Behavior

June 29, 2021

Most retirees manage to get by on less than they earned as workers. Yet they devote a much larger percentage of their income to medical care than working people.

To limit their annual spending on care, retirees usually buy some type of insurance policy to help pay the bills Medicare does not cover. But a big shift is under way: the Medigap and employer plans that once dominated are now in decline. Only about a third of retirees have one of these two supplementary arrangements, down from two-thirds in 2002.

Retirees are instead swarming into Medicare Advantage plans  – HMOs run by insurance companies – which doubled enrollment in the past decade to become the most popular form of coverage. A small minority of retirees go without any policy at all, so the only premium they pay is for Medicare Part B’s physician coverage. (The Part A hospital coverage has no premium.) At the same time, the vast majority of retirees today enjoy prescription drug coverage, either through a stand-alone Part D plan or as part of an employer or Advantage plan.

Helen Levy at the University of Michigan digs into what the market changes mean for retirees’ bottom line in recent research funded by the U.S. Social Security Administration.

With fewer employers offering retiree health insurance, new Medicare beneficiaries focus on the tradeoffs between Medigap and Advantage policies. A big reason the Advantage plans have taken off is lower premiums, which are, on average, substantially below the premiums on Medigap plans. Advantage plans’ other appeal is that they frequently cover extra services like dentists and eyeglasses.

Both Advantage and Medigap plans can still leave beneficiaries with high out-of-pocket spending. The federal limit on Advantage plans’ deductibles and copays increased this year to $7,550 per year, though insurers are permitted to reduce this cap. Many Medigap plans do not have out-of-pocket maximums at all. However, these plans tend to give more protection from large medical bills overall.

Just as important to retirees as paying the bills is the risk of being socked with inordinately high spending on hospital and physician care in a bad year. Levy defines this unpredictability as retirees having to shell out more than 10 percent of income out of their pockets, excluding all premiums.

Under this standard, about 23 percent of the retirees in the study with Advantage plans spent more than 10 percent of their income for care – versus 17 percent of Medigap buyers.  About 28 percent of those without any coverage outside of Medicare exceeded the 10-percent threshold. …Learn More

Research

June 17, 2021

The U.S. Social Security Administration reported a few years ago that half of retirees get at least half of their income from their monthly checks. For lower-income retirees, the benefits constitute almost all of their income.

Yet Americans have only a vague understanding of how this crucial program works – one of many obstacles on the road to retirement. A new study by the University of Southern California’s Center for Economic and Social Research finds that workers are overly optimistic about their future benefits, which is one reason so many people don’t save enough for retirement.

Workers “would probably have fewer regrets after retirement” if they were better informed, the study concluded. And many retirees in the study have regrets. Roughly half wished they’d done a better job of planning.

The researchers’ focus was on working people ages 30 and over. In a survey, the workers were asked to pick the age they plan to start Social Security and to estimate their future monthly benefits. To get as good a number as possible, they were instructed to predict a range of benefits in today’s dollars and then assign subjective probabilities to the amounts within that range.

Their guesses were compared with more precise estimates, made by the researchers, who predicted each workers’ future earnings paths – based on characteristics like their age, gender, education, and past and current earnings – and put them into Social Security’s formula to calculate the expected benefits.

The subjective estimates made by every group analyzed – men, women, young, old, college degree or not – on average exceeded the researchers’ more accurate estimates, though to different degrees. For example, women were more likely than men to overshoot the reliable estimates. Interestingly, people who said they had “no idea” what their benefits would be came closer to the mark than anyone – having less confidence apparently offset the tendency toward overestimation.

Young adults, who aren’t naturally focused on retirement, overshot their benefits the most. This is not surprising but still unfortunate, because good decisions made early in a career – namely, how much to save in a 401(k) – will greatly improve financial security in retirement.

One explanation for workers’ widespread inaccuracy, the researchers found, is that they aren’t clear on how much their benefit would be reduced if they claim it before reaching Social Security’s full retirement age. …Learn More

On the Web

April 1, 2021

It’s difficult to envision what life will look like on the other side of the consequential decision to retire.

But research can help demystify what lies ahead – about the decision itself, the financial challenges, and even the taxes. Readers understand this, as evidenced by the most popular blog posts in the first three months of the year.

Here are the highlights:

The retirement decision. The article, “Retirement Ages Geared to Life Expectancy,” attracted the most reader traffic. Myriad considerations go into a decision to retire. But a sense of whether one might live a long time – because of good health or simply seeing that parents or neighbors are living unusually long – is a compelling reason to postpone retirement either to remain active or to build up one’s finances to fund a longer retirement.

A recent study found that as men’s life spans have increased, they have responded by remaining in the labor force longer, especially in areas of the country with strong job markets and more opportunity. This is also true, though to a lesser extent, for working women.

The planning. The second most popular blog was, “Big Picture Helps with Retirement Finances.” It described the success researchers have had with an online tool they designed, which shows older workers the impact on their retirement income of various decisions. When participants in the experiment selected when to start Social Security or how to withdraw 401(k) funds, the tool estimated their total retirement income. If they changed their minds, the income estimate would change.

The tool isn’t sold commercially. But it’s encouraging that researchers are looking for real-world solutions to the financial planning problem, since the insights from experiments like these often make their way into the online tools that are available to everyone.

The taxes. It’s common for a worker’s income to drop after retiring. So the good news shouldn’t be surprising in a study highlighted in a recent blog, “How Much Will Your Retirement Taxes Be?” Four out of five retired households pay little or no federal and state income taxes, the researchers found. But taxes are an important consideration for retirees who have saved substantial sums. …Learn More

Behavior

May 9, 2019

Every Thursday morning, five, six, seven of them meet for a hearty breakfast and freewheeling conversation at the Sunrise Bistro in Summerville, South Carolina.

The retirees’ talk careens from Tammany Hall and texting while driving to their military experiences and the aches and pains of old age. Several of the men had technical careers, so they recently dived deep into analyzing why a Coast Guard cutter carrying Zulu royalty crashed into a New Orleans dock.

“We talk about man things,” said Bob Orenstein, an 83-year-old Korean War veteran who is retired from a Wall Street computer firm. “Men are mainly loners frankly, but everybody has found something to identify with in the group.”

The truth is that the ROMEOs – retired old men eating out – get much more than that from their weekly assemblies. “I think it’s just the friendship, the camaraderie,” said Paul Brustowicz, 74, a former jack-of-all-trades for an insurance company.

Friendship is the best antidote to isolation, which is dangerous for older Americans because it can lead to depression, poor health habits, and other problems. Most of the men in the breakfast club are South Carolina transplants, and their meetings have led to socializing and phone calls outside the group. Two of the men go deep-sea fishing together for redfish, and others share memories of growing up in New York or the tricks of the trade for constructing sailboat and railroad models. …Learn More

Field Work

May 7, 2019

A majority of workers do not know a crucial piece of information about their retirement: how much married couples can expect to receive from Social Security.

The program will one day be the most important source of income for millions of Americans. But they showed their lack of understanding of how benefits work in a recent survey by researchers at RAND.

A previous blog covering the same survey reported on workers’ poor knowledge of the survivor benefit for widows. This blog focuses on the other benefit for couples: the spousal benefit.

Social Security works a little differently for a married couple than for a single worker, whose future benefit check will simply be determined by his or her earnings history.

For the highest-earning spouse in a working couple – usually the husband – the size of his monthly check is also based on his past earnings. But his wife’s benefit is complicated. If she didn’t work, the rules entitle her to a spousal benefit equal to half of her retired husband’s benefit. If she did work, her benefit is based on her work history – with an exception. If her benefit is less than half of her husband’s, Social Security increases her monthly check to half of his check.

Only one in three of the people surveyed understood how this works, probably partly because of the complexity.

Most workers also had misconceptions about other aspects of the program. For example, only about one in four knew that a couple must be married for more than a year for the lower-paid person to receive the spousal benefit. If a couple has divorced, the lower-earning ex-spouse gets the spousal benefit only if the marriage lasted more than 10 years. Again, just one in four workers knew this important rule.

Couples of all ages should know the rules about a program they will rely on – no retirement plan is complete without this information. …Learn More

Field Work

April 18, 2019

My divorced aunt did not work while she was raising eight children. After her former husband died, she was pleasantly surprised to learn she could start collecting his Social Security.

She has a lot of company. Nearly two out of three men and women in a new survey by RAND were unaware of this rule: a divorced person who was married for at least 10 years is entitled to the deceased spouses’s survivor benefit. In fact, she would even get the benefit if he remarried.

In the case of couples who were still married when the spouse died, the marriage had to last only nine months for the survivor to get the benefit. Fewer than half of the people surveyed by the RAND researchers were aware of this rule.

The responses were no more impressive for some of the other questions about Social Security’s survivor benefit. This benefit is based on the higher-earning spouse’s work record – typically the husband. Even a wife who used to work and is collecting Social Security based on her work record is eligible to switch to her husband’s benefit after he dies – if his check is larger than hers.

To make the switch in this particular case, the widow must file with the Social Security Administration either online or at a local office. (However, if the wife never worked and is at retirement age, she will automatically start receiving her late-husband’s check.)

Unmarried partners sometimes operate under a misconception too: three out of four think, incorrectly, either that unmarried people can get the survivor benefit, or they don’t know.

One thing to note about this study is that Americans of all ages were surveyed, and it is not surprising that young adults would have little knowledge of program benefits intended for widows.  But age doesn’t seem to bring wisdom: the results were equally dismal in a similar earlier survey of individuals who were at least 50 years old.

April is National Social Security Month. Couples should celebrate by learning more about how Social Security works – it’s critical to a widow’s standard of living. …Learn More

November 27, 2018

Nearly 10 million seniors are having difficulty paying for housing – and the problem is growing.

Housing experts typically recommend that people keep their housing costs below a third of their income. But one in three Americans over age 65 are spending more than that on their rent or  mortgage payment, utilities, property insurance, maintenance, and other housing costs, according to a new study, “Housing America’s Older Adults,” by Harvard’s Joint Center for Housing Studies.

If the senior housing problem hasn’t reached crisis proportions yet, Jennifer Molinsky, who wrote the center’s report, predicted that it will if nothing is done to increase the supply of housing structures that are both affordable and age-friendly to meet the needs of aging baby boomers. The number of households over 80 will more than double over the next 20 years, the housing center estimates.

“Unless we create more options for people at the middle- and lower-income levels, we are going to be seeing that people have fewer choices and that they’re forced into options they don’t want,” she said. …Learn More