARP. A young person with fractured ribs might be discharged from the hospital within a day, he says, “but someone who is 75 years old may end up in the intensive care unit on a ventilator.”

None of this should discourage retirees from seeking the sunny climate they desire—or from taking to the streets and sidewalks for exercise or transportation. Walking helps maintain bone and muscle strength, as well as mobility and agility. And research shows regular walks help fight chronic ailments and preserve independence. This is partly why cities generally are trying to make streets easier to get around on foot.

Aside from safety, transportation and accessibility are always important considerations when scouting a place to retire. Check out your town’s walk score. And if you plan to you walk for exercise, as many boomers do, or just to get to the local grocery store, take a test stroll though your dream neighborhood. It may not be as easy to get around as you might think.

Read next: Retire to One of these Great Small Cities

MONEY retirement planning

3 Simple Steps to Crash-Proof Your Retirement Plan

piggy bank surrounded by styrofoam peanuts
Thomas J. Peterson—Getty Images

The recent stock market slide is timely reminder to protect your retirement portfolio from outsized risks. Here's how.

At this point it’s anyone’s guess whether the recent turmoil in the market is just another a speed bump on the road to further gains or the start of a serious setback. But either way, now is an ideal time to ask: Would your retirement plans survive a crash?

The three-step crash-test below can give you a sense of how your retirement plans might fare during a major market downturn, and help you take steps to avert disaster. I recommend you do this stress-test now, while you can still make meaningful adjustments, rather than waiting until a crisis actually hits—and wishing you’d taken action beforehand.

1. Confirm your asset allocation. The idea here is to divide your portfolio into two broad categories: stocks and bonds. (You can create a third category, cash equivalents, if you wish, or throw cash into the bond category. For the purposes of this kind of review, either way is fine.)

For most of your holdings this exercise should be fairly simple. Stocks as well as mutual funds and ETFs that invest in stocks (dividend stocks, preferred shares, REITs and the like) go into the stock category. All bonds, bond funds and bond ETFs go into the bond category. If you own funds or ETFs that include both stocks and bonds—target-date funds, balanced funds, equity-income funds, etc.—plug their name or ticker symbol into Morningstar’s Instant X-Ray tool and you’ll get a stocks-bonds breakdown. Once you’ve divvied up your holdings this way, you can easily calculate the percentage of your nest egg that’s invested in stocks and in bonds.

2. Estimate the downside. It’s impossible to know exactly how your investments will perform in a major meltdown. But you can at least estimate the potential hit based on how your portfolio would have fared in past severe setbacks.

In the financial crisis year of 2008, for example, the Standard & Poor’s 500 index lost 37% of its value, while the broad bond market gained just over 5%. So if you’ve got 70% of your retirement portfolio in stocks and 30% in bonds, you can figure that in a comparable downturn your nest egg would lose roughly 25% of its value (70% of -37% plus 30% of 5% equals 24.4%—we’ll call it 25%). If your portfolio consists of a 50-50 mix of stocks and bonds, its value would drop about 15%.

Remember, you’re not trying to predict precisely how the market will perform during the next crash. You just want to make a reasonable estimate of what kind of hit your retirement savings might take so you can get an idea of what size nest egg you may end up with when things get ugly.

3. Assess the impact on your retirement. Go to a retirement income calculator that uses Monte Carlo simulations and enter your nest egg’s current value as well as such information as your age, income, when you plan retire, how your savings are invested and how much you’re saving each year (or spending, if you’re already retired). You’ll come away with the percentage chance that you’ll be able to generate the income you’ll need throughout retirement based on things as they stand now. Consider this your “before crash” estimate. Then, get an “after crash” estimate by plugging in the same info, but substituting your nest egg’s projected value after a downturn from step 2 above.

You’ll now be able to gauge the potential impact of a market crash on your retirement prospects. For example, if you’re 45, earn $80,000 a year, contribute 10% of pay to a 401(k) 70% in stocks and 30% in bonds that has a current balance of $350,000, you have roughly a 70% chance of being able to retire on 75% of pre-retirement salary, according to T. Rowe Price’s Retirement Income Calculator. Were your portfolio’s value were to drop 25% to $262,500 in a crash, your probability of retirement success would fall to 55% or so.

Once you see how a major setback might affect your retirement prospects, you can consider ways to protect yourself. For someone like our fictional 45-year-old above, switching to a more conservative portfolio probably isn’t the answer since doing so would also lower long-term returns, perhaps reducing the odds of success even more. Rather, a better course would be to consider saving more. And, in fact, by boosting the savings rate from 10% to 15%, the level recommended by many pros as a reasonable target, the post-crash probability of success rises almost to where it was originally.

If you’re closer to or already in retirement, however, the proper response to a precipitous drop in the odds of retirement success could be to invest more cautiously, perhaps by devoting a portion of your nest egg to an annuity that can generate steady, assured income. Or you may want to maintain your current investing strategy and focus instead on ways you can cut spending, should it become necessary, so you can withdraw less from your portfolio until the markets recover.

Truth is, there’s a whole range of actions you might take—or at least consider—that could put you in a better position to weather a market crash (or, for that matter, provide a measure of protection against other setbacks, such as job loss or health problems). But unless you go through this sort of stress test, you can’t really know what effect a big market setback might have on your retirement plans, or what steps might be most effective.

So run a scenario or two (or three) now to see how you fare, assuming different magnitudes of losses and different responses. Or you can just wait until the you know what hits the fan, and then scramble as best you can.

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 Savings

Why Illinois May Become a National Model for Retirement Saving

150107_RET_StateRetirement
Chris Mellor—Getty Images/Lonely Planet Image

Illinois will automatically enroll workers who lack an employer retirement plan into a state-run savings program

In what may emerge as a standard for all states, Illinois is introducing a tax-advantaged retirement savings plan for most residents who do not have such a plan at work. The program echoes one that President Obama has endorsed at the federal level, and it boosts momentum that has been building for several years at the state level.

Beginning in 2017, Illinois businesses with 25 or more employees that do not offer a retirement savings plan, such as a 401(k) or pension, must automatically enroll workers in the state’s Secure Choice Savings Program, which will enable them to invest in a Roth IRA. Workers can opt out. But reams of research suggest that inertia will keep most employees in the plan.

Once enrolled, workers can choose their pre-tax contribution rate and select from a small menu of investment options. Those who do nothing will have 3% of their paycheck automatically deducted and placed in a low-fee target-date investment fund managed by the Illinois Treasurer.

The plan may sound novel, but at least 17 states, including bellwethers like California, Connecticut, Massachusetts and Wisconsin, have been considering their own savings plans for private-sector employees. Many are taking steps to establish one. In Connecticut, lawmakers recently set aside $400,000 to set up an oversight board and begin feasibility studies. Wisconsin and others are moving the same direction. Oregon may approve a plan this year.

But Illinois appears to be the first set to go live with a plan, and for that reason the program will be closely watched. If more workers open and use the savings accounts, more states are almost certain to push ahead. The estimate in Illinois is that two million additional workers will end up with savings accounts.

The Illinois plan may serve as a model because there is little cost to the state—that’s crucial at a time when many states face budget problems. (The budget shortfalls in Illinois, in particular, led to a pension crisis.) All contributions come from workers, and employers must administer the modest payroll deduction. Savers will be charged 0.75% of their balance each year to pay the costs of managing the funds and administering the program.

About half of private-sector employees in the U.S. have no access to retirement savings plans at work, which is one key reason for the nation’s retirement savings crisis. Those least likely to have access are workers at small businesses. The Illinois program addresses this issue by mandating participation from all but the very smallest companies.

These state savings initiatives have been spurred by the lack of progress in Washington to improve retirement security. President Obama promoted a federally administered IRA for workers without an employer plan in his State of the Union address last year, but bipartisan bills to establish an automatic IRA have long been stalled in Congress. Still, the U.S. Treasury unveiled a program called myRA for such workers to invest in guaranteed fixed-income securities on a tax-advantaged basis. Clearly, there is broad support for these kinds of programs. Now Illinois just has to show they work.

Read next: 5 Simple Questions that Pave the Way to Financial Security

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