MONEY retirement income

QUIZ: How Smart Are You About Retirement Income?

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Tom Merton—Getty Images

Only 4 in 10 Americans have seriously looked at their retirement income options.

Do you have a credible retirement income plan? A TIAA-CREF survey earlier this year found that only four in 10 Americans had seriously looked into how to convert their savings into post-career income. To see just how much you know about creating income that will support you throughout retirement, answer the 10 questions below—and see immediately if you got them right. You’ll find a full explanation of all the correct answers, plus a scoring guide, just below the quiz.

When $1.5 Million Isn’t Enough for Retirement

Scoring:

0-4: You really need to brush up on retirement income basics, preferably before you start collecting Social Security and drawing down your nest egg.

5-7: You understand the basics, but you’ll improve your retirement prospects immensely if you take a deeper dive into how to create a retirement income plan.

8-9: You clearly know your way around most retirement-income concepts. That doesn’t mean you couldn’t profit, however, from learning more about such topics as Social Security, different ways to get guaranteed income and how to set up a retirement income plan.

10: If the answers in this quiz weren’t so obvious, I’d say you’re a retirement income expert. Still, congratulations are in order if for no other reason than you actually read this story from top to bottom and got every answer right.

Explanation of Answers:

1. Based on projections in the Social Security trustees report released last week, the trust fund that helps pay Social Security retiree and disability benefits will run out of money in 2034. That means…
c. that payroll taxes coming into the system will still be able to pay about 79% of scheduled benefits.
d. that Congress needs to do something between now and 2034 to address this issue.

Both c and d are correct. Although the trust fund’s “exhaustion date”—2034 in the latest report—gets a lot of press attention, all it means is that we’ll have run through the surplus that accumulated over the years because more payroll taxes were collected than necessary to fund ongoing benefits. When that surplus is exhausted, enough payroll taxes will still flow in to pay about 79% of scheduled benefits. That said, I doubt the American public will stand for a system that eventually calls for them to take a 21% haircut on Social Security benefits. So at some point Congress will have to act—i.e., find some combination of new revenue and perhaps smaller or more targeted cuts—to deal with this looming shortfall, as it has addressed similar problems in the past.

2. Given the low investment returns expected in the future, what initial annual withdrawal rate subsequently increased by the inflation should you limit yourself to if you want your nest egg to last at least 30 years?
a. 3% to 4%

In eras of more generous stock and bond market returns, retirees who limited their initial withdrawal to 4% of savings and subsequently increased that draw for inflation had a roughly 90% or better chance of their nest egg lasting 30 or more years. Hence, the oft-cited “4% rule.” But later research that takes lower investment returns into account suggests that an initial withdrawal rate of 3% or so makes more sense if you want your money to last at least 30 years. Truth is, though, whatever initial withdrawal rate you start with, you should be prepared to adjust it in the future based on on market conditions and the size of your nest egg.

3. An immediate annuity can pay you a higher monthly income for life for a given sum of money than you could generate on your own by investing the same amount in very secure investments. That is due to…
c. mortality credits.

Some annuity owners will die sooner than others. The payments that would have gone to those who die early and that are essentially transferred to those who die later are called mortality credits. Thus, mortality credits are effectively an extra source of return an annuity offers that an individual investing on his own has no way of earning.

4. A Roth IRA or Roth 401(k) …
c. may or may not be a better deal depending on the particulars of your financial situation.

While it’s true in theory that a traditional 401(k) or IRA makes more sense if you expect to face a lower tax rate when you make withdrawals in retirement and you’re better off with a Roth 401(k) or Roth IRA if you expect to face a higher rate, in real life the decision is more complicated. The tax rate you pay during your career can vary significantly, which means sometimes it may go to go with a traditional account, other times the Roth may make more sense. It can also be difficult to predict what tax rate you’ll actually face in retirement, making it hard to know which is the better choice. Given the uncertainty due to these and other factors, I think it makes sense for most people to practice “tax diversification,” and try to have at least a bit of money in both types of accounts.

5. Starting at age 70 1/2, you must begin taking annual required minimum distributions (RMDs) from 401(k)s, IRAs and similar retirement accounts. If you miss taking your RMD in a given year, the IRS may charge a tax penalty equal to what percentage of the amount you should have withdrawn?
d. 50%

That’s right, there’s a 50% tax penalty for not taking your RMD—and that’s in addition to the regular tax you own on that RMD. (If you’re still working, you may be able to postpone RMDs from your current 401(k) until after you retire, if the plan allows). You can plead your case and ask the IRS to waive the penalty—and sometimes the IRS will. But clearly the better course is to make sure you take your RMD every year rather than putting yourself at the IRS’s mercy.

6. Many retirees focus heavily on dividend stocks to provide steady and secure income throughout retirement. How did the popular iShares Dividend Select ETF perform during the financial crisis year 2008?
d. It lost 33%.

Tilting your retirement portfolio heavily toward dividend-paying stocks and funds can leave you too concentrated in a few industries. The main reason iShares Dividend Select ETF lost 33% in 2008 was because of its heavy weighting in financial stocks, which got hammered in the financial crisis. If you want to include dividend stocks and funds in your portfolio, that’s fine. But don’t overdo it. A better way to invest for retirement income is to build a portfolio that mirrors the weightings of the broad stock and bond markets and supplement dividends and interest payments by selling stock or fund shares to get the income you need.

7. To avoid running through your savings too soon, you should spend down your nest egg so that it will last as long as the remaining life expectancy for someone your age.
b. False

Life expectancy represents the number of years on average that people of a given age are expected to live. (This life expectancy calculator can help you calculate yours.) But many people will live beyond their life expectancy; some well beyond. So if arrange your spending so that your nest egg will carry you only to life expectancy, you may find yourself forced to stint in your dotage. To avoid that possibility, I generally recommend that you plan as if you’ll live at least to your early to mid-90s.

8. If your Social Security benefit at your full retirement age of 66 is $1,000 a month, roughly how much per month will you receive if you begin collecting benefits at age 62? How about if you wait until age 70?
c. $750/$1,320

For each year you delay taking Social Security between the age of 62 and 70, your benefit increases by roughly 7% to 8% (and that’s before cost-of-living adjustments). If you also work during the time you postpone taking benefits, your payment could rise even more. To see how much delaying benefits and other strategies might boost the amount of Social Security you (and your spouse, if you’re married) collect over your lifetime, check out the Financial Engines Social Security calculator.

9. With yields so low these days, bonds and bond funds, no longer deserve a place in retirement portfolios.
b. False

There’s no doubt that if interest rates continue to rise as they already have since the beginning of the year, that bonds and bond funds could post losses. But as long as you stick to a diversified portfolio of investment-grade bonds with short- to intermediate-term maturities, those losses aren’t likely to come anywhere close to the 50% or more declines stocks have suffered in past meltdowns. Which means that while bonds at current yields may not provide as much of a cushion as they have in past years, a portfolio that includes bonds will be much more stable than an all-stocks portfolio. In short, for diversification reasons alone, it still makes sense to include short- to intermediate-term bonds or bond funds in your retirement portfolio.

10. A new type of longevity annuity called a Qualified Longevity Annuity Contract, or QLAC (pronounced “Cue Lack”), allows you to invest a relatively small sum today within your 401(k) or IRA in return for a relatively high guaranteed lifetime payout in the future. For example, a 65-year-old man who invests $25,000 in a QLAC might receive $550 a month starting at age 80, or $1,030 a month starting at 85. Putting a portion of your nest egg into a QLAC also allows you to…
b. Worry less that overspending early in retirement will exhaust your nest egg since you can count on your QLAC payments kicking in later on.
c. postpone taking RMDs on value of the QLAC (and avoid the income tax that would be due on those RMDs) until it actually begins making payments.

Both b and c are correct. The main reason to consider a QLAC is to hedge against the possibility of running through your savings and finding yourself short of the income you need late in retirement. But the fact that you can postpone RMDs and the tax that would be due on them is an added bonus. To qualify for this bonus, however, you must be sure that the longevity annuity you buy with your 401(k) or IRA funds meets the Treasury Department’s criteria to be designated as a QLAC and that the amount you put into the QLAC doesn’t exceed the lesser of $125,000 or 25% of your account balance.

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.

Read next: Why the Right Kind of Annuity Can Boost Your Retirement Income

MONEY IRAs

This Is the Biggest Mistake People Make With Their IRAs

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Jan Stromme—Getty Images

Too many investors view IRAs simply as parking accounts for their rollover 401(k) money.

Millions of American have IRAs. Some people, like me, have multiple IRAs, but hardly anyone makes regular contributions to these accounts. According to a recent study by the Investment Company Institute (ICI), only 8.7% of investors with a traditional (non-Roth) IRA contributed to them in tax year 2013.

The Employee Benefit Research Institute’s IRA database, which tracks 25 million IRA accounts, estimates an even smaller percentage of investors contributed to their traditional IRA accounts—just 7%.

The problem, it seems, is that many people have come to see IRAs as a place to park money rather than as a savings vehicle that needs regular, new contributions. Most IRAs are initially established with money that is rolled over from an employer-sponsored 401(k) when a worker changes jobs or retires.

As savings options, IRAs are inferior to 401(k)s, which typically offer employer matches and a tax deduction for your contribution. With IRAs, the deduction for contributions is more limited. If you are already covered by a plan at work, you qualify for a tax deduction to a traditional IRA only if your income is $61,000 or less. Moreover, the contribution limit for IRAs is low—$5,500 a year, or $6,500 if you’re 50 and older. By contrast, the contribution limit for a 401(k) is $18,000 this year ($24,000 for those 50 and older).

Still, traditional IRA accounts will let your money grow tax-deferred; with Roth IRAs, you contribute after-tax money, which will grow tax-free. Adding an extra $5,500 a year to your savings today can make a sizable difference to your retirement security. Even if you don’t qualify for a deduction, you can make a nondeductible contribution to an IRA. (Be sure to file the required IRS form, 8606, when you make nondeductible contributions to avoid tax headaches.) Still, as these new findings show, most people don’t contribute new money to any IRA.

I get it. I have two traditional IRAs from rollovers and have been making the mistake of not contributing more to them for years. Since my traditional IRAs were started with a lump sum, I mistakenly viewed them as static (though still invested) nest eggs. If I had thought of them as active vehicles to which I should contribute annually, I would be on much firmer footing in terms of my “retirement readiness.” (I also have a SEP-IRA that I can only contribute to from freelance income, and a Roth IRA which I converted from a third rollover IRA one year when it made sense tax-wise to do so, but also now can’t contribute to. No wonder I find IRAs confusing.)

The ICI’s report suggests that very low contribution rates for IRAs “are attributable to a number of factors, including that many retirement savers are meeting their savings needs through employer-sponsored accounts.” But that explanation is misleading. Even those lucky enough to have access to 401(k)s need to have been making the absolute maximum contributions every year since they were 23 years old to feel confident they’re saving enough.

IRAs are a valuable and often overlooked part of the whole plan—and for many without 401(k)s, they are THE whole plan. There has been a lot of attention on improving 401(k) plan participation rates by automatically enrolling employees. But only recently has there been more focus by policymakers on getting people to contribute to their IRAs on a regular basis, including innovations like President Obama’s MyRA savings accounts and efforts by Illinois and other states to create state savings plans for workers who lack 401(k)s. These are worthy projects that need an even bigger push.

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 next: Americans Left $24 Billion in Retirement Money on the Table

MONEY financial advisers

How to Know If Your Retirement Planner’s Credentials Are Real or Worthless

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It's easy for advisers to add a title after their names without doing all that much, so be sure your pro has actual expertise.

Is your adviser touting questionable retirement-planning credentials? Just last week the Massachusetts Securities Division fined LPL Financial $250,000 after an investigation into the use of senior designations by some of the firm’s representatives. Here’s what you need to know if you’re considering hiring someone for retirement help.

If you were looking for guidance with your retirement planning, would you be more likely to hire someone if his business card stated he was an Accredited Retiree Counselor? How about if he were a Qualified Retirement Strategies Specialist? Or a Certified Retirement Planning Expert?

I hope not, because I just made them up by writing dozens of words like “retirement,” “accredited,” “specialist,” etc. onto little slips of paper, tossing them into a bowl and then drawing them out at random. Which illustrates a fundamental quandry: Given the dozens of official-sounding designations out there, how can you tell whether a string of impressive titles represents real retirement-planning know-how or is a marketing gimmick designed to imply expertise that isn’t there? I have three suggestions.

1. Demand details about the designation. Don’t be shy. Just say you’re naturally skeptical of such titles in light of the recent National Senior Investor Initiative report from the SEC and FINRA and an earlier study from the Consumer Financial Protection Bureau that raised questions about senior designations. Among the questions you should ask: What organization issues the credential? What makes that organization credible (Is it accredited? If so, by whom?) How long did it take to get the designation and what was required (how many hours of study, on-site or online course work, a final exam)? Is continuing education required to maintain it? Basically, you want to know that the adviser isn’t effectively trying to buy credibility.

You can get more information about professional titles and designations by going to the Paladin Registry’s Check A Credential tool and FINRA’s Professional Designations database.

2. Vet the adviser. I don’t care how extensive an array of designations an adviser holds, you still have to do some due diligence to make sure the adviser hasn’t had a litany of complaints clients and/or run ins with regulators. A good place to start your digging into the adviser’s background is the Check Out A Broker or Adviser section of the Securities and Exchange Commission site, which has detailed information on how to research the background of all types of advisers—brokers, financial planners, investment advisers—plus other resources, including links to FINRA’s BrokerCheck system and state securities regulators’ sites.

3. Listen to your gut. Although there’s always the risk of being duped by a Madoff-like investor who’s a complete fraud, the more likely scenario is that you end up doing business with an adviser who’s willing to boost his bottom line at the expense of yours. To lower the odds of that happening, spend some time with the adviser to find out exactly what he intends to do for you and what his products and services will cost.

Start by getting a sense of how he operates: Does he make his living mostly by selling a limited range of products from a restricted menu offered by his own or affiliated companies? Or can he pick and choose investment options from a broad range of firms? You also want to find out exactly how is he compensated—solely by commissions, by annual or hourly fees, a combination of fees and commissions? Each method has its advantages and drawbacks (although I think paying fees for advice has less potential for conflicts of interest). But whatever system the adviser uses, he should be able to provide you a written estimate of his fees and any other charges upfront.

Ultimately, you want to deal with an adviser you feel you can rely on to deliver independent advice, not someone looking to charge bloated annual fees to manage your money or a salesperson looking to unload his inventory on you. So if at any point in the process of dealing with an adviser you feel that something doesn’t ring true or that you’re not really sure you can trust the adviser, my advice would be to move on. There are plenty of advisers out there to choose from.

Who knows, maybe efforts now underway by the White House, Department of Labor and Securities and Exchange Commission to hold advisers to a more rigorous standard may make it easier for consumers to find advisers they can trust. I don’t consider that a given, but we’ll see. In the meantime, though, don’t let an alphabet-soup of credentials on a business card determine which adviser gets to handle something as crucial and irreplaceable as your retirement savings.

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 Reading Your Social Security Statement Can Make You Richer

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Making smart use of the information in your benefits statement can save your retirement.

The Social Security Administration is learning what financial educators have known for decades: good information is helpful but does not always lead to useful action. Now, in a bid to help individuals make smarter decisions about their benefits and retirement income overall, a push is on to broaden the regular Social Security statements that all taxpayers receive.

Social Security is the nation’s most important source of retirement security, providing half the monthly income of half of all retirees. Yet the system is so complicated that many puzzle over when to take monthly benefits, which may vary widely depending on the age at which you begin. You can start at age 62. But your check is about 8% higher for each year you delay until age 70.

As traditional pensions disappear, Social Security is the only source of guaranteed lifetime income that many future retirees will have. Making the most of it is critical—and it may be as simple as just reading your statement, now available online, in order to understand your options. (To find yours, go to ssa.gov/myaccount.)

The government began mailing a regular benefits statement in 1995, but stopped in 2011 as a cost-cutting measure and tried to direct people to the Social Security website instead. Last fall, however, the agency began mailing out paper statements again to recipients every few years.

This statement shows your expected monthly Social Security benefit at various retirement dates. Studies show that 40% of taxpayers use these calculations in their planning, according to a new study from the Center for Retirement Research at Boston College. But individuals do not use this information as a prod to change the date that they intend to start taking benefits, the CRR’s researchers found.

This is a familiar disconnect that lurks in money behavior at many levels. Proponents of financial education have had a difficult time proving that kids or adults who are taught about things like budgets and retirement saving put this knowledge to good use and make smarter money decisions because of the knowledge they have gained. They understand. They can pass a test. But does this knowledge change behavior for the better? Some encouraging signs are surfacing. But the lasting impact of financial education remains an open question.

Looking at a set of studies centered on awareness of the regular Social Security statements, researchers at CRR found that more Americans have been delaying benefits since the statements began arriving in mailboxes 20 years ago. But they attribute this entirely to outside forces, including a higher rate of college graduates, greater longevity and longer careers. “The information contained in the statement is not sufficient to improve their retirement behavior,” the authors note.

The upshot: a more “comprehensive” Social Security statement would lead more taxpayers to better optimize their benefit, CRR asserts. That might mean including instruction on how to place Social Security benefits in context with other assets and income sources, and how to determine the amount of monthly income you are likely to need.

Meanwhile, to make sure you are making the right claiming decision, gather the information in your statements and plug those numbers into one or more Social Security calculators; you can find several listed here. As a study last year by Financial Engines found, many individuals are leaving $100,000 or more in income on the table—as much as $250,000 for married couples—by choosing the wrong claiming strategy. That money could make your retirement a whole lot more comfortable.

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

MONEY Medicare

What You Can Expect from Medicare on Its 50th Anniversary

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Getty Images

As it turns 50, Medicare faces big financial shortfalls and sweeping changes.

America’s landmark government health care programs, Medicare and Medicaid, celebrate their 50th anniversaries on July 30th. (The other key safety net, Social Security, turns 80 in August.) Decades into operation, the future of these plans is still hotly debated in Washington, as policymakers wrangle over needed changes in their finances. Two major reforms are already underway, which I’ll address in a moment.

Meanwhile, outside the Beltway, where real people (aka voters) live, there is little debate about the value of these programs. We like our Medicare and Medicaid—a lot. Republicans, independents and Democrats all feel this way, and by big, big majorities.

The Kaiser Family Foundation, which closely tracks Medicare developments, recently conducted an anniversary opinion poll. Here’s how the public responded:

*Keep Medicare intact. By two-to-one margins, people of all political persuasions favor preserving Medicare in its current form, as opposed to replacing it with vouchers or other forms of premium support.

Among people ages 65 and older, 85% of Republicans, 89% of independents, and 92% of Democrats say Medicare is very important. And roughly 90% of those using Medicare and Medicaid report positive experiences with the programs. While Medicaid was once viewed as health insurance for poor people, any stigma associated with the program has largely disappeared. If people need it, they’ll sign up for it, Kaiser said.

*Improve Medicare’s finances. People are concerned about the future of Medicare, and two-thirds of those surveyed support changing the program to make sure it’s around for future generations. Nearly 60% also support raising Medicare premiums for wealthier seniors. There was little support for raising the Medicare eligibility age or general cost increases for all beneficiaries.

By contrast, nearly nine in ten people want to empower Medicare to negotiate with drug companies over their prices, making it the most wisely supported financial reform. This move is expressly forbidden under the 2003 law that created Part D prescription drug insurance.

*Not enough coverage. Kaiser also found that nearly a third of Medicaid beneficiaries and more than 20% of those on Medicare reduced their use of dental, vision, and hearing care because they couldn’t afford them and the items were not covered by the programs.

Reforms on the way

While the public expects Medicare tomorrow to look much like it does today, the Centers for Medicare & Medicaid Services (CMS) has announced major reforms that will change the way healthcare providers are paid for their services. Instead of being reimbursed for based on the number of services or tests conducted, providers will increasingly be paid based on the quality of the work they do and on how well it helps improve patient health.

That policy is likely to include paying physicians to have conversations with patients about how they would want to be treated if they are too ill to express their wishes. Previous plans to encourage end-of-life discussions were derailed in 2009, when Sarah Palin denounced the plan as an effort to set up “death panels.” Today, with millions of boomers aging and more patients wanting a say in their own treatment, these policies have broad support.

At the same time, CMS is pushing providers to coordinate care for Medicare patients. Doctors, hospitals and other care providers will be expected to work together, and their compensation eventually will also be determined by patient outcomes and improved health.

Looking 50 years ahead

These reforms, while significant, are modest compared to the vision that Medicare’s creators had for the program 50 years ago. Back in 1965, Medicare was expected to be the first big step toward universal health care. As Jonathan Oberlander and Theodore R. Marmor write a new collection of 50th anniversary essays about the programs:

“They never imagined that, a half-century after its birth, Medicare would look as it does today, with seniors comprising the vast proportion of its enrollees. Medicare, they expected in 1965, would soon expand far past social insurance protection for the elderly and would evolve into a full-scale system of national health insurance for all Americans.”

There are many reasons why this did not come to pass. But perhaps the single most important factor was the Vietnam War, which soaked enormous sums from the federal budget and diverted the attention of Presidents Lyndon Johnson and Richard Nixon away from any serious efforts to expand Medicare as its creators had hoped.

Will Medicare ever grow into the broader health care program its creators envisioned? Today’s political gridlock makes that scenario unlikely. Of course, over the next decades, it’s possible that a new consensus will emerge that brings about a national health insurance program. But the American people will have to make it a priority. Let’s check back in 2065.

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

Read next: Here’s What to Do When You’re Ready to Sign up for Medicare

MONEY retirement income

This Is the Top Secret of Wealthy Retirees

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Barry Winiker—Getty Images

Successful retirees still save nearly a third of income from their pension and 401(k) distributions.

Individuals that have saved successfully for retirement evidently cannot kick the habit. Even after they have reached retirement age they continue to save, on average, 31% of income, new research shows.

In many cases this continued saving comes from income streams guaranteed for life, such as a traditional pension, certain annuities, or Social Security. So further saving may have little to do with financial security—and much to do with a routine that has served them well over the years. If you are looking for the top secret of affluent retirees, it may be just that simple.

Retiree income flows from five primary sources, according to the research from fund company Vanguard. Guaranteed lifetime income is the biggest cut at 42%. Withdrawals from tax-advantaged accounts like IRAs and 401(k) plans are the second biggest source (20%), followed by pay from a part-time job (12%), withdrawals from savings accounts (7%) and from specialty accounts like a cash-value life insurance policy (4%).

The income source matters. Those who mainly get by on withdrawals from a 401(k) or other financial accounts reinvest about a third of what they take out due, say, to required minimum distribution rules. Those collecting guaranteed monthly income save only 25%.

This makes perfect sense. Lifetime income, by definition, never runs out. Those who get most of their income this way are under far less pressure to save anything at all. Meanwhile, those living off withdrawals from financial accounts, which can run dry, show a predictable concern with that possibility.

These are findings worthy of some study in government and pension circles. In coming years, a greater share of retirees will rely more heavily on their own savings, which could undermine spending in general and take a bite out of economic growth. On the other hand, those who get most of their income from withdrawals from financial accounts are more likely to work longer or part-time in retirement, which contributes to the economy and probably the individual health of those doing so.

The Vanguard study looked at households where the head was 60 to 79 years old, had at least $100,000 of investable assets, and at least one member of the household was fully or partially retired. This is an affluent, though not rich, group that continues to save and, in some ways may be doing so inappropriately.

Two-thirds of the money saved from income that comes from financial accounts goes into low-yielding savings vehicles. That might be by design—a desire to lower risk or save for a big purchase. But it might also be the result of inertia—required distributions left unattended. If such distributions are not needed for spending they might be better reinvested in growth or higher income accounts.

It’s tempting to assume that affluent retirees keep saving simply because they have the means to live as they wish and still have income left over. But that probably sells them short. They had to save or work hard for their pension to get there. It’s the habit that made it happen—and once established it’s tough to kick.

Read next: How Being a Boring Investor Can Make You Rich

MONEY annuities

Why Millennials May Be Risking Their Retirements with This Investment

Young investors are being targeted by salespeople pushing a complex annuity with a tempting guarantee.

Memo to Millennials: Don’t be surprised if an adviser or insurance salesperson suggests that your retirement savings strategy include a type of annuity that’s guaranteed not to lose money. My advice if you’re on the receiving end of that pitch: Walk the other way.

It’s hardly news that many young investors are wary of the stock market. So I was hardly taken aback when a recent survey by the Indexed Annuity Leadership Council (IALC) found that more than twice as many investors age 18 to 34 described their retirement investing strategy as conservative as opposed to aggressive. But another stat highlighted in IALC’s press release did grab my attention: namely, 52% of Millennials—more than any other age group—said they were interested in fixed indexed annuities.

Really? Fixed indexed annuities aren’t exactly a mainstream investment. And to the extent you do hear about them, they’re usually associated with older investors looking to preserve capital in or near retirement. So I was surprised that Millennials would be familiar with them at all.

And in fact they’re probably not. You see, the IALC survey didn’t actually mention fixed indexed annuities. Rather, it asked Millennials if they would be interested in an investment that may not have as high returns as the stock market, but would provide guaranteed payments in retirement and guarantee that they would not lose money.

I can’t help but wonder, however, whether those young investors would have been less enthusiastic if they were aware of some of the less appealing aspects of fixed indexed annuities, such as the fact that many levy steep surrender charges, which I’ve seen go as high as 18%, if you withdraw your money soon after investing. They’re also incredibly complicated, starting with the arcane methods they use to calculate returns (daily average, annual point-to-point, monthly point-to-point). And while they allow you to participate in market gains on a tax-deferred basis while protecting you from losses—and offer a minimum guaranteed return, typically 1% to 2% these days—they can seriously limit your upside. Fixed indexed annuities typically impose annual “caps,” “participation rates” or “spreads” that reduce the amount of the market, or benchmark, return you actually receive. So, for example, if your fixed indexed annuity is tied to the S&P 500 index and that index rises 10% or 15% in a given year, you may be credited with a return of, say, 5%.

Don’t take my word for these drawbacks, though. Check out FINRA’s Investor Alert on such annuities, which describes them as “anything but easy to understand” and notes that it’s difficult to compare one to another “because of the variety and complexity of the methods used to credit interest.”

But even if you’re able to wade through such complexities and make an informed choice, should you put your retirement savings into a such a vehicle if you’re in your 20s or 30s? I don’t think so. After all, if you’ve got upwards of 30 or 40 years until you retire, your savings stash has plenty of time to recuperate from any market meltdowns between now and retirement. (Besides, if you’re really anxious about short-term market setbacks, you can easily deal with that anxiety by scaling back the proportion of your savings you keep in stocks vs. bonds.)

Better to create a mix of low-cost stock and bond index funds that jibes with your tolerance for risk and allows you to fully participate in the financial markets’ long-term gains than to opt for an investment that severely limits your upside in return for providing more protection from periodic setbacks than you really need. Or to put it another way, why end up with a stunted nest egg at retirement to insulate yourself from a threat that, viewed over a time horizon of 30 or 40 years, isn’t as ominous as it may seem?

When I talked to Jim Poolman, a former North Dakota insurance commissioner and the executive director of IALC, he did note that Millennials shouldn’t be putting all their retirement savings into fixed indexed annuities. Rather, he says fixed indexed annuities can be “part of a balanced portfolio” that would include traditional investments, such as stock and bond funds in a 401(k). But as much as I like the idea of balance and diversification, I’m not convinced even that is a good strategy. I mean, if you’ve funded your 401(k) and are looking to invest even more for retirement outside your plan, what’s the point of choosing an investment that not only restricts long-term growth potential but that could leave you facing hefty surrender charges (plus a 10% tax penalty if you’re under age 59 1/2), should you need to access those funds?

I’m not anti-annuity. I’ve long believed that certain types of annuities can often play a valuable role for people in or nearing retirement by providing guaranteed lifetime retirement income regardless of what’s going on in the financial markets. But if you’re in your 20s or 30s, you should focus on investing your savings in a way that gives you the best shot at growing your nest egg over the long-term, not obsessing about the market’s ups and downs.

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 Aging

How Obama Plans to Save Your Retirement

President Barack Obama speaks during the 2015 White House Conference on Aging 150714_RET_obama
Saul Loeb—Getty Images President Barack Obama speaks during the 2015 White House Conference on Aging

At a once-per-decade conference, the White House unveils an action plan some aging experts believe is ho-hum.

With Americans living longer than ever, medical experts recently updated their definition for the oldest of the old—they’re now people past the age of 90, up from 85. This group, along with retirees in general, is now firmly in the sights of government as it seeks to meet the needs of an aging population.

That message was at the heart of just about every panel discussion at Monday’s White House Conference on Aging, a once-per-decade gathering meant to “look ahead to the issues that will help shape the landscape for older Americans.” It’s a worthy topic. Longevity is changing the economic and social picture for everyone. But not all are happy with what seems like a stale approach.

Rather than focusing on things like eldercare and health problems, leaders in this area should be addressing ways to keep seniors active and “debunk the myths and stigma of aging,” Michael Hodin, executive director of the Global Council on Aging, writes in his blog.

Granted, issues surrounding caregiving and the financial exploitation of seniors must be examined. But keeping aging Americans productive—not dependent—is a challenge that calls for being proactive. Likewise, leaders need to adopt an innovative approach to education and saving. They must rethink the whole notion of retirement in a world where young people will have few safety nets, may work 60 years, and will be required to reinvent themselves over and over.

These themes weren’t missing entirely from the conference. Andy Sieg, head of global wealth and retirement solutions at Bank of America Merrill Lynch, spoke of the importance of paying off college loans and beginning to save early in life. Both of those are Millennials’ issues and by definition require taking far-sighted steps.

Robin Diamonte, chief investment officer at United Technologies, further spoke to the long-term savings issue when she said at her company “we are auto everything-ing,” a nod to the vital role that automatic enrollment of new employees in 401(k) plans and automatic escalation of contributions can play.

Still, the dominant themes of the conference focused on coping with old age and failing cognitive and general health, along with elders’ financial pressures. The best measure of a society is how it treats its older citizens, President Obama said, using the occasion to champion his legacy. Obamacare has extended the solvency of the Medicare trust fund by 13 years and helped nine million seniors save $15 billion on prescription drugs, he said. He called out Congress for not passing a tax-advantaged federal savings program for workers not eligible for an employer sponsored plan—the “auto IRA”. And he promised that by year-end he would roll out “a path for states” to offer such plans.

Also on Obama’s priority list are programs to educate prosecutors about elder abuse, upgrade nursing home facilities and promote flexible work schedules for family members who are caregivers. Health and Human Services Secretary Sylvia Burwell announced $35.7 million of funding for “geriatric workforce training” to raise the quality of both family and paid caregiving.

Pointing up the critical role that private employers must play in solving longevity issues, Sieg announced that Merrill Lynch would begin working with benefits and human resources professionals at 35,000 companies, offering up the latest gerontology research around continued employment and other retiree issues. Merrill is believed to be the only major bank with an executive gerontologist on staff.

A panel on financial security noted that the biggest obstacles to a secure retirement for all include expanding the popular concept of retirement to include productive engagement, getting people to save early, and finding ways to convert lifetime savings into lifetime income with easy low-fee annuities. These, at least, are proactive ideas—and that’s where the real solutions lie.

Read next: Here’s What You Can Really Expect from Social Security

MONEY Social Security

Here’s What You Can Really Expect from Social Security

Senior Couple
Getty Images

The projected Social Security shortfall is likely to hit younger workers hardest.

Social Security turns 80 next month and, as always, one of big unknowns for this octogenarian program is how much longer it will be around—at least in its present form.

Social Security has two trust funds: the Old-Age and Survivors (OAS) fund, and its smaller sibling, the Disability Insurance ( DI) fund. Most people lump the funds together as the OASDI retirement program. But they operate separately. Out of the 6.2% payroll tax that workers and their employers each must pay into Social Security, 5.3% goes into the OAS fund and 0.9% to the DI fund.

The bigger OAS fund is what most people focus on when they worry about Social Security’s long-term sustainability. Every year program trustees issue an report that includes the latest projections about how long the fund will last.

Money Running Out

Last year’s report said the combined reserves of both funds would be exhausted in the year 2033, at which time it could pay only 77¢ on the dollar of its benefit obligations. The DI fund, however, faces a more immediate crisis. It will run out of money in 2016—as in next year—and its 0.9% payroll tax levy will then collect only enough to pay 81% of its benefit obligations.

The DI fund has faced shortfalls before, and Congress has papered over the problem by transferring money into it from the larger OAS fund. When the Republicans assumed control of both houses of Congress this year, however, they rejected this short-term fix and said they would be seeking a longer-term solution before DI funds ran out. Expecting anything more before next year’s elections than a last-minute bailout from the OAS fund is a long shot.

Regardless of the DI fund situation, the biggest concern for future retirees remains the OAS fund. On paper, there are loads of reasonable ways to return the fund to long-term sustainability. But there is no sign yet that Congress is any more willing to tackle this issue than it has been during the many years since it became a well-known problem. If anything, Democrats have seized on rising income inequality to mount a campaign that Social Security benefits should be increased, not reduced.

Future Benefit Cuts

All of which raises the big question: What should current workers and near-retirees expect from Social Security now?

For anyone 55 or older, relax—it’s highly unlikely that your Social Security benefits will change substantially. Even the reform proposals with the steepest benefit cuts tend to leave this age group alone.

Younger generations, however, have more reason to be concerned. Opinion polls regularly find that many younger workers think Social Security will not be there for them when they retire.

While I think Social Security certainly will be around for another 80 years, I do think it makes sense for people younger than 50 to build a contingency in their retirement plans that would allow for, say, a 10% haircut in benefits for those ages 45 to 55, and a 20% trim for those who are younger.

Personally, I do not think these cuts will occur. But even under existing Social Security rules, Social Security’s so-called replacement rate—benefits as a percentage of pre-retirement incomes—has been slowly declining and is projected to continue doing so.

Lifting the Wage Ceiling

Younger high-income earners, in particular, should plan for smaller Social Security benefits. That’s because one of the most likely ways to improve system finances, as well as one of the most politically popular, is to substantially increase the level of annual wage income on which payroll taxes are levied. It stands at $118,500 this year but could easily be doubled and then some under many proposals. And some progressive reformers would remove the wage ceiling entirely, exposing all wage income to Social Security taxes.

However, more drastic benefit reductions are unlikely. Why?

More than half of couples aged 65 and older depend on Social Security for more than half of their total household income. For single beneficiaries, nearly 75% are reliant on Social Security for most of their income.

These figures will be cited with increasingly frequency as the 2016 Presidential campaign picks up steam. So will the reality these older Americans tend to show up to vote at a higher-than-average rate. There is a reason Social Security is called the “third rail” of American politics—and it hasn’t lost that juice at all.

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

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

MONEY Retirement

College or Retirement? How to Save When You’re an Older Parent

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Amble Design—Shutterstock

Women in their 30s and 40s are having more babies. But a unique set of financial challenges are waiting.

For the first time in seven years, more Americans are busy making babies.

The National Center for Health Statistics recently reported that the birth rate rose 1% in 2014, the first time since 2007. The seven-year decline has been attributed to the deterioration of the economy during the Great Recession—unsurprising when you consider that the U.S. Department of Agriculture estimates you’ll spend $245,340 to raise a child to age 18.

Women in their 30s and 40s have led the baby bounce-back, with birth rates rising 3% year-over-year for women ages 30 to 39. Birth rates for women in their early 40s rose 2%.

While the uptick suggests parents are feeling financially secure enough to start raising a family, later-in-life pregnancies do come with their own set of financial challenges.

Resetting Your Priorities

One of the hardest things for couples to do when they have kids later in life is to re-evaluate their budgets, says Mitch Kraus, a financial planner in Santa Monica, Calif. “Most people struggle in their 20s to get by, then in their 30s they’re in a decent career and making some money and they get used to the niceties in life,” he says. All of a sudden, money that went to spontaneous weekend trips or eating out has to be allocated towards child-care expenses and diapers.

Having had his first child when he was 38, Kraus knows that resetting those financial priorities can be easier said than done, especially if you’ve grown accustomed to a certain lifestyle.

“I hadn’t made dinner two nights in a row in 10 years,” he laughs. “It’s hard to transition back to some of these things.”

Of course, the demands on your money will vary depending on your kids’ age—and your own.

If baby is already on the way, start budgeting during your pregnancy. Many parenting sites have baby cost calculators to help you wrap your mind around just how much Junior will bite into your vacation fund. Pre-delivery is also a great time to revisit your life insurance policy to make sure your family would have the financial resources they need if you’re not around.

Once the baby is born, one of the most pressing concerns (especially for working couples) is daycare. A report last fall by Child Care Aware America found that in some states, the cost of full-time childcare is more than a year of in-state college tuition. (Exhibit A: New York, where daycare can cost $15,000 but in-state tuition and fees at a public college is about $7,500 a year.)

Andy Tate, a financial advisor in Minneapolis, Minn., reminds parents to view the cost of childcare and education as a fluid expense instead of separate costs. Once Junior goes to elementary school, you can reallocate most of the daycare money to a college savings account. Socking away some of the money you had been spending on daycare can help you catch up on college savings.

Balancing Your Own Needs

But what about saving for you? Perhaps the trickiest financial issue for older parents is finding a way to fund ever-approaching retirement and a child at the same time. Someone who has a child at 35 or 40 will find tuition bills coming just as they may be preparing—and saving in earnest for—retirement. A recent poll by T. Rowe Price found that 52% of parents prioritize college savings over their own retirement. While that may make sense emotionally, it’s not always a good move financially. “You can take out loans for college,” Tate explains, “but you can’t for retirement.”

One strategy to consider: don’t put too much money into 529 college savings plans, Tate suggests. Though they are great options for younger parents with a longer time horizon, older parents need more liquidity and may be better off putting their money into other options such as a typical, non-qualified brokerage account. You’ll miss out on the tax-deferred status of a 529, but Tate argues that a well-managed account can help you minimize tax consequences while providing greater flexibility to use the funds for other expenses (such as your son or daughter’s wedding).

What’s more, putting your money into retirement savings instead of a dedicated education fund could help your child get more grants and low-interest loans. Many financial aid programs don’t take retirement accounts into consideration when calculating your expected family contribution, but they almost all will check on how much you have earmarked for education.

“Throwing money into retirement lowers income and takes money out of taxable accounts where schools will count it against them,” says Kraus.

Still feel guilty about directing some of your money into your retirement fund instead of the college fund? Remember, if you shortchange your own retirement and run into money or health problems in your 60s or 70s, your kids might not be established enough in their own careers to help you out financially. Or, even worse, they might have to quit school to help you pay the bills.

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