September 5, 2019
Social Security: the ‘Break-even’ Debate
Our recent blog post about the merits of delaying Social Security to improve one’s retirement outlook sparked a raft of comments, pro and con.
In the example in the article, a 65-year-old who is slated to receive $12,000 a year from Social Security could, by waiting until 66 to sign up for benefits, get $12,860 a year instead. By comparison, it would cost quite a bit more – about $13,500 – to buy an equivalent, inflation-adjusted annuity in the private insurance market that pays that additional $860 a year.
The strategy of delaying Social Security “is the best deal in town,” said a retirement expert quoted in the article.
Aaron Smith, a reader, doesn’t agree. “It will take 14 years to make that ($12,000) up. Sorry but I’ll take the $12k when I’m in my early 60s and can actually enjoy it,” he said in a comment on the blog.
Smith is making what is known as the “break-even” argument, which is behind a lot of people’s decisions about when to start collecting their Social Security.
But other readers point out that the decision isn’t a simple win-loss calculation. The benefit of getting a few extra dollars in each Social Security check – between 7 and 8 percent for each year they delay – is that it would help retirees pay their bills month after month.
This is a critical consideration for people who won’t have enough income from Social Security and savings to maintain their current standard of living after they stop working – and 44 percent of workers between 50 and 59 are at risk of falling short of that goal.
One big advantage of Social Security is that it’s effectively an annuity, because it provides insurance against the risk of living a long time. So the larger check that comes with delaying also “lasts the rest of your life,” said Chuck Miller, another reader. …Learn More
September 3, 2019
Second Careers Late in Life Extend Work
Moving into a new job late in life involves some big tradeoffs.
What do older people look for when considering a change? Work that they enjoy, fewer hours, more flexibility, and less stress. What could they be giving up? Pensions, employer health insurance, some pay, and even prestige.
Faced with such consequential tradeoffs, many older people who move into second careers are making “strategic decisions to trade earnings for flexibility,” concluded a review of past studies examining the prevalence and nature of late-life career changes.
The authors, who conducted the study for the University of Michigan’s Retirement and Disability Research Center, define a second career as a substantial change in an older worker’s full-time occupation or industry. They also stress that second careers involve retraining and a substantial time commitment – a minimum of five years.
The advantage of second careers is that they provide a way for people in their late 40s, 50s, or early 60s who might be facing burnout or who have physically taxing jobs to extend their careers by finding more satisfying or enjoyable work.
Here’s what the authors learned from the patchwork of research examining late-life job changes:
People who are highly motivated are more likely to voluntarily leave one job to pursue more education or a position in a completely different field, one study found. But older workers who are under pressure to leave an employer tend to make less dramatic changes.
One seminal study, by the Urban Institute, that followed people over time estimated that 27 percent of full-time workers in their early 50s at some point moved into a new occupation – say from a lawyer to a university lecturer. However, the research review concluded that second careers are more common than that, because the Urban Institute did not consider another way people transition to a new career: making a big change within an occupation – say from a critical care to neonatal nurse. “Unretiring” is also an avenue for moving into a second career.
What is clear from the existing studies is that older workers’ job changes may involve financial sacrifices, mainly in the form of lower pay or a significant loss of employer health insurance. But they generally get something in return: more flexibility. …Learn More
August 27, 2019
The ACA and Retirement: Is there a Link?
When older workers are able to get health insurance from a source outside of their jobs – Medicare, a spouse’s job, or an employer’s retiree health coverage – they become much more likely to decide it is time to retire.
So it’s reasonable to ask whether the Affordable Care Act, which provided millions of people with health insurance for the first time, has also helped to nudge more older workers into early retirement.
The answer, surprisingly, is no, according to a recent study for the University of Michigan Retirement and Disability Research Center. This finding is important, because baby boomers who are poorly prepared financially to retire should be working longer – not retiring sooner – to improve their retirement outlook.
The researchers, who are at the University of Michigan and Vanderbilt University, estimated that the uninsured rate of 50- to 64-year-olds dropped substantially after the ACA went into effect in 2014 – from 16 percent in 2013 to 12 percent in 2016. But when they tracked these older workers for several years, they found no evidence that they started retiring at a faster pace after the ACA established the state insurance exchanges and gave tax subsidies to people who purchased coverage on the exchanges.
The study also looked at whether retirement activity increased in response to a separate provision of the ACA: the expansion of the Medicaid health insurance program for low-income Americans. The expansion, which was voluntary for each state, was achieved by increasing the income ceiling for eligibility. The federal government gave a financial incentive to states that broadened eligibility for Medicaid coverage, and about two-thirds of the states have expanded to date.
In comparing states that expanded their Medicaid programs to states that had not, the researchers again found virtually no change in low-income workers’ retirement trends.
There is widespread agreement that turning 65 and becoming eligible for Medicare motivates people to retire. So why is the ACA different?
One possible explanation is that the “political uncertainty” surrounding the ACA and Medicaid expansion “discourage[s] older workers from counting on them when making career decisions,” the researchers said. …Learn More
August 20, 2019
Modifying a Retirement Plan is Tricky
Employers beware: changing your retirement plan’s design can have unfortunate, unintended consequences for your employees.
That’s what happened to the Thrift Savings Plan (TSP) for federal workers, says a new study by a team of researchers for the NBER Retirement and Disability Research Center.
Like many private-sector savings plans, the $500 billion TSP – one of the nation’s largest retirement plans – has automatic enrollment. Federal employees can make their own decision about how much they want to save and, in a separate decision, how to invest their money. But if they don’t do anything, their employer will automatically do it for them.
In 2015, the TSP changed its automatic, or default, investment from a government securities fund to a lifecycle fund invested in a mix of stocks and bonds with the potential for higher returns than the government fund. However, the employer did not change the plan’s default savings rate for workers – 3 percent of their gross pay. (The government matches this contribution with a 3 percent contribution to employees’ accounts.)
After the TSP switched to the lifecycle fund, the new employees at one federal agency – the Office of Personnel Management – started saving less, the researchers said.
This probably occurred because, in passively accepting the TSP’s new lifecycle fund – a more appealing option than the old government securities fund – they were also passively accepting the relatively low default 3 percent contribution.
Employees seem to “make asset and contribution decisions jointly, rather than separately,” the researchers concluded. …Learn More
August 15, 2019
Walk? Yes! But Not 10,000 Steps a Day
A few of my friends who’ve recently retired decided to start walking more, sometimes for an hour or more a day.
Becoming sedentary seems to be a danger in retirement, when life can slow down, and medical research has documented the myriad health benefits of physical activity. To enjoy the benefits from walking – weight loss, heart health, more independence in old age, and even a longer life – medical experts and fitness gurus often recommend that people shoot for 10,000 steps per day.
But what’s the point of a goal if it’s unrealistic? A Centers for Disease Control study that gave middle-aged people a pedometer to record their activity found that “the 10,000-step recommendation for daily exercise was considered too difficult to achieve.”
Here’s new information that should take some of the pressure off: walking about half as many steps still has substantial health benefits.
I. Min Lee at Brigham and Women’s Hospital in Boston tracked 17,000 older women – average age 72 – to determine whether walking regularly would increase their life spans. It turns out that the women’s death rate declined by 40 percent when they walked just 4,400 steps a day.
Walking more than 4,400 steps is even better – but only up to a point. For every 1,000 additional steps beyond 4,400, the mortality rate declined, but the benefits stopped at around 7,500 steps per day, said the study, published in the May issue of the Journal of the American Medical Association.
More good news in the study for retirees is that it’s not necessary to walk vigorously to enjoy the health benefits. …Learn More
August 8, 2019
For Family, Caregiving is a Choice
Francey Jesson’s life took a dramatic turn in 2014 when she lost her job at Santa Fe, New Mexico’s airport after a dispute with the city. In 2015, she relocated to Sarasota, Florida to be close to her family. One day, her mother, who has dementia, started crying over the telephone.
Jesson had always known she would be her mother’s caregiver, and that time had arrived. She and her brother combined resources and bought a house in Sarasota, and Jesson and her mother moved in.
“It wasn’t difficult to decide. What was difficult was everything that came with it,” she said.
One reason for the rocky adjustment was that Jesson, who is single, had been preparing herself mentally to take care of her mother’s physical needs in old age. But Kay Jesson, at 88, is in pretty good health. She requires full-time care because she has cerebral vascular dementia, the roots of which can be traced back to a stroke more than 15 years ago.
She is still able to function and has not lost her social skills. Her muscle memory is also intact, allowing her to chop onions while her daughter cooks dinner. But she forgets to turn off the water in the bathtub, mixes up her pills, can’t remember who her great-grandchildren are, and is unable to distinguish fresh food from rotting food in the refrigerator.
She’s also developed a childlike impatience and constantly interrupts her daughter, who works from home for her brother’s online company. “When she’s hungry, she’s hungry,” Francey Jesson said about her mother.
“Nothing ever stops for me. I can’t sit in a room and not be interrupted,” she said. “Sometimes I just want to watch TV for an hour.”
One way she copes is to approach caregiving with a combination of love and bemusement. She uses “therapeutic fibbing” to protect her mother’s feelings, for example, telling her that a friend who died has moved instead to Kansas so she doesn’t grieve over and over again. Francey Jesson also resorts to humor in a blog she writes about her day-to-day experiences. In one article, “Debating with Dementia,” she recounted a conversation about the best way to repair some bathroom floor tile: …Learn More
August 1, 2019
A Proposal to Fill Your Retirement Gap
David and Debra S. both had successful careers. In analyzing their retirement finances, the couple agreed that he should wait until age 70 to start his Social Security in order to get the largest monthly benefit.
But he wanted to sell his business at age 69 and retire then, so the North Carolina couple used their savings to cover some expenses over the next year.
Waiting until 70 – the latest claiming age under Social Security’s rules – accomplished two things. In addition to ensuring David gets the maximum benefit, waiting guaranteed that Debra, who retired a few years ago, at 62, would receive the maximum survivor benefit if David were to die first.
Other baby boomers might want to consider using this strategy. As this blog frequently reminds readers, each additional year that someone waits to sign up for Social Security adds an average 7 percent to 8 percent to their annual benefit – and these yearly increments spill over into the survivor benefit.
Delaying Social Security is “the best deal in town,” said Steve Sass at the Center for Retirement Research, in a report that proposes baby boomers use the strategy to improve their retirement finances.
Here’s the rationale. Say, an individual wants a larger benefit. Instead of collecting $12,000 a year at age 65, he can wait until 66, which would increase his Social Security income to $12,860 a year, adjusted for inflation, with the increase passed along to his wife after his death (if his benefit is larger than his working wife’s own benefit). The cost of that additional Social Security income is the $12,000 the couple would have to withdraw from savings to pay their expenses while they delayed for that one year.
Social Security is essentially an annuity with inflation protection – and the payments last as long as a retiree does. So the $12,000 cost of increasing his Social Security benefit can be compared with cost of purchasing an equivalent, inflation-indexed annuity in the private insurance market. An equivalent insurance company annuity for a 65-year-old man, which begins paying immediately and includes a survivor benefit, would cost about $13,500. …Learn More