MONEY retirement income

3 Retirement Loopholes That Are Likely to Close

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Design Pics/Darren Greenwood—Getty Images

The government has a knack for catching on to the most popular loopholes.

There are plenty of tips and tricks to maximizing your retirement benefits, and more than a few are considered “loopholes” that taxpayers have been able to use to circumvent the letter of the law in order to pay less to the government.

But as often happens when too many people make use of such shortcuts, the government may move to close three retirement loopholes that have become increasingly popular as financial advisers have learned how to exploit kinks in the law.

1. Back-door Roth IRA conversions
The U.S. Congress created this particular loophole by lifting income restrictions from conversions from a traditional Individual Retirement Account (IRA) to a Roth IRA, but not listing these restrictions from the contributions to the accounts.

People whose incomes are too high to put after-tax money directly into a Roth, where the growth is tax-free, can instead fund a traditional IRA with a nondeductible contribution and shortly thereafter convert the IRA to a Roth.

Taxes are typically due in a Roth conversion, but this technique will not trigger much, if any, tax bill if the contributor does not have other money in an IRA.
President Obama’s 2016 budget proposal suggests that future Roth conversions be limited to pre-tax money only, effectively killing most back-door Roths.

Congressional gridlock, though, means action is not likely until the next administration takes over, said financial planner and enrolled agent Francis St. Onge with Total Financial Planning in Brighton, Michigan. He doubts any tax change would be retroactive, which means the window for doing back-door Roths is likely to remain open for awhile.

“It would create too much turmoil if they forced people to undo them,” says St. Onge.

2. The stretch IRA
People who inherit an IRA have the option of taking distributions over their lifetimes. Wealthy families that convert IRAs to Roths can potentially provide tax-free income to their heirs for decades, since Roth withdrawals are typically
not taxed.

That bothers lawmakers across the political spectrum who think retirement funds should be for retirement – not a bonanza for inheritors.

“Congress never imagined the IRA to be an estate-planning vehicle,” said Ed Slott, a certified public accountant and author of “Ed Slott’s 2015 Retirement Decisions Guide.”

Most recent tax-related bills have included a provision to kill the stretch IRA and replace it with a law requiring beneficiaries other than spouses to withdraw the money within five years.

Anyone contemplating a Roth conversion for the benefit of heirs should evaluate whether the strategy makes sense if those heirs have to withdraw the money within five years, Slott said.

3. “Aggressive” strategies for Social Security
Obama’s budget also proposed to eliminate “aggressive” Social Security claiming strategies, which it said allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.

Obama did not specify which strategies, but retirement experts said he is likely referring to the “file and suspend” and “claim now, claim more later” techniques.

Married people can claim a benefit based on their own work record or a spousal benefit of up to half their partner’s benefit. Dual-earner couples may profit by doing both.

People who choose a spousal benefit at full retirement age (currently 66) can later switch to their own benefit when it maxes out at age 70 – known as the “claim now, claim more later” approach that can boost a couple’s lifetime Social Security payout by tens of thousands of dollars.

The “file and suspend” technique can be used in conjunction with this strategy or on its own. Typically one member of a couple has to file for retirement benefits for the other partner to get a spousal benefit.

Someone who reaches full retirement age also has the option of applying for Social Security and then immediately suspending the application so that the benefit continues to grow, while allowing a spouse to claim a spousal benefit.

People close to retirement need not worry, said Boston University economist Laurence Kotlikoff, who wrote the bestseller “Get What’s Yours: The Secrets to Maxing Out Social Security.”

“I don’t see them ever taking anything away that they’ve already given,” Kotlikoff said. “If they do something, they’ll have to phase it in.”

MONEY

You’ll Never Guess the Latest Victims of the Student Loan Crisis

hand reaching out of hole using adding machine with rolls of paper
Renold Zergat—Getty Images

A fast-growing number of seniors are hitting retirement with a student debt burden. Even their Social Security is at risk.

Most debt you can get out of—painful as it might be. Credit card debt can be cleared in bankruptcy. A mortgage can end in foreclosure. But student debt is more sticky, and it turns out it can have big consequences in retirement.

Last year, Richard Minuti’s Social Security payments were cut by 10%.

The Philadelphia native was already earning only a bit over $10,000 a year, including some part-time work as a tutor. “I was desperate,” says Minuti. “Taking 10% of a person’s pay who’s trying to live with bills, that’s the cruelty of it.”

The Treasury Department was taking the money to pay for federal student loans he had taken out years before. Just before age 50, Minuti had gone back to college to get a second bachelor’s degree and a better job in social work and counseling. But the non-profit jobs he landed afterwards were lower paying, and he defaulted on the debt.

Student debt’s painful new twist

Minuti is one of the small but expanding group of seniors who are hitting retirement with a student debt burden. Over the past decade, people over the age of 60 had the fastest growing educational loan balances of any age group, according to the Federal Reserve Bank of New York. The total amount grew by more than nine times, from $6 billion in 2004 to $58 billion in 2014.

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Only about 4% of households headed by people age 65 to 74 carry educational debt, according to a 2014 U.S. Government Accountability Office report. But as recently as 2004, student loans balances in retirement were close to unheard of, affecting less than 1% of this group.

Educational loans are very difficult to pay off when you are in or near retirement. Unlike a new college grad, there’s little prospect of years of rising salary income to help pay off the loan. That’s one reason older debtors have the highest default rate of any age group. (Also, most people who can’t pay off a loan will eventually age into being included among older debtors.) Over half of federal loans held by people over age 75 are in default, according to the GAO.

Student loan debts can’t be discharged in bankruptcy. And, as Minuti learned, federal tax refunds and up to 15% of wages and Social Security can be garnished.

This can be devastating, says Joanna Darcus, consumer rights attorney at Community Legal Services of Philadelphia.

“Most clients find me because the collection activity that they’re facing is preventing them from paying their utilities, from buying food for themselves, from paying their rent or their mortgage,” says Darcus, who works with low-income borrowers.

The number of seniors whose Social Security checks were garnished rose by roughly six times over the past decade, from about 6,000 to 36,000 people, says the GAO. Legislation from the mid-1990s ensured recipients could still get a minimum of $750 a month. At the time, this was enough to keep them from sliding below the poverty threshold. But to meet the current threshold, Congress would need to increase this to above $1,000 a month.

In other words, with enough debt, a Social Security recipient can be pulled into poverty.

“That’s pretty stressful for seniors when they understand that,” says Jan Miller, a student loan consultant who has seen a rise in his senior clients.

What’s behind the rise?

It’s not, despite what you might guess, only about parents who are taking on loans for their kids late in their careers.

In the GAO data, about 18% of federal educational debt held by seniors was from Parent PLUS loans for children or grandchildren. The remaining 82% was taken out by the borrower for his or her own education. (The GAO data differs from the New York Fed’s, showing lower total balances, so it may be missing some parental borrowing.)

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Darcus says many of her clients turned to education as a solution to unemployment and long-stagnant wages. Enrollment for all full and part-time students over age 35 increased 20% from 2004 to its recessionary peak in 2010, according to the National Center for Education Statistics.

“Among many of my clients, education is viewed as a pathway out of poverty and toward financial stability, but their reality is much different from that,” Darcus says. “Sometimes it’s their debt that keeps them in poverty, or pushes them deeper into it.”

And in recent years, both tuition and older debts have been especially difficult to pay, as home values and household assets took a hit in the Great Recession. Meanwhile, of course, the cost of higher education has soared. Tuition for private nonprofit institutions is up 78% in real dollars since 2004, according to the College Board.

What may be changing

New regulations and legislation this year may bring some relief to educational loan borrowers. The Senate in March introduced legislation to make private loans, but not federally subsidized loans, dismissible through bankruptcy.

For federal loans, more favorable income-driven repayment plans may be extended to up to 5 million borrowers this year. These plans, which have been growing in popularity since launching in 2009, adjust monthly payments according to reported discretionary income. The Department of Education is scheduled to issue new regulations by the end of 2015 that may allow all student borrowers to cap payments at 10% of their monthly income.

But it is unclear what percentage of that 5 million people are older borrowers who would benefit. Some borrowers have also complained that income-driven repayment plans require too much complex paperwork to enroll and stay enrolled. Borrowers who want to find out if they are already eligible for income-driven repayment plans can go here.

Parent PLUS loans would not be included in the new regulations. However, Parent PLUS loans can still be consolidated in order to take advantage of a similar, albeit less generous option, called the Income Contingent Repayment plan. This plan allows borrowers to cap their monthly payments at 20% of their discretionary income.

Still, some feel the best way to help seniors with student loan debt is to stop threatening to garnish Social Security benefits altogether. This spring, the Senate Aging Committee called for further investigations of the effects of student debt on seniors.

“Garnishing Social Security benefits defeats the entire point of the program—that’s why we don’t allow banks or credit card companies to do it,” said Sen. Claire McCaskill of Missouri in a statement.

Getting out from under

Richard Minuti was able to enroll in an income-based repayment plan last year with the help of a legal advocacy group. Because Minuti earned less than 150% of the federal poverty level, the government set his monthly obligation at $0, eliminating his monthly payment.

“I’m appreciative of that, thank God they have something like that,” Minuti says, “because obviously there are many people like myself who are similarly situated, 60-plus, and having these problems.”

But Deanne Loonin, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, says she doesn’t see the trend of rising educational debts ending any time soon. And some seniors will struggle with this debt well into retirement.

“I’ve got clients in nursing homes who are still having their Social Security garnished and they were in their 90s,” she says.

MONEY Saving

More Than Half of Americans are Delaying Major Life Events Because of This

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iStock

Some say money doesn’t buy happiness, but a lack of money might actually delay it.

A new study shows more than half of Americans have put off major life events like retirement and marriage because of financial worries in the last year. And that number has grown significantly since the recession, according to a poll from the American Institute of Certified Public Accountants (AICPA).

When asked whether they delayed an important life decision because of money woes, 51% of respondents answered yes, up from only 31% in 2007.

A closer look shows the number of Americans putting off certain life events for financial reasons has more than doubled. For example, 24% put off going back to college last year, up from only 11% before the financial downturn, and 18% put off retirement, compared with only 9% in 2007.

Many also put starting a family on the back burner: 12% put off getting married, compared with 6% in 2007; 13% delayed having kids, up from 5%; and 22% put off buying a home, compared with 14% before the housing bust.

The number one financial worry that held people back from these milestones? A lack of savings, cited by 60% of survey respondents.

“If you don’t have adequate savings in place or you’re having trouble paying your bills, it may make sense to hold off on major life decisions until you’re on more solid financial footing,” explained Ernie Almonte, chairman of the AICPA’s National CPA Financial Literacy Commission.

But there are many ways people can make sure financial worries don’t get in the way of life goals, Almonte added. Among them: sticking to a monthly budget to keep you living within your means, starting an emergency fund to help with unexpected costs, and increasing the amount you save from each paycheck.

 

MONEY Social Security

This Surprising Sign May Tell You When to Claim Social Security

old woman facing younger woman in profile
Liam Norris—Getty Images

For aging Americans, the condition of your skin can be a barometer of your overall health and longevity.

Skin is in, and not just for beach-going millennials. For boomers and older generations, the condition of your skin, especially your facial appearance, is a barometer of your overall health and perhaps your life expectancy, scientists say. And as the population ages—by 2020 one in seven people worldwide will be 60 or above—dollars are pouring into research that may eventually link your skin health to your retirement finances.

What does your skin condition have to do with your health and longevity? A skin assessment can be a surprisingly accurate window into how quickly we age, research shows. Beyond assessing your current health, these findings can also be used as to gauge your longevity. This estimate, based on personalized information and skin analysis, may be more reliable than a generic mortality table.

All of which has obvious implications for financial services companies. One day the condition of your skin—your face, in particular—may determine the rate you pay for life insurance, what withdrawal rate you choose for your retirement accounts, and the best age to start taking Social Security.

Skin health is also a growing focus for consumer and health care companies, which have come to realize that half of all people over 65 suffer from some kind of skin ailment. Nestle, which sees skin care as likely to grow much faster than its core packaged foods business, is spending $350 million this year on dermatology research. The consumer products giant also recently announced it would open 10 skin care research centers around the world, starting with one in New York later this year.

Smaller companies are in this mix as well. A crowd funded start-up venture just unveiled Way, a portable and compact wafer-like device that scans your skin using UV index and humidity sensors to detect oils and moisture and analyze overall skin health. It combines that information with atmospheric readings and through a smartphone app advises you when to apply moisturizers or sunscreen.

This is futuristic stuff, and unproven as a means for predicting how many years you may have left. I recently gave two of these predictive technologies a spin—with mixed results. The first was an online scientist-designed Ubble questionnaire. By asking a dozen or so questions—including how much you smoke, how briskly you walk and how many cars you own—the website purports to tell you if you will die within the next five years. My result: 1.4% chance I will not make it to 2020. Today I am 58.

The second website was Face My Age, which is also designed by research scientists. After answering short series of questions about marital status, sun exposure, smoking and education, you upload a photo to the site. The tool then compares your facial characteristics with others of the same age, gender, and ethnicity. The company behind the site, Lapetus Solutions, hopes to market its software to firms that rely heavily on life-expectancy algorithms, such as life insurers and other financial institutions.

Given the fledgling nature of this technology, it wasn’t too surprising that my results weren’t consistent. My face age ranged between 35 and 52, based on tiny differences in where I placed points on a close-up of my face. These points help the computer identify the distance between facial features, which is part of the analysis. In all cases, though, my predicted expiration age was 83. I’m not taking that too seriously. Both of my grandmothers and my mother, whom I take after, lived well past that age—and I take much better care of my health than they ever did.

Still, the science is intriguing, and it’s not hard to imagine vastly improved skin analysis in the future. While a personalized, scientific mortality forecast might offer a troublesome dose of reality, it would at least help navigate one of the most difficult financial challenges we face: knowing how much money we need to retire. A big failing of the 401(k) plan—the default retirement portfolio for most Americans—is that it does not guarantee lifetime income. Individuals must figure out on their own how to make their savings last, and to be safe they should plan for a longer life than is likely. That is a waste of resources.

I plan to live to 95, my facial map notwithstanding. But imagine if science really could determine that my end date is at 83, give or take a few years. It would be weird, for sure. But I’d have a good picture of how much I needed to save, how much I could spend, and whether delaying Social Security makes any sense. I’m not sure we’ll ever really be ready for that. But not being ready won’t stop that day from coming.

Read next: This Problem is Unexpectedly Crushing Many Retirement Dreams

MONEY real estate

This Problem Is Unexpectedly Crushing Many Retirement Dreams

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Peter Goldberg—Getty Images

Housing is most Americans' most important source of retirement security. So a sharp reduction in the rate of ownership, coupled with rising rents, is taking a toll.

The housing bust of 2008 touched every homeowner. The subsequent recovery has been selective, mainly benefiting those with the resources and credit to invest. This has had a more damaging effect on individuals’ retirement security than many might expect.

For a quarter century, home equity has been the largest single source of wealth for all but the richest households nearing retirement age, accounting for 44% of net worth in the 1990s and 35% today, new research shows. The home equity percentage of net worth is greatest among homeowners with the least wealth, reaching 50% for those with median net worth of $42,460, according to a report from The Hamilton Project, a think tank closely affiliated with the Brookings Institution.

By comparison, the share of net worth in retirement accounts is just 33% for all but the wealthiest households, a figure that drops to 21% for low-wealth households. So a housing recovery that leaves out low-income families is especially damaging to the nation’s retirement security as a whole.

There can be little doubt that low-income households largely have missed the housing recovery. Homeownership in the U.S. has been falling for eight years, down to 63.7% in the first quarter from a peak of over 69% in 2004, according to a report from Harvard University’s Joint Center for Housing Studies. Former homeowners are now renters, frozen out of the market by their own poor credit and stricter lending standards.

Meanwhile, rents are rising, taking an additional toll on many Americans’ ability to save for retirement. On average, the number of new rental households has increased by 770,000 annually since 2004, making 2004 to 2014 the strongest 10-year stretch of rental growth since the late 1980s.

The uneven housing recovery is contributing to an expanding wealth gap, the report suggests. Among households near retirement age, those in the top half of the net worth spectrum had more wealth in 2013, adjusted for inflation, than the top half in 1989. Those in the bottom half had less wealth.

Housing is by no means the only concern registered in the report. Much of what researchers point to is fairly well known: Only half of working Americans expect to have enough money to live comfortably in retirement; longevity is putting a strain on retirement resources; half of American seniors will pay out-of-pocket expenses for long-term services and supports; the percentage of dedicated retirement assets in traditional defined-benefit plans has shrunk from two-thirds in 1978 to one third today.

All of this diminishes retirement security. Individuals must adapt, and with so much riding on our personal ability to manage our own financial affairs it is surprising that the report goes to some lengths to play down the importance of what has blossomed into a broad financial education effort in the U.S.

Financial acumen is generally lacking among Americans and, for that matter, most of the world. Just half of pre-retirees, and far fewer younger folks, can correctly answer three basic questions about inflation, compound growth, and diversification, according one often-cited study. Yet researchers at The Hamilton Project assert that it is an “open question” as to whether public resources should be spent on educational efforts, citing evidence of its effectiveness as “underwhelming.”

I have argued that we cannot afford not to spend money on this effort. Yet I also understand the benefits of promoting things like automatic enrollment into 401(k) plans and automatic escalation of contributions, which The Hamilton Project seems to prefer. The truth is we need to do all of it, and more.

MONEY First-Time Dad

What Millennials are Getting Right About Retirement

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Jeffrey Coolidge—Getty Images

And what this generation still doesn't understand about investing for their future.

I was born between 1980 and 2000. This simple fact, over which I had no control, means that I am a millennial — a term that seems to become more loaded with each passing day.

Depending on whom you ask, millennials are lazy, highly educated, entitled, outwardly focused, technologically savvy, impersonal, cheap, indebted. We also have sophisticated palates and an aversion to risk. We’re afraid to commit, apolitical, and unmoored to institutions. And we love craft everything.

Ascribing an ever-expanding series of contradictory descriptors, however, has the effect of making millennials seem alien. Yet the truth is, young professionals today are simply rational actors navigating significant financial hurdles while balancing short and long-term goals.

Take retirement. I’m about 36 years from turning 65, which means I have a number of competing interests. I know that every dollar I put away in my 401(k) will help me replace my income when I no longer work (especially if it’s matched by my employer). But each dollar saved is a dollar not spent on child care or rent or paying down student loan debt. My wife and I are conscientious about our finances, but our income can be stretched so far.

Other millennials are struggling with these choices too. But all things considered, we’re actually doing quite nicely — contrary to the prevailing narrative.

T. Rowe Price recently released its exhaustive Retirement Saving & Spending Study and found millennials are socking away 6% of their annual salary, while boomers saved 8%. Meanwhile four-in-ten millennials are saving a higher percentage of their income in their 401(k) compared to a year ago, compared to 21% of boomers. Moreover three-quarters of millennials track their expenses carefully and 67% say they stick to a budget, both higher than boomers.

Young savers are also more open to nudging than their older colleagues, a sign of our humility when it comes to financing retirement.

Almost half of millennials who were auto-enrolled into a 401(k) plan wished their bosses had penciled them in at a higher rate. (The prevailing introductory savings percentage is 3%.) Only about a third of boomers wished the same. More than a quarter of millennials said they wouldn’t opt out if the auto-enrollment level was set at 10% or greater.

What kind of investments are millennials being enrolled into? According to Vanguard’s How America Saves report, which looks at the savings habits of almost 4 million participants, eight-in-ten new retirement plan entrants were solely invested in a professionally managed allocation. That means they put their money in a professionally managed target date fund, a balanced fund, or a managed account advisory service that customizes investor portfolios.

And while auto-enrollment may put new workers at a measly 3% contribution, 70% of millennials increase contributions annually. Moreover almost 40% of plans default to 4% or more compared to 28% in 2010.

Of course, there is room for improvement.

Starting early is a necessary element of achieving your retirement goals, but not sufficient. If you save 6% of your income, according to Vanguard, you’ll take have about $275,000 by the time you hit 65 (assuming a 4% real rate of return and an annual salary growth rate of 1%.) Putting away 10% will net you almost $460,000. So millennials could stand to save more.

Millennials would also do well to have a firmer grasp of what it is they’re actually investing in. For instance, almost 70% of millennials who use target-date funds agreed with the statement, “Target date funds are usually less risky than balanced funds.” This isn’t really accurate.

How risky a target date fund is depends largely on what “target date” you choose. For instance the Vanguard Target Retirement 2050 Fund — designed for younger workers who won’t retire until around the year 2050 — consists of about 90% equities. A traditional balanced fund, on the other hand, generally holds about 60% to 70% in stocks.

Millennials also don’t appreciate the diversification offered by a target date fund. Because each target date fund invests in a wide array of stocks, bonds, and other assets, these vehicles are designed to be a one-fund solution. Yet almost 80% of those same millennials agreed with the statement “It’s better to hold additional funds in your 401(k) than just a target date fund.”

Then there are those millennials who aren’t saving at all.

While it’s easy to say they lack prudence and acquiesce to the immediate pleasure of money, it’s more accurate to note that they probably cannot afford to save. The median personal income of non-savers is $28,000, almost $30,000 less than savers. Non-savers are not only more likely to have student loan debt, but their balances are higher.

My wife and I don’t save nearly enough for retirement, but then again, we don’t save enough period. Raising a small child in Brooklyn doesn’t help, neither does our chosen professions in the notoriously high-paying education and journalism sectors.

But we do what we can and when other expenses fall off (like when our son starts school) or we enjoy a nice raise we’ll direct that cash flow into our retirement and emergency funds. Millennials, after all, are practical.

MONEY withdrawal strategy

Which Generates More Retirement Income—Annuities or Portfolio Withdrawals?

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Getty Images

People's overconfidence in their investing ability makes them less likely to opt for guaranteed income.

New research by Mark Warshawsky, the retirement income guru who’s now a visiting scholar at George Mason University’s Mercatus Center, suggests more retirees should consider making an immediate annuity part of their retirement portfolio—and also highlights a reason why many people may simply ignore this advice.

When it comes to turning retirement savings into lifetime retirement income, many retirees and advisers rely on the 4% rule—that is, withdraw 4% of savings the first year of retirement and increase that amount by inflation each year to maintain purchasing power (although in a concession to today’s low yields and expected returns, some are reducing that initial draw to 3% or even lower to assure they don’t deplete their savings too soon).

But is a systematic withdrawal strategy likely to provide more income over retirement than simply purchasing an immediate annuity? To see, Warshawsky looked at how a variety of hypothetical retirees of different ages retiring in different years would have fared with an immediate annuity vs. the 4% rule and some variants. The study is too long and complicated to go into the particulars here. (You can read it yourself by going to the link to it in my Retirement Toolbox section.) The upshot, though, is Warshawsky concluded that while an annuity didn’t always outperform systematic withdrawal, an annuity provided more inflation-adjusted income throughout retirement often enough (with little risk of ever running out) that “it is hard to argue against a significant and widespread role for immediate life annuities in the production of retirement income.”

Now, does this mean all retirees should own an immediate annuity? Of course not. There are plenty of reasons an annuity might not be the right choice for a given individual. If Social Security and pensions already provide enough guaranteed income, an annuity may be superfluous. Similarly, if you’ve got such a large nest egg that it’s unlikely you’ll ever go through it, you may not need or want an annuity. And if you have severe health problems or believe for some other reason you’ll have a short lifespan, then an annuity probably isn’t for you.

Even if you do decide to buy an annuity, you wouldn’t want to devote all your assets to one. The study notes the advantage of combining an annuity with a portfolio of financial assets that can provide liquidity and long-term growth, and suggests “laddering” annuities rather than purchasing all at once as a way to get a better feel for how much guaranteed income you’ll actually need and to avoid putting all one’s money in when rates are at a low.

But there’s another part of the paper that I found at least as interesting as the comparison of systematic withdrawals and annuities. That’s where Warshawsky says he worries whether the “lump sum culture” of 401(k)s and IRAs will interfere with people seriously considering annuities. I couldn’t agree more. Too many people laser in on their retirement account balance—the whole, “What’s Your Number?” thing—rather than thinking about what percentage of their current income they’ll be able to replace after retiring. And when choosing between, say, a traditional check-a-month pension vs. a lump-sum cash out, many people still tend to put too little value on assured lifetime monthly checks.

Although the paper didn’t mention this specifically, I think there’s a related problem of people’s overconfidence in their investing ability that makes them less likely to opt for guaranteed income. I can’t tell you the number of times after doing an annuity story that I’ve gotten feedback from people who essentially say they would never buy annuity because they think they can do better investing on their own—never mind that that’s difficult-to-impossible to do without taking on greater risk because annuities have what amounts to an extra return called a “mortality credit” that individuals can’t duplicate on their own.

Along the same lines I’m always surprised by the number of people who pooh-pooh the notion of delaying Social Security for a higher benefit because they’re convinced they can come out ahead by taking their benefits as soon as possible and investing them at a 6% to 8% annual return (although why anyone should feel confident about earning such gains consistently given today’s low rates and forecasts for low returns is puzzling).

Clearly, we all have to make our own decisions based on our particular circumstances about the best way to turn savings into income that we can count on throughout retirement, while also assuring we have a stash of assets we can tap for emergencies and unexpected expenses. There’s no one-size-fits-all solution. That said, I think it’s a good idea for anyone nearing or already in retirement to at least consider an annuity as a possibility. If you rule it out, that’s fine. Annuities aren’t for everyone. Just be sure that if you’re nixing an annuity, you’re doing it for valid reasons, not because of a misplaced faith in your ability to earn outsize returns or because you’re unduly swayed by lump-sum culture.

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

Something Very Significant Just Happened to 401(k) Plans

sea of golden eggs, many emptied
Alamy

We've reached a tipping point

For decades, legions of American workers dutifully poured money into their 401(k) retirement plans. Overall contributions to these plans easily outnumbered withdrawals from the accounts of retirees ready to start using the money saved up to enjoy their golden years.

Now, however, data cited by the Wall Street Journal indicates that withdrawals from 401(k) plans are exceeding contributions. We’ve reached a tipping point largely due to the combination of retiring baby boomers and younger workers who are incapable or less interested in saving.

“Millennials haven’t moved into a higher savings rate yet,” Douglas Fisher, the head of policy development on workplace retirement for Fidelity Investment, which manages millions of 401(k) plans. “We need to start getting them to the right level.”

The most immediate implications of withdrawals exceeding contributions will be felt by the retirement industry—the companies that manage all of those 401(k)s and collect fees from them. As for the average retiree, or the average worker who one day hopes to retire, it’s unclear what effects, if any, this turn of events will have. In one likely scenario, some money-management firms are expected to lower their fees in order to increase market share in the increasingly competitive retirement plan space.

Read next: The Risky Money Assumption Millennials Should Stop Making Now

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