July 11, 2016 By

Q&A: Don’t miss out on spousal Social Security benefits

Dear Liz: How far back can Social Security go for someone who did not know to apply for spousal benefits? I’m 69, still working and did not know I was eligible for spousal benefits from my retired wife when I turned 66. Social Security is indicating six months of retroactive benefits is the maximum.

Answer: Unfortunately, that’s correct. You’ve missed out on at least two and a half years’ worth of spousal benefits based on your wife’s work record.

You still can file a restricted application for spousal benefits only and get a lump sum payment for the previous six months. You also still have the option to switch to your own benefits when they max out at age 70. These strategies aren’t available to younger people because Congress changed the rules last year.

Social Security rules can be complex, and the penalty for misunderstanding or missing deadlines can be huge. “Get What’s Yours,” a book about Social Security-claiming strategies that recently was updated, should be required reading for anyone approaching retirement age.

Filed Under: Q&A, Retirement Tagged With: , , ,
June 27, 2016 By

Q&A: Tips for divvying up your retirement investments

Dear Liz: With all the investment options offered in 401(k) plans, how as a contributor do I know where to place my money?

Answer: Too many investment options can confuse contributors and lower participation rates, according to a study by social psychologist Sheena Iyengar of Columbia University in cooperation with the Vanguard Center for Retirement Research. The more options, the more likely participants are to simply divide their money evenly among the choices, according to another study published in the Journal of Marketing Research. That’s a pretty random method of asset allocation and one that may not get people to their retirement goals.

As a participant, you want a low-cost, properly diversified portfolio of investments. For most people, that means a heavy weighting toward stock funds, including at least a dab of international stocks. Your human resources department or the investment company running the plan may be able to help with asset allocation.

Some plans offer free access to sophisticated software from Financial Engines or Morningstar that can help you pick among your available options. Once you have your target asset allocation, you’ll need to rebalance your portfolio, or return it to its original allocation, at least once a year. A good year for stocks could mean your portfolio is too heavily weighted with them, while a bad year means you need to stock up.

If that feels like too much work, you may have simpler options. Many plans provide a balanced fund, typically invested 60% in stocks and 40% in bonds, that provides automatic reallocation. The same is true for target-date funds, which are an increasingly popular choice. Pick the one with the date closest to your expected retirement year. If you’re 35, for example, you might opt for the Retirement 2045 fund.

It’s important, though, that you minimize costs because funds with high fees can leave you with significantly less money at retirement. The average target-date fund charged 0.73% last year. If you’re paying much more than that, and have access in your plan to lower-cost stock and bond funds, choose those instead.

Filed Under: Investing, Q&A, Retirement Tagged With: , ,
June 27, 2016 By

Q&A: No wedding, no Social Security benefits

Dear Liz: I’m a female who has been with her male partner for 20 years. We are not married. In the event one of us dies, is the other entitled to the partner’s Social Security benefits? Or do we have to be legally married to qualify for benefits?

Answer: Your genders don’t matter. Your marital status does. To get Social Security benefits based on the other person’s work record, you need to make it legal.

Marriage offers hundreds of legal, financial and estate-planning advantages, and Social Security is certainly one of those. With married couples, lower-earning partners may qualify for bigger benefit spousal benefits than the retirement benefits they would receive on their own work records. After a death, the surviving spouse gets the larger of the couple’s two benefits. Social Security makes up more than half of most elderly people’s income, so this is no small deal.

Filed Under: Couples & Money, Q&A, Retirement Tagged With: , ,
June 13, 2016 By

Q&A: State pensions’ effect on Social Security

Dear Liz: Recently someone wrote to you about plans to receive a state pension and apply for Social Security benefits. You said if the person’s job didn’t pay into Social Security, the Social Security benefit might be reduced because of the state pension. I have a state pension from a job that did not pay into Social Security and was under the impression that I would not be eligible for Social Security benefits. Am I wrong about that?

Answer: If you previously worked at a job that paid into Social Security, you may be able to receive both your state pension and a Social Security retirement benefit. Your Social Security benefit is typically reduced, but never eliminated, because of pensions received from jobs that didn’t pay into the system.

This reduction, known as the windfall elimination provision, does not apply to people who worked for 30 years or more in jobs that paid into Social Security. Its effect is greatest on people who worked less than 20 years in such jobs. Between 20 years and 30 years, the impact declines year by year.

Your state pension also affects — and can eliminate — any spousal or survivor benefits you might have received based on a current or former spouse’s Social Security work record. This separate provision is known as the government pension offset. You can learn about both the windfall elimination provision and government pension offset on the Social Security site, www.ssa.gov.

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June 6, 2016 By

Q&A: Do the math on retirement benefits

Dear Liz: My full retirement age for Social Security benefits is 66. To receive that amount, do I have to keep working until I am 66? I was going to retire at 63 and receive a state pension and wait until 66 to apply for Social Security. I wasn’t planning on working full-time from 63 to 66.

Answer: You don’t have to keep working. When to retire can be a separate decision from when to start Social Security benefits.

Before you do either, though, find out how your state pension may affect your Social Security benefits. If you’re receiving a pension from a job that didn’t pay into the Social Security system, your Social Security benefit may be reduced. If that’s the case, it can make sense to delay taking your pension and start taking Social Security earlier. You can use claiming software such as MaximizeMySocialSecurity.com or SocialSecurityChoices.com to see what might be the best approach.

Filed Under: Q&A, Retirement Tagged With: , ,
May 30, 2016 By

Q&A: Retirement account bears close scrutiny

Dear Liz: About five years ago, I transferred a 401(k) account to an IRA with a financial advisor recommended by a friend. I receive monthly statements, but like most people, I am busy and do not study them, which is my fault. The statements are very confusing, even though I am a college graduate with a business degree. I recently realized that the account has not grown at all, even though it’s invested in stock mutual funds. The Standard & Poor’s 500 has been up about 10% each year on average, so I feel that I should have a much better return. How do I best go about finding out why I am not making any money? Approaching this financial advisor is useless.

Answer: It appears your advisor is worse than useless; he or she is a hazard to your financial health.

A properly diversified retirement portfolio may not grow at exactly the same rate as a stock benchmark such as the S&P 500, but it certainly should have grown significantly in the past five years. It could be that the advisor has been trying to “beat the market” with actively managed funds, which typically fall far short of the mark and do little other than cost investors too much. Or the advisor could be pushing high-cost funds that pay fat commissions and benefit the firm far more than they benefit you.

The Department of Labor recently instituted regulations that should stop many of these shenanigans by requiring advisors giving retirement advice to put their clients’ interests ahead of their own. You shouldn’t wait for those changes to be implemented, though, because you’ve already lost enough ground. Transfer your IRA to a low-cost provider such as Vanguard, Fidelity or T. Rowe Price and consider investing in a target-date retirement fund that will take care of asset allocation and rebalancing for you.

Filed Under: Q&A, Retirement Tagged With: , , ,
May 30, 2016 By

Q&A: Healthcare coverage should be part of retirement planning

Dear Liz: You’ve been writing about how much to save for retirement, including how much of our incomes we should aim to replace with our savings. Two additional reasons to shoot for a higher replacement rate is the possibility that medical needs will be higher the older one becomes (even with Medicare and a supplemental plan) and the possibility that long-term care will take a huge bite out of savings if one self-insures for this. My wife and I took these into account when we saved as much as we could afford during our working years.

Answer: Many people erroneously believe that Medicare will take care of their healthcare costs in retirement. In reality, Medicare generally pays for about 60% of typical healthcare services, according to the Employee Benefit Research Institute. Fidelity Investments estimates the typical couple at age 65 can expect to spend $245,000 on healthcare throughout retirement. That figure doesn’t include the costs of nursing homes or long-term care, which also aren’t typically covered by Medicare. Anticipating and saving for these expenses was a smart move on your part.

Filed Under: Elder Care, Insurance, Q&A, Retirement Tagged With: , ,
May 23, 2016 By

Q&A: More on Saving for Retirement

Dear Liz: Here is another take on your response to the reader who questioned whether retirement calculators were a hoax that promoted excessive savings rates. You mentioned that current retirees had enough pensions, Social Security and savings to replace nearly 100% of their working income, while younger people likely would have only enough to replace 50%. You closed your advice by asking if the letter writer would be comfortable living on 50% of that person’s income. For a non-saver, that is a fair question. But for a saver, it isn’t an accurate comparison.

If one is presently saving, say, 10%, then that person is already living on 90% of current income. If saving 15%, then that person is already living on 85%. When you analyze the expected impact of having the compounded savings at retirement, the true “step down” in income is really the difference between the current 90% or 85% figure and what you will have with Social Security, part-time job income, pension (if you work for the government) and savings. The gap becomes much more manageable, because you already are used to living on 10% to 15% less than your current income.

The point? Savers are already accustomed to living on less — in some cases, significantly less — than current income. Between the already lowered current disposable income and the benefit from the accumulated savings and investments, the “step down” gap is made manageable. Saving helps on both ends.

Answer: That’s an excellent point. Taxes are another factor to consider. Working people pay nearly 8% of their wages in Social Security and Medicare taxes, an expense that disappears when work ends. Income tax brackets often drop in retirement as well.

Still, there are good reasons to shoot for a higher replacement rate than you think you may need. Investment markets don’t always cooperate and give you the returns you expect. Inflation can kick up and erode the value of what you’ve saved. Careers can be disrupted, leading to lower wages or an earlier retirement than you planned. People who have “oversaved” will be in a better position to deal with these setbacks than those who save only enough to scrape by.

Filed Under: Q&A, Retirement Tagged With: ,
May 16, 2016 By

Q&A: Retirement calculators are a wake-up call for undersavers

Dear Liz: Are retirement calculators a hoax? It seems that the published estimates for the amount of savings required are insanely high. If most U.S. citizens haven’t saved much and have a decent standard of living in retirement, where is the misperception? Let’s say an individual is resolved to choose hospice over intensive care — so we can reduce healthcare from the equation — and is no longer paying for a mortgage or college. How could someone really need to replace a high percentage of salary? Do we really need to save millions to retire? Even if we just spend the principal in the calculated estimates, we are truly old before we run out. I have got to be missing something.

Answer: You’re missing quite a few things.

People born between 1936 and 1945 — those aged 71 to 80 now — typically had enough savings, home equity, pension income and Social Security benefits to replace 99% of their annual incomes in retirement, according to a Pew Charitable Trust study. This generation benefited from steadily rising incomes and wealth levels through most of their working lives.

Early boomers, born between 1946 and 1955, aren’t quite as well off but typically can replace a comfortable 82% of their incomes.

They’re the last generation, though, that’s expected to be truly secure on average in retirement. Younger people are much less likely to have pensions. Stagnant incomes, rising costs and falling wealth levels further undermine their financial security.

Late boomers, born between 1956 and 1965, are on track to replace 59% of their incomes. GenX, born between 1966 and 1975, could see their incomes cut in half in retirement.

Imagine living on 50% of what you make now. If that would be easy — and if you’re really resolved to choose death over medical treatment — maybe you don’t have to worry about retirement calculations.

If the thought of eking by on half your current income makes you break out in a cold sweat, though, then you better start saving.

Filed Under: Q&A, Retirement Tagged With: , ,
May 2, 2016 By

Q&A: Social Security family maximum

Dear Liz: My husband is disabled from a stroke and is on Social Security disability. I am 65 and nearing retirement. I keep seeing Social Security rules about “family maximums.” Does this mean that I won’t get my full retirement amount if, between his SSDI and my retirement, we exceed the family maximum? Or will my retirement amount be what I actually earned?

Answer: You’ll get what you earned. The family limit refers to the maximum benefits that can be paid out based on one worker’s earning record. They kick in when multiple family members claim benefits, such as spousal and child benefits in addition to the worker’s retirement benefit. The rules are stricter for disabled family benefits than for retirement family benefits, but that doesn’t affect you since you’ll be claiming a check based on your own work record.

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