MONEY Investing

Why Wary Investors May Keep the Bull Market Running

running bull
Ernst Haas—Getty Images

Retirement investors are optimistic but have not forgotten the meltdown. That's good news.

Six years into a bull market, individual investors around the world are feeling confident. Four in five say stocks will do even better this year than they did last year, new research shows. In the U.S., that means a 13.5% return in 2015. The bar is set at 8% in places like Spain, Japan and Singapore.

Ordinarily, such bullishness following years of heady gains might signal the kind of speculative environment that often precedes a market bust. Stocks in the U.S. have risen by double digits five of six years since the meltdown in 2008. They are up 3%, on average, this year.

But most individuals in the market seem to be on the lookout for dangerous levels of froth. The share that say they are struggling between pursuing returns and protecting capital jumped to 73% in this year’s Natixis Global Asset Management survey. That compares to 67% in 2013. Meanwhile, the share of individuals that said they would choose safety over performance also jumped, to 84% this year from 78% in 2014.

This heightened caution makes sense deep into a bull market and may help prolong the run. Other surveys have shown that many investors are hunkered down in cash. That much money on the sidelines could well fuel future gains, assuming these savers plow more of that cash into stocks.

Still, there is a seat-of-the-pants quality to investors’ behavior, rather than firm conviction. In the survey, 57% said they have no financial goals, 67% have no financial plan, and 77% rely on gut instincts to make investing decisions. This lack of direction persists even though most cite retirement as their chief financial concern. Other top worries include the cost of long-term care, out-of-pocket medical expenses, and inflation.

These are all thorny issues. But investing for retirement does not have to be a difficult chore. Saving is the hardest part. If you have no plan, getting one can be a simple as choosing a likely retirement year and dumping your savings into a target-date mutual fund with that year in the name. A professional will manage your risk and diversification, and slowly move you into safer fixed-income products as you near retirement.

If you are modestly more hands-on, you can get diversification and low costs through a single global stock index fund like iShares MSCI All Country or Vanguard Total World, both of which are exchange-traded funds (ETFs). You can also choose a handful of stock and bond index funds if you prefer a bit more involvement. (You can find good choices on our Money 50 list of recommended funds and ETFs.) Such strategies will keep you focused on the long run, which for retirement savers never goes out of fashion.

Read next: Why a Strong Dollar Hurts Investors And What They Should Do About It

MONEY Social Security

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

teacher in lecture hall
Gallery Stock

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

Some U.S. workers who have paid into the Social Security system are in for a rude awakening when the checks start coming: Their benefits could be chopped up to $413 per month without advance warning.

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

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

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

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

WHY WEP?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MONEY Ask the Expert

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

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

Q. I lost my WWII husband on January 14, 2014. It was a common-law marriage. I worked for over 50 years in the fields of education and medicine. However, many of the places where I worked did not have Social Security. I have turned in all the evidence required to prove that we presented ourselves as husband and wife. Texas recognizes common-law marriages. I am confined to a wheelchair. I served our country, as a civilian commissioned as a 2nd Lt., in the Air Force and Army overseas. Please help me as I am going to be homeless. – Joan

A. In the six weeks since Joan wrote me this note, she found a place to live. But she is no closer to resolving her problems with Social Security. It is easy to paint the agency as a heartless bureaucracy preventing an impoverished, 80-year-old veteran from getting her widow’s benefit. But there’s nothing about Joan’s story that is easy, and her problem is one that is becoming all too common.

Today more and more couples are living together without getting married, especially Millennials and Gen Xers. And many of them are having children and raising families. More than 3.3 million persons aged 50 and older were in such households in 2013, according to the U.S. Census Bureau.

There can be sound reasons for avoiding legal marriage. But when it comes to Social Security, you and your family may pay a high price by opting for a common-law union. Quite simply, it may be difficult, if not impossible, to claim benefits. And that can damage the financial security of your partner, children and other dependents. If you are in a common-law marriage, here are the three basic requirements for claiming benefits:

1. Your state recognizes common-law marriage. And yours may not. Only 11 states plus the District of Columbia recognize these marriages—among them, Colorado, New Hampshire, and Texas, which is Joan’s state of residence.

For your partnership to qualify, these states generally require that you both agree that you are married, live together and present yourselves in public as husband and wife. But the specifics of these rules are different in many states and usually complicated.

Social Security rules follow state laws when determining eligibility for spousal and survivor benefits. (The same policy applies to same-sex marriage.) If you do qualify, you will be able to receive the same benefits as you would with a traditional marriage, including spousal or survivor benefits.

2. You’ve got plenty of documentation. Social Security requirements for claiming survivor benefits call for detailed proof of the union. For an 80-year old, wheelchair-bound person like Joan, that’s a challenge to provide, especially in the case of a deceased spouse. Among other documents, she must complete a special form, plus get similar forms filled out by one of her blood relatives and two blood relatives of her late partner, John.

3. You’re prepared to fight bureaucratic gridlock. Joan has had multiple meetings with Social Security postponed for reasons she does not understand. She has been told she does not qualify as a common-law spouse under Texas laws. But the reasons she has been given may be incorrect. She says, for example, a Social Security rep told her that she and John needed to own a home to qualify. This is not true. She needs only to document that they lived as husband and wife and held themselves out to be married. Beginning in 2003, Texas made it harder for couples to qualify as common-law spouses, which could complicate Joan’s case.

Making matters even more difficult, Social Security has other convoluted rules that can change or even invalidate her benefits. Joan, it turns out, took a lump-sum payment from her government pension decades ago. That triggers something called the Government Pension Offset rule, which may prevent her from receiving a survivor’s benefit based on John’s earnings record. (For more on that rule, click here.)

Clearly, older Americans need more help than we’re giving them to navigate Social Security, Medicare, Medicaid and other highly regulated and complicated safety-net programs. This is hard stuff even for experts. It is not possible for the rest of us to understand without more knowledgeable assistance.

Meanwhile, for those in common-law marriages it’s important to plan ahead now. If you can’t qualify for Social Security benefits, you will need to save more while you’re still working. If your state does recognize common-law marriage, find out what documentation you’ll need, so you’ll have it when you file your claim. The last thing you’ll want to do in retirement is struggle with the Social Security bureaucracy.

“I am pushing 80 and this has been going on now for two years,” said Joan, a former special-needs educator, in a recent email. “I hope my health holds up as I have no life. What a way to treat an American citizen in a wheelchair who can teach the deaf to talk, the dyslexic to read and the stuttering to talk. I am just useless living in a room.”

Joan has another Social Security appointment scheduled this week.

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 a research fellow at the Center for Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: The One Investment You Most Need for a Successful Retirement

MONEY index funds

The One Investment You Need Most For A Successful Retirement

two men walking toward hole on golf course
Chris Ryan—Getty Images

Market returns may be lower in future. But you can make the most of them by focusing on low-cost funds and ETFs.

Whether you’re still building your nest egg or tapping it for income, you need to re-evaluate your investing strategy in light of lower projected investment returns in the years ahead. The upshot: Unless you’re putting most of your money into low-cost index funds and ETFs, you may very well be jeopardizing your shot at a secure retirement.

As if we needed more confirmation that future investment gains will likely be anemic, investment adviser and ETF guru Rick Ferri recently unveiled his long-term forecast for stock and bond returns. It’s sobering to say the least. Assuming 2% yearly inflation, he estimates stocks and bonds will deliver annualized gains of roughly 7% and 4% respectively over the next few decades. That’s quite a comedown from the 10% for stocks and 5% or so for bonds investors had come to expect in past decades.

Given such undersized projected rates of return, you can’t afford to give up any more of your gain to fees than you absolutely have to if you want to have a reasonable shot at attaining and maintaining a secure retirement. Which means broad-based index funds or ETFs with low annual expenses should be the investment of choice for individual investors’ portfolios.

Check Out: 4 Retirement Mistakes That Can Cost You $250,000 or More

Here’s an example. Let’s say you’re 25, earn $40,000 a year, get 2% annual raises and plan to retire at 65. Back when stocks were churning out annualized gains of 10% and bonds were delivering 5% yearly, you might reasonably expect an annualized return of 8% or so from a 60% stocks-40% bonds portfolio. Assuming 1.25% in annual expenses—about average for mutual funds, according to Morningstar—that left you with an annual return of roughly 6.75%. Given that return, you would have to save about 11% of salary through0ut your career to end up with a $1 million nest egg at retirement.

But look at how much more you have to stash away each year if returns come in at current low projections. If stocks return 7% annually and bonds generate gains of 4%, a 60-40 portfolio would return roughly 6%. Deduct 1.25% in expenses, and you’re looking at an annualized return of 4.75%. With that return, the 25-year-old above would have to save 17% of salary annually to accumulate $1 million by age 65. In short, he would have to increase the percentage of salary he devotes to saving by almost 55% each year, enough to require a major lifestyle adjustment.

There’s not much you can do to boost the returns the market delivers. But you do have some control over investment expenses. Suppose that instead of shelling out 1.25% a year in expenses, our 25-year-old lowers annual costs to 0.25% by investing exclusively in low-cost index funds and ETFs. That would boost his potential return on a 60-40 portfolio by one percentage point from 4.75% to 5.75%. With that extra percentage point in return, our hypothetical 25-year-old would be able to build a $1 million nest egg at 65 by saving 13% of salary annually instead of 17% year. Granted, 13% is still more than the 11% he had to save when he was paying 1.25% annually in expenses and stocks and bonds were delivering higher historical rates of return. But investing low-fee index funds and ETFs clearly gives him a better shot at building a seven-figure nest egg than he would have with funds that charge higher expenses.

Check Out: 10 Smart Ways To Boost Your Investment Results

Holding the rein on expenses in the face of expected subpar returns is just as important when you’re tapping your nest egg. For example, if you follow a systematic withdrawal system like the 4% rule—i.e., draw 4%, or $40,000, initially from a $1 million 60% stocks-40% bonds portfolio and increase that amount each year for inflation—reducing annual expenses by a percentage point will significantly increase the probability that your nest egg will last 30 years or more.

Can I guarantee that you’ll be able to duplicate these results exactly? Of course not. Given the choices in your 401(k) or other retirement accounts, you may not be able to reduce expenses as much as in these scenarios. Even if you can, there’s no assurance that every cent you save in expenses will translate to an equivalent gain in returns (although research shows funds with lower costs do tend to outperform their high-cost counterparts).

And let’s not forget that we’re dealing with projections here. They may very well get it wrong. Even if they’re spot on, you won’t earn that annualized return year after year. Some years will be higher, others lower, which will affect both the size of the nest egg you accumulate as well as how long it will last. It’s also possible that you may be able to generate a higher return than the market ultimately delivers (although doing so typically means taking on more risk).

Check Out: The Retirement Income Mistake Most Americans Are Making

But the point is this: If returns do come in lower than in the past—which seems likely given the current low level of interest rates—the more you stick to low-cost index funds and ETFs, the better the shot that you’ll have at accumulating the savings you’ll need to maintain your standard of living in retirement, and the more likely your savings will last at least as long as you do.

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

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MONEY retirement planning

How to Make Sure Your Retirement Adviser Is On Your Team

two people the same bike
Claire Benoist

A new rule would require financial advisers to act solely in their clients' best interest when giving retirement advice. Until that happens, here's how you can protect yourself.

In a move aimed at improving consumer protection for investors, the U.S. Labor Department today proposed a rule that would reduce conflicts of interest for brokers who advise on retirement accounts.

The proposed rule would require brokers to act solely in their clients’ best interests when giving advice or selling products related to retirement plans, including 401(k)s or IRAs.

Conflicted advice has been a longstanding problem for anyone nearing retirement—a parade of financial advisers will line up to help you roll over your 401(k) into an individual retirement account. And all too often, the guidance you get may improve your adviser’s returns more than yours.

A report issued in February by the Council of Economic Advisers found that conflicted financial advice costs retirement investors an estimated $17 billion a year. That’s why President Obama announced his support for the proposal back in February.

The new rule would require brokers to follow what is known as a fiduciary standard, which already applies to registered investment advisers. In contrast to RIAs, stockbrokers—who may go by “wealth manager” or some other title—follow a less stringent “suitability” standard, which lets them sell investments that are appropriate for you but may not be the best choice.

Many brokers do well by their customers, but some don’t. “A broker might recommend a high-cost, actively managed fund that pays him higher commissions, when a comparable lower-cost fund would be better for the investor,” says Barbara Roper, director of investor protection for the Consumer Federation of America.

During the next 75 days, the rule will be open to public comments. After that, the Labor Department is expected to hold a hearing and receive more comments. After that, the rule could be revised further. And it’s not clear when a final rule would go into effect—perhaps not before Obama leaves office.

An earlier Labor Department measure was derailed in 2011 by Wall Street lobbyists, who argued it would drive out advisers who work with small accounts. The new measure carves out exceptions for brokers who simply take orders for transactions. It also permits brokers to work with fiduciaries who understand the nature of their sales role.

Securities and Exchange Commission chairwoman Mary Jo White has also announced support for a fiduciary standard that would protect more individual investors beyond just those seeking help with retirement accounts. And the New York City Comptroller recently proposed a state law that would require brokers to tell clients that they are not fiduciaries.

Until those measures take effect—and even if they do—protect your retirement portfolio by following these guidelines:

Find out if you come first. Ask your adviser or prospective adviser if she is a fiduciary. A yes doesn’t guarantee ethical behavior, but it’s a good starting point, says Roper.

Then ask how the adviser will be paid. Many pros who don’t receive commissions charge a percentage of assets, typically 1%. Some advisers, however, are fiduciaries in certain situations but not all. So ask if the adviser is compensated in any other way for selling products or services. “You should understand what the total costs of the advice will be,” says Fred Reish, a benefits attorney with Drinker Biddle.

Many RIAs work with affluent clients—say, those investing at least $500,000—since larger portfolios generate larger fees. That’s one reason other investors end up with brokers, who are often paid by commission. Have a smaller portfolio? Find a planner who will charge by the hour at GarrettPlanning.com or findanadvisor.napfa.org (select “hourly financial planning services”). Your total cost might range from $500 for a basic plan to $2,500 or more for a comprehensive one.

Beware a troubled past. Any financial professional can say he puts his clients’ interests first, but his past actions might contradict that. To see whether a broker has run afoul of customers or regulators, inspect his record at brokercheck.finra.org. RIAs, who are regulated by the SEC and the states, must file a disclosure form called ADV Part 2, which details any disciplinary actions and conflicts of interest; you can look it up at adviserinfo.sec.gov.

150414_RET_Getapro_graphic

Favor a low-cost approach. A fiduciary outlook should be reflected in an adviser’s investment choices for you—and their expense. “Before making any recommendations, your adviser should first ask how your portfolio is currently invested,” says Mercer Bullard, a securities law professor at the University of Mississippi. Your 401(k) may have low fees and good investment options, so a rollover might be a bad idea.

If the adviser is quick to suggest costly, complex investments such as variable annuities, move on. “Most investors are best off in low-cost funds,” says Bullard. And with so much at stake, you want an adviser who’s more concerned with your costs than his profits.

Read Next: Even a “Fiduciary” Financial Adviser Can Rip You Off If You Don’t Know These 3 Things

MONEY money advice

Money Advice for the Class of 2015 From 8 Recent College Grads

Who better to give real-world financial advice than recent grads who are making the transition to financial adulthood

To help new college graduates prepare for the financial challenges ahead, MONEY lined up a panel of experts: young adults from the Class of 2014 and other recent years who have already made the transition to post-college finance. These recent grads have taken big steps to launch their financial futures, and their tips address everything from managing everyday spending to planning for retirement. No matter what your age, you can learn plenty from their experience.

  • José Anaya

    150414_FF_CollegeAdvice_JoseAnaya
    Jose Anaya

    Biola University Class of 2014
    Age: 22
    Home town: San Francisco
    Master of: Debt management

    Planning his wedding and prepping for real world expenses while still a senior in college, José Anaya decided to take a conscious step toward securing his financial future. After hearing rumblings on campus about Dave Ramsey’s Financial Peace University, he started attending sessions to boost his financial savvy.

    Upon graduation, Anaya and his wife, Adaline, applied Ramsey’s strategy of assigning every dollar a purpose. The purpose they chose? Paying off their approximately $117,000 in student loans. The couple pays more than $1,100 a month and are on track to meet the government’s standard 10-year repayment plan, but for the Anayas, that’s just not fast enough.

    “We are talking with different long-term planners to figure out how to expedite our game plan,” José says. “We are trying to get rid of debt as quickly as we can.”

    Advice: “College debt and financial needs ahead could create a lot of stress. The only way to overcome that stress is by looking at the facts, crunching the numbers, and creating a game plan to tackle the financial challenges ahead. Be honest about what you owe and what it will take to pay that off, and have courage.”

  • Lisa Bernardi

    150414_FF_CollegeAdvice_Bernardi
    Lisa Bernardi

    American University of Paris Class of 2014
    Age: 22
    Home town: Chicago
    Master of: Long-term career planning

    When Lisa Bernardi returned to the United States after studying abroad, she knew she wanted to move to Chicago. With the help of a recruiting agency, she pursued two separate offers and negotiated her salary with each company. Then she took a surprising step: she accepted the lower offer.

    From her research, she had found that one of the companies had tripled in size in over a year, while the other had started small and stayed small for over a decade. “I’ve gained much more responsibility than I would have at the other one,” she says of her current position with the fast-growing company. “I also considered the offices and how happy people were here, and saw it was not the same atmosphere.”

    Even though the recruiting agency tried to convince her to take the higher-paying position, Bernardi stuck to her guns. “People don’t expect desperate college grads to stand up for themselves,” she says. “I took that risk for myself.”

    Advice: “It’s tempting to take the first offer you get, especially when you’ve been applying for months, but make sure you take some time to think it through and ask yourself about your long-term potential in that position. Where do you see yourself in six months, two years, five years, if you follow that path?”

  • Megan Beatty

    150414_FF_CollegeAdvice_Beatty
    Megan Beatty

    Biola University Class of 2014
    Age: 22
    Home town: Denver
    Master of: Thrift

    After graduation, Megan Beatty was dismayed by the amount of money she saw going toward tasks that she felt she could tackle on her own. So she starting working on do-it-yourself projects that she considered just “a Google search and an hour away.” Now Beatty has a wealth of money-saving knowledge of cars, home repair, technology, and taxation. When her laptop stopped working, for example, she fixed it on her own with tools that cost her $80 — thus avoiding an estimated $500 repair bill from Apple.

    Her research doesn’t stop there. Instead of using Uber or Lyft to get in to work every day (like some co-workers), Beatty researched cheap parking lots in the city and, through her employer, was able to use pretax dollars to pay for parking.

    Advice: “Financially, never take the first easy way out. The most accessible, easy option is always going to be the most expensive.”

  • Kirk Leonard

    150414_FF_CollegeAdvice_Leonard
    Kirk Leonard

    Lamar University Class of 2013
    Age: 24
    Home town: Nederland, Texas
    Master of: Retirement Planning

    When Kirk Leonard started his job as an office manager of a dialysis facility, the company didn’t offer a retirement plan. After witnessing a colleague leave the company in favor of a competitor that offered better benefits, he knew it was time to do something about employee retention.

    Though the company had talked for years about implementing a 401(k) for employees, high fees always halted the process. Already a savvy negotiator — during the hiring process he negotiated a 10% pay bump — he got to work researching options. He ended up proposing to his employers a Simple IRA with a 3% match, which his company agreed to implement. Now he and 35 of his colleagues have a new retirement savings plan.

    Advice: “Basically, confidence is key. Notice I said confidence, not arrogance. There’s a fine line between the two that I am constantly having to watch.”

  • David Russell

    150414_FF_CollegeAdvice_Russell
    David Russell

    Texas Christian University Class of 2012 / Oklahoma State University (M.A.) 2013
    Age: 24
    Home town: Dallas
    Master of: Negotiation

    David Russell is prepared. By researching compensation on websites like Glassdoor, he was able to interview for an analyst position with a wealth management firm in Dallas with a target salary in mind. “It’s important to do your homework,” he says. “You can’t just pull numbers out of nowhere.”

    And when you have a number in mind, don’t settle. When Russell was interviewing straight out of graduate school in 2013, he was offered a position with a starting salary that was lower than he wanted. With each party standing firm, Russell decided to walk away and pursue other options. “A few minutes later they emailed back with the number I wanted,” he says. “I think confidence and persistence at the end of the day will lead to a better negotiation as long as you’ve done your homework and show you’ve done your research.”

    Advice: “If a company is giving you a second or third interview, they are interested.”

  • Elizabeth Bybordi

    Elizabeth Bybordi
    Elizabeth Bybordi

    University of Central Florida Class of 2011
    Age: 25
    Home town: New York City
    Master of: Money management

    Elizabeth Bybordi manages daily spending with a simple comparison: value vs. price. “I’d much rather bring lunch and have a night out or go to brunch on Sunday with my friends than buy a $10 salad for lunch every day,” she says.

    To keep herself focused, she views her money as lump sums. After moving 33% of her paycheck into a savings account (from which she makes automatic contributions to her Roth IRA), she lives on the remaining 67%. After rent and bills, she can spend down her remaining funds because she’s already taken care of important expenses and savings.

    Her penny-pinching strategies include walking 30 minutes to work to avoid paying subway and cab fares, and lugging her laundry from her Manhattan apartment building — which lacks a laundry room — to a self-service laundromat down the street. These small sacrifices allow her to spend money on things that are important to her.

    “I don’t want to just deny myself everything,” she says. “What’s the point of living in New York City when you’re young if you can’t enjoy it?”

    Advice: Check your bank account daily. “If you’re going over, at that point reevaluate to see where you have to cut back and determine what’s wasteful or unnecessary.”

  • Kristine Nicolaysen-Dowhan

    Kristine Nicolaysen-Dowhan, University of Michigan class of 2012
    Dustin Aksland

    University of Michigan Class of 2012
    Age: 24
    Home town: Grosse Ile, Mich.
    Master of: Housing, Saving, Retirement Planning

    For Kristine Dowhan, the transition back into her mom and stepdad’s home after graduation was fairly easy. An independent youth, she was already used to doing her own laundry and buying her own specialty food items. And rent? Her parents didn’t charge it.

    How do parents feel about kids who boomerang home? “I think with parents, they don’t necessarily mind,” she says, “as long as they don’t feel that they’re going to be stuck with you forever.”

    And Dowhan took advantage of her low-cost housing. Her first paycheck went to necessities like new work clothes, the second went to paying off her credit card, and the third went to Christmas presents. By that time she received her fourth paycheck, she qualified for her company’s 401(k) and began directing 75% of her income into retirement savings.

    “If you’re only home four nights a week because you’re visiting friends the other nights,” she says, “why waste money on your own place?”

    Dowhan lived at home for a year, during which she spent enough time at her job to know it was a good fit. She also saved up enough money to buy her own house: a fixer-upper with spare rooms she may rent out.

    Advice: “You never know where life will take you, or what opportunities might come up. So don’t rush.”

  • Sean Starling

    Sean Starling, Morehouse College class of 2013
    Dustin Aksland

    Morehouse College Class of 2013
    Age: 25
    Home town: Atlanta
    Master of: Budgeting

    After graduation, Sean Starling was shocked by the financial realities that hit him.

    Accustomed to living in a dorm and eating on a meal plan, Starling “didn’t really know much about how far the dollar went,” he says. Once he became responsible for bills and rent, he knew he had to get a handle on his spending. “What I really had to do was just budget and determine what was a need versus a want,” he says. He started using the finance tracking website Mint.com, which he says gave him a clear, concise way to look at what he was saving versus what he was spending. Later on, he found he was more comfortable tracking his money with an Excel spreadsheet, so he used that instead.

    Advice: “Whether you use a piggy bank or Mint or an Excel spreadsheet, find a way to make the savings process your own.”

MONEY retirement income

Why Are States Leaving Billions in Retiree Income on the Table?

Many elderly can afford to pay more in taxes. And with a growing number of needy seniors to support, states can't afford to pass up that revenue.

Illinois is the national poster child for state budget messes. My home state faces a $7.4 billion general fund deficit and a $12 billion revenue shortfall. One proposed idea for plugging at least part of the horrific shortfall: tax retirement income. But our new governor, Republican Bruce Rauner, has rejected the idea.

Illinois exempts all retirement income from state taxes—Social Security, private and public pensions, and annuities. We’re leaving $2 billion on the table annually, according to the state’s estimates. And we’re hardly alone: 36 states that have an income tax allow some exemption for private or public pension benefits, and 32 exempt all Social Security benefits from tax, according to the Institute on Taxation and Economic Policy (ITEP). States currently considering wider income tax exemptions for seniors include Rhode Island and Maryland.

With the April 15 tax day just around the corner, it’s a timely moment to ask: What are these politicians thinking?

Income tax exemptions date back to a time when elderly poverty rates were much higher than they are today (federal taxation of Social Security began in the 1980s). As recently as 1970, almost 25% of Americans older than 65 lived in poverty, according to the Census Bureau; now it’s around 9%. Today, it still makes sense to tread lightly on vulnerable lower-income seniors, many of whom live hand to mouth trying to meet basic expenses. And the number of vulnerable seniors is on the rise.

MORE SENIORS

But much of the benefit of state retirement income exemptions goes to affluent elderly households. The cost of these exemptions is high, and it’s going to get higher as our population ages. In llinois, the number of senior citizens is projected to grow from 1.7 million in 2010 to 2.7 million by 2030. That points to a demographic shift that will mean a shrinking pool of workers will be funding tax breaks for a growing group of retirees.

So there’s a real need for states to target these tax breaks to seniors who really need them. Yet one of the plans floated in Rhode Island would exempt all state, local and federal retirement income, including Social Security benefits—from the state’s personal income tax. The Social Security proposal is an especially good example of a poorly targeted break.

Currently, Rhode Island uses the federal formula for taxing Social Security, which already protects low-income seniors from taxes. Under the federal formula, beneficiaries with income lower than $25,000 ($32,000 for couples) are exempt from any tax (income here is defined as adjusted gross plus half of your Social Security benefit). Up to 50% of benefits are taxed for beneficiaries with income from $25,000 to $34,000 ($32,000 to $44,000 for married couples). For seniors with incomes above those levels, up to 85% of benefits are taxed.

If Rhode Island decides to exempt all Social Security income from taxation, more than half of the benefit will flow to the wealthiest 20 percent of taxpayers, according to an ITEP analysis.

“The poorest seniors in Rhode Island wouldn’t get a dime from this change, because they already don’t pay state taxes on Social Security,” says Meg Wiehe, ITEP’s state tax policy director.

WORKING LONGER

Another tax fairness issue is inequitable treatment of older workers and retirees. The percentage of older workers staying in the labor force beyond traditional retirement age is rising—and many of them are sticking around just to make ends meet. Those workers are bearing the full state income tax burden, effectively subsidizing more affluent retired counterparts.

Some tax-cut advocates might argue that breaks for seniors will help retain or attract residents to their states. But numerous studies show that few seniors move around the country for any reason at all. Just 50% of Americans age 50 to 64 say they hope to retire in a different location, according to a recent survey by Bankrate.com, and the rate drops to 20% for people over 65.

For those who do move, taxes are a consideration—but not the only one.

“A lot of factors go into the decision,” says Rocky Mengle, senior state analyst at Wolters Kluwer, Tax & Accounting US. “Climate, proximity to family and friends are all very important, along with the overall cost of living. But I’d certainly throw taxes into the mix as a consideration.”

Smart tax policy makers and politicians should take all these factors into consideration—especially in states that are facing crushing deficits and debt burdens. Targeted exemptions for vulnerable seniors make sense, but the breaks should be affluence-tested.

“The scales would vary state to state,” says Wiehe. “But a test that makes sure taxation isn’t a blanket giveaway with most of it going to the most affluent households.”

Indeed. In the golden years, not all the gold needs to go to the rich.

Read next: 1 in 3 Older Workers Likely to Be Poor, or Near Poor, in Retirement

MONEY 401(k)s

1 in 3 Older Workers Likely to Be Poor or Near Poor in Retirement

businessman reduced to begging
Eric Hood—iStock

Fewer Americans have access to a retirement plan at work. If you're one of them, here's what you can do.

A third of U.S. workers nearing retirement are destined to live in or near poverty after leaving their jobs, new research shows. One underlying cause: a sharp decline in employer-sponsored retirement plans over the past 15 years.

Just 53% of workers aged 25-64 had access to an employer-sponsored retirement savings plan in 2011, down from 61% in 1999, according to a report from Teresa Ghilarducci, professor of economics at the New School. More recent data was not available, but the downward trend has likely continued, the report finds.

This data includes both traditional pensions and 401(k)-like plans. So the falloff in access to a retirement plan is not simply the result of disappearing defined-benefit plans, though that trend remains firmly entrenched. Just 16% of workers with an employer-sponsored plan have a traditional pension as their primary retirement plan, vs. 63% with a 401(k) plan, Ghilarducci found.

Workers with access to an employer-sponsored plan are most likely to be prepared for retirement, other research shows. So the falling rate of those with access is a big deal. In 2011, 68% of the working-age U.S. population did not participate in an employer-sponsored retirement plan. The reasons ranged from not being eligible to not having a job to choosing to opt out, according to Ghilarducci’s research.

She reports that the median household net worth of couples aged 55-64 is just $325,300 and that 55% of these households will have to subsist almost entirely on Social Security benefits in retirement. The Center for Retirement Research at Boston College and the National Institute on Retirement Security, among others, have also found persistent gaps in retirement readiness. Now we see where insufficient savings and the erosion of employer-based plans is leading—poverty-level retirements for a good chunk of the population.

At the policy level, we need to encourage more employers to offer a retirement plan. On an individual level, you can fix the problem with some discipline. Even those aged 50 and older have time to change the equation by spending less, taking advantage of tax-deferred catch-up savings limits in an IRA or 401(k), and planning to stay on the job a few years longer. That may sound like tough medicine, but it’s nothing next to struggling financially throughout your retirement.

MONEY retirement planning

4 Ways to Set Yourself Up for Early Retirement

Carlos and Jessica Gomez
Scott Council Carlos and Jessica's real estate purchases have put their daily finances at risk.

Knocking off at 55 is hard but not impossible. Here's what one young family needs to do to reach their goal.

Carlos O. Gomez, 38, wants to retire at 55. To that end, the high school assistant principal from Oceanside, Calif., puts $11,100 of his $106,000 salary into retirement accounts that include a pension expected to pay $52,000 a year. With another $68,100 he and his wife, Jessica Grimmett-Gomez, 34, have saved, he’s tried all kinds of growth strategies—from cautious (a fixed annuity at 3%) to risky (two Roth IRAs in Ford stock).

He’s also bought three rental properties over three years, though he now realizes that using $25,000 to buy the last in July was a mistake. The couple have very little cash. And with Jessica, a former dental assistant, staying home with their two toddlers, they don’t have a lot of wiggle room in their income for emergencies. As a result, they’ve racked up $6,300 on credit cards, partly due to expenses on the rentals. “I was trying to make sure we’d have income in retirement,” Carlos says sheepishly, “but I got overzealous.”

150402_PRO_Gomez_graphic
Money

Here are 4 things the Gomezes can do to get back on track.

1. Keep a Cushion
San Diego financial planner Scott Kilian says the couple’s priorities should be paying off credit card debt and saving three months’ expenses ($21,000) in cash. They can free up $1,000 a month by trimming retirement savings and reallocating discretionary spending to achieve both in about two years.

2. Sell the Rentals Later
With $78,000 tied up in equity, “another real estate crisis could impact their net worth dramatically,” Kilian says. That said, the units are producing $338 in net income a month. So Kilian suggests waiting to sell until they have trouble finding tenants.

3. Mix the Mix
Their nest egg is now 60% in equities, 40% fixed income. Kilian says they can boost returns by going 80%/20%. They can surrender the annuity in his 403(b) at no penalty and divvy the money among stock and bond funds, then sell the Ford stock to buy the diversified Vanguard Total World fund.

4. Delay the Date
To quit at 55, Carlos needs $1.3 million, as his state pension makes him ineligible for Social Security. That means saving $55,000 more a year—which is unlikely. But if they up their annual savings to $33,000, he can quit at 62. Once the cash fund is built and debt paid, they can redirect the $1,000 a month. And if Jessica returns to work full-time—which she said she’ll consider—they can hit the goal.

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MONEY retirement planning

3 Ways to Be Sure You’re Not Fooling Yourself About Your Retirement Readiness

150331_RET_READYFORRETIREMENT
Abrams/Lacagnina—Getty Images

Having a plan is important. But so is knowing whether your plan is realistic.

Are you on track toward a secure retirement? Before you answer, consider this: A new study shows that many people who aren’t preparing well for retirement apparently think they are—while others who actually are on track may erroneously believe they’re not.

In a recent study titled “Do U.S. Households Perceive Their Retirement Preparedness Realistically?” researchers from the University of Alabama and Ohio State found that 58% of the nearly 2,300 full-time workers age 35 to 60 polled in the Federal Reserve’s Survey of Consumer Finances weren’t on a path to a secure retirement. They also concluded that just under half of those who are unprepared didn’t realize that they were falling short. No surprises there. Plenty of studies show that lots of people are woefully unprepared for retirement, while other research finds that many are overconfident about their prospects.

But the study also revealed some counterintuitive twists. For example, the researchers found that just over half of those who are actually preparing decently for retirement don’t view themselves as being on track. And among workers who weren’t prepared, those who had a traditional defined benefit pension were more likely to be unrealistic about where they stood than those who lack a pension. These sorts of surprising disconnects could be the result of people simply not knowing how to evaluate their retirement preparedness or, in the case of pensions, mistakenly thinking that the mere fact that they have a pension means they’ll have sufficient retirement income to maintain their standard of living.

Clearly, you’re better off being on track for retirement than not. But either way, it’s also important that your outlook be accurate, so you have a more realistic notion of what you must do to have a decent shot at a secure retirement. Here are three things you can do to make sure you’re being realistic about your retirement readiness.

1. Crunch the numbers—and I mean really crunch them. If you’ve been socking away money diligently in a 401(k) or other retirement plan and investing in a broadly diversified portfolio, chances are you’re making decent headway toward a secure retirement. But the only way to know for sure is to do a full-fledged assessment of your progress.

Specifically, you need go to a retirement calculator that uses Monte Carlo analysis and plug in such information as the amount you currently have saved, the percentage of salary you’re contributing to retirement accounts each year, how you’re investing your savings, when you plan to retire, and how much you expect to spend annually in retirement. Based on that information, the calculator can estimate the probability that you’re on track toward accumulating the resources necessary to generate the income you’ll need to sustain you throughout retirement. If you’re not comfortable doing this sort of exercise on your own, you should consider having a financial adviser run the numbers for you.

Check Out: Should You Bet Your Retirement On Warren Buffett?

2. Fine-tune your plan, if necessary. There’s no official standard of what constitutes “being on track.” Generally, though, if the type of analysis I recommend shows that you have less than an 80% or so chance of generating the lifetime income you’ll need once you retire, that’s a sign you need to step up your efforts. If that’s the case—and the study cited above suggests it will be for most people—you can see what steps might tilt the odds of success more in your favor.

Typically, the single best way to improve your retirement outlook is to increase the amount you contribute to a 401(k), IRA or other retirement savings plan. Contributing even an extra couple of percentage points of pay each year can fatten the size of your nest egg by 20% over the course of a career. Revising your investing strategy may also help, but be careful: Taking a more aggressive stance by loading up with more stocks may boost returns, but it also makes your portfolio more vulnerable to market setbacks. A more effective tweak: Look for ways to cut investment fees. Reducing annual costs by even a half a percentage point a year can have the same effect as saving roughly an extra 1% of pay throughout your career. Postponing retirement a few years, claiming Social Security at a later age, and downsizing or relocating can also increase your chances of retirement success.

Check Out: Drink That Latte! How To Save And Still Enjoy Life

3. Reassess your readiness periodically. Bumps and detours along the road to retirement are the rule, not the exception. Indeed, a recent TD Ameritrade survey found that two-thirds of Americans have had their retirement planning disrupted by a job loss, illness, or other problem. And even if you’re fortunate enough to sail through your career without such a setback, there’s always the possibility that a market downturn will devastate your nest egg and seriously damage your retirement outlook.

Which is why it’s crucial that every year or so you plug updated information up that retirement calculator and get a fresh evaluation of where you stand, and take corrective measures if necessary. In periods of market turmoil, you may also want to give your retirement plan a “crash test” just to be sure a severe market correction won’t irretrievably damage your retirement prospects.

Bottom line: If you want a secure retirement, you’ve got to plan for it during your career. But it’s also a good idea to have an accurate sense of whether that planning is actually panning out.

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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