Three ways to retire poor

Will Work for FoodI hear from a lot of people who think they’re doing the right things with their money—little realizing that they’re impoverishing their future selves. Three behaviors you’re most likely to regret later:

Putting off saving for retirement. Some people spend every dime they make, while others delay saving while they pursue other goals that seem more worthy, like saving for a home or paying off debt. The reality is that retirement savings opportunities are “use it or lose it”—you can’t get back the company matches, tax breaks or (most important) the power of compounding if you don’t get those contributions into your account. Compounding is so powerful, in fact, that it gets harder and harder to catch up the older you get…until it gets impossible. The smarter solution: Start saving for retirement from your first job, and don’t stop.

Cashing out your retirement when you leave a job. The next most widespread and destructive behavior is tapping into what you do manage to save. About 42% of those who lost their jobs in 2010 cashed out their retirement plans, which is about the same percentage as before the recession, according to an Aon report. More than half of those in their 20s cashed out. Not only do you incur taxes and penalties that eat up 25% or more of your withdrawal, but you lose all the future tax-deferred compounding on that money—which means those in their 20s are hurt even more by cash-outs than those who do it later. (Figure every $1,000 you withdraw in your 20s will cost you $20,000 or more in lost future retirement income.) The smarter solution: Leave your retirement money for retirement. If you can’t or don’t want to leave your balance when you leave your job, roll it into your new employer’s plan or into an IRA.

Grabbing your Social Security benefit early. Social Security will be a big part of most people’s retirements, but too few people understand how much they’re hurting themselves—or their loved ones—when they apply early and lock in a permanently reduced check. It’s not just that you’re likely to live past the “breakeven point” when, mathematically, waiting until full retirement age pays off in terms of total benefits. More importantly, you may be cutting yourself off from strategies that would maximize your lifetime benefits and leaving your surviving spouse with a bigger check. Take a minute to read AARP’s excellent primer on the subject, “How to Maximize Your Social Security Benefits,” and use the free calculator at T. Rowe Price to help you understand the impact of different strategies. (If you want more freedom to customize a tool, gives you that for $40.) The smarter solution: View Social Security as a kind of longevity insurance that helps protect you against the possibility of outliving your savings.


Why delaying Social Security can make sense

Dear Liz: Your comments about the benefits of delaying Social Security misled readers. While a cost-of-living increase was standard for many years, it no longer is. You might want to check back over the last 10 years to get details. In addition, a reader might interpret your points about the increased benefit at full retirement age versus the benefit amount at 62 as a promise for the future. Factors such as health and family longevity are also involved. Depending solely on one’s Social Security check for living expenses will most likely bring derisive laughs for those who unfortunately have to do just that.

Answer: Your comments are a good example of why it’s important to get a second opinion on Social Security benefits, because what we think we know about the program may not be true.

One of the best reasons for delaying Social Security is to claim a bigger benefit down the road, a benefit that has nothing to do with cost-of-living increases. “Retirement benefits increase by 6 2/3% each full year an individual waits between age 62 and 65,” said Patricia Raymond, regional communications director for the Social Security Administration. “For each additional year an individual delays benefits from age 65 until full retirement age, the benefit increases 5%.”

The full retirement age is now 66 and will increase to 67. Even if Social Security is restructured sometime in the future, it’s highly unlikely that the system would stop rewarding people for delaying retirement or that cost-of-living increases would be discontinued (although they may be reduced).

By the way, there have been only two years in the last 10 when there was no cost-of-living increase, as you can see at Increases have ranged from 1.7% this year to 5.8% in 2009. The average for the last decade was 2.56%. Whether these increases truly keep up with inflation is questionable, especially with increasing Medicare costs, but to say cost-of-living adjustments are no longer “standard” simply isn’t true.

Trying to decide when to take Social Security based on your current health or your family history of longevity is tricky, at best. Taking Social Security early might turn out to be a good decision if you die relatively early, or it could be a big mistake if you live longer than expected or you have a surviving spouse who may depend on your benefit. (Starting your retirement early would reduce not only your check but also the check a survivor would receive.)

The AARP website has a Social Security calculator that can help you understand the ramifications.

Obviously, some people have little choice but to apply for Social Security as soon as they’re eligible because they need the money. But delaying Social Security for a bigger benefit can be seen as a kind of longevity insurance for those who can afford to do so. Even people in poor health or who lack a family history of longevity might want to hedge against the possibility of outliving other assets, either for themselves or their spouses.

Ideally, no one would rely solely on Social Security benefits, but unfortunately many do. Social Security constitutes 90% or more of income for nearly half of single retirees and more than 1 in 5 married couples. For most people who receive Social Security, the checks represent half or more of their income. So it makes sense to learn how to maximize your benefits using information from reliable sources. In addition to the Social Security and AARP websites, you can learn more from the excellent primer “Social Security for Dummies” by Jonathan Peterson.

Can’t afford to save for retirement?

Dear Liz: Is it reasonable for a 50-year-old single man helping with support of a teenage child and earning a steady $35,000 a year to save for his retirement? Rent alone takes $800 a month; food, car and health costs leave little discretionary money.

Answer: Can you reasonably expect to live on Social Security alone? If making ends meet now is a strain, imagine trying to get by on about $1,230 a month (which was the average Social Security check in 2012). Your check could be higher or lower; you can get an estimate at

If you can’t scrape by with whatever Social Security offers, then you need to find a way to save. You should be able to increase your savings once your child support ends, but you should get started now.

How Social Security calculates your check

Dear Liz: I have been told over the years that your Social Security monthly benefit amount is computed using years closest to retirement. I have now been told benefits are calculated from your highest earning year in your working life. Which is true? I am 61 and unable to work more than part time for physical reasons, so now my income has gone down while I’m still contributing to Social Security from my earnings. Are my lower yearly earnings for the next couple of years going to lower my overall benefit when I do start drawing my benefit?

Answer: Your Social Security benefit is not based on either your earnings close to retirement or your highest-earning year. Your checks will be based on your 35 highest-earning years. That long period helps keep you from being too badly penalized if your earnings drop toward the end of your working career. You can find out more at You can estimate your future benefits with this calculator:

Live it up now, or insure against longevity

Dear Liz: I was born in 1960 and plan to retire with reduced Social Security benefits at 62. I’ve read in many places that taking reduced benefits isn’t a good idea because you are locked into a lower amount for life. While this is true on a monthly basis, what about on a cumulative basis? I have figured out that on a cumulative basis I can collect to about the age of 78 and be even with collecting full benefits at 67, and this doesn’t include cost-of-living increases that would add a few more years before full benefits exceed reduced benefits on a cumulative basis.

This means I would be collecting my benefits while I am younger and healthier so I can enjoy it as opposed to delaying it on the presumption I will live well into my 80s when who knows what the future holds. Social Security will not be my main source of income as I will have a sizable amount saved by then. Would taking reduced benefits make sense for me, or am I missing something?

 Answer: You’re right that the break-even period — the point where waiting for full benefits gets you more than taking benefits early — is typically in your late 70s. A male at age 62 is expected to live 19 more years on average, while a woman the same age is expected to live 22 more years. If you’re in poor health and don’t expect to live long after you retire, however, that can tip the scales toward taking benefits early.

Wanting to claim your benefit early, while you’re “young enough to enjoy it,” is certainly understandable. But you might also want to look at Social Security as a kind of longevity insurance. If you live into your 80s and beyond, you may well exhaust your savings and wind up relying more than you think on your Social Security check. In that case, you might appreciate the larger benefit you’d get from waiting until your full retirement age.

AARP has a free Social Security benefits calculator that can help you determine the best time to claim benefits.