Posts Tagged "retirement planning"

The Bridge to a Larger Social Security Check

Retirees who postpone collecting Social Security from age 62 to 66 – the full retirement age for most baby boomers – get around a third more in their monthly checks. Delaying to 70 increases it even more.

There’s one problem with this strategy. Many people want to retire well before they turn 66.

But there is an alternative for people with 401(k) savings: retire but don’t sign up for Social Security and withdraw an amount from the 401(k) equivalent to the Social Security check. Then delay Social Security for a few years. The start date will, of course, depend on how much money is in savings and how much of it the retiree can spend comfortably.

In a recent experiment, this idea appealed to a substantial minority of older workers who were made aware they could create this so-called “bridge” to a larger Social Security check.

The researchers randomly assigned the workers – all between 50 and 65 – to one of four groups. Each group was presented with the same choice of whether to use the bridge strategy but the choice was described differently. Regardless of the description, the share of participants willing to consider the strategy fell within a range of 27 percent to 35 percent.

This level of interest is “noteworthy,” given that “the survey is likely the first time the respondents would have encountered the idea of drawing down their 401(k)s to postpone claiming Social Security,” said the researchers at the Center for Retirement Research. …Learn More

The Many Facets of Retirement Inequality

Retirement inequality is a thread running through several articles that have appeared here this year.

One blog that was particularly popular with our readers distinguishes retirees who have enough wealth to maintain the same spending levels throughout retirement from those who will, over time, have to cut back and reduce their standard of living.

The research behind the article – “Health and Wealth Drive Retirees’ Spending” – makes clear that wealth is just one component of a satisfying lifestyle. Even retirees who can afford to maintain their living standard may not be healthy enough to enjoy their money to the fullest. The retirees who have both – health and wealth – are best equipped to maintain their pre-retirement lifestyle.

Homeownership also marks a dividing line between the haves and have-nots. A home is one of retirees’ largest sources of wealth. Although most are hesitant to withdraw home equity, the ones who have equity and tap it to pay medical bills see large, positive health benefits, according to “Using Home Equity Improves Retirees’ Health.”

Pensions are another dividing line. “Retirees with Pensions Slower to Spend 401(k)s” shows the value of having guaranteed income from defined benefit pensions, which are all but extinct outside the public sector. …Learn More

Using Home Equity Improves Retiree Health

Retirees spend $1,500 more per year, on average, for medical care after a diagnosis of a serious condition like lung disease or diabetes.

Often, the solution for individuals who can’t afford such big bills is to scrimp on care or avoid the doctor altogether. But older homeowners can get access to extra cash if they withdraw some of the home equity they’ve built up over the years.

While the money clearly provides financial relief for retirees, a new study out of Ohio State University finds that it is also good for their health. Every $10,000 that Medicare beneficiaries extracted from their homes greatly improved their success in controlling a chronic or serious disease.

Among the retirees who had hypertension or heart disease, for example, one standard used to determine whether the condition was under control was whether blood pressure levels stayed below 140/90, which the medical profession deems an acceptable level. The people who tapped their home equity were more likely to stay below these levels than those who did not.

This is one of several studies in recent years to tie financial security to home equity, a resource many retirees are reluctant to tap. A study in 2020 found that older homeowners were less likely to skip medications due to cost after they had extracted equity through a refinancing, home equity loan, or reverse mortgage.

But this new research is the first attempt to connect the strategy to retirees’ actual health. The analysis followed the health of more than 4,000 homeowners for up to 15 years after they were diagnosed with one of four conditions – lung disease, diabetes, heart conditions, or cancer. …Learn More

Boomers Lament Disappearance of Pensions

More than one of this blog’s readers said a recent article about 401(k)s was hardly revelatory. But it sure generated a lot of comments.

Ed McGrath wrote this about “Retirees with Pensions Slower to Spend 401(k):” “Well thank you for this Caption Obvious.”

Perhaps the article struck a nerve because baby boomers are the generation who mostly lost out on pensions. Nearly two-thirds of U.S. workers born in the 1920s through the 1940s – many of them parents of boomers – had pensions. But a measly 6 percent of boomers from the tail end of the wave have them.

Millennials and members of Generation Z usually wouldn’t even consider pensions in their retirement plans. But boomers at one time might’ve hoped or even expected to enjoy a retirement similar to their pensioned parents.

“I am a single woman, a former nurse, and not one job offered me a pension,” said Jennifer Lee, who is 67. “I am relying on my savings and Social Security as well as the equity in my home.” Lee expressed chagrin that a 60-year-old cousin – a rare boomer with a pension – has already “mailed in his retirement papers.”

Gumball MachineSeveral readers pointed out problems with a U.S. retirement system that increasingly relies on savings – leaving retirees to figure out how much to withdraw every year – as monthly pension checks have disappeared. Ken Pidock, quoting a financial journalist, said 401(k)s lack the reliability of pensions: “Forcing people of modest means to depend on the stock market for income to pay bills after they stop working is madness.”

Paul Brustowicz, a former insurance company employee in his late 70s, feels lucky to have the security that comes with a pension, along with his Social Security and some IRA funds he converted to an annuity. “The steady monthly income lets my wife rest easy at night,” he said.

But another reader, Brian Jarvis, has a different perspective on the generational pension divide. “Yes, my father had a traditional pension that I don’t have,” he said. But Jarvis and his wife built up an ample nest egg “that my parents couldn’t have dreamed of,” he said. “We’ll be in good shape for quite a while – the rest of our lives – even without our parents’ type of pensions.”

Unfortunately, not everyone is as prepared as Jarvis. About half of U.S. households aren’t saving enough to retire at the traditional age of 65, which puts them at risk of suffering a drop in their standard of living when they quit working and the paychecks stop. …Learn More

People of different ages and nationalities

Workers: Social Security Info is Eye-Opening

Most workers have never created an online my SocialSecurity account to get an estimate of their future retirement benefits. The people who do use this feature tend to be older or are retired and already receiving their benefits.

If only more younger adults would log on.

One 31-year-old worker, after looking up his personal estimate for the first time, learned that his future benefit is “not quite nearly enough to survive on.” The estimate – retrieved during an interview with researchers for a new study – prompted him to think about a retirement plan now. A 43-year-old woman realized her spouse’s decision about when to retire would affect her spousal benefit from Social Security. “I had no idea,” she said, calling the information “a reality check.”

And it’s a good thing one 60-year-old logged on to my Social Security. He didn’t know he qualified for retirement benefits, because the last time he’d checked, he had not built up the earnings record – 40 quarters of work – the program requires. “I will look into it further and find out exactly what is going on,” he said.

These and other revelations came from interviews with 24 workers by University of Southern California researchers Lila Rabinovich and Francisco Perez-Arce. They combined these insights with a much larger, online survey to analyze how Americans use the valuable benefit estimates available to them.

It’s important to understand why my Social Security isn’t being used more, especially since first-time users described the online feature as easy to use and eye-opening. Going online didn’t seem to be an issue either, because the people in the survey already search for other information that way.

One of the primary reasons the workers hadn’t looked up their personal accounts, the researchers concluded, was a lack of awareness the feature existed. But this isn’t at all surprising for younger workers, who are more concerned about developing their careers than about retiring. …Learn More

401k Plans Evolve to Boost Workers’ Savings

Many employees in the private sector, when left to their own devices, either save very little in the company retirement savings plan or don’t even sign up for it.

But a growing number of companies have revamped their 401(k)-style plans over the past two decades to strengthen the incentives for employees to save. While progress has been gradual and uneven, the companies are moving in the right direction.

In a new study, researchers have compiled a unique nationally representative data set that tracks the changes employers have made to their 401(k)s and 403(b)s. The findings describe three important areas in which they are making progress:

  • About 41 percent of the largest 4,200 U.S. employers in this study automatically enrolled workers in a savings plan in 2017 – up sharply from 2 percent in 2003. Workers can still opt out but the vast majority remain in the plans.
  • Similar improvements were also evident in the study’s broader sample of employers of all sizes. In 2017, about a third of all companies had auto-enrollment, compared to virtually none in 2003.
  •  Among companies with auto-enrollment, about 44 percent of the large employers and half of the overall sample are automatically increasing their workers’ contributions.
  • Contributions to the plans are generally rising too.

The researchers credited some of the improvements to the Pension Protection Act. The 2006 law explicitly allowed companies to automatically enroll employees in savings plans and also established a minimum standard for the level of employer contributions made by companies that adopt auto-enrollment. …Learn More

Be prepared

Onus of Retirement Planning is on Us

Many workers are poorly prepared for retirement. Inadequate savings is a primary culprit.

But the question of why workers don’t save enough was debated by our readers in comments posted to a recent article. The article pertained to a new study showing that life gets in the way of saving, which is derailed by major disruptions such as unemployment or a large, unexpected medical bill.

“This confirms my thinking that the major reason for not saving is spotty employment and a lack of money,” Chuck Miller wrote in his comment posted to “Here’s Why People Don’t Save.” Debi Street agreed: “It is also the quotidian reality of too many people in low-wage, precarious jobs with no surplus to save.”

The research study also tested an alternative explanation for insufficient savings: procrastination. The procrastination theory was not supported by the analysis.

Readers, however, would not let people off the hook so easily. “What’s that old saying? ‘Failing to plan is planning to fail,’ ” said Brian Jarvis. “That planning is certainly impacted by procrastination, which then leads to being … unprepared for life’s disruptions.”

A reader who calls herself Retirement Coffee Shop knows “more than a few people who just disregard the notion of saving for the future. They have lived their lives like there is no tomorrow and spend money on any and everything they want.”

On another matter central to retirement planning – Social Security – readers didn’t criticize. They just offered practical advice.

The article, “Workers Overestimate their Social Security,” described research showing that workers of all ages have a poor grasp of how much they’ll receive in their monthly Social Security checks when they retire.

Specifically, the workers’ estimates were higher than the more precise benefit projections made by the researchers, based on each individual’s earnings history. Not surprisingly, young adults, who have more pressing matters on their minds than retirement, were farthest off the mark.

Several readers made the same suggestion: get the facts. “Go online and look at your SSA statement,” said Lynn. “It lists your FRA [monthly benefit] amount” – at the full retirement age – “as well as estimated amounts at 62 and 70.” …Learn More