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

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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

MONEY Kids and Money

The 3 Most Important Money Lessons My Dad Taught Me

father letting son swipe credit card at cash register
Monashee Frantz—Getty Images

Many of our financial dos and don'ts are instilled by parents at an early age. Here's what my father passed along to me.

One of the responses I often hear from clients toward the end of a financial planning meeting is, “This sounds good. I’m going to talk to my dad about it.”

For many of us, our mothers and fathers have played a profound role in shaping our financial habits—so much so that we still discuss our plans with our parents well into our adult lives. Whether it’s deciding where to invest retirement savings, how much to pay for a first home, or how much of each paycheck to invest in a 401(k), we sometimes go to our parents to help make decisions and to doublecheck we’re on the right path.

These conversations with many of my clients have me thinking about the values and habits my father instilled in me at a young age. Three very powerful lessons come to mind:

Live Within Your Means

On my eighth birthday, my father began to teach me how to live within my means. As I write those words, it sounds funny, even to me. He sat me down and taught me about an allowance. He was going to provide me with a weekly stipend that I would later come to realize was my means. I was going to have a set amount of money that I could spend on anything I’d like. The only catch was that once I spent it all, I couldn’t buy anything else until the following Friday when I received my next allowance. At the age of 8, I began to learn how to budget, how to save, and how to spend wisely.

Plan For the Future

At 14, my father took me to his bank’s local branch to open my first savings account. We sat down at the desk with the bank manager and I shared that I had saved $370 and I needed a place to keep it so it would grow. Entering high school, I knew I wanted two things on the day I turned 16: a driver’s license and a car. If I was going to make them both happen, I was going to need a plan. Dad and I worked out a savings plan to help me save the money I earned from a part-time tutoring job. It took me a bit longer to save up for my first car than I anticipated, but planning and saving to reach a future goal is a valuable life lesson—one I share with my clients every day..

Start Today

When I was 16, I sat down again with Dad to learn about a Roth IRA, retirement planning and perhaps, most importantly, compound interest. I learned that by starting early and investing, my money could grow. By opening an investment account and saving into my Roth IRA with the possibility to earn compound returns, I could potentially become a millionaire when I was older—a crazy thought for a 16-year-old. We charted out a simple savings plan to invest a portion of each paycheck I earned—a savings and investing program I follow to this day.

On the occasion of Father’s Day, I thank you, Dad, for instilling many of my financial values and habits at a young age—habits that will continue to shape the decisions I make for years to come.

Read next: 3 Financial Lessons For Dads on Father’s Day

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Joe O’Boyle is a financial adviser with Voya Financial Advisors. Based in Beverly Hills, Calif., O’Boyle provides personalized, full service financial and retirement planning to individual and corporate clients. O’Boyle focuses on the entertainment, legal and medical industries, with a particular interest in educating Gen Xers and Millennials about the benefits of early retirement planning.

MONEY 401(k)s

The Painless Way New Grads Can Reach Financial Security

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Steve Debenport—Getty Images

You don’t need to be sophisticated. You don’t need to pick stocks. You don’t need to understand diversification or the economy. You just need to do this one simple thing—now.

A newly minted class of college graduates enters the work world this summer in what remains a tough environment for young job seekers. Half of last year’s graduates remain underemployed, according to an Accenture report. Yet hiring is up this year, and as young people land their first real job they might keep in mind a critical advantage they possess: time, which they have more of than virtually everyone else and can use to build financial security.

Saving early is a powerful force. But it loses impact with each year that passes without getting started. You don’t need to be sophisticated. You don’t need to pick stocks. You don’t need to understand diversification or the economy. You just need to begin putting away 10% of everything you make, right away. And 15% would be even better.

Consider a worker who saves $5,000 a year from age 25 to 65 and earns 7% a year. Not allowing for expenses and taxes, this person would have $1.1 million at age 65. Compare that to a worker who starts saving at the same pace at age 35. This worker would amass half that total, just $511,000. And now for the clincher: If the worker that started at age 25 suddenly stopped saving at age 35, but left her savings alone to grow through age 65, she would enjoy a nest egg of $589,000—more than the procrastinator who started at age 35 and saved for 30 more years.

That is the power of compounding, and it is the most important thing about money that a young worker must understand. Those first 10 years of a career fly by quickly and soon you will have lost the precious early years of saving opportunity and squandered your advantage. That’s why, if possible, I advise parents to get their children started even before college.

Once you start working, your employer will almost certainly offer a 401(k) plan. More than 80% of full-time workers have access to one. This is the easiest and most effective way to get started saving immediately. Here are some thoughts on how to proceed:

  • Enroll ASAP Some companies will allow you to enroll on your first day while others require you to be employed for six months or a year. Find out and get started as soon as possible. Most people barely feel the payroll deductions; they quickly get used to making ends meet on what is left.
  • Have you been auto enrolled? Increasingly, employers automatically sign you up for a 401(k) as soon as you are eligible. Some also automatically increase your contributions each year. Do not opt out of these programs. But look at how much of your pay is being deferred and where it is invested. Many plans defer just 3% and put it in a super safe, low-yielding money market fund. You likely are eligible to save much more than that and want to be invested in a fund that holds stocks for long-term growth.
  • Make the most of your match A big advantage of saving in a 401(k) is the company match. Many plans will match your contributions dollar for dollar or 50 cents on the dollar up to 6% of your salary. This is free money. Make sure you are contributing enough to get the full match.
  • Keep it simple Choosing investment options are where a lot of young workers get hung up. But it’s really simple. Forget the noise around large-cap and small-cap stocks, international diversification, and asset allocation. Most plans today offer a target-date fund that is the only investment you’ll ever need in your 401(k) plan. Choose the fund dated the year you will turn 65 or 70. The fund manager will handle everything else, keeping you appropriately invested for your age for the next 40 years. In many plans, such a target-date fund is the default option if you have been automatically enrolled.
  • Take advantage of a Roth Some plans offer a Roth 401(k) in addition to a regular 401(k). Divide your contributions between both. They are treated differently for tax purposes and having both will give you added flexibility in retirement. With a Roth, you make after-tax contributions but pay no tax upon withdrawal. With a regular 401(k), you make pre-tax contributions but pay tax when you take money out. The Roth is most effective if your taxes go up in retirement; the regular 401(k), if your taxes go down. Since it’s hard to know in advance, the smart move is to split your savings between the two.
  • Get help An increasing number of 401(k) plans include unbiased, professional third-party advice. This may be via online tools, printed material, group seminars, or one-on-one sessions. These resources can give you the confidence to make decisions, and according to Charles Schwab young workers that seek guidance tend to have higher savings rates and better ability to stay invested for the long haul in tough times.

Read next: 6 Financial Musts for New College Grads

 

 

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