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.

MONEY Social Security

How to Claim Social Security Without Shortchanging Your Spouse

Deciding when to take Social Security can have a big impact on your family's income. Here's what you need to know.

When it comes to claiming Social Security, millions of people make this huge mistake: overlooking the impact on their family’s income.

Many people don’t realize that Social Security pays a host of benefits beyond your individual retirement income. The program may also pay so-called auxiliary benefits to your spouse, your children and even your parents. A separate program may provide auxiliary benefits if you become disabled, and, in some cases, if you are divorced or if you have passed away. The amount of these benefits is tied to your earnings record—the wages you’ve earned over a lifetime during which you’ve forked over Social Security payroll taxes—and your decision on when to file your claim.

To make the best choices about when to claim Social Security, anyone who is, or was, married, and especially those with children, needs to consider not only their own retirement benefits but also benefits that might be available to family members. This is especially true of survivor benefits.

Let me give you an example. (I wish it was simple but very little about Social Security is simple.) Say you’re 62 and your wife is 58. You’ve heard that delaying Social Security will raise your income but you want the benefits now, so you begin looking into the process of claiming them.

If you file for benefits at 62 (the earliest claiming age unless you’re disabled or a surviving spouse), they will be reduced by 25% from what you could get at full retirement age, which is 66 for people now approaching retirement. What’s more, that payout would be a whopping 76% less than if you waited until age 70 to file. To use convenient numbers, if your benefit at 66 would be $1,000 a month, you would get only $750 a month if you filed at age 62 but $1,320 a month if you waited until age 70.

Perhaps you’re okay with receiving lower income, if you start getting it sooner. But how about your family members? These reductions would also apply to their auxiliary benefits.

The most dramatic impact of early claiming decisions affects widows. Husbands are overwhelmingly likely to begin taking their retirement benefits before their full retirement age, according to Social Security data. Yet husbands are likely to die several years before their wives, statistics show, which leaves many widows struggling on small incomes.

Granted, many women have salary records of their own, and as their wages have increased over the past 30 years, so have Social Security benefits. But many women now reaching retirement age have not accumulated Social Security benefits equal to that earned by their husbands.

That inequality is a real problem for widows. While they both are alive, each spouse can collect his or her own Social Security benefit. But after one dies, the surviving spouse can only collect the greater of the two benefits. This is likely to be the husband’s benefit, even if it’s been reduced because he filed for it early.

As a result, millions of widows in this country are receiving reduced survivor benefits based on their late husband’s earnings record. Had he waited to file, their survivor benefits would have been higher—much higher in many cases.

The trend is so pronounced that the agency devised a special way of calculating benefits to try and ease its impact. It’s called the Retirement Insurance Benefit Limit, or RIB-LIM in the agency’s acronym-crazy jargon. It’s also known as the Widow(er)’s Limit.

When you make the decision when to claim Social Security, make sure it’s in the best interest of everyone in the family. To really understand this decision, you’ll need to know about Social Security’s family maximum benefits. Tune in next week to learn how they work.

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

Here’s How to Avoid Making a Huge Social Security Mistake

Spousal benefits are a crucial Social Security option for millions of couples. But getting extra, and in some cases “free,” spousal benefits is not possible for couples that run afoul of the agency’s tricky “deeming” rules.

Spousal benefits are a crucial Social Security option for millions of couples. But getting extra, and in some cases “free,” spousal benefits is not possible for couples that run afoul of the agency’s tricky “deeming” rules.

To understand deeming, it helps first to understand the best-case scenario for spousal benefits. Take a couple where the wife is about to turn 66 and her husband is about to turn 70. For her, age 66 is considered “full retirement age”, when, among other things, she can claim benefits without any early retirement reductions. For him, age 70 is when he can claim the greatest possible benefit, assuming he has so far deferred filing.

In this example, if the husband files for his own retirement benefit at 70, his filing permits his wife to file only for her spousal benefit, which is equal to half of the benefit he was entitled to at his full retirement age — not, that is, half of the larger amount he can claim at age 70.

But if the wife files what’s called a restricted application for spousal benefits at 66, she can receive these benefits while deferring her own retirement benefit for up to four years until she turns 70. During this time she earns delayed retirement credits so she, too, can claim her highest-possible benefit at that time. During this period, she can receive what essentially are free spousal benefits – free in the sense that collecting them has no adverse effect on her own retirement benefits.

This claiming strategy has been so well-publicized that the Obama Administration has proposed ending it — reportedly because the maneuver is used predominantly by wealthier workers, who are most likely to be able to afford deferring their benefits to age 70. But let’s debate the fairness of this proposal another day.

The problem is that this maneurver doesn’t work at all when people file before reaching full retirement age. Say that our couple is instead aged 62 and 65. And remember that 62 is generally the earliest that people who are married can file for spousal benefits. So our couple figures that the 62-year-old wife will file for spousal benefits on the earnings record of her 65-year-old husband, while she defers her own retirement benefits. This may be a logical assumption based on the ideal claiming scenario of our first couple. But it won’t be allowed by Social Security.

Here’s where “deeming” comes in. Remember that for the wife to file for spousal benefits, her husband first has to file for his retirement benefits. And because she is younger than full retirement age, Social Security’s rules will “deem” her to be also filing for her own retirement benefit when she files for her spousal benefit. There is no way around this if she is younger than 66. And the benefit she will actually receive won’t be both of these benefits but in effect only the larger of either her retirement benefit or her spousal benefit. Further, because she’s filing before reaching full retirement age, both benefits will be subject to early claiming reductions.

And remember her hubby, who filed for his own retirement at 65 to enable her to file for spousal benefits? He will get a reduced early retirement benefit, not the benefit he could get by waiting until full retirement age, let alone the benefit he would get if he deferred retirement until age 70.

Unfortunately, very few people even know deeming exists, so many of them unknowingly file for both spousal and retirement benefits at the same time without realizing it.

In 2012, 6.8 million persons – nearly all of them women – were simultaneously receiving two benefits at the same time, according to Social Security records. But the agency says it has no idea how many of these people were affected by deeming and how many of them were aware their filing action had automatically triggered a claim for a second benefit at the same time.

The bottom line here: You can qualify for two Social Security benefits at the same time but you can only collect an amount that is equal to the greater of the two benefits. In practical terms, the second benefit is lost to you because of deeming. If you can defer one benefit instead, it might be possible to have the best of both benefits.

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 First-Time Dad

Why Millennials Aren’t Lazy, Spoiled or Entitled…

Luke Tepper

...At least not any more than other generations are.

Mrs. Tepper and I spent the better part of the past week trying to induce our six-month old son Luke to sleep through the night. After a parade of co-sleepers, swings, night feedings and magic sleeping suits, it was time — our doctor told us — to go medieval and let the little guy cry in his room until he woke up the next morning.

The (seemingly) endless sobbing was difficult to endure, but within a few nights, Luke slept all night. He did it! And so did we.

Luke’s accomplishment not only put our minds at ease, it helped stroke our parenting egos. Now when other parents ask us how he’s sleeping, we’ll be able to look them dead in the eyes and with not a small amount of satisfaction say, “We got him to sleep like a log.”

Parenting, much like sports and everything else, is competitive. If you think your kid is cuter than mine, well, we might just have a problem. Of course, this is silly. Whether a kid sleeps through the night, rolls over, or cries incessantly is largely a matter of luck and circumstance. Some parents happen to have a newborn that sleeps well, while others don’t and there are millions in between.

The mistaking of luck for skill, the conflation of happenstance for personal achievement, is pervasive in our society. You even see this play out in the management of mutual funds. In fact, I think this natural phenomenon is one reason that older generations think mine is narcissistic, instead of simply unlucky.

More than a few readers have responded to my articles with a common refrain that kids today are given much more than older generations — and thus are much more willing to spend and less principled in saving. And that this deficit accounts for Millennials’ current economic struggles.

Fine, though older generations complaining about the lives lead by their children and their children’s children is just as much a cliché. Nevertheless, a few facts and figures may help to enlighten the perception of today’s young adults and help align the views of those from different ages.

We Grew Up During the Great Recession

Millennials graduated college in the teeth of the worst economic downturn since the Great Depression. While people of all ages felt its impact, Millennials were a little more vulnerable — if not economically, then psychologically — than other groups.

In a recent speech, the chairman of the White House’s Council of Economic Advisers highlighted just how rough the Great Recession was on Millennials. “While the unemployment rate for those over 34 peaked at about 8%, the unemployment rate among those between the ages of 18 and 34 peaked at 14% in 2010 and remains elevated, despite substantial improvement,” Furman said.

Graduating into a recession leads to lower wages, which has been especially true for those who had the misfortune of turning 22 in 2008. In fact, per a recent Pew Research Center survey, “Millennials are the first in in the modern era to have higher levels of debt, poverty and unemployment, and lower levels of wealth and personal income than their two immediate predecessor generations had at the same time.”

We Pay More to Raise Our Kids Than You Did

If you had kids in 1985, and the mother of those kids worked, you paid on average $87 (in 2013 dollars) a week in child-care expenses, according to Pew. In 2010, the figure grew to $148. That means, on average, working mothers today pay over $3,000 more a year on child care than their mothers paid for them.

Of course, child-care expenses, like real estate, differ zip code to zip code. We live in Brooklyn and teamed up with another family to hire a nanny. The total cost to us? Almost $400 a week.

And it doesn’t look like families like ours well get help anytime soon. A few months ago, the International Labor Organization put out a report which found that the U.S. and Papua New Guinea are the only two countries in the world that have “no general legal provision of maternity leave cash benefits.”

Not only is it more expensive to raise your kids now, but we live in one of the two countries in the entire world that doesn’t offer any help.

You Are More Entitled Than We Are

Despite the fact that some think that seniors have earned their Social Security and Medicare benefits, entitlements have always been a transfer of wealth from the working to the elderly. Ida May Fuller was a legal secretary who retired in the end of 1939 having paid $24.75 in social security taxes. A couple of months later, she received the first retirement check and would go on to accumulate almost $23,000 in Social Security benefits.

Ida is not alone. According to the Urban Institute, a couple that earned $71,700 (in 2013 dollars) a year from 22, and retired in 2015, will receive more than $1 million in lifetime benefits (including Social Security and Medicare.) This despite paying nearly $650,000 in lifetime entitlement taxes.

Now, I’m fine paying taxes to fund a social program that has so effectively reduced elderly poverty and improved the lives of millions of people. I just don’t want those recipients of public funds to think of my generation as entitled.

Look, so much of our success is defined by luck.

If you graduated college during the Carter or Reagan presidencies, you entered an economy that was adding between 150,000 and 250,000 jobs a month. Over the past 14 years? Not so much.

Of course, you can’t do much to control your macroeconomic environment. The only thing non-policy makers can do is hope — hope that in 28 years your son is luckier than you were.

So when you think about Millennials in terms of living at home and deifying self-aggrandizing behavior, remember the economic hardships that we endured and you didn’t. Remember that others who receive Social Security and Medicare may not have really earned those funds. Remember “there but for…” and appreciate the luck you have in this world.

Taylor Tepper is a reporter at Money. His column on being a new dad, a millennial, and (pretty) broke appears weekly. More First-Time Dad:

MONEY Health Care

Why the Good News for Retiree Health Care May Not Last

With overall health-care costs in check, Medicare didn't hike the premiums seniors pay again this year. But once economic growth picks up, rising prices could come back too.

Medicare turned 49 years old last week, and the program celebrated with some good financial news for seniors: Premiums will not rise in 2015 for the third consecutive year.

The question now: How long can the good news persist? Worries about Medicare’s long-range financial health persist, but for now persistent low healthcare cost inflation will translate into a monthly premium of $104.90 next year for Part B (outpatient services), according to the Medicare trustees. Meanwhile, the Centers for Medicare & Medicaid Services (CMS) says the average premium for a basic Part D prescription drug plan will rise by about $1, to $32 per month.

The Part B premium has been $104.90 since 2012—except for 2011, when it actually dropped by about $15, to $99.90. The moderation is good news for seniors, since premiums are deducted from Social Security checks. Beneficiaries will keep all of next year’s Social Security cost-of-living adjustment, which likely will be about 1.7%.

Meanwhile, the average Part D premium has been $30 or $31 since 2011. That’s because of a dramatic shift to cheap generic drugs, and innovation by plan providers competing for customers.

“Seniors can expect to see more of what they’ve been getting over the last few years, which is increasing effort by Part D insurers to offer very-low-premium plans,” says Matthew Eyles, executive vice president of Avalere Health, a consulting firm specializing in healthcare.

As in recent years, Eyles says, the best deals will be found in plans that require enrollment in preferred pharmacy networks. Those plans offer lower premiums and co-pays. “We’ll also see plans limiting or eliminating deductibles, and encouraging the use of generics by offering them free or at nominal prices,” says Eyles.

But the average figures mask a more complicated story. Part D enrollees will find significant regional variations in premiums around the country. CMS data shows average premiums will be as low as $21.19 in New Mexico, and $25.83 in Florida—but as high as $39.74 in Idaho and Utah.

Eyles says it is not entirely clear why premiums will vary so extensively, although the prices tend to track the overall cost of healthcare, and are related to the overall healthiness of seniors by state.

“The plan providers have to submit bids for regions that take into account differences in the enrolled populations, including prescribing and utilization patterns,” he says. “It could be that one state tends to have more people using statins, or a diabetes medication.”

Another complication in Part D is the “doughnut hole,” the gap in coverage for Part D enrollees with high drug costs. Higher-cost plans are available to provide gap coverage, but the hole’s size is being shrunk under a provision of the Affordable Care Act (ACA), and the gap is set to disappear in 2020.

The coverage gap begins after you and your drug plan have spent a certain amount for covered drugs. Next year the gap starts at $2,960 (up from $2,850 this year) and ends after you’ve spent $4,700 (up from $4,550 this year).

Seniors who enter the gap also get discounts on brand-name and generic drugs, and those breaks will be larger next year. Enrollees will pay 45% of the cost of brand-name drugs in 2015 (down from 47.5% this year) and 65% of the cost of generic drugs (down from 72% this year).

Can the recent good news on lower healthcare costs continue indefinitely? Medicare spending reflects our overall health economy, and the big picture is that the United States does not have effective controls on spending growth. Healthcare outlays have quadrupled since the 1950s as a percentage of gross domestic product, to 17.7% in 2011. What’s more, our spending is more than double any other major industrialized nation, according to the Organization for Economic Cooperation and Development.

Still, our per capita Medicare spending growth averaged 2% from 2009 to 2012, and it was nearly zero last year.

The Obama administration often points to the ACA, but outside experts are more skeptical. Research published this month by Health Affairs, a leading health policy and research and journal, credited 70% of the recent spending slowdown to the slack economy. Absent further changes in the structure of our healthcare system, the researchers expect higher healthcare inflation to resume as the economy improves.

“A significant amount of it is due to the economic slowdown,” says Eyles, “although we know that changes in the way providers deliver care, and how providers are being paid are also making a difference in the overall rate of growth.”

MONEY retirement planning

9 Steps to a Successful Retirement Plan

These time-tested moves can help you achieve a retirement that meets your financial goals and is emotionally satisfying too.

Your retirement will benefit from an informed understanding of key numbers, as I explained last week. How big is your nest egg? How much money will you need to live on? How much should you draw from your funds each year? How long do you expect to live?

Whether your retirement is successful, however, will depend not so much on these numbers but on whether your later years fulfill your emotional needs.

Money is important to happiness, of course. But there are other requirements here, including feeling secure about your future, not being exposed to investment risks you consider excessive, satisfying your concerns and goals for the legacy you wish to leave behind, and, when all is said and done, feeling you’ve run the best race of your life.

These are emotional and aspirational goals and you can’t put numbers to them. Yet, everyone has them, so it’s important to factor them into your retirement savings, investing and spending plans.

I’ve written gobs of stories about “can’t miss” and “best practices” retirement plans, speaking with retirement experts across the spectrum. From them, I’ve fashioned an approach to retirement that I like so well that I’ve adopted it for my own retirement plan. Here it is.

My advice to you, as with pretty much all financial advice, is to use this approach as a starting place. Adopt it, modify, or toss it out. But by all means, think about it and use it to help you make your own retirement plans.

My plan is shaped by my risk tolerances (low) and desire for financial security (high). It creates a 100% likelihood that I will not outlive my money. It is also a strategy that includes the needs of myself and my wife. We are willing to leave some money on the table in the interest of security. And we also are willing to defer some retirement income and thus “lose” money should we die earlier than we hope.

Step One: Add up sources of guaranteed retirement income—Social Security and pensions. In terms of longevity risk, the odds favor at least one member of a 65-year old couple living into their 90s. Therefore, give serious thought to deferring Social Security until age 70, when it has reached its maximum value.

Beyond being guaranteed, Social Security payments also increase each year to reflect the prior year’s inflation. They are, quite simply, the very best retirement dollars around. And I don’t buy all the gloom-and-doom stories about the program’s demise. Social Security will be here for a long, long time.

Step Two: Unless you know a shorter life is in the cards, opt for joint survivorship payments on any pension proceeds. They will be smaller than payments that would stop upon you or your spouse’s death. But both pensions will continue so long as either of you live. The goal here is to maximize security, not dollars.

Step Three: Tote up how much guaranteed money you will receive every month once you stop working. This could be a long time off or, depending on an adverse health or other life event, just around the corner.

Step Four: Build a detailed record of household spending, perhaps divided into major spending buckets—mortgage, utilities, good, cars, insurance, out-of-pocket healthcare, etc. Make note of required versus discretionary spending.

Step Five: Compare your projected guaranteed retirement payments with your current required spending needs. The goal here is for the two numbers to match. If they do, then in a worst-case world, you will always have enough money to keep a roof over your head and maintain a lifestyle that is close to the one you now have.

Step Six: If your fixed income today is projected to be smaller than your current fixed expenses, you will need to downsize. This might involve your home. Getting out from under mortgage and upkeep costs is the largest downsizing opportunity for most people.

Step Seven: If downsizing doesn’t get you there, consider using a portion of your nest egg to get more guaranteed lifetime income by purchasing an immediate annuity that will close the gap. This would reduce your savings, of course, but it scores very, very high on the “Sleep at Night” scale! Consider a longevity annuity as part of your solution.

Step Eight: Having balanced your fixed income and expenses, you can tap your investment portfolio to fund the gratifying things you want to do during your retirement years. If market returns are good, you will be able to do more. And during the inevitable periods of poor market performance, you can reduce discretionary spending without putting your basic standard of living at risk.

Step Nine: Set aside a portion of your savings against the day when one of you dies, so that it can compensate for the loss of one Social Security benefit. If you want to leave a financial legacy, set it aside here as well. If you still own a home after downsizing, use your equity as a piggy bank you hope never to break open. But it will be there for healthcare and other unforeseen emergencies.

That’s my plan. What’s yours?

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

Why Millennials and Gen Xers Shouldn’t Diss Social Security

Don't fall for the myth that Social Security runs dry after Baby Boomers retire. You'll still get most of the promised benefits.

Ask your average American born after 1964 what they think about Social Security and they will probably say something like, “I’ll never see any of it. When I get those statements in the mail I just throw them away.” For this we have to thank (among others) novelist Douglas Coupland, author of Generation X, who back in 1991 said in an interview, “I don’t think anyone honestly expects to collect a single penny they pay into Social Security…The day you want to go collect your money the system will have just gone bankrupt buying a jewelled stereo system for Jane Fonda’s walker.”

It is true that timing is terribly unkind to me and my peers—the Social Security trust fund reserves will be depleted in 2033, the same year I will be turning 65, according to the most recent board of trustees report.

And it is equally true that this depletion will be due to ballooning expenditures for Baby Boomer beneficiaries that will begin to create a steeply rising deficit in about 2019. But this does not mean that Social Security will not be there for me when I retire—which is what more than 80% of Millennials and Gen X-ers believe, according to a survey released last monthby the TransAmerica Center for Retirement Studies.

Social Security gets money to make payments to retirees in three ways: through taxes on current workers, through taxes on the benefit payments, and through interest income on a trust fund of about $2.6 trillion as of the end of 2013. (The Department of the Treasury invests the trust fund in special, non-marketable government securities, which may explain why it only made 3.75% last year—more on that later.) As the program begins to run a larger and larger deficit, the shortfall will be made up by eating into the reserve fund itself. That’s what will be depleted by 2033, but not the entire program, which anticipates being able to pay approximately 75% of scheduled benefits between 2033 and 2088.

75% isn’t as good as 100%, but I’ll take it. (I’m not as sure about deferring benefits to age 70, even though the economic advantages of doing so make Michael Kitces describe deferral as “the best annuity money can buy.”)

According to projections done by the Employee Benefit Research Institute, between 73% and 76 % of people in 401(k) plans will still have a “successful” retirement (defined as being able to replace between 60% to 80% of pre-retirement income) even with reduced Social Security benefits, compared to between 83% and 86% of people reaching “successful” retirement at current Social Security benefit amounts.

Those projections assume a retirement at age 65. They also assume that nothing will be done to “fix” the projected shortfall, such as raising taxes or more actively managing the trust fund investment to get a higher return, both of which would be extremely controversial solutions. Something must be done, if only, as the trustees warn, to avoid the increasing strain that the trust fund deficit will also put on the unified Federal budget. If there’s one fiscal issue Millenials and Gen Xers could both rally around, this should be it, and yet the problem seems to be met with apathy, perhaps owing to the misunderstanding that we no longer have anything at stake.

I used to like getting those statements of estimated benefits, the ones called “what Social Security means to you.” After suspending those mailings due to financial cutbacks, Social Security will once again send estimates but only at five-year intervals (you can also get them online.) Don’t disregard them. Social Security will still mean an awful lot.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management.

More on Social Security:

 

MONEY Social Security

The 5 Key Things to Know About Social Security and Medicare

No need to panic, but both Social Security and Medicare face long-term financial challenges, this year's trustees report finds. There's still time to make fixes.

If you worry about the future of Social Security and Medicare, this is the week to get answers to your questions. The most authoritative annual reports on the long-term health of both programs were issued on Monday, and while the news was mixed, there are reasons to be encouraged about our two most important retirement programs.

Under the Social Security Act, a board of trustees reports annually to Congress on the status and long-term financial prospects of Social Security and Medicare. The reports are prepared by the professional actuaries who have made careers out of managing the numbers and are signed by three cabinet secretaries, the commissioner of Social Security and two publicly appointed trustees—one Republican, one Democrat.

Here are my five key takeaways from this year’s final word on our social insurance programs.

* Imminent collapse nowhere in sight. Social Security and Medicare face long-term financial problems, but there’s no cause for panic about either program.

Social Security’s retirement program is fully funded for the next 19 years. It has $2.8 trillion in reserves, and that figure will rise to $2.9 trillion in 2019, when the surplus funds will begin depleting rapidly as baby boomer retirements accelerate. Although you’ll often hear that Social Security spends more annually than it receives in taxes, the program actually took in $32 billion more than it spent last year, when interest on bond holdings and taxation of benefits are included.

The retirement trust fund will be depleted in 2034, at which point current revenue would be sufficient to pay only 77% of benefits—unless Congress enacts reforms to put the program back into long-term balance.

Medicare’s financial outlook improved a bit compared with last year’s report because of continued low healthcare inflation. The program’s Hospital Insurance trust fund – which finances Medicare Part A— is projected to run dry in 2030, four years later than last year’s forecast and 13 years later than forecast before passage of the Affordable Care Act (ACA).

In 2030, the hospital fund would have enough resources to cover just 85 percent of its expenditures. (Medicare’s other parts—outpatient and prescription drug services—are funded through beneficiary premiums and general revenue, so they don’t have trust funds at risk of running dry.)

Could healthcare inflation take off again? Certainly. Some analysts—and the White House – chalk up the recent cost-containment success to features of the ACA. But clouds on the horizon include higher utilization of healthcare, new medical technology and a doubling of enrollment by 2030 as boomers age.

* Medicare is delivering good pocketbook news. The monthly premium for Medicare Part B (outpatient services) is forecast to stay put at $104.90 for the third consecutive year in 2015. That means the premium won’t take a larger bite out of Social Security checks, and that retirees likely will be able to keep most— if not all—of the expected 1.5% cost-of-living adjustment (COLA) in benefits projected for next year. (Final numbers on Part B premiums and the Social Security COLA won’t be announced until this fall.)

* Social Security Disability Insurance (SSDI) requires immediate attention. The program faces a severe imbalance, and only has resources to pay full benefits only until 2016; if a fix isn’t implemented soon, benefits would be cut by 20 percent for nine million disabled people.

That can be avoided through a reallocation of a small portion of payroll tax revenues from the retirement to the disability program – just enough to keep SSDI going through 2033 while longer-range fixes to both programs are considered. Reallocations have been made at least six times in the past. Let’s get it done.

*Aging Americans aren’t gobbling up the economic pie. Social Security outlays equalled 4.9% of gross domestic product last year and will rise to 6.2% in 2035, when the last baby boomer is retired. Medicare accounted for 3.5% of GDP in 2013; it will be 3.7% of GDP in 2020 and 6.9% in 2088.

* Kicking the can is costly. There’s still time for reasonable fixes for Social Security and Medicare, but the fixes get tougher as we get closer to exhausting the programs’ trust funds. Social Security will need new revenue. Public opinion polls show solid support for gradually eliminating the cap on income subject to payroll taxes (currently $117,000) and gradually raising payroll tax rates on employers and workers, to 7.2% from 6.2%. There’s also strong public support for bolstering benefits for low-income households and beefing up COLAs.

Medicare spending can be reduced without resorting to drastic reforms such as vouchers or higher eligibility ages. Billions could be saved by letting the federal government negotiate discounts on prescription drugs, and stepping up fraud prevention efforts. And an investigative series published earlier this summer by the Center for Public Integrity uncovered needed reforms of the Medicare Advantage program, pointing to “tens of billions of dollars in overcharges and other suspect billings.”

Your move, Congress.

Related stories:

How to Fix Social Security—and What It Will Mean for Your Taxes

Why Taxing the Rich Is the Wrong Way to Fix Social Security

3 Smart Fixes for Social Security and Medicare

 

MONEY early retirement

How Much Money Do I Really Need to Retire at 55?

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Robert A. Di Ieso, Jr.

Q: I’m 40 and can’t imagine working till I am 65. If I want to retire in my mid-50s, how can I make sure I have enough money to live a comfortable lifestyle?

A: How much you need to put away depends on the kind of lifestyle you want in retirement. A general rule of thumb is that you’ll need to replace 70% to 80% of your pre-retirement income to have a similar standard of living when you retire. So if you earn $100,000 a year, you’ll need roughly $80,000 in annual income. Some of that will come from Social Security (once you reach retirement age) and a pension, if you get one, so perhaps your portfolio will need to produce $50,000 to $60,000 of that income.

You’ll probably need less than your pre-retirement income because you’re no longer socking away a big chunk of your salary for retirement—and if you are aiming to retire early, you should be maxing out all your savings options and more. Your income taxes will likely be lower and many of the costs associated with working, such as commuting and eating lunch out, will disappear.

But if you retire at 55, you’re looking at funding four decades of retirement. That means you’ll need a much bigger cash stash than someone with a standard 30-year time horizon, says Charles Farrell, CEO of Northstar Investment Advisors and author of Your Money Ratios: Eight Simple Tools for Financial Security.

If you work till the traditional retirement age of 65, you should have 12 times your annual household income saved, says Farrell. For someone earning $100,000 a year, that’s $1.2 million (his figures take Social Security benefits into account). But if you want to quit work at age 55 and replace 75% of your income, you’ll need 18 times your annual income or $1.8 million. That assumes a 4% annual withdrawal rate, adjusted for inflation. “Not only does your money have to last longer but as you draw down your nest egg, your savings has less time to grow,” says Farrell.

If you’re not on track, it’s not too late. As you hit your peak earning years and big expenses fall away, such as college tuition for your kids, you may be able to power save, putting away much bigger chunks of money. Or you can adjust your goal. “Maybe 60 or 62 is more realistic than 55 or you can get by on less than you think,” says Farrell.

If you push back retirement to age 62, you’ll need 16 times your annual salary saved. If you really want to quit work at 55 and you’re willing to live on 60% of your pre-retirement income, you’ll need 15 times your annual income. Or if you can get by on 50% of your household income—say you pay off your mortgage or you significantly downsize your home to cut your post-retirement expenses—a nest egg of 12 times your final income may be enough.

Early retirement requires a willingness to stick to a lifestyle that allows you to save diligently throughout your career, while avoiding money drains like high interest rate debt. If this is your dream, it’ll be well worth the effort.

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