MONEY retirement age

Australia’s Brilliant — and Brutal — Retirement Crisis Solution

Sydney Opera House and downtown skyline, Sydney, Australia.
Jill Schneider—Getty Images/National Geographic

Australia is asking workers to work longer. Would it work in the United States?

Americans are quite familiar with the challenges threatening the Social Security system, with an aging population starting to retire and putting more strain on the shrinking group of workers paying the Social Security taxes that support their benefits. But America isn’t alone in facing a retirement crisis, and other countries are taking much more dramatic steps to shore up their systems for providing financial assistance to people in their old age. In particular, Australia plans to force its workers to stay in their jobs for years beyond their current retirement age in order to qualify for benefits — and it’s giving employers incentives to make sure older workers can get the jobs they need to hold out that long.

The Australian solution: Work until you’re 70

Australia has seen many of the same things happen to its old-age pension system that the U.S. has seen with Social Security. When Australia first implemented what it calls its age pension more than a century ago, only 4% of the nation’s population lived to the age at which they could claim benefits. Now, though, life expectancies have grown, with the typical Australian living 15 to 20 years beyond the official retirement age of 65. As a result, 9% of the Australian population gets benefits from the age pension, and the potential for some of those recipients to get support from the program for two decades or more has threatened the financial stability of the system. Currently, 2.4 million Australians receive about $35 billion in benefits from the program, making it the Australian government’s largest expenditure.

As a result, Australia has made plans to increase its official retirement age. Over the next 20 years or so, Australians will see the age at which they can officially retire climb to 70 if the plan is approved, putting the land down under at the top of the world’s list of highest retirement ages.

When you just look at the age-pension portion of Australia’s retirement system, that sounds draconian, and plenty of Australians aren’t thrilled about the move. With a significant part of Australia’s economy based on extracting natural resources like oil, natural gas, coal, and various metals, the back-breaking work that many Australians do makes the prospect of staying on the job until 70 seem almost physically impossible. Proponents of the measure counter that argument with the fact that 85% of Australians work in the services industry, and many of those jobs don’t require the physical exertion that makes them impractical for those in their 60s.

Moreover, younger Australians worry about the need for older workers to stay on the job longer. Many fear a “jobless generation” of young adults who can’t get their older counterparts to give way and make room for them to start their careers.

What Australians have that the U.S. doesn’t

Yet before you bemoan the fate of the Australian public, it’s important to keep in mind that the age pension system isn’t the only resource they have going for them. In addition, Australians participate in what’s known as the superannuation system, under which employers are required to make contributions toward superannuation retirement accounts equal to 9.5% of their pay. Like American 401(k)s, employees are allowed to select investment options for this money, with default provisions usually investing in a balanced-

Over time, superannuation assets have built up impressively. As of June 30, assets in superannuation accounts rose to A$1.85 trillion. Australia is also seeking to have those fund balances rise more quickly by requiring more from employers on the superannuation front. Over the next seven years, the employer contribution rate will rise to 12%, accelerating the growth of this important part of Australians’ retirement planning.

Like 401(k)s and IRAs in the U.S., Australians can make withdrawals from their superannuation accounts at earlier ages than they can claim pensions. For those born before mid-1960, access to their retirement savings opens at age 55. That age is slated to rise to 60 over the next decade, but it will still give Australians access to money well before age pensions become available to help them bridge the financial gap.

Should America follow Australia’s lead?

Calls to increase Social Security’s retirement age have met with strong opposition in the U.S., and the Australian plan won’t change that. Yet without the backstop that superannuation provides, raising the retirement age to 70 in the U.S. would be even more painful for aging Americans. Some workers are fortunate enough to have employer matching and profit-sharing contributions that mimic what most Australians get from superannuation, but it’s rare for anyone to get anywhere near the 9.5% to 12% that Australian workers have contributed on their behalf.

Many see Australia’s answer to its retirement crisis as brutal, but given the aging population, it’s consistent with the original purpose of old-age pensions. If the U.S. wants to make similar moves, American workers need the same outside support for their retirement that Australians get — and that will also require more effort on workers’ part to save on their own for retirement.

MONEY Social Security

Why Your Social Security Check Isn’t Keeping Up With Your Costs

Next year retirees will see their benefits rise by the inflation rate. But that may not be the best measure of seniors' true spending.

Social Security’s annual inflation adjustment is one of the program’s most valuable features. But it’s time to adjust the adjustment.

Retirees will get a 1.7% bump in their Social Security benefit next year, according to the Social Security Administration, which announced the annual cost-of-living adjustment (COLA) on Wednesday. Recipients of disability benefits and Supplemental Security Income also will receive the COLA.

That reflects continuing slow inflation in the economy—the COLA has averaged 1.6% over the past four years—but it’s not enough to keep up with the higher inflation retirees face.

My in-box fills up with angry e-mail messages about the COLA every year. So if you’re gearing up to accuse Washington politicians of conspiring against seniors, please note: By law, the COLA is determined by a formula that ties it to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is compiled by the U.S. Bureau of Labor Statistics (BLS).

There is good news about this year’s COLA: Beneficiaries will keep every penny. There won’t be any offset for a higher Medicare Part B premium, which typically is deducted from Social Security payments. The premium will stay at $104.90 for the third consecutive year.

Still, the COLA formula should be revised as part of the broader Social Security reform that Congress must tackle. Many economists and policymakers say the CPI-W doesn’t measure retiree inflation accurately.

“From an ideal math perspective, what you want is a calculation based on an index that matches retirees’ cost of living,” says Polina Vlasenko, a senior research fellow at the American Institute for Economic Research. “The CPI-W is constructed to measure spending patterns of urban wage earners, and it’s pretty clear that retired people spend differently than wage earners.”

A recent national survey by the Senior Citizens League illustrates the cost pressures seniors, especially those living on fixed, lower amounts of income, face. Half of retirees said their monthly expenses rose more than $119 this year, while an even higher percentage (65%) said their benefits rose by less than $19 per month.

Other research by the group, based on BLS data, shows that Social Security beneficiaries have lost 31% of their buying power since 2000. Among big-ticket items, the largest price hikes were for property taxes (104%), gasoline (160%), some types of food and healthcare expenses.

Low COLAs also cut into future benefits for Americans who are eligible for benefits (ages 62 to 70) but haven’t yet filed. When you delay taking benefits until a later age—say, full retirement age (66)—you get full benefits increased by the COLAs awarded for the intervening years.

COLAs are prominent in the debate over Social Security reform that is likely to be rekindled in the next Congress. COLA reform could involve more generous adjustments – or a benefit cut. A cut would be achieved by adopting the “chained CPI,” which some say more accurately measures changes in consumer spending by reflecting substitution of purchases that they make when prices rise. The Social Security Administration has estimated the chained CPI would reduce COLAs by three-tenths of a percent annually.

A more generous COLA would come via the CPI-E (for “elderly”), an alternative, experimental index maintained by the BLS that is more sensitive to retirees’ spending. That index generally rises two-tenths of a percent faster than the CPI-W.

Congress has been gridlocked on Social Security, but public opinion is clear. The National Academy of Social Insurance (NASI) released a national poll Thursday that shows 72% support raising benefits. The survey also asks Americans to say how reform should be paid for. The most popular options (71%) included a gradual elimination of the cap on income taxed for Social Security ($117,000 this year, and $118,500 in 2015) and a gradual increase over 20 years on the payroll tax rates workers and employers both pay, from 6.2% to 7.2%.

Poll respondents also backed adoption of a more generous COLA, such as the CPI-E.

“Seniors are noticing the very small COLAs, and they just have a feeling that prices are going up more than that,” says Virginia Reno, NASI’s vice president for income security policy. “If you measure the market basket separately for seniors, average inflation has been a bit higher because they spend a larger share of their money on healthcare, and for things like housing and heating.”

Read more from the Ultimate Retirement Guide:

MONEY Ask the Expert

Here’s How Social Security Will Cut Your Benefits If You Retire Early

man holding calculator in front of his head
Oppenheim Bernhard—Getty Images

Whether you retire early or later, it's important to understand how Social Security calculates your benefits.

Q: I am 60 and planning on withdrawing Social Security when 62. Due to a medical condition, I am not making $16.00 an hour anymore but only making $9.00. Do you know how income level is calculated on early retirement? Thank you.

A. Social Security retirement benefits normally may be taken as early as age 62, but your income will be substantially higher if you can afford to wait. If you are entitled to, say, a $1,500 monthly benefit at age 66, you might get only $1,125 if you began benefits at age 62. Defer claiming until age 70, when benefits reach their maximum levels, and you might receive $1,980 a month.

Still, most older Americans are like you—they can’t afford to wait. Some 43% of women and 38% of men claimed benefits in 2012 at the age of 62, according to a Social Security report. Another 49% of women and 53% of men took benefits between ages 63 and 66. Just 3% of women and 4% of men took benefits at ages 67 and later, when payouts are highest.

Why are people taking Social Security early? The report didn’t ask people why they claimed benefits. But academic research suggests that the reasons are pretty much what you might expect—retirees need the money, and they also worry about leaving benefits on the table if they defer them. There is also strong evidence that most Americans are not fully aware of the advantage of delaying benefits. A study last June sponsored by Nationwide found that 40% of early claimants later regretted their decisions.

So before you quit working, it’s important to understand Social Security’s benefits formula. To calculate your payout, Social Security counts up to 35 of your highest earning years. It only includes what are called covered wages—salaries in jobs subject to Social Security payroll taxes. Generally, you must have covered earnings in at least 40 calendar quarters at any time during your working life to qualify for retirement benefits.

The agency adjusts each year of your covered earnings to reflect subsequent wage inflation. Without that adjustment, workers who earned most of their pay earlier in their careers would be shortchanged compared with those who earned more later, when wage inflation has caused salary levels to rise.

Once the agency adjusts all of your earnings, it adds up your 35 highest-paid years, then uses the monthly average of these earnings (after indexing for inflation) to determine your benefits. If you don’t have 35 years of covered earnings, Social Security will use a “zero” for any missing year, and this will drag down your benefits. On the flip side, if you keep working after you claim, the agency will automatically increase your benefits if you earn an annual salary high enough to qualify as one of your top 35 years.

The figures below show how Social Security calculated average retirement benefits as of the end of 2012 for four categories of worker pay: minimum wage, 75% of the average wage, average wage, and 150% of the average wage. (The agency pulls average wages each year from W-2 tax forms and uses this information in the indexing process that helps determine benefits.)

  • Worker at minimum wage: The monthly benefit at 62 is $686 and, at age 66 is $915.50. The maximum monthly family benefits based on this worker’s earnings record (including spousal and other auxiliary benefits) is $1,396.50.
  • Worker at 75% of average wage: The monthly benefit at 62 is $975 and, at age 66 is $1,300.40. The maximum monthly family benefits based on this worker’s earnings record (including spousal and other auxiliary benefits) is $2,381.20.
  • Worker at average wage: The monthly benefit at 62 is $1,187 and, at age 66 is $1,583.20. The maximum monthly family benefits based on this worker’s earnings record (including spousal and other auxiliary benefits) is $2,927.40.
  • Worker at 150% of average wage: The monthly benefit at 62 is $1,535 and, at age 66 is $2,047. The maximum monthly family benefits based on this worker’s earnings record (including spousal and other auxiliary benefits) is $3.582.80.

In short, claiming at age 62 means you’ll receive lower benefits compared with waiting till full retirement age. But given a lifetime earnings history and Social Security’s wage indexing, receiving a lower wage for your last few working years will not make a big difference to your retirement income.

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published early next year by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Related:

How does Social Security work?

When can I start collecting Social Security benefits?

Why should I wait past age 62 to start collecting benefits?

MONEY retirement planning

3 Little Mistakes That Can Sink Your Retirement

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Cultura RM/Korbey—Getty Images/Collection Mix

Big mistakes are easy to catch, but even a small miscalculation may jeopardize your retirement portfolio. Here are three common missteps to avoid.

We think it’s the big mistakes that cost us in retirement, like hiring an unscrupulous adviser or funneling savings into a risky investment that goes belly up. Major errors can certainly hurt. But the smaller seemingly sensible decisions we make without really examining the rationale behind them can also come back to bite us in the…

Assiduous planning is key to a secure retirement, but the effectiveness of plans we make depends on the assumptions behind them. And when you’re making a plan that extends well into the future, as is the case with retirement, even a small miscalculation can take you way off course. Below are three mistakes that may seem minor, but that can seriously erode your odds of achieving a successful retirement. Make sure you’re not incorporating these errors of judgment into your retirement planning.

1. Relying on an unrealistic rate of return. Clearly, the higher the return you earn on the money in 401(k)s, IRAs and other retirement accounts, the less you’ll have to stash away in savings each month to build a sizable nest egg. For example, if you start saving $600 a month at age 30 and earn a 7% annual rate of return, you’ll have $1 million by age 65. Bump up that rate of return to 8% a year, however, and you have to put away only $480 a month to hit the $1 million mark by 65, leaving you an extra $120 month to spend. Earn 9% annually, and the monthly savings required to get to $1 million shrinks to just $385 a month, freeing up even more for spending.

Problem is, just because a retirement calculator lets you plug in a higher rate of return or a more aggressive stocks-bonds mix, doesn’t mean that loftier gains will actually materialize. Shooting for higher returns always involves taking on more risk, which raises the possibility that your aggressive investing strategy could backfire and leave you with a smaller nest egg than you expected. That can be especially dangerous when you’re on the verge of retirement.

For example, just prior to the financial crisis, nearly one in four pre-retirees had more than 90% of their 401(k)s in stocks. A pre-retiree with a $1 million retirement account invested 90% in stocks and 10% in bonds would have suffered a loss in 2008 of roughly 33%, reducing its value to $670,000—enough of a drop to require seriously scaling back retirement plans if not postponing them altogether. No one knows whether recent market turbulence will be a prelude to a similar meltdown. But anyone who has his retirement savings invested in a high-octane stocks-bonds mix, clearly runs the risk of a experiencing a significant setback.

A better strategy when creating your retirement plan is to keep your return assumptions modest and focus instead on saving as much as you can. That way, you’re not as dependent on investment returns to build an adequate nest egg. To see how different savings rates and stocks-bonds mixes can affect your chances of achieving a secure retirement, check out the Retirement Income Calculator in RDR’s Retirement Toolbox.

2. Factoring pay from a retirement job into your planning. It’s almost become a cliche. Virtually every survey asking pre-retirees what they plan to do in retirement shows that the overwhelming majority plan to work. Indeed, a recent Merrill Lynch survey found that nearly three out of four people over 50 said their ideal retirement would include working. Which is fine. Staying connected to the work world in some way can not only offer financial benefits, it can also keep retirees more active and socially engaged.

It would be a mistake, however, to factor the earnings you expect to receive while working in retirement into your estimate of how much you have to save. Or, to put it more bluntly, you’re taking a big risk if you assume that you can skimp on saving because you’ll be make up for a stunted nest egg with money from a retirement job.

Why? Well for one thing, what people say they plan to do in 10 or 20 years and what they end up doing can be very different things. You may find that the eagerness you feel in your 50s to continue to working may fade as you hit your 60s and 70s. Or even if you wish to work—and actively seek it through sites like RetiredBrains.com and Retirementjobs.com, it may not be as easy as you think to land a job you like. Maybe that’s why the Employee Benefit Research Institute’s Retirement Confidence Survey finds year after year that the percentage of workers who say they plan to work after retiring (65% in the 2014 RCS) is much higher than the percentage of retirees who say they have actually worked for pay since retiring (27%).

So when you’re making projections about income sources in retirement, keep work earnings on the modest side, if you factor them in at all. And don’t fall into the trap of believing you can get by with saving less today because you’ll stay in the workforce longer or rejoin it whenever you need some extra cash in retirement. Or you may find yourself working some type of job in retirement whether you like it or not.

3. Taking Social Security sooner rather than later. Although a recent GAO report found that the percentage of people claiming Social Security at age 62 has declined in recent years, 62 remains the single most popular age to begin taking benefits, and a large majority still claim benefits before their full retirement age. But unless you have no choice but to grab benefits early on, doing so can be a costly mistake.

One reason is that for each year you delay between 62 and 70, you boost the size of your benefit roughly 7% to 8%. You’re not going to find a low-risk-high-return option like that anywhere else in today’s financial markets. More important, waiting for a higher monthly check can often dramatically increase the amount of money you receive over your lifetime. That’s especially true for married couples, who can take advantage of a variety of claiming strategies to maximize their expected benefit.

For example, if a 65-year-old husband earning $90,00 a year and his 62-year-old wife who earns $60,00 claim Social Security at 65 and 62 respectively, they might receive just over $1.1 million in today’s dollars in joint benefits over their expected lifetimes, according 401(k) advice firm Financial Engines.

But they can boost their estimated joint lifetime benefit by roughly $177,000, according to the Social Security calculator on Financial Engines’ site, if the wife files for her own benefit based on her work record at age 63, the husband files a restricted application for spousal benefits at 66 and then switches to his own benefit based on his work record at age 70.

Although you may not think of it this way, Social Security is, if not your biggest, certainly one of your biggest and most valuable retirement assets. And chances are you’ll get more out of it by taking it later rather than sooner and, if you’re married, coordinating the timing with your spouse.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

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MONEY retirement planning

Why Americans Can’t Answer the Most Basic Retirement Question

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marvinh—Getty Images/Vetta

Workers are confused by the unknowns of retirement planning. No wonder so few are trying to do it.

Planning for retirement is the most difficult part of managing your money—and it’s getting tougher, new research shows. The findings come even as rising markets have buoyed retirement savings accounts, and vast resources have been poured into things like financial education and simplified investment choices meant to ease the planning process.

Some 64% of households at least five years from retirement are having difficulty with retirement planning, according to a study from Hearts and Wallets, a financial research firm. That’s up from 54% of households two years ago and 50% in 2010. Americans rate retirement planning as the most difficult of 24 financial tasks presented in the study.

How can this be? Jobs and wages have been slowly improving. Stocks have doubled from their lows, even after the recent market tumble. The housing market is rebounding. Online tools and instruction through 401(k) plans have greatly improved. We have one-decision target-date mutual funds that make asset allocation a breeze. Yet retirement planning is perceived as more difficult.

The explanation lies at least partly in an increasingly evident quandary: few of us know exactly when we will retire and none of us know when we will die. But retirement planning is built around choosing some kind of reasonable estimate for those two variables. But that’s something few people are prepared to do. As the study found, 61% of households between the ages of 21 to 64 say they can’t answer the following basic retirement question: When will I stop full-time work?

Even the more straightforward retirement planning issues are challenging for many workers. Among the top sources of difficulty: estimating required minimum distributions from retirement accounts (57%), deciding where to keep their money (54%), and getting started saving (51%).

Those near or already in retirement have considerably less financial angst, the study found. Their most difficult task, cited by 33%, is estimating appropriate levels of spending, followed by choosing the right health insurance (31%) and a sustainable drawdown rate on their savings accounts (28%).

For younger generations, planning a precise retirement date has become far more difficult, in part because of the Great Recession. Undersaved Baby Boomers have been forced to work longer, and that has contributed to stalled careers among younger generations. The final date is now a moving target that depends on one’s health, the markets, how much you can save, and whether you will be downsized out of a job. Americans have moved a long way from the traditional goal of retirement at age 65, and the uncertainty can be crippling.

Nowhere does the study mention the difficulty of estimating how long we will live. Maybe the subject is simply one we don’t like to think about, but the fact is, many Americans are living longer and are at greater risk of running out of money in retirement. This is another critical input that individuals have trouble accounting for.

In the days of traditional pensions, many Americans could rely on professional money managers to grapple with these problems. Left on their own, without a reliable source of lifetime income (other than Social Security), workers don’t know where to start. The best response is to save as much as you can, work as long you can—and remember that retirees tend to be happy, however much they have saved.

Related:

How should I start saving for retirement?

How much of my income should I save for retirement?

Can I afford to retire?

Read next: 3 Little Mistakes That Can Sink Your Retirement

MONEY Ask the Expert

How Late-Life Marriage Can Hurt Your Retirement Security

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Robert A. Di Ieso, Jr.

Q: I am 66 and my partner is 63. We are thinking of getting married. How long must we be married for her to be eligible for spousal benefits based on my earnings? Neither of us have filed for Social Security yet. – Mark Sander, Indianapolis, IN

A: It’s wonderful to find love at any age. But for older couples, the decision to marry can have a big impact on your retirement finances, particularly when it comes to Social Security. Some experts say that may be one reason why co-habitation among older people is on the rise. According to the U.S. Census, nearly three million people age 50 and older live together, up from 1.2 million in 2000. “Many seniors live together instead of getting married because of money issues,” says Steve Vernon, author of Recession-Proof Your Retirement Years.

The good news is that if you do tie the knot, you only need to be married for one year for your wife to collect Social Security spousal benefits.

Still, it may not be a good idea for your wife to apply for benefits right away, says Vernon. At age 66 you are what Social Security deems full retirement age. But for your wife to collect full spousal benefits (50% of your full Social Security monthly payment) she will need to be full retirement age too.

If your wife files for Social Security before she reaches 66, she will get less than she would receive than if she waited till full retirement age. How much less? If your wife files for spousal benefits at 63, she will get 37.5% of your Social Security. At 64, that rises to 42% and at 65, 46%.

Waiting to collect benefits also means a higher payout for you. You can boost your Social Security paycheck by 8% each year you wait until age 70. A method called file and suspend allows you to file for your Social Security benefits so your wife can start collecting spousal benefits but you suspend receiving your benefits till you are 70.

Also be aware that if either of you has been married before, remarrying could mean losing alimony or the survivor benefits of a pension. “You really need to think strategically about how to maximize your Social Security benefits,” says Vernon.

There are a number of calculators and advice services that can help you figure the claiming strategy that’s best for your situation. Earlier this year, 401(k) advice provider Financial Engines released a Social Security income calculator that’s free and easy to use. The calculator sifts through thousands of claiming strategies to come up with a recommended option. For $40, you can use the Maximize My Social Security online software to evaluate more detailed scenarios. You may also want to consult a financial planner who’s familiar with Social Security rules.

Marriage can have a hazardous effect on other parts of your financial life, says Vernon. You will legally be on the hook for your spouse’s medical bills, and there may be sticky issues when it comes to inheritance. In some cases, married couples also face higher taxes, depending on your income and tax bracket.

Whether you get married is a personal decision, but by choosing the right financial plan, you’re more likely to enjoy a happy retirement together.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

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MONEY Social Security

This Little-Known Social Security Strategy Can Boost Your Retirement Income

woman flicking light switch
JGI/Jamie Grill—Getty Images

For retirees who need added income temporarily, turning your Social Security benefit on and off can be a smart move. It may also help your family over the long term.

Welcome to the Social Security claiming world of start-stop-start, a sophisticated strategy that can add big bucks to some people’s lifetime benefits if properly used.

By now, anyone who regularly reads about Social Security likely knows that delaying benefits until age 70 allows them to reach their highest level.

They also probably know that beginning to collect retirement benefits as early as age 62 will reduce them by 25% from what they would have been at age 66 (and 76% from their level at age 70 if claiming is deferred).

But it’s a whole lot less likely that they know about being able to begin taking benefits early, stopping them at age 66, and enjoying the benefits of delayed retirement credits until age 70. This is a potentially great option that can boost lifetime benefits, as well as help people who may be in a temporary financial bind in their early 60s—perhaps they have to take early retirement, but later end up earning more money in a second career.

Larry Kotlikoff, an economics professor (and co-author of my upcoming book on Social Security claiming), provides a useful and detailed explanation of the start-stop-start strategy. His analysis includes extensive computer simulations to determine how best to take advantage of these rules.

How Start-Stop-Start Works

The flexibility to start and stop your benefit is yet another important aspect of the agency’s rules regarding what it calls Full Retirement Age (FRA). This is 66 for people born between 1943 and 1955. For people born later, it rises by two months a year before hitting 67 for anyone born in 1960 and later. (I wrote recently about how the FRA can affect claiming decisions.)

I recommend that people consider waiting until age 70 to begin Social Security. But there are lots of valid reasons to begin claiming as soon as 62, which normally is the soonest you can receive benefits (there are earlier claiming ages for people with disabilities and surviving spouses).

If you take reduced benefits early—with “early” meaning before your FRA—you generally are stuck at those reduced benefit levels until you reach your FRA. There is a provision that lets you withdraw your benefit decision within a year of making it, pay back everything you’ve received from Social Security (included Medicare premium payments, if applicable) and get a fresh start with your claiming record.

But most early claimers don’t do this. Once they file early, they are stuck with whatever reduced benefit they get until they hit their FRA. At that time, Social Security rules allow a person to suspend their benefits for as long as four years. This is the “stop” part of start-stop-start. And most people are not aware of this FRA-related rule.

During this “stop” period, their benefits will earn delayed retirement credits. If they suspend for the full four years before their second “start,” their benefit will be 32% higher than when they suspended it. That’s a real 32% gain, too, as the delayed credits include the program’s annual cost-of-living adjustments for inflation. Now, this person’s benefits at age 70 will still be less than if they had never claimed a reduced benefit. But they’ll still be much higher than if they had never suspended them at their FRA.

Here’s a simple example: Say you are due a $1,000 retirement benefit at your FRA of 66. It will rise 32% to $1,320 a month (in real, inflation-adjusted terms) if you wait to claim until you turn 70. It will be reduced 25% to $750 a month if you claim early at age 62. However, that $750 will rise by 32% to $990 a month if you suspend at age 66 (the “stop”) and resume (the second “start”) at age 70. That’s a lot more than $750, of course, but it’s still far short of the $1,320 you’d get if you never claimed benefits at all until you turned 70.

Who Benefits by Resetting Your Claim

Besides helping out those in a temporary financial bind, this strategy may also improve your spouse’s benefits. Under Social Security rules, one spouse has to first file for their retirement benefit before the second spouse can file for a spousal benefit. While filing for retirement early will reduce that filer’s benefits, it could increase your family’s overall income. That’s because your husband or wife can then collect spousal benefits, while his or her individual benefit will keep rising till age 70.

If there’s a big age difference between you and your spouse, or if your spouse has a work record to consider, it can make sense for one spouse to begin benefits early, then suspend them when the second spouse reaches an optimal claiming age. The benefits of start-stop-start can become particularly valuable in maximizing family benefits for a couple, especially if they have young children.

As you can see, calculations for how to maximize benefits using start-stop-start can be very complex. You will probably do best to get help from a financial adviser, or use a benefits claiming calculator (see some recommendations here and here), or both.

Philip Moeller is an expert on retirement, aging, and health. He is an award-winning business journalist and a research fellow at the Sloan Center on Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

MONEY retirement planning

Smart Moves for Controlling Health Care Costs in Retirement

stethoscope with golf ball
pixhook—Getty Images

Planning for later-life medical costs is essential. These steps can keep you healthy longer and ease your worries.

It’s clear that planning for later-life health care costs is essential for a secure retirement—but figuring out what to do about them is a lot less clear. Out-of-pocket health expenses are not only a big-ticket item but are not predictable or controllable. No wonder few of us build financial strategies for future health needs, preferring the ever-popular ostrich plan: Place head in sand and hope for the best.

“Less than one out of six pre-retirees has ever attempted to estimate how much money they might need for health care and long-term care in retirement,” according to a report by Merrill Lynch and Age Wave, a consulting firm. Knowledge about Medicare is abysmal, the survey found, even among those already enrolled in the program.

And a recent health benefits survey by the Employee Benefits Research Institute, a non-profit retirement industry think tank, found that while nearly half of workers were confident about their ability to get the treatments they need today, only 30% were confident about that ability during the next 10 years, and just 19% are confident once they are eligible for Medicare.

Having a plan is a good way to build confidence. So start by taking a look at the mirror and asking yourself: How long do you think you’ll live and how healthy will you be in your later years?

“A 65-year-old male in excellent health can expect to live to age 87, while the same male in poor health has a life expectancy at age 65 of approximately 81 years,” said a recent study from the Insured Retirement Institute, a trade group that pushes annuity investments. A 65-year-old female in excellent health has a life expectancy of 89, or 84 in poor health. An average couple age 65 has a 40% chance that one or both will live to age 95.

While living to an old age may be better than what’s behind Door Number Two, it may prove costly. Old-age health expenses tend to be loaded into the last few years of life, often to deal with chronic illnesses, especially Alzheimer’s.

Average out-of-pocket health care expenses for that 65-year-old male will be an estimated $246,000 for the rest of his life if he is in poor health and dies at 81, the IRI study said. The lifetime bill rises to $345,000 for the healthy man who survives to an average age of 87.

Adopting healthy lifestyle habits may significantly reduce older-age health expenses. Just as important, it’s the best investment you can make in a higher quality of life during your later years.

The Merrill Lynch-Age Wave study recommends these proactive planning steps:

  1. Map out future out-of-pocket health expenses, including estimating future Medicare premiums and co-pays.
  2. Learn how Medicare and long-term insurance work.
  3. Develop contingency plans, for you and other family members, should illness cause lost income from an extended work disability.
  4. Broaden your planning to include those family members most likely to comprise your caregiving and financial support network.

The IRI report, not surprisingly, sings the virtues of using annuities to provide guaranteed lifetime streams of income to deal with long-running health care expenses. Many financial advisers prefer other investments. But you should at least look at annuity options as part of your long-term financial planning anyway.

If you’re especially worried about running out of money in your 80s— and, God willing, your 90s—then you should explore deferred annuities. Often called longevity insurance, a deferred annuity can be designed to not begin payouts until old age. If you buy one of these products in your 50s or 60s, the insurance company will provide very attractive payment terms. And it should, of course, because it will have the use of your annuity purchase money for 20 or even 30 years, with a good chance you’ll die before they have to pay you a cent.

The other insurance product worth a close look is long-term care insurance. Increasingly, this product is being linked with annuities to provide purchasers with choices—receive annuity payments or use the money for a qualifying long-term care needs. Generally, such hybrid products provide less bang for the buck than a pure annuity or long-term care policy. Also, keep in mind that your goal here should be to protect you and your family from ruinous health care bills. This is primarily an insurance product, not an investment.

Finally, the best annuity around is Social Security. It offers lifetime payments, annual inflation protection and government payment guarantees. That’s why I pound the drum of deferring Social Security until age 70, if it makes sense for your financial, family and longevity profile.

Philip Moeller is an expert on retirement, aging, and health. He is an award-winning business journalist and a research fellow at the Sloan Center on Aging & Work at Boston College. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

MONEY retirement planning

8 Things You Must Do Before You Retire

sébastien thibault

Getting ready to retire? The moves you make in the months before you call it quits can smooth the way to a secure future.

After working diligently for more than 30 years—so you could set yourself up financially for your golden years—the glow of retirement is finally on the horizon. Alas, it’s not time to relax just yet.

Each day more than 10,000 baby boomers enter retirement. Yet only around one-quarter of workers 55 and older say they’re doing a good job preparing for the next phase, according to the Employee Benefit Research Institute. The last 12 months before you call it a career is especially critical to putting your retirement on a prosperous path. It’s time to get your portfolio, health care, and other finances in order so you can enjoy your new life.

THE TURNING-POINT CHECKLIST

12 Months Out:

Dial back on stocks now. You still need the growth that equities provide, but even a 15% market slide in the year before you retire can erase four years’ worth of income. Cap stock exposure to around 50% in your sixties, advises Rande Spiegelman, vice president of financial planning at Schwab Center for Financial Research.

Raise cash. Your paychecks are about to stop. So as you downshift from stocks, move that money into a savings or money market account to fund at least one year of expenses, says Judith Ward, T. Rowe Price senior financial planner.

Set a realistic retirement budget. Use the worksheet on Fidelity’s free retirement-income planner to list all of your fixed and discretionary expenses. Then use T. Rowe Price’s free retirement-income calculator to see how safe that level of spending is likely to be, based on the size of your nest egg and age.

6 Months Out:

Play out Social Security scenarios. You can claim Social Security at 62, but if you can hold off until 70 your checks will be 76% bigger. Tool around FinancialEngines.com’s free Social Security Income Planner to find the best strategy for you.

Figure out how you’ll pay for health care. Check if your company offers retirees medical, long-term care, and other insurance coverage. If you won’t get health insurance and aren’t yet 65 (when you qualify for Medicare), then compare plans offered via the Affordable Care Act at eHealthInsurance.com. Or use COBRA, where you can stay on your employer plan up to 18 months after leaving.

3 MONTHS OUT:

Begin the rollover process. In a small 401(k) plan, average fund expenses can run north of 0.6% of assets. You can cut those fees at least in half by shifting into index funds at a low-cost IRA provider. See if your plan provides free access to investment advisers to help you decide.

Sign up for Medicare. Nearing 65? You can enroll for Medicare up to three months before turning that age. Also, figure in supplemental plans to cover expenses that Medicare does not, such as dental care and prescription drugs.

Get a running start. Put your post-career itinerary into action. Research volunteer groups that you want to join, reach out to contacts if you plan to keep a hand in work, start a new exercise routine, or begin planning that big trip.

TIME human behavior

The One Equation That Explains All of Humanity’s Problems

Relax, it's not nearly this complicated
Relax, it's not nearly this complicated niarchos Getty Images

There's you, there's me and there's everyone else on the planet. How many of those people do you care about?

Good news! If you’re like most Americans, you don’t have much reason to worry about the dangerous state of the world. Take Ebola. Do you have it? No, you don’t, and neither does anyone in your family. As for Ukraine, it’s not your neighborhood, right? Ditto ISIS.

Reasonable people might argue that a position like this lacks a certain, well, perspective, and reasonable people would be right. But that doesn’t mean it’s not a position way too many of us adopt all the same, even if we don’t admit it. If it’s not happening here, it’s not happening at all—and we get to move on to other things.

I was put freshly in mind of this yesterday, after I wrote a story on the newest—and arguably least honest—argument being used by the dwindling community of climate deniers, and then posted the link to the piece on Twitter. Yes, yes, I know. If you can’t stand the tweet heat stay out of the Twitter kitchen. But all the same, I was surprised by one response:

Just out of curiosity, how has ‘climate change’ personally affected you? Has it brought you harm?

And right there, in 140 characters or less, was the problem—the all-politics-is-local, not-in-my-backyard, no-man-is-an-island-except-me heart of the matter. It is the sample group of one—or, as scientists express it, n=1—the least statistically reliable, most flawed of all sample groups. The best thing you can call conclusions drawn from such a source is anecdotal. The worst is flat out selfish.

No, climate change has not yet affected me personally—or at least not in a way that’s scientifically provable. Sure, I was in New York for Superstorm Sandy and endured the breakdown of services that followed. But was that a result of climate change? Scientists aren’t sure. The run of above-normal, heat wave summers in the city are likelier linked to global warming, and those have been miserable. But my experience is not really the point, is it?

What about the island nations that are all-but certain to be under water in another few generations? What about the endless droughts in the southwest and the disappearance of the Arctic ice cap and the dying plants and animals whose climates are changing faster than they can adapt—which in turn disrupts economies all over the world? What about the cluster of studies just published in the Bulletin of the American Meteorological Society firmly linking the 2013-2014 heat wave in Australia—which saw temperatures hit 111ºF (44ºC)—to climate change?

Not one of those things has affected me personally. My cozy n=1 redoubt has not been touched. As for the n=millions? Not on my watch, babe.

That kind of thinking is causing all kinds of problems. N=1 are the politicians acting against the public interest so they can please a febrile faction of their base and ensure themselves another term. N=1 is the parent refusing to vaccinate a child because, hey, no polio around here; it’s the open-carry zealots who shrug off Sandy Hook but would wake up fast if 20 babies in their own town were shot; it’s refusing to think about Social Security as long as your own check still clears, and as for the Millennials who come along later? Well, you’ll be dead by then so who cares?

N=1 is a fundamental denial of the larger reality that n=humanity. That includes your children, and it includes a whole lot of other people’s children, too—children who may be strangers to you but are the first reason those other parents get out of bed in the morning.

Human beings are innately selfish creatures; our very survival demands that we tend to our immediate needs before anyone else’s—which is why you put on your own face mask first when the plane depressurizes. But the other reason you do that is so you can help other people. N=all of the passengers in all of the seats around yours—and in case you haven’t noticed, we’re all flying in the same plane together.

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