MONEY Social Security

Your 2016 Social Security Increase Will Probably Disappear

cloud of smoke
Jeremy Hudson—Getty Images

Inflation rates are still too low.

Social Security supports millions of Americans in their retirement, and many of them depend on the program for the vast majority of their overall income. Yet even though retirees have had to make do with minimal cost-of-living increases in their benefits in recent years, early signs suggest the Social Security increase for 2016 could be smaller still — or even disappear entirely.

What goes into calculating your Social Security increase for 2016
Like many of the numbers the government works with, the Social Security Administration indexes benefits to the rate of inflation. New payment rates take effect every January for retirees and other Social Security recipients.

You don’t have to wait that long, however, to determine the number. Specifically, the SSA takes an average from the Consumer Price Index for July, August, and September. It then compares that average to the number from the previous year. The resulting percentage increase corresponds to the amount by which Social Security benefits are adjusted upward to reflect rising costs of living.

Obviously, inflation figures for the summer months are still a long way away. But if you look at April’s CPI figures, you’ll notice the index’s current level is well over a full percentage point below the three-month average from 2014. This means that even if inflation rises at a more typical rate between now and September, it’s unlikely to rise enough to catch up with the drop in the index over the past six months. As a result, the cost of living adjustment could evaporate, leaving Social Security recipients getting exactly the same amount in 2016 that they received this year.

A history of low COLAs
Unfortunately, retirees have had to struggle with small cost of living adjustments for several years. The rise for 2015 was 1.7%, following an increase of 1.5% in 2014 and 1.7% in 2013. Only in 2012 did Social Security recipients collect what seemed like a sizable bump in their monthly checks, a cost of living adjustment amounting to 3.6%.

Even if Social Security recipients don’t get any increase in 2016, it wouldn’t be an unprecedented event for the program. In both 2010 and 2011, the SSA made no changes to overall benefit payments, as dramatic declines in prices kept the inflation rate negative during both years.

Indeed, some retirees’ monthly checks might decline in 2016 if prices keep up this behavior. Many Social Security recipients have Medicare premiums taken out of their monthly payments, and if those premiums rise, it could result in smaller net amounts being paid to retirees. Many retirees faced this situation in 2010 and 2011.

Be ready for no Social Security increase in 2016
The only silver lining in a year in which Social Security doesn’t pay a COLA is that low inflation should — at least theoretically — be good for retirees. If price levels stay constant, then your money will keep going as far as it did in past years. That can make it easier to make ends meet on a fixed budget.

Many retirees, though, are convinced that the inflation figures on which Social Security cost of living adjustments are based don’t reflect their actual expenses. With a different set of priorities than typical American adults, retirees can experience personal inflation rates far in excess of what government figures state.

Nevertheless, without full-blown Social Security reform, recipients are likely to endure an even more painful year of flat benefits than they have faced in recent years. Unless trends such as cheaper gas prices reverse themselves quickly, retirees will have to get used to the idea that their monthly Social Security benefits aren’t likely to rise until 2017 at the earliest.

MONEY Social Security

Why Social Security Still Matters

gold nest egg atop a pyramid of egg cups
Andy Roberts—Getty Images

It's absurd to think it won't help much in retirement.

This weekend, I hit the limit for idiotic journalism when it comes to writing about retirement in America.

One article, purporting to warn about the seven myths that can ruin your retirement, stated, “Social Security isn’t going to be much help [in retirement].” Another article — taking the elitist stance that $1 million isn’t enough for retirement — completely ignored the role of Social Security altogether.

Both stances are ridiculous.

Look: I know as much as the next person that Social Security’s Trust Fund is running out of money. I also think that, if you can, it’s wise to build in a margin of safety and assume that the program will pay less in the future.

That being said, saying that Social Security “isn’t going to help much,” or ignoring it altogether, is either ignorant or willfully negligent.

Putting Social Security in perspective
One of the reasons it’s hard to grasp Social Security’s importance is that we talk about it using a different language than we use for our savings. Usually, people talk about the monthly benefit they get from Social Security — but when we talk about retirement savings, we talk about the size of our nest egg.

If we use the 4% safe-withdrawal rule, we can translate all of this so that we can start to compare apples to apples. For instance, according to the Social Security Administration,, the average retired worker receives $1,328 per month. That’s the same as $15,936 per year. Using the 4% rule, that’s the same as a nest egg of almost $400,000!

Taking it a step further, the average married couple where both are receiving benefits gets $2,176 per month, or $26,112 per year. That’s the same as a whopping $653,000 nest egg.

Will that be enough to live on? For some, yes. For many others, no. But to say that this “isn’t going to help much” is absurd.

What will your Social Security “nest egg” be worth?
Fellow Fool John Maxfield has already broken down how to calculate your average monthly benefits, and you can visit the administration’s site to get an idea of your own personal situation. I’m just going to focus on translating all of this into what it means for the size of your “nest egg,” depending on how much you earn and when you choose to start claiming benefits.

Change the tab on the top to get an idea for how your “nest egg” changes based on the inflation-adjusted average of your 35 top earning years. Take a minute to look at and digest these figures.

A couple of important notes: For those who earned well over $100,000 per year, the “nest egg” hits a limit, and there’s not much growth beyond these levels. Also, these figures are for retired individuals only. If your spouse worked throughout his or her life, then your spouse will be able to claim benefits, too.

This clearly isn’t chump change: If you averaged a $50,000 salary, and you can wait until 65 to claim benefits, your Social Security payout is equal to a half-million-dollar nest egg.

While it’s true that Social Security benefits could be cut in the future, it’s estimated that those cuts will be between 22% and 29%. If you’d like to see how much your “nest egg” would be in that scenario, simply cut that amount out of your total.

In the end, the takeaway is clear: Social Security probably won’t provide everything you need in retirement, but ignoring it altogether is just plain silly.

MONEY 401(k)s

How the New-Model 401(k) Can Help Boost Your Retirement Savings

150521_RET_NewModel401k
Betsie Van Der Meer—Getty Images

As old-style pensions disappear, today's hands-off 401(k)s are starting to look more like them. And that's working for millennials.

If you want evidence that the 401(k) plan has been a failed experiment, consider how they’re starting to resemble the traditional pensions they’ve largely replaced. Plan by plan, employers are moving away from the do-it-yourself free-for-all of the early 401(k)s toward a focus on secure retirement income, with investment pros back in charge of making that happen.

We haven’t come full circle—and likely never will. The days of employer-funded, defined-benefit plans with guaranteed lifetime income will continue their three-decade fade to black. But the latest 401(k) plan innovations have all been geared at restoring the best of what traditional pensions offered.

Wall Street wizards are hard at work on the lifetime income question. Nearly all workers believe their 401(k) plan should have a guaranteed income option and three-in-four employers believe it is their responsibility to provide one, according to a BlackRock survey. So annuities are creeping into the investment mix, and plan sponsors are exploring ways to help workers seamlessly convert some 401(k) assets to an income stream upon retiring.

Meanwhile, like old-style pensions, today’s 401(k) plans are often a no-decision benefit with age-appropriate asset allocation and professionally managed investment diversification to get you to the promised land of retirement. Gone are confusing sign-up forms and weighty decisions about where to invest and how much to defer. Enrollment is automatic at a new job, where you may also automatically escalate contributions (unless you prefer to handle things yourself and opt out).

More than anything, the break-neck growth of target-date funds has brought about the change. Some $500 billion is invested in these funds, up from $71 billion a decade ago. Much of that money has poured in through 401(k) accounts, especially among our newest workers—millennials. They want to invest and generally know they don’t know how to go about it. Simplicity on this front appeals to them. Partly because of this appeal, 40% of millennials are saving a higher percentage of their income this year than they did last year—the highest rate of improvement of any generation, according to a T. Rowe Price study.

With a single target-date fund a saver can get an appropriate portfolio for their age, and it will adjust as they near retirement and may keep adjusting through retirement. About 70% of 401(k) plans offer target-date funds and 75% of plan participants invest in them, according to T. Rowe Price. The vast majority of investors in target-date funds have all their retirement assets in just one fund.

“This is a good thing,” says Jerome Clark, who oversees target funds for T. Rowe Price. Keeping it simple is what attracts workers and leads them to defer more pay. “Don’t worry about the other stuff,” Clark says. “We’ve got that. All you need do is focus on your savings rate.”

Even as 401(k) plans add features like auto enrollment and annuities to better replace traditional pensions, target-date funds are morphing too and speeding the makeover of the 401(k). These funds began life as simple balanced funds with a basic mix of stocks, bonds and cash. Since then, they have widened their mix to include alternative assets like gold and commodities.

The next wave of target-date funds will incorporate a small dose of illiquid assets like private equity, hedge funds, and currencies, Clark says. They will further diversify with complicated long-short strategies and merger arbitrage—thus looking even more like the portfolios that stand behind traditional pensions.

This is not to say that target-date funds are perfect. These funds invest robotically, based on your age not market conditions, so your fund might move money at an inopportune moment. Target-date funds may backfire on millennials, who have taken to them in the highest numbers. Because of their age, millennials have the greatest exposure to stocks in their target-date funds and yet this generation is most likely to tap their retirement savings in an emergency. What if that happens when stock prices are down? Among still more concerns, one size does not fit all when it comes to investing. You may still be working at age 65 while others are not. That calls for two different portfolios.

But the overriding issue is that Americans just don’t save enough and a reasonably inexpensive and relatively safe investment product that boosts savings must be seen as a positive. With far less income, millennials are stashing away about the same percentage of their earnings as Gen X and boomers, according to T. Rowe Price. That’s at least partly thanks to new-look 401(k)s and the target-date funds they offer.

Read next: 3 Ways to Build a $1 Million Nest Egg Despite Lower Investment Returns

MONEY 401(k)

How the Supreme Court Just Improved Your Retirement

The Supreme Court just ruled on an obscure aspect of ERISA. It could be great news for your retirement nest egg.

The Supreme Court just handed millions of retirement savers a helping hand.

You many not know much about ERISA, the body of rules that governs retirement accounts. But chances are you have a 401(k). That means Monday’s Supreme Court decision could indirectly lower investment fees you’re paying. And that’s great news.

On Monday the Supreme Court made it easier for 401(k) investors to sue employers over needlessly costly 401(k) investments. The actual point of contention in the case, known as Tibble vs. Edison, was pretty obscure. It involved how the statute of limitations should be applied to a breach of fiduciary duty.

But because ERISA law is so complicated, companies almost always choose to fight such suits on technical grounds. This time around, the typically business friendly U.S. Supreme Court decided in favor of investors, unanimously overruling the U.S. 9th Circuit Court of Appeals. As a result, employers will be forced to think a little harder about whether similar arguments are likely to prevail in the future.

But the fact is, employers have grown increasingly proactive about regulating plan fees. The reason: Tibble vs. Edison is just a high-profile example of a series of lawsuits launched in the past decade over employers’ failure to police exorbitant retirement plan fees. And many large employers have already reacted to the threat by urging investment firms to lower fees for their employees. As a result, 401(k) plan fees have come down, and investors have had greater access to low-cost options like index funds.

With the Supreme Court weighing in on investors’ side, you can expect that trend to continue.

 

MONEY Personal Finance

Oh No! Needing a Fridge, Rubio Raids Retirement Account

Larry Marano/Getty Images

Dipping into retirement savings to fund an everyday expense is a common but costly error.

If Florida Sen. Marco Rubio intends to lead by example, he’s off to a rocky start. The Republican presidential hopeful raided his retirement account last September, in part to buy a new refrigerator and air conditioner, according to a recent financial disclosure and comments on Fox News Sunday.

In liquidating his $68,000 American Bar Association retirement account, Rubio showed he’s no Mitt Romney, whose IRA valued at as much a $102 million set tongues wagging coast to coast during the last presidential cycle. Rubio clearly has more modest means, which is why—like most households—if he doesn’t already have an emergency fund equal to six months of fixed living expenses he should set one up right away.

He told Fox host Chris Wallace: “It was just one specific account that we wanted to have access to cash in the coming year, both because I’m running for president, but, also, you know, my refrigerator broke down. That was $3,000. I had to replace the air conditioning unit in our home.”

Millions of Americans treat their retirement savings the same way Rubio did in this instance, raiding a 401(k) or IRA when things get tight. Sometimes you have no other option. But most of the time this is a mistake. Cash-outs, early withdrawals, and plan loans that never get repaid reduce retirement wealth by an average of 25%, reports the Center for Retirement Research at Boston College. Money leaking out of retirement accounts in this manner totals as much as $70 billion a year, equal to nearly a quarter of annual contributions, according to a HelloWallet survey.

Rubio’s brush with financial stress from two failed appliances probably won’t set him too far back. He has federal and state retirement accounts and other savings. And let’s face it: The whole episode has an appealing and potentially vote-getting Everyman quality to it. Still, it is not a personal financial strategy you want to emulate.

 

 

MONEY caregiving

Why Family Caregivers Won’t Do What’s Best for Aging Parents

Technology and online communities can enrich the lives of older people and make them more independent. But who's got time to teach them?

For all their good intentions, family members caring for an aging parent may be stifling their parent’s independence and enrichment by failing to expose them to online communities and other technology, new research shows.

Older people want to learn. About half of those needing care already email, text, and share photos online, according to a study by the Global Social Enterprise Initiative at Georgetown University’s McDonough School of Business and Philips. Some 82% of caregivers believe technology can make aging a better experience, and 63% agree that the person in their care is ready to learn.

So what’s the hangup? Simply that most family caregivers are stretched for time. About three-quarters either have full-time jobs or small kids in the house; they are too tired or don’t have another minute to spend on their care-giving duties, the study shows.

This borders on tragic, because 74% of caregivers say teaching older adults about online communities would be fun and 72% feel qualified to do so. What’s more, 44% of family caregivers are concerned that their parent is lonely or depressed, but 67% say the older adult in their care has not started any new enrichment activities in the past two years and most often resorts to watching TV and talking on the phone.

To a degree, this is a pocketbook issue. Long-term care is costly and choosing how to pay for it is a difficult calculation. Two-thirds of those past age 65 and receiving care at home get it exclusively from a family member, for free. About a third get some family care and some paid care. Family caregivers provide an average of 75 hours of support per month, according to the federal government. The Georgetown study estimated average service at 88 hours per month. This free care has an annual value of $234 billion, according to government estimates.

Some of that value could be recovered at the family level if older people were savvier about technology in a way that kept them occupied, safe, and made them more self-sufficient. Family caregivers could spend more time earning income—and that’s what most likely would choose to do. Caregivers say if they had more time they’d spend only 17% of it on care giving, the Georgetown study shows.

Perhaps with that in mind, family caregivers are high on the agenda at this year’s White House Conference on Aging; a forum convened just once a decade and which Monday holds a full-day event focusing entirely on caregivers. According to the conference materials, a promising development is the growth of publicly financed professional care through Medicaid and the Affordable Care Act. In some states, resources are also available through the Veterans Health Administration. Older adults report high levels of satisfaction with professional care through these channels, which can give family caregivers a break.

The Georgetown study suggests that more professional care would lead to more technology training—not so much by the professionals, many of whom make just $10 an hour and are fighting for a raise, but by family members who found a little more time in their schedule and have the most incentive to help an older family member get the most from exploring online enrichment.

MONEY Financial Education

The Surprising New Company Benefit That’s Helping Americans Retire Richer

chalkboard with graph showing increase in money over time
Oleg Prikhodko—Getty Images

Financial education at the office is booming—and none too soon.

Like it or not, the job of educating Americans about how to manage their money is falling to the corporations they work for—and new research suggests that many of those employers are responding.

Some 83% of companies feel a sense of responsibility for employees’ financial wellness, according to a Bank of America Merrill Lynch Workplace Benefits Report, which found the vast majority of large companies are investing in financial education programs. Among other things, companies are using the annual fall benefits re-enrollment period to talk about things like 401(k) deferral rates and asset allocation, and enjoying impressive results.

Workers are responding to other programs too. Another Merrill report found that retirement advice group sessions in the workplace rose 14% last year and that just about all of those sessions resulted in a positive outcome: employees enrolling in a 401(k) plan, increasing contributions, or signing up for more advice. Calls to employer-sponsored retirement education centers rose 17.6% and requests for one-on-one sessions more than doubled.

So a broad effort to educate Americans about money management is under way, including in government and schools—and none too soon. This year, Millennials became the largest share of the workforce. This is a huge generation coming of age with almost no social safety net. These 80 million strong must start saving early if they are going to retire. Given this generation’s love of mobile technology, it’s notable that Merrill found a 46% increase in visits to its mobile financial education platform. That means employers are reaching young workers, who as a group have shown enormous interest in saving.

“There is not a single good reason—none—that should prevent any American from gaining the knowledge and skills needed to build a healthy financial future,” writes Richard Cordray, director of the Consumer Financial Protection Bureau, in a guest blog for the Council for Economic Education. His agency and dozens of nonprofits are pushing for financial education in grades K-12 but have had limited success. Just 17 states require a student to pass a personal finance course to graduate high school.

That’s why it’s critical that corporations take up the battle. Even college graduates entering the workplace generally lack basic personal money management skills. This often translates into lost time and productivity among workers trying to stay afloat in their personal financial affairs. So companies helping employees with financial advice is self serving, as well as beneficial to employees. Some argue it helps the economy as a whole, too, as it lessens the likelihood of another financial crisis linked to poor individual money decisions.

 

 

 

 

MONEY First-Time Dad

The 3 Things All Millennial Parents Should Be Saving For

Luke Tepper

MONEY writer and first-time dad Taylor Tepper asks some financial pros for help prioritizing his competing financial goals.

No one aspect of parenting is in itself particularly difficult.

What makes it the hardest thing I’ve ever done in my life, however, is that one discrete task continuously leads into another and another, until you’re ground down and raw. Bedtime follows a bath, which follows dinnertime, which follows a walk, which follows a trip to the playground, which follows…which follows…which follows…

It’s exhaustion by a thousand baby steps.

Family budgeting presents a similar Sisyphean sequence. I know I should have a healthy emergency fund and contribute up to the match in my 401(k) and save for Luke’s college education. But in which order? And how am I supposed to do those things while also paying for child care, Brooklyn rent and the occasional whisky ginger?

Each financial responsibility can be fixed easily enough. In aggregate, though, it’s nearly impossible to see the forest through the trees.

One of the small advantages of reporting on personal finance, however, is that financial planners will take my calls and answer these questions for me for free. So I took advantage. What I learned may help you, too.

First: Start On Emergency Savings

“Emergency savings is about avoiding an immediate cash flow problem,” says Leesburg, Va.-based financial advisor Bonnie Sewell. “It’s the number one thing you should focus on.”

Here’s why, she explains: Without a sufficient rainy-day fund, your family is vulnerable to the vicissitudes of life (see: layoffs and car repairs and illnesses).

Now for the scariest part. Depending on your obligations and savings, and from whom you solicit advice, you should have anywhere from three to 12 months worth of expenses sitting in a bank account.

That’s madness. Between child care, rent, transportation and food, we spend at least $4,500 a month, or more than $50,000 a year. I can’t envision a world where I have $50,000 in cash, much less putting it to no use in a near-zero-rate savings account.

Pensacola, Fla. financial planner Matt Becker helped quell my panic.

He recommends tackling emergency savings in two steps: First, get about a month’s worth of expenses stowed away and then turn my attention to other priorities (see below). After I’ve found firm footing with those, I can try to build up my fund.

Next Step: Get a Start on Retirement

The next thing for me to consider is retirement.

Every expert I spoke with noted the costs of procrastinating on this one are significant. That’s because, by putting money aside for use at a later date, I’m giving up the power of compounding returns. To end up with $1 million in my 401(k) by 65, I’ll need to save almost $15,000 starting at age 30. If I wait to begin until I’m 40, I’ll need to put away around $23,500 more a year.

Of course, retirement accounts are illiquid by nature. They’re designed to reward people who wait to tap them until they’re nearing the end of their career.

Since I could also use liquid funds for things like a down payment on that house Mrs. Tepper hopes we’ll one day buy and savings for the college degree we hope Luke will one day get, Sewell says I should contribute up to my employer match and deploy the rest as follows…

Third: Set a Course for College

After I’m set up on retirement, Luke’s college savings comes into focus.

Everyone tells me to fund a 529, which allows me to invest tax-free so long as the money is used for higher education. I can also get a break on my state taxes. (Check out this article to see if you get a break on yours.)

As Melville, NY financial planner James J. Burns points out, every little bit I contribute for Luke’s college will go a long way.

For example, let’s assume that I contribute $200 a month and enjoy an average annual return of 8%. After 16 years, I’ll have amassed more than $73,000.

“That’s pretty darn good,” says Burns, who estimates that will go along way toward paying for two years of in-state tuition by the time Luke goes off to school.

Of course there’s a reason the 529 comes after retirement. “You can borrow money for college,” says Burns. “You can’t borrow money for retirement.”

Last: Grow Some Liquid Savings

Burns also recommends going over my budget annually, seeing if I can’t find more to save. If I do, I can divide that money between my emergency fund, retirement, Luke’s 529 and a taxable account through a portfolio of broadly diversified, low-cost funds for the house and our other goals.

Now that I’ve heard from the experts, I’m willing to take a more holistic approach as they suggested—patiently building up our anemic rainy day fund, contributing as much to our retirement accounts as we can afford, and making incremental additions to Luke’s college account. Whenever we earn a raise or unburden a significant cost like child care, we’ll judiciously target those extra dollars into the different buckets that will fund our lives.

But we’ll also set aside money for vacations and a few fancy dinners, even if that money could be leveraged elsewhere. The universe may be infinite, but our lives are short, and I intend to relish the occasional whisky ginger without pangs of guilt.

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