TIME Retirement

This Is the Worst City to Retire In

FRANCE-ELDERLY
Philippe Huguen—AFP/Getty Images An elderly couple walks in le Touquet, northern France, on September 8 ,2013

Retirees should look to Arizona instead

If you want to retire well, set out for Arizona. According to a new Bankrate survey out Monday, the Grand Canyon state is home to three of the country’s best cities for retirees, ranked by metrics like cost of living, weather, crime rate, health care, taxes, walkability and the well-being of seniors living in the area.

“It’s just a great place for a low-maintenance, outdoor type of lifestyle,” Chris Kahn, a Bankrate analyst, told USA Today. “Your dollar is going to stretch further in Arizona.”

But where’s the worst place to call it quits? That’s New York City.

The survey’s full results for the best places to retire are as follows:

1. Phoenix metro area, including Mesa and Scottsdale

2. Arlington/Alexandria, Virginia.

3. Prescott, Arizona

4. Tucson, Arizona

5. Des Moines, Iowa

6. Denver, Colorado

7. Austin, Texas

8. Cape Coral, Florida

9. Colorado Springs, Colorado

10. Franklin, Tennessee

Meanwhile, the worst cities for retirees include the Big Apple; Little Rock, Ark.; New Haven, Conn.; and Buffalo, N.Y.

MONEY

6 Questions to Ask Before Switching to Medicare

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Robert A. Di Ieso, Jr.

Knowing the answers will help you avoid costly mistakes and coverage gaps.

The hand-off from employer health insurance to Medicare can be one of the trickiest challenges you will face in managing your retirement.

The rules are full of pitfalls that can cost you thousands of dollars in unnecessary premiums or lead to a risky gap in coverage.

Here are the six most frequent questions I get about the work-to-Medicare transition:

1. Is the Medicare enrollment process automatic?

A: Only if you have already claimed Social Security benefits by the time you turn 65, which is the Medicare eligibility age.

If not, Medicare requires you to sign up in a seven-month window before and after your 65th birthday, unless you have employer coverage or through your spouse.

Failing to sign up when required is costly. Monthly Part B premiums, which cover doctor visits and medical supplies, jump 10 percent – lifetime – for each full 12-month period that you should have been enrolled. Penalties also are applied for late enrollment in Part D (prescription drugs).

If you retire after 65, you can take advantage of an eight-month special enrollment period that begins the month after employment ends.

2. Should I enroll in Medicare even if I am offered COBRA health insurance when I leave my job?

A: Yes. Although you might need COBRA to cover a spouse or dependent child, Medicare must be your primary insurance coverage once you are over age 65.

“People often miss that memo and find out about the consequences in a nasty way,” says Katy Votava, president of Goodcare.com, which advises consumers on health plan selection.

Besides leading to penalties, missing the special enrollment window could mean going with nothing but COBRA, which provides limited coverage to retirees, until the next enrollment period, which could be a year away.

3. What if I am still working when I turn 65?

A: If your employer has fewer than 20 insurance-eligible workers, Medicare will be your primary coverage, so go ahead and enroll.

You can stick with your employer’s coverage and forestall Medicare enrollment if your employer has 20 or more insurance-eligible workers. The insurance must be similar to Medicare benefits as measured by a set of standards set by the program.

You also could enroll in Medicare, which would provide secondary coverage to fill gaps in your employer’s plan.

One caveat: Do not enroll if you contribute to a Health Savings Account linked to a high-deductible employer plan. You are prohibited from making further contributions to the HSA once enrolled in Medicare.

4. What if I want to execute a file-and-suspend strategy for Social Security? Could I contribute to an HSA in that situation?

A: No. Claiming Social Security benefits automatically triggers enrollment in Medicare Part A, which covers hospital and nursing home stays. That would still be true if you file and suspend your benefits while still working and participating in a high-deductible employer health insurance plan.

5. Do I sign up for Medicare when I retire if my former employer provides a retiree health benefit?

A: Even if your former employer offers a retiree health benefit, it is important to sign up for Medicare at age 65 to avoid penalties and coverage gaps. Employer-provided benefits usually provide a secondary layer of coverage – often covering co-pays or providing a drug benefit.

The key to coordinating the two insurance plans: “Understand who pays first,” says Votava.

But Votava says retirees should compare the cost of retiree coverage with what is available on the open Medicare market. “I often see people holding on to retiree coverage when it’s not the best value for them.”

This is especially true for with supplemental plans that cap out-of-pocket costs, either Medigap or Medicare Advantage. “I’ve had clients find much less expensive Medigap or Medicare Advantage policies with equal or better coverage,” Votava says.

6. What if I retire, enroll in Medicare and then go back into a full-time job?

A: If your new employer provides health insurance, you can drop Medicare and re-enroll when you finally retire without paying late enrollment penalties.

Call the Social Security Administration (1-800-772-1213), which will send a form to sign that creates a record of what you are doing. The paper trail is important because it helps you avoid late enrollment penalties when you return to Medicare.

MONEY mortgages

When a Reverse Mortgage Is Too Big a Risk

Q: Can I take out a reverse mortgage and invest that money in an account that would pay a decent rate of return? My home is paid off and the equity is just sitting there drawing no return. If repay the loan in 10 or 20 years with the money I invested, would I come out ahead? – Stan Larrison

A: In theory it sounds good, but to get the kind of return you’d need to make it worth doing, you’d have to take on a fair amount of risk. “You don’t want to gamble with your home equity,” says Tom Mingone, founder and managing partner of Capital Management Group of New York.

First, a little background on how reverse mortgages work. A reverse mortgage is a loan that allows you to convert your home equity into cash. Based on the amount you borrow, you’ll get a payment every month. You can also take the money as a lump sum or an equity line of credit. The proceeds of the loan are tax-free.

You have to be at least 62 and own the home as your primary residence. How much you’ll get depends on your age, home equity, and current loan rates. The amount you can borrow is capped, typically less than 60% of your home equity. For example, if you are 70, your spouse is 68, and you own a $255,000 house with no mortgage, you could get a $139,000 loan in the New York area, Mingone says. You can use a calculator to figure out how much you would qualify for where you live.

You don’t have to repay the loan as long as you live in the house. Once you do leave it, say when you pass away or move out to assisted living, the house gets sold and the proceeds go toward paying off the loan, as well as any interest or fees that have accrued. Keep in mind that the longer you have the loan, the more you will owe. And depending on the type of loan, the rates may be variable.

If the house sells for more than the loan balance, you or your heirs get the difference. If the house sells for less, you aren’t on the hook; the bank just takes a loss.

Now here’s why it would be hard to come out ahead by investing money from a reverse mortgage. First, reverse mortgages are costly loans to pay back compared with traditional loans. Reverse mortgage rates are currently about 5%, versus about 4% for a typical 30-year fixed rate loan. Closing costs are typically higher too.

You also need to factor in taxes. “If the money is invested in anything that has capital gains or interest income, you’ll owe taxes on that,” says Mingone. So you’ll need to aim for a 7% to 8% return to cover taxes and interest. To find an investment that would give you that kind of return, you’d have to take on more risk.

Still, there are some situations where a reverse mortgage makes sense, especially for retirees who are cash-poor and house rich, Mingone says.

If money is tight, the payments from a reverse mortgage can give you a new stream of income. If you have a mortgage on your current home and it’s hurting your cash flow, you can pay off your conventional loan with a reverse mortgage and eliminate that expense.

It could also be used to pay off high rate credit card debt, fund major home repairs, or cover big medical bills. Check out the AARP Reverse Mortgage Education Project for more information that can help you decide if a reverse mortgage is right for you. If you do go ahead, the federal government requires you to meet with a counselor before taking out the loan. You can find a counselor at the Department of Housing and Urban Development’s web site.

“There are definitely times when using a reverse mortgage is a smart move, but investing the money isn’t one of them,” says Mingone.

MONEY financial advice

Nobel Prize-Winning Economist Shares His Best Financial Advice

Nobel Prize winner Robert Shiller talks about the upside of financial advisers and the downside of compound interest.

Nobel Prize winner Robert Shiller tells investors to get a financial planner. He advises people to speak frankly and honestly with an adviser about their financial situation. Financial advisers are not always right, but Shiller says there is a lot to be gained by speaking to an adviser or fiduciary. He also warns that compound interest may not compound as much as you hope it will.

TIME Retirement

The Retirement Risk We All Share

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Getty Images

Our retirement system is as hard to understand, opaque, and predatory as ever

As wealth begins to get transferred from baby boomers to the millennial generation—the largest single generation in history and within five years fully half of our nation’s workforce—many social contracts that were enjoyed by the parents and grandparents will not be relied upon, or available, for their children. Two financial bubbles have burst: American cities have gone bankrupt, and the notion of guaranteed pensions has come to seem like a relic from a more innocent time in the world where society paid back its firefighters, teachers, and hard-working middle class for keeping us safe, educating our children, and ensuring the engine of our economy keeps running. So pronounced is this breakdown between our country, our corporations, and our workers that entire political campaigns are won and lost over middle class workers and the pensions they receive in retirement.

Corporations don’t want any part of guaranteed pensions. It’s too expensive, their shareholders don’t like it, and it crimps profits. Neither do governments—politicians are laser focused on the next election cycle and would rather divert taxpayer dollars toward shiny new concepts that will get them re-elected over boring old public pension funds. Today, only 1 in 5 workers in corporate America still has access to a guaranteed pension. Half of American workers have no access to any workplace retirement plan whatsoever. That’s right: in the future, we are going to own all of this risk. We’d better learn to make good decisions for ourselves.

Unfortunately, the 401(k) system is as hard to understand, opaque, and predatory as ever. Two thirds of Americans do not know that they pay fees on their 401K plans, and 90% of people could not accurately tell you what these fees are. Why? Because they never actually write a check to anyone—the fees are automatically deducted from their accounts. I challenge you to go log in to your employer’s 401(k) plan now, and figure out within 5 minutes, or 5 hours, or 5 days the total amount of fees you pay per year. You won’t find it. And it is a huge amount of money. Lifetime fees for the average American household are greater than $150,000 and can erode a third of total savings. Broadly speaking, total mutual fund fees could be the least-known and least-understood $600 billion that come out of Americans pockets every year.

We need to make this far simpler for people. It should be law that you can only give people advice on their 401(k) or IRA, or futures for that matter, if you owe them a legal fiduciary duty to only act in their best interest. Fees should be disclosed in terms that people can understand. Nobody understands what “basis points” or “expense ratios” are. This is purposeful. How about: “this will cost you $5 per year?” That shouldn’t be too hard, right?

Finally, hundreds of investment choices are often used as an illusion to give unsuspecting people the sense that they, too, can beat the market if they just choose right. By now, we know that beating the market is impossible and we should steer people toward the things we can control—diversification, low costs, and good savings behavior over long periods of time, and through many market cycles. Watching CNBC is a waste of time. Index funds are the way to go (although some 401(k) plans still don’t offer them).

The Obama administration and Department of Labor have been trying for years to institute protections for investors against high fees and high-risk products. But the lobbying against these protections has been vicious—billions of dollars of profits do not just go quietly into the night.

So how about a simple and effective do-it-yourself solution in the meantime? The next time someone is offering you serious advice about your retirement or the stock market, print this out and ask them to sign this statement:

“I ________, as your advisor, will act as a fiduciary and only give you advice that is in your best interest.”

If your advisor will not sign this statement—for your own good—run as fast as you can in the other direction and find one of the many advisors that will. It could save you tens of thousands of dollars and years in retirement.

In a world where we are left to fend for ourselves in retirement, the stakes are too high not to at least make sure that someone is legally obligated to tell you the right thing to do. Your 65-year-old self will thank you for it some day.

Greg Smith is president of blooom, an online service that evaluates, simplifies, and manages 401(k) accounts for individuals, and the best-selling author of Why I Left Goldman Sachs: A Wall Street Story.

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

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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.

 

 

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