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.

MONEY Social Security

The Social Security Mistake Even Its Reps Are Making

The rules surrounding claiming requirements are so complicated that the official source of information doesn't always get them right. Here's some guidance that will save you money—and keep you from settling for bad advice.

Claiming Social Security benefits is an exercise in timing. Benefits are pegged to what the agency calls your Full Retirement Age, or FRA, 66 for those now near retirement. Claim too early—or too late—and you could be out truly big bucks.

First, there are early retirement reductions. For example, if you file at the earliest claiming age of 62, your benefits will be reduced by up to 25 percent. Early claiming reductions are even greater for spousal benefits: up to 30 percent if a spouse files at 62 versus 66.

The agency also has rules affecting the maximum benefits that qualifying family members may receive based on a person’s earnings record. So if a worker files early, the whole family stands to lose benefits.

The effects of early claiming don’t end there. If a person files for spousal benefits before reaching their FRA, Social Security deems them to be filing at the same time for their own retirement benefits. They will receive the greater of the two amounts, but will not be able to file a restricted application for just the spousal benefit.

Further, they will not be able to suspend their own retirement benefit and take advantage of Social Security’s delayed retirement credits, which add 8% a year to someone’s benefits, adjusted for inflation, between the ages of 66 and 70.

When someone has reached their FRA, however, such deeming no longer applies. The claimant can file for just the retirement or spousal benefit, receiving its full value while letting the second benefit rise in value until they switch to it at a later date.

These are complicated rules. Even if you understand them, Social Security representatives may not, or there may be communications and misunderstandings.

That’s what happened to Steve Hirsh, from Ridgeland, Miss. After reaching his FRA, Hirsh filed for his retirement benefit. His wife, who is younger, has not reached her FRA and has not yet filed for any benefit. The couple’s plan, Steve wrote, is for his wife to claim a spousal benefit at age 66, which would equal half of Steve’s benefit at his FRA.

At the same time, she would suspend her own retirement benefit for four years. Then, when she turned 70, she would stop receiving spousal benefits and begin taking her own retirement benefits, which would have risen during four years of delayed retirement credits and reached their maximum amount.

Steve’s plan is sound, but he said that Social Security didn’t see it that way. “I have been told repeatedly by various Social Security reps that she cannot file for the spousal option because her [earnings] base is more than half of mine,” he wrote to me via email. In other words, her retirement benefit from her own work record would be larger than her spousal benefit from Steve’s work history. “Is the Social Security office correct that we can’t do this because of the relative values of our full base amounts?”

Steve got bad advice from Social Security. Repeatedly. The relative values of a couple’s Social Security earnings can come into play if either spouse files for benefits before reaching FRA and is deemed to be filing for multiple benefits. But deeming ends at FRA, and the relative values of a couple’s covered earnings does not restrict their ability to collect a benefit.

I asked Steve to take another crack at Social Security, and he did. This time, the agency got it right. He sent me the agency’s response, which said in part, “Please note that deemed filing is not applicable for a claimant who is full retirement age (FRA). If an individual is FRA, he or she can file for a spousal benefit and delay filing for his or her own retirement benefit until a later time.”

Steve was delighted. “This will make a significant difference in our overall retirement strategy,” he said.

Beyond congratulating him for being persistent, we should read this as a cautionary tale. Even the official source of Social Security information can make mistakes, and what you don’t know can hurt you. So, do your homework and understand Social Security benefits. If Steve and his wife had taken the agency’s earlier responses at face value, they would have lost a lot of retirement income.

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 Social Security

How Student Loans Are Jeopardizing Seniors’ Retirements

Senior overwhelmed with debt
Chris Fertnig—Getty Images

Old debts are haunting retirees, as the federal government goes after their Social Security checks for repayment.

It’s a rude awakening for a growing number of seniors: They file for Social Security, then discover that the federal government plans to take part of their benefit to pay off delinquent student loans, tax bills, child support or alimony.

This month the U.S. Government Accountability Office (GAO) released findings on the problem of rising student debt burdens among retirees—and how the government goes after delinquent borrowers by going after wages, tax refunds and Social Security checks.

Under federal law, benefits can be attached and seized to pay child support and alimony obligations, collection of overdue federal taxes and court-ordered restitution to victims of crimes. Benefits also can be attached for any federal non-tax debt, including student loans.

It seems the student loan crisis isn’t just for young people. The GAO found that 706,000 of households headed by those aged 65 or older have outstanding student debts. That’s just 3% of all households, but the debt they hold has ballooned from $2.8 billion in 2005 to about $18.2 billion last year. Some 27% of those loans are in default.

If you’re among the 191,000 households that GAO estimates have defaulted, your Social Security benefits can be attached and seized.

“When that happens, the federal government pays off the creditor, and now it’s a debt to the federal government,” says Avram L. Sacks, an attorney who specializes in Social Security law. “So they can go after you for the loans—and now that students are reaching retirement age, long-forgotten debts are coming back to haunt them.”

The amounts that can be seized are limited, and the maximum amounts vary. In the case of any federal non-tax debt, including student loan debt, the government can take up to 15% of your monthly Social Security check. That’s a painful bite for low-income seniors living primarily on their benefits.

The law prohibits any attachment due to a federal non-tax debt that reduces a monthly benefit below $750. (Federal tax debt is not subject to this limitation.) Retirement and disability checks can be attached, but Supplemental Security Income—a program of benefits for low-income people administered by the Social Security Administration—is exempt.

In alimony or child support situations, garnishment is limited to the lesser of whatever maximums are set by states or the federal limit. The federal limits vary from 50% to 65% depending on how much the debt is in arrears and on whether the debtor is supporting a spouse or child. In victim restitution cases, the limit is 25% of the benefit.

Benefits can be deducted through an “administrative offset” against the amount the government sends you or through garnishment. In the case of garnishment, banks are required to protect the two most recent months of benefits that have been paid into your account, and the bank must notify you within five days that benefits have been attached.

Sacks advises people who have had benefits attached to establish stand-alone bank accounts for their Social Security deposits. “It’s much more simple and safe, and makes it much easier to trace funds,” he says.

Sacks says the government has been going after benefits more often because of changes in federal law and court rulings that have widened its powers. He urges people in their pre-retirement years to make every effort to pay off delinquent debts.

“It can be painful, but consider going to legal aid or finding a non-profit debt counselor who can help negotiate repayment. The worst thing is to ignore it.”

The government can go after delinquent debt while you’re working—but that requires a court judgment. ” are a known asset over which the federal government has total control,” says Sacks.

He adds that people sometimes are blindsided by garnishment for unpaid debts they had forgotten about. If you’re not sure about a federal debt, contact the U.S. Department of the Treasury’s Bureau of the Fiscal Service (800 304-3107), which serves as a clearinghouse for debts.

If the bureau shows a debt that you dispute, contact the agency that is owed. Do the same if your benefits already have been tapped. “Don’t try to deal with the Social Security Administration,” says Sacks. “They don’t have direct responsibility for the attachment.”

Finally, Sacks notes funds not in the bank can’t be garnished. Most people don’t hang on to Social Security benefits for long—they’re used to meet living expenses. “I hate to urge people to keep money under the mattress, but money that’s been sitting in a bank account for more than two months is exposed to attachment.”

MONEY retirement planning

4 Ways to Fix Our Retirement System

These changes would help all of us work longer, if we want to, and retire more comfortably.

Boomers have expressed a strong desire to remain engaged in the market economy. They still want to make a difference. They’re a creative force for change.

What could the government do to make it practical and desirable for more people to work longer? After spending two years researching my new book, Unretirement, I think the answer is: Fix four problems in America’s retirement system. In my opinion, these remedies would entice boomers to stay on the job, switch careers (possibly pursuing encore careers for the greater good) and launch businesses in midlife.

Below are four initiatives I think might accelerate unretirement; you may like all, a handful, or none of them. But hopefully, taken altogether, the ideas will spark a conversation about what’s possible and desirable for encouraging unretirement and encore careers.

1. Make America’s retirement savings system universal and with lower costs. It’s high time to acknowledge that our retirement savings system is not only broken, but unsuited for the new world of unretirement.

Only 42% of private sector workers ages 25 to 64 have any pension coverage in their current job. The result, according to the Center for Retirement Research at Boston College, is that more than one third of households end up with no coverage during their working years while others moving in and out of coverage accumulate small 401(k) balances. In short, the current system doesn’t even come close to universal coverage for the private economy.

The typical value of 401(k)s and IRAs for workers nearing retirement who do have them was about $120,000 in 2010, according to the Federal Reserve. That sum would provide a mere $575 in monthly income, assuming a couple bought a joint-and-survivor annuity, calculates Alicia Munnell, director of the Center for Retirement Research at Boston College.

Defined-contribution savings plans, like 401(k)s, can be improved. They’ve asked too much of people. You’ve usually had to voluntarily join (a difficult decision for lower-income workers living off tight budgets); many employees have been overwhelmed by their plans’ enormous mutual fund options, and high fees have eroded their returns.

In addition, most 401(k) participants don’t have the option of receiving payments from their plans as a stream of annuitized income that they can’t outlive in retirement. It’s widely recognized that plans need to offer their near-retirees this choice.

Lawmakers should require 401(k) plans have: automatic enrollment (where you can opt out if you wish); automatic annual escalation of the percentage of pay employees contribute (again, you could opt out of this feature); limited investment choice (say, no more than five or six); low fees and an annuity option for retirees.

The government could open up to companies that don’t offer a retirement plan to their workers—usually smaller firms—the federal government’s Thrift Savings Plan (TSP), one of the world’s best designed plans. Contributions could be made through payroll deduction, so the cost to firms would be minimal.

The TSP offers five broad-based investment funds along with the option of a lifecycle fund. Its annual expense ratio was an extremely low 0.027% in 2012, meaning for each fund, the cost was about 27 cents per $1,000 of investment.

“What’s the downside?” asks Dean Baker, co-director at the Center for Economic and Policy Research, during an interview at his office. “It’s common sense.”

Better yet, lawmakers could create a universal retirement plan attached to the individual. There have been a number of proposals over the years along these lines. For instance, the government could enroll every worker in an IRA through automatic payroll deduction.

2. Allow Americans who delay claiming Social Security to take their benefits in a lump sum. That’s a proposal being floated by Jingjing Chai, Raimond Maurer, and Ralph Rogalla of Goethe University and Olivia Mitchell of the Wharton School at the University of Pennsylvania.

The scholars give this example: Older workers who decide to stay on the job until age 66, rather than retire at 65, would get a lump sum worth 1.2 times the age 65 benefit and would also receive the age 65 annuity stream of income for life when filing for benefits at 66. Those who wait until 70 would get a lump sum worth some six times their starting-age annual benefit payment, plus the age 65 benefit stream for life.

Among the attractions of a lump sum are financial flexibility, the option of leaving money to heirs, and—for “financially sophisticated individuals”—the opportunity to invest the money. The lure of the lump sum would encourage workers to voluntarily stay on the job, on average by about one and a half to two years longer, the researchers calculate. Nevertheless, the workers’ Social Security benefits wouldn’t be cut, they would still have a lifetime annuity to live on and Social Security’s finances would remain essentially the same.

3. Offer Social Security payroll tax relief. A leading proponent of this idea is John Shoven, an economist at Stanford University. The current Social Security benefit formula is based on a calculation that takes into account a worker’s highest 35 years of earnings. Once 35 years have been put in, the incentive to stay on the job weakens, especially since older workers usually take home less pay than they did in middle age, their peak earning years.

Why not declare that older workers are “paid up” for Social Security after 40 years, asks Shoven. Why not indeed? There are a number of proposed variations on the idea, but they all converge on the notion that eliminating the employee share of the payroll tax around that point would be an immediate boost to an aging worker’s take-home pay and getting rid of the employer’s contribution then would lower the cost of employing older workers.

The change seems like a win-win situation from the unretirement perspective. “It’s an incentive for people to work longer,” says Richard Burkhauser, professor of policy analysis at Cornell University.

4. Change the rules for required minimum distributions (RMDs) beginning at age 70½ from 401(k)s, IRAs and the like. The requirements are Byzantine. For instance, with a traditional IRA, the RMD is April 1 following the year you reach 70 and six months, even if you are still working. The withdrawal requirement includes IRAs offered through an employer, such as the SIMPLE IRA and a SEP IRA. The same withdrawal date applies with a 401(k), unless you continue working for the same employer. But there is no RMD with a Roth IRA.

Got all this?

A pet peeve of mine is how unnecessarily complicated the rules are for retirement savings plans. Washington could raise the required minimum distribution rules on all plans to, say, age 80 or 85. Then again, Washington could simply eliminate the RMD altogether.

Like the other proposals mentioned earlier, I think it’s worth a try.

This article is adapted from Unretirement: How Baby Boomers Are Changing The Way We Think About Work, Community, and the Good Life, by Chris Farrell. Chris is senior economics contributor for American Public Media’s Marketplace. He writes about Unretirement twice a month, focusing on the personal finance and entrepreneurial start-up implications and the lessons people learn as they search for meaning and income. Tell him about your experiences so he can address your questions in future columns. Send your queries to him at cfarrell@mpr.org. His twitter address is@cfarrellecon.

More from NextAvenue.org:

What You Should Know About the 50+ Job Market

Dip Your Toe Into the Encore Career Waters

Phased Retirement: What You Need to Know

MONEY Social Security

When It Comes to Claiming Spousal Benefits, Timing Is Everything

Seemingly straightforward questions about claiming Social Security spousal benefits can wind up becoming complicated in a hurry. Here's one answer.

Recently I received a question from a reader that opens up all sorts of concerns shared by many couples:

I am four years older than my husband. I have reached my full retirement age (66) in June 2014. My own benefit is very small ($289/month), since my husband is the bread earner. I have been mostly a stay-at-home mom.

Should I just claim my own benefit now and wait four more years for my husband to reach his full retirement age, then apply for spousal benefits? That means he will get about $3,000/month, and I will get half of his benefit.

Or should my husband apply for early retirement now, at age 62, so I can apply for my own spousal benefits? He can then suspend his benefit and wait four more years until his full retirement age to get more money.

Please advise.

First, your husband should not apply for early retirement at 62. If he does so, his benefit will be reduced by 25% from what he would get if he waits until age 66 to file, and a whopping 76% less than if he waits to age 70, when his benefit would hit its maximum.

Further, if he does file at 62, he cannot file and suspend, as you suggest. This ability is not enabled until he reaches his full retirement age of 66. So if he files early, he will be triggering reduced benefits for the rest of his life. And because his benefits are set to be relatively large, this reduction would involve a lot of money.

If your household absolutely needs the money now, or if your husband’s health makes his early retirement advisable, he could file early and then, at 66, suspend his benefits for up to four years. They would then grow by 8% a year from their reduced level at age 62 – better than no increase, but not nearly as large a monthly benefit as if he simply files at age 66 and then suspends.

I normally advise people to wait as long as possible to collect their own benefits. But this is probably not the best advice in your case. Here’s why:

When your husband turns 66 in four years, it’s clear that you should take spousal benefits based on his earnings record. You say he would be entitled to $3,000 a month at that point and that you stand to get half of that, or $1,500 a month. That $3,000 figure seems a little steep to me, so I’d first ask you to make sure that is his projected benefit when he turns 66 and not when he turns 70.

In either event, however, it’s clear that your spousal benefit based on his earnings record is going to be much, much higher than your own retirement benefit. Even if you waited to claim your own retirement benefit until you turned 70, your spousal benefit still would be much higher.

Thus, you’re only going to be collecting your own retirement benefit for four years, from now until your husband turns 66. Even though your own retirement benefits would rise by 8% a year for each of those four years, those deferred benefits would never rise enough to come close to equaling the benefits you will get by filing right away.

So, take the $289 a month for four years, and have your husband wait until he’s 66 to file for his own retirement benefit and enable you to file for a spousal benefit based on his earnings record. He may decide to actually begin his retirement benefits then or, by filing for his benefit and then suspending it, earn annual delayed retirement credits of 8% a year, boosting his benefit by as much as 32% if he suspends until age 70.

If he does wait until 70, he will get his maximum monthly benefit. But you also will benefit should he die before you. That’s because your widow’s benefit would not just be equal to your spousal benefit but would equal his maximum retirement benefit. So, the longer he waits to file, the larger your widow’s benefit will be.

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.

Related:
Here’s How to Avoid Making a Huge Social Security Mistake
Here’s How to Handle Social Security’s Trickiest Claiming Rule
How to Claim Social Security Without Shortchanging Your Spouse

MONEY working in retirement

Here’s the Best Way to Rescue Your Retirement and Find Happiness Too

A second career can provide income as well as meaning. This advice from retirement expert Chris Farrell can help you plan your next venture.

Chris Farrell has a hot retirement investing tip for you, but it’s not a stock or bond.

Farrell wants you to invest in yourself. In his new book, Unretirement (Bloomsbury Press), he argues that developing skills that can help you earn income well past traditional retirement age offers a better return on investment than any financial instrument—and it can help transform the economy as it continues to heal from the Great Recession.

Farrell is senior economics contributor at public radio’s Marketplace, a contributing editor at Bloomberg Businessweek and a columnist for the Minneapolis Star Tribune. In a recent interview, I asked him to describe his vision of unretirement.

Q: How do you define “unretirement”?

“Unretirement” is about the financial impact of working longer. If you can work well into your 60s, even earning just a part-time income through a bridge job or contract work, you’ll make so much more in the course of a year than you could from saving.

That changes the financial picture—and not just income. You also don’t have to tap your retirement nest egg during those years, and you might be able to add to it. And it allows you to realistically wait to claim Social Security between age 66 and 70, depending on your health and personal circumstances.

Q: What are the essential tools and strategies for people trying to figure out how to unretire? Where should they begin?

The most important thing is to begin by asking yourself what it is you want to be doing—what kind of work. Do informational interviews with people. The real asset that older workers have is their networks—the people who have known them over the years. Talk with them to find out if you need to add new skills.

Don’t romanticize any particular idea—research it. Think about how you can take your existing skills and move into a different sector of the economy with those.

Q: One of the biggest obstacles facing older workers is age bias. Are employers adapting to help older people keep working longer?

The only evidence I’ve seen of that is at companies that face very tight labor markets—typically technology businesses. It’s also true for the nursing profession. For the rest of the economy, I’ve been to conference after conference focused on older workers, where employers wring their hands about all the brain power walking out the door. They’re sincere, but when they go back to the office they really aren’t motivated to do anything about it because the labor market isn’t strong enough

Q: If that’s the case, how will unretirement be able to take hold as a trend?

The economy is getting better, and labor markets are tightening. But this also will be driven by grassroots change. Many leading-edge boomers are negotiating their own deals, starting businesses or setting themselves up for self-employment with a portfolio of part-time jobs. It’s very do-it-yourself.

And attitudes are changing—there will be enormous pressure from society as people push for this. They’re going to be saying, “We’re pretty well educated, and healthier than we were before, and the numbers don’t work for us to go down to Florida or Arizona and retire—and we actually don’t want to do that.”

Q: There’s a great debate under way over whether we are headed for a crisis in retirement security or not. What’s your view?

I don’t think there will be a retirement crisis if we continue to work longer. But we’re going to want to do it with jobs that provide meaning rather than those that make people just miserable enough that they have to continue to work.

One thing that upsets me is that we have a conflation of financial stresses facing the middle class and pretending that the middle class will be in poverty in retirement—and that’s just not true. There is a group that is really vulnerable—they’ve worked all their lives for companies that don’t provide retirement or health insurance benefits. That is the really vulnerable group.

I think two-thirds of our society will be fine, but for this other group, it’s not about investing in a 401(k), because they simply don’t have the money. For them, Social Security will be the entire retirement plan.

Q: That suggests we will need to beef up Social Security, at least for the lowest-income retirees.

Absolutely. If a majority of us are healthy and continue to work and pay into the Social Security system, we will become a wealthier society—and we will be able to afford to be more generous with Social Security.

Chris Farrell’s write columns on second careers for NextAvenue.com, which also appear on Money.com; you can find his articles here.

MONEY retirement income

5 Tips For Tapping Your Nest Egg

Cracked egg
Getty Images—Getty Images

Forget those complex portfolio withdrawal schemes. Here are simple moves for making your money last a lifetime.

It used to be that if you wanted your nest egg to carry you through 30 or more years of retirement, you followed the 4% rule: you withdrew 4% of the value of your savings the first year of retirement and adjusted that dollar amount annually for inflation to maintain purchasing power. But that standard—which was never really as simple as it seemed— has come under a cloud.

So what’s replacing it?

Depends on whom you ask. Some research suggests that if you really want to avoid running out of money in your dotage, you might have to scale back that initial withdrawal to 3%. Vanguard, on the other hand, recently laid out a system that starts with an initial withdrawal rate—which could be 4% or some other rate—and then allows withdrawals to fluctuate within a range based on the previous year’s spending.

JP Morgan Asset Management has also weighed in. After contending in a recent paper that the 4% rule is broken, the firm went on to describe what it refers to as a “dynamic decumulation model” that, while comprehensive, I think would be beyond the abilities of most individual investors to put into practice.

So if you’re a retiree or near-retiree, how can you draw enough savings from your nest egg to live on, yet not so much you run out of dough too soon or so little that you end up sitting on a big pile of assets in your dotage?

Here are my five tips:

Tip #1: Chill. That’s right, relax. No system, no matter how sophisticated, will be able to tell you precisely how much you can safely withdraw from your nest egg. There are just too many things that can happen over the course of a long retirement—markets can go kerflooey, inflation can spike, your spending could rise or fall dramatically in some years, etc. So while you certainly want to monitor withdrawals and your nest egg’s balance, obsessing over them won’t help, could hurt and will make your retirement less enjoyable.

Tip #2: Create a retirement budget. You don’t have be accurate down to the dollar. You just want to have a good idea of the costs you’ll be facing when you initially retire, as well as which expenses might be going away down the road (such as the mortgage or car loan you’ll be paying off).

Ideally, you’ll also want to separate those expenses into two categories—essential and discretionary—so you’ll know how much you can realistically cut back spending should you need to later on. You can do this budgeting with a pencil and paper. But if you use an online tool like Fidelity’s Retirement Income Planner or Vanguard’s Retirement Expenses Worksheet—both of which you’ll find in the Retirement Income section of Real Deal Retirement’s Retirement Toolboxyou’ll find it easier to factor in the inevitable changes into your budget as you age.

Tip #3: Take a hard look at Social Security. The major questions here: When should you claim benefits? At 62, the earliest you’re eligible? At full retirement age (which is 66 for most people nearing retirement today)? And how might you and your spouse coordinate your claiming to maximize your benefit?

Generally, it pays to postpone benefits as your monthly payment rises 7% to 8% (even before increases for inflation) each year you delay between ages 62 and 70 (after 70 you get nothing extra for holding off). But the right move, especially for married couples, will depend on a variety of factors, including how badly you need the money now, whether you have savings that can carry you if you wait to claim and, in the case of married couples, your age and your wife’s age and your earnings.

Best course: Check out one of the growing number of calculators and services that allow you to run different claiming scenarios. T. Rowe Price’s Social Security Benefits Evaluator will run various scenarios free; the Social Security Solutions service makes a recommendation for a fee that ranges from $20 to $250. You’ll find both in the Retirement Toolbox.

Tip #4: Consider an immediate annuity. If you’ll be getting enough assured income to cover most or all of your essential expenses from Social Security and other sources, such as a pension, you may not want or need an annuity. But if you’d like to have more income that you can count on no matter how long you live and regardless of how the markets fare, then you may want to at least think about an annuity. But not just any annuity. I’m talking about an immediate annuity, the type where you hand over a sum to an insurance company (even though you may actually buy the annuity through another investment firm), and the insurer guarantees you (and your spouse, if you wish) a payment for life.

To maximize your monthly payment, you must give up access to the money you devote to an anuity. So even if you decide an annuity makes sense for you, you shouldn’t put all or probably even most your savings into one. You’ll want to have plenty of other money invested in a portfolio of stocks and bonds that can provide long-term growth, and that you can tap if needed for emergencies and such. To learn more about how immediate annuities work, you can click here. And to see how much lifetime income an immediate annuity might provide, you can go to the How Much Guaranteed Income Can You Get? calculator.

Tip #5: Stay flexible. Now to the question of how much you can draw from your savings. If you’re like most people, an initial withdrawal rate of 3% won’t come close to giving you the income you’ll need. Start at 5%, however, and the chances of running out of money substantially increase. So you’re probably looking at an initial withdrawal of 4% to 5%.

Whatever initial withdrawal you start with, be prepared to change it as your needs, market conditions and your nest egg’s value change. If the market has been on a roll and your savings balance soars, you may be able to boost withdrawals. If, on the other hand, a market setback puts a big dent in your savings, you may want to scale back a bit. The idea is to make small adjustments so that you don’t spend so freely that you deplete your savings too soon—or stint so much that you have a huge nest egg late in life (and you realize too late that you could have spent large and enjoyed yourself more early on).

My suggestion: Every year or so go to a retirement calculator like the ones in Real Deal Retirement’s Retirement Toobox and plug in your current financial information. This will give you a sense of whether you can stick to your current level of withdrawals—or whether you need to scale back or (if you’re lucky) give yourself a raise.

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MONEY Social Security

Here’s How to Handle Social Security’s Trickiest Claiming Rule

Grandfather with family
Cavan Images—Getty Images

Your spouse and other family members may depend on Social Security benefits. But their income may be limited by the family benefit "ceiling"—unless you plan now.

Social Security benefits include a surprising array of payments beyond your own retirement benefit. As I wrote last week, these so-called auxiliary benefits, which are geared to your earnings record, may provide income to your spouse (or former spouse), your children and even your parents. If you’re disabled, yet another set of Social Security benefits to your present and former family members may kick in.

This is, overall, a good deal. (And it’s a reason why delaying your own benefits is a thoughtful way to increase benefits to your loved ones.) But there is a big, big catch—it’s called the Family Maximum Benefit (FMB). This rule limits total Social Security payments to you and any eligible family members to a percentage of your own Social Security benefit. And it’s arguably one of the most tricky aspects of figuring out the best Social Security claiming strategy for you and your family.

Basically the FMB limits total payments to you and eligible family members to a total of 150% to 187% of the payments you alone would receive. It thus sets a ceiling on total family benefits—often, a very low ceiling. Here’s how it works:

Let’s say your spouse applies for spousal benefits based on your earnings and the payout is equal to 50% of your retirement benefit. Already we’re up to 150% of your retirement benefit. Now let’s say you have other family members who qualify for benefits—perhaps dependent children—who add another 150%, for a total of 200% on top of your payout. In all, these payments would cost Social Security 300% of your benefit.

This is where the the FMB ceiling comes in. If your FMB is 175% of your retirement benefit, then the rule will require the agency to reduce everyone’s benefit (except yours, which cannot be reduced) to a total of 75% of your benefit. Your family members will have to take nearly a two-thirds’ haircut in their benefits.

For those who want to get deeper into Social Security math—the rest of you can skip ahead—the FMB ceiling is based on what’s called your Primary Insurance Amount (PIA). This is the monthly retirement benefit you would receive if you started payments at what’s known as the Full Retirement Age (FRA), which is age 66 for those born between 1943 and 1954. (The FRA then will rise by two months a year for those born between 1955 and 1959, finally settling at 67 for anyone born in 1960 or later.) If your PIA is projected to be $2,500 in a few years, and you’re using this number for making auxiliary benefit decisions, here’s the way this year’s FMB formula would work:

  • 150% of the first $1,042 of your PIA (or $1,563);
  • 272% of the PIA between $1,042 through $1,505 (or $1,259);
  • 134% of the PIA over $1,505 through $1,962 (or $612); and,
  • 175% of the PIA over $1,962 (or $942).

The sum of these four numbers—$4,376—is the FMB for monthly benefits for all Social Security claims based on your earnings record. It equals 175% of your PIA. There is a separate formula covering FMBs for disabled persons, and it can produce very small benefits for lower-income claimants.

Is there a way around the FMB ceiling? Yes, but only if your family is flexible. Since the FMB limits apply to total benefits being collected on your earnings record in a given year, consider staggering the timing of your family’s claims. That way, they may be able to stay under the ceiling.

Here’s one example: Say you have a spouse and younger children who qualify for benefits. If your FMB would seriously reduce all these benefits, it might be best for your husband or wife to hold off on claiming the spousal benefit and take the child benefits only. The amount of money your family receives might not drop much, if at all. And the child benefits likely will expire anyway when the kids are older. Your spouse can make a claim at a later date, when the benefit also may have risen in value, depending on your age and the age of your significant other. Clearly, when it comes to strategizing benefits, Social Security is a family affair.

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 Social Security

Maximize Your Social Security Benefits…By Not Freaking Out

Seniors doing yoga on the beach
Lyn Balzer and Tony Perkins—Getty Images

A financial planner explains why, when it comes to retirement income, being patient can pay off in a big way.

About a month ago, a client walked into our office and announced that he had decided to take his retirement package being offered at work. We had to work out a number of issues related to his company’s retirement benefits. Finally, when the subject of Social Security came up, my client said, “I want to start taking the benefit as soon as I can, before they stop it.”

His opinion of Social Security is common. Many retirees believe that Social Security may run out or that Congress may legislate away their benefit.

We pushed back on this. First, the actuarial analysis shows the Social Security fund is pretty secure; it is Medicare that we all need to be worried about. Second, we feel that for a current retiree, the benefit amount is fairly safe; the only possible changes might involve a lower increase in the annual benefit. We agree with most experts that making changes to current benefits is a non-starter.

Our client was persuaded. Then he asked us a question we hear a lot: “When should I start taking Social Security, at age 66 or 70?”

The answer is not straightforward. If our client — let’s call him Jack — started taking Social Security at age 66, he’d receive a monthly benefit of $2,430. But your initial benefit increases the longer you postpone taking it, until you reach age 70. If Jack delayed taking the benefit until he turned 70, the initial amount would be $3,680, or 52% more per month.

Since Jack has other forms of retirement income, he doesn’t need the monthly check as soon as possible to live on. Instead, Jack’s goal is to get as much back from Uncle Sam as possible.

If Jack started his benefit at age 66, he would receive approximately $116,700 by age 70. (He’d actually get more, since benefits are adjusted annually for inflation. But for the sake of simplicity, I am ignoring inflation and other complicating factors.)

If he waited until age 70, he would be receiving $1,250 more per month, but he wouldn’t have received any money over the prior four years. It would take around 94 months to recoup the $116,700 he did not earn by waiting.

In other words, Jack would have an eight-year breakeven point if he waited until 70. If Jack dies before age 78, he would have received more by taking the benefit at age 66; if he lives past 78, he would be better off to wait until age 70. Federal life expectancy tables say a male 65 years old has a life expectancy of age 82. So if Jack has average health, the odds suggest he should wait until age 70 to take his benefit.

Jack’s wife — we’ll call her Jill — is 65, and has been retired for a couple of years. Jill’s Social Security projection looks like $2,120 monthly at age 66 or $3,200 at age 70. Jill’s breakeven also projects to be at age 78, yet her life expectancy is age 85, so the odds that she will be better off waiting until age 70 are greater than Jack’s.

But they both shouldn’t necessarily wait until 70 to take their benefits. Why? Because Social Security offers married couples a spousal benefit option.

This takes us into a different kind of strategy with our clients, something advisers call “file and suspend.”

It is possible to start taking a spousal benefit at age 66 (as long as your spouse has filed for his or her own benefit amount) and let your personal benefit increase to the maximum amount at age 70. The strategy is to have both spouses wait until 70 to take their own benefit, but for the spouse with the lower benefit amount to take a spousal benefit from age 66 up to age 70. For this to work, the spouse with the higher benefit amount needs to file for his or her benefit—then suspend receiving his or her own benefit until age 70.

For Jack and Jill, the file and suspend would work as follows: Jack, the spouse with the higher benefit, files for benefits at age 66, then immediately requests the benefits be suspended; that’s “file and suspend.” Then at age 70, he requests his benefits, which would be approximately $3,680 a month.

Jill files for her spousal benefit at age 66. This allows her to delay her own benefit while collecting a spousal benefit of around $1,250 a month. Then at age 70, she cancels the spousal benefit in order to collect her full benefit of $3,200 a month.

This scenario would provide them an added benefit of almost $60,000 in those first 4 years!

All Social Security scenarios have a breakeven age, so it is important to take an honest look at your health when evaluating all your options. The most important factor is your own cash flow need when you retire. If Social Security is going to be one’s sole source of income in retirement, waiting until age 70 is probably not an option.

But for those who can, delaying benefits is a useful tool. Outliving your money in your 80s or 90s is a real possibility. Postponing Social Security to allow for the highest possible benefit can mitigate that longevity risk.

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Scott Leonard, CFP, is the owner of Navigoe, a registered investment adviser with offices in Nevada and California. Author of The Liberated CEO, published by Wiley in 2014, Leonard was able to run his business, originally established in 1996, while taking his family on a two-year sailing trip from Florida to New Caledoniain the south Pacific Ocean. He is a speaker on investment and wealth management issues.

MONEY Social Security

What’s Missing in Your New Social Security Benefits Statement

colored balloons in a question mark formation
iStock

Many workers will start receiving Social Security benefits statements again. Just don't expect to see much discussion of inflation's impact on your payout.

The Social Security Administration will be mailing annual benefit statements for the first time in three years to some American workers. That’s good news, because the statements provide a useful projection of what you can expect to receive in benefits at various retirement ages, if you become widowed or suffer a disability that prevents you from working.

But if you do receive a statement next month, it is important to know how to interpret the benefit projections. They are likely somewhat smaller than the dollar amount you will receive when you actually claim benefits, because they are expressed in today’s dollars—before adjustment for inflation.

That is a good way to help future retirees understand their Social Security benefits in the context of today’s economy—both in terms of purchasing power, and how it compares with current take-home pay. “For someone who is 50 years old, this approach allows us to provide an illustration of their benefits that are in dollars comparable to people they might know today getting benefits,” says Stephen Goss, Social Security’s chief actuary. “It helps people understand their benefit relative to today’s standard of living.”

In part, the idea here is to keep Social Security out of the business of forecasting future inflation scenarios in the statement that might—or might not—pan out. The statement also provides a starting point for workers to consider the impact of delayed filing.

“It provides valuable information about how delaying when you start your benefit between 62 and 70 will increase the monthly amount for the rest of your life—an important fact for workers to consider,” says Virginia Reno, vice president for income security at the National Academy of Social Insurance.

Unfortunately, the annual statement is silent when it comes to putting context around the specific benefit amounts. The document’s only reference to inflation is a caveat that the benefit figures presented are estimates. The actual number, it explains, could be affected by changes in your earnings over time, any changes to benefits Congress might enact, and by cost-of-living increases after you start getting benefits.

And the unadjusted expression of benefits can create glitches in retirement plans if you do not put the right context around them. Financial planners don’t always get it right, says William Meyer, co-founder of Social Security Solutions, a company that trains advisers and markets a Social Security claiming decision software tool.

“Most advisers do a horrible job coming up with expected returns. They choose the wrong ones or over-estimate,” he says, adding that some financial planning software tools simply apply a single discount rate (the current value of a future sum of money) to all asset classes: stocks, bonds and Social Security. What’s needed, he says, is a differentiated calculation of how Social Security benefits are likely to grow in dollar terms by the time you retire, compared with other assets.

“Take someone who is 54 years old today—and her statement says she can expect a $1,500 monthly benefit 13 years from now when she is at her full retirement age of 67,” says William Reichenstein, Meyer’s partner and a professor of investment management at Baylor University. “If inflation runs 2% every year between now and then, that’s a cumulative inflation of 30%, so her benefit will be $1,950—but prices will be 30 percent higher, too.

“But if I show you that number, you might think ‘I don’t need to save anything—I’ll be rich.’ A much better approach for that person is to ask herself if she can live on $1,500 a month. If not, she better think about saving.”

About those annual benefit statements: the Social Security Administration stopped mailing most paper statements in 2011 in response to budget pressures, saving $70 million annually. Instead, the agency has been trying to get people to create “My Social Security” accounts at its website, which allows workers to download electronic versions of the statement. The move prompted an outcry from some critics, who argue that the mailed statement provides an invaluable reminder each year to workers of what they can expect to get back from payroll taxes in the future.

Hence the reversal. Social Security announced last spring that it is re-starting mailings in September at five-year intervals to workers who have not signed up for online accounts. The statements will be sent to workers at ages 25, 30, 35, 40, 45, 50, 55 and 60.

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