Ask Liz Weston

Get smart with your money

Retirement

How to shoot yourself in the foot

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Dear Liz: I want to stop contributing to my 401(k). How do I cancel it and withdraw my funds?

Answer: You can stop contributing to most workplace retirement funds by contacting your human resources department. You typically won’t be able to withdraw the money, however, unless you can prove a hardship or you leave your job.

You should think long and hard before you discontinue your contributions, in any case. For many workers, contributing to a 401(k) is their best shot at a comfortable retirement. You may be unsettled by volatile investment markets now, but over time a diversified mixture of stocks and bonds should give you the returns you’ll need to overcome inflation and have a reasonable nest egg.

Not contributing to your 401(k) could mean giving up free money in the form of a company match and could trigger a larger tax bill, since your contributions usually are tax-deductible. Money saved within retirement accounts, including 401(k)s and IRAs, is also protected from creditors should you ever be sued or have to file for bankruptcy.

If you’re disgruntled with your plan because you think the fees are too high, ask your employer to look for a more reasonable-priced option. Now that 401(k) administrators must fully disclose their fees, many companies will be looking for better deals.

Now available: My new book!

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Do you have questions about money? Here’s a secret: we all do, and sometimes finding the right answers can be tough. My new book, “There Are No Dumb Questions About Money,” can make it easier for you to figure out your financial world.

I’ve taken your toughest questions about money and answered them in a clear, easy-to-read format. This book can help you manage your spending, improve your credit and find the best way to pay off debt. It can help you make the right choices when you’re investing, paying for your children’s education and prioritizing your financial goals. I’ve also tackled the difficult, emotional side of money: how to get on the same page with your partner, cope with spendthrift children (or parents!) and talk about end-of-life issues that can be so difficult to discuss. (And if you think your family is dysfunctional about money, read Chapter 5…you’ll either find answers to your problems, or be grateful that your situation isn’t as bad as some of the ones described there!)

Interested? You can buy this ebook on iTunes or on Amazon.

Working longer means more money overall

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Dear Liz: You’ve been answering several questions about when to start Social Security benefits. Most people who talk about the break-even point seem to fixate on when you’ll end up with the most money, but they’re only considering Social Security money. It’s worth pointing out that if one continues to work until full retirement those wages, for most of us, will add up to much more than the reduced Social Security payments for those first four or five years. So unless a person really hates his or her job, or poor health makes the person no longer able to do that job, working until age 66 or 67 will give a person the highest total.

Answer: That’s a good point, and it’s not just the wages you earn that are important. It’s the fact that you can delay tapping your retirement savings, so that those can continue to grow tax deferred. The effect of delaying retirement even a few years is so powerful that people who have saved substantially over their working lives can actually stop saving in their 60s — and use the extra cash for fun stuff like travel — without increasing their risk of running out of money, according to research by mutual fund company T. Rowe Price. The company has dubbed this approach “practice retirement,” and you can read more about it at http://www.troweprice.com/practice.

Delay collecting Social Security for a bigger benefit

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Dear Liz: My spouse started collecting Social Security in 2002 at age 63. I am 59, and not working, so my future benefits are unlikely to increase very much, even if I wait until age 70. If he dies before I do, will I get same amount he would be collecting at that time? If I collect Social Security at 62, would Social Security combine our records to calculate my benefit? In other words, should I try to wait or just start collecting at 62?

Answer: Your presumption that your benefit wouldn’t increase much by waiting is incorrect. Even if you aren’t working now, your benefit amount will grow the longer you can wait to apply. That’s true whether you ultimately get benefits based on your own work record or your husband’s.

When you apply, the Social Security Administration will compare your earned benefit with your spousal benefit and give you the larger of the two. Your spousal benefit starts at half of what your husband’s benefit would have been at full retirement age. That amount is reduced significantly if you apply for benefits before your own full retirement age (which is 66 for you, although it rises to 67 for anyone born after 1959).

Also, if you apply for spousal benefits before your full retirement age, you wouldn’t have the option of switching to your own benefit later, even if your benefit grows to a larger amount than what you’re receiving based on your husband’s record.

When your husband dies, you can switch to survivor’s benefits, which equal what he was receiving. Since he started benefits early, however, his checks have been permanently reduced to reflect that early retirement. In other words, if he had waited longer to retire, you would have been entitled to a larger survivor’s benefit.

The Social Security system is designed to reward people for delaying retirement, which is why it often makes sense to do so.

How spousal benefits work

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Dear Liz: My wife has never worked outside the home and therefore has no Social Security credits. My understanding is that as a nonworking spouse, she is entitled to 50% of my benefit, assuming she is 66 years old and I have started receiving benefits. Is that correct?

Answer: You’ve got the right general idea. But spousal benefits are available to working spouses as well, your wife has the right to start benefits earlier (at a discounted rate) and you don’t have to actually receive checks for her to get this benefit.

Your wife is eligible for a spousal benefit based on your “primary insurance amount.” That’s the amount you would receive at your normal retirement age, no matter whether you’ve actually attained that age or started benefits. Normal retirement age is currently 66, but it will rise to 67 for people born after 1959. If she waits until her own full retirement age to start benefits, then she can qualify for a benefit equal to half your primary insurance amount. If she starts earlier, the benefit is permanently reduced.

If your wife had worked and qualified for her own retirement benefit, the Social Security Administration would give her whichever benefit paid the most — her own, or a portion of yours.

Because you’re still married, your wife wouldn’t be able to start spousal benefits until you’ve claimed your own benefit. However, if you’ve reached your full retirement age, you have the option to “file and suspend.” That means you’d file for benefits but immediately suspend your claim. That way, your benefit could continue to grow while she could begin receiving her payments.

If you were divorced but had been married at least 10 years, she could begin her benefits without waiting for you to file for your own. That exception was put into place so people wouldn’t have to seek their exes’ cooperation to get benefits.

Is a 3% withdrawal rate too conservative?

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Question: In a recent column you repeat advice I have often read that withdrawing about 3% of my investment capital will reduce the chances of my running out of money in retirement. But that doesn’t make sense to me. I have been retired for over 19 years and I have sufficient data now to extrapolate that I could live for 100 more years with so meager a drawdown because, through good and bad times, my earnings after inflation and taxes always exceed 3%. If I am missing something, I must be extraordinarily lucky because it hasn’t hurt me yet, and at age 77 I think it unlikely to do so in my remaining years. Can you explain this discrepancy between my experience and the consequences of your advice?

Answer: Sure. You got extraordinarily lucky.

You retired during a massive bull market, which is the best possible scenario for someone who hopes to live off investments. You were drawing from an expanding pool of money. Your stocks probably were growing at an astonishing clip of 20% or more a year for several years. Although later market downturns probably affected your portfolio, those initial years of good returns kept you comfortably ahead of the game.

Contrast that with someone who retires into a bear market. She’s drawing from a shrinking pool of money as her investments swoon. The money she takes out can’t participate in the inevitable rebound, so she loses out on those gains as well. All that dramatically increases the risks that she’ll run out of money before she runs out of breath.

It’s the first five years of retirement that are crucial, according to analyses by mutual fund company T. Rowe Price, which has done extensive research on sustainable withdrawal rates. Bad markets and losses in the first five years after withdrawals begin significantly increase the chances that a person will run out of money during a 30-year retirement.

Some advisors contend that a 3% initial withdrawal rate, adjusted each subsequent year for inflation, is too conservative. If you retire into a long-lasting bull market, it may well be. But none of us knows what the future holds, which is why so many advisors stick with the 3%-to-4% rule.