Turning to Social Security Retirement Benefits

Earlier this year, as I looked more and more into the challenges and prospects for soon-to-be retirees - the two-thirds of us who do not have huge nest eggs - I discovered that Social Security benefits will be the critical component of our retirement finances.  The past six months I have dug deeply into this program - the largest single financial program operated by the federal government.

I learned how deceptively complex Social Security is.  I mean, I just go down to your local office, sign up, and receive a monthly check for the rest of your life, right?  (Or, skip the trip to the local office and sign up online in minutes.)  What could be simpler?

As you surely know by now, I can start my benefits any time between the ages of 62 and 70, and therein lies the complexity: when I start can make a huge difference in my cumulative lifetime benefits, depending on how long I live.  For married couples - I fit in that category - the complexity multiples because of rules governing spousal benefits and survivors.  It turns out that the simple decision to sign up can cost me a lot - easily over a $100,000 - if I get the timing wrong.  And, what's true for me is true for you.

So, I created a new online analysis tool to share some of the insights I gained in my research with you.  I also created a Social Security Alternatives Report that provides you an in depth analysis of how your claiming age affects your cumulative lifetime benefits in order to determine the claiming age that best serves you and your spouse.  (I also have a beta version available of this report for singles; versions for divorcees and widow/widowers are coming soon.)

For those of us in our fifties and sixties, there is little time for the miracle of compound interest to work on our financial nest eggs, battered as they have been in the financial crisis.  Social Security benefits, by contrast, offer us one area where we can control part of our financial future, especially by letting the amount of these benefits grow by delaying claiming them.  Inflation-adjusted, not subject to the gyrations of the financial markets, and guaranteed by the federal government, Social Security is one terrific program.  Future posts will continue for the time being to focus on Social Security and how you can use it to your lifelong benefit.

Are Four More Years of Work a Retirement Panacea?

Alicia Munnell, Director of the Center for Retirement Research at Boston College, made this recommendation yesterday on the Smart Money (a Wall Street Journal publication) Encore Blog: work four more years to defer drawing down on retirement accounts, allow those accounts to grow longer, and receive an increased Social Security benefit. Otherwise, “… [you] are going to face a severe decline in living standards.”

That is fine advice, if you love your job (and your co-workers), and if you have the health to continue with work, and if you can keep your job… This is not the case for so many of us, a sentiment echoed in many of the comments. Wrote “DJ”, “Nice idea, but this opinion disregards a basic reality. Most companies do not want you working for them in your 60′s, actually even once you get to your 50′s the reality is most companies don’t want you anymore and you will be the first to go and oh BTW – good luck finding another job.” “Workingstiff” was even more to the point: “If I have to work until age 70 I would rather be dead.” What is a fifty or sixty-something to do?

Fortunately there are alternatives to just sticking it out as long as you can at the daily grind. Are surrendering those years to the job worth it for the increased financial security? Can you make different choices that reap the same degree of financial security without sacrificing those years to drudgery? Of course, you can. Examine how much flexibility you have in your spending, both near term and long term. Consider finding work (or part-time work) you love that may not pay as much, yet covers your essential expenses. You just have to be willing to take a hard look at what is most important to you. Then, design a plan that makes the trade-offs that work best for you.

What is Retirement, Anyway?

It used to be that retirement meant we stop working, stop earning, and indulge in leisurely pursuits until our time runs out. Lest we stray from this path, a massive advertising effort by the retirement industry reminds us constantly of our need to amass a daunting fortune of savings before we can dare consider retirement. Whatever else, we are warned to avoid any prospect of running out of money before we run out of life. The new mantra for a “prudent” retirement is to work longer, save more, retire later.

Or not. Mounting evidence suggests that retirement today is less about leisure and more about a transition to a different mode of daily activity. It is less about work to pay the bills and save for retirement and more about investing our remaining time where we experience the most social impact and benefit. We are seeking to focus our efforts where we can make a lasting difference.

Instead of a life of golf and bridge stretching to the distant horizon, the new retirement can be busier than the work life that preceded it. It can take many forms: starting a business, volunteering, work for a not-for-profit, teaching, the Peace Corps, AmeriCorps. The common thread is a desire to leverage a lifetime of experience to the benefit of our families, our communities, our societies. While this work may or may not generate any pay, it must be gratifying to be the new retirement.

A recent book that weaves together many of the threads of this emerging trend is The Big Shift: Navigating the New Stage beyond Midlife by Marc Freedman. Freedman takes us back through the history of how society conceives the various stages of life and how that societal perception evolves over time. He proceeds to make a compelling case for a “new stage” that lies between our early working lives and the traditional view of a retirement of leisure before our eventual decline with old age. For more insights into this new stage, check out his website Encore.org.

So, as we approach the traditional retirement age, for those who love their jobs, keep at it. For those who think they desire a leisurely retirement and have the means to afford it, congratulations and good luck! For the other 80% of us, the potential of an “encore” career to afford a transition from a life of “work” to a life that nurtures our souls while it continues to support our pocketbooks is worth a closer look.

Feeling Like the Only One without a $500,000+ Nest Egg?

Fisher Investments, a financial advisory firm, is running an ad on the home page of the Washington Post (among others) titled, “Don’t Run Out of Money in Retirement.” The opening sentence: “If you have a $500,000 portfolio, download the guide by Forbes columnist Ken Fisher’s firm” for a “must-read guide” for “rebuilding your portfolio.” By implication, if you don't have a $500,000 portfolio, don’t bother them…

If you are feeling left out, you can take some comfort in the fact that you have plenty of company. According to Federal Reserve data from 2007 (most recent survey – before the carnage of the financial crisis), nearly 90% of U.S. households have less than $500,000 in total net worth, a number which includes non-financial assets like your home. You can be sure that few have a $500,000 portfolio for Fisher Investments to manage.

You might wonder if the numbers look much different for those in age groups closer to retirement. Not so, according to the Fed. It turns out that the median net worth of those with a head-of-household 55 and older is around $250,000. Since “median” means half have less and half have more, you can imagine that those with a $500,000 portfolio are a small fraction of those at or near retirement age.

If you find yourself in this same boat with the vast majority of Americans, take heart: a comfortable and secure retirement does not have to rely on amassing the gargantuan nest eggs suggested by the investment advisors. Millions are successfully retired on far less and you can too. The trick is to plan a retirement lifestyle within your means. You have far more control over your spending choices than you will likely have over the investment returns on your existing portfolio, so put more of your energy into researching and evaluating your spending options in retirement.

Do not let the Ken Fishers of the investment management industry hook you with their misleading and self-serving obsession with the size of your nest egg. By all means, do what you can to grow your nest egg in the time horizon you have; however, devote more of your time to focus on a solid plan for spending that nest egg. The return on that investment of your time could be far greater.

"The Number" Versus the Numbers...

You've seen those TV ads from ING, where all the characters are carrying around a large, orange number depicting the amount they will need to save in order to retire. Take a look at one of these ads, called "Nurture". I count thirteen legible "numbers" in the ad (for a few more the number can't be read). The lowest is $589,000; two others are under a million, the other ten are over a million. Looks to me like in ING's world at least, most people need upwards of a million dollars to retire.

Let's see how that compares with the real world... A Wall Street Journal article from February 19, 2011, titled "Retiring Boomers Find 401(k) Plans Fall Short" points to data indicating that boomers aged 60 to 62 have a median retirement savings of $149,900. "Median" means half have less and half have more; you can bet that the distribution is something of a bell curve, meaning that of those who have more than the median, most are fairly close to the median. All this suggests that a vast number of Boomers, the bulk of them, are unlikely to ever come close to realizing an ING type of number. Either that, or they will have to cut their current spending to the bone, save like crazy, and work well into their 70's.

Well, before we all go into despair over this condition so many of us find ourselves in, keep in mind that the messenger has a bias. ING, like all the financial houses that sell investments and insurance, would far prefer to see us build our nest eggs - which generates more and more fees for them over the long term - than to see us retire earlier with less and start spending that down. So here's an alternate thought: if we are going to have to pare our spending to the bone anyway, why not focus even more on this spending side of the equation. What if we can find a way to spend less without reducing our quality of life? What if we spent less yet actually improved our quality of life? While it takes some out-of-the-box thinking, it can be done. And, to the extent we learn to live, perhaps even better, on less today, then perhaps we don't need to save so much to live just as well tomorrow. Retirement from today's job can be closer than we might think if we master our spending.

The Retirement Worry We All Wish We Had!

     Smart Money published an article on March 11, 1011, titled "5 Biggest Retirement Myths" (also picked up in the Wall Street Journal today). The article opens with the sad tale of a retired dentist who left Colorado with his wife for warmer climes in Arizona five years ago with a nest egg of $3 million. Between the stock market crash, higher than expected insurance costs, and unanticipated travel expenses, the couple finds it must make do on 20% less than originally planned. "The golden ages aren't always golden," laments the former dentist. I know, cry me a river...
     Let's look at the numbers. A rule of thumb says it is generally safe to withdraw about 4% of your retirement assets for living expenses (then adjust a bit each year based on how the accounts are doing). On $3 million that comes to $120,000. The article didn't say whether the couple - both of whom had working careers - had started drawing Social Security benefits yet, though at full retirement age you can bet they would claim $4,000 per month or better, some $48,000 yearly. That's $168,000 total per year. Now they face a 20% reduction which would bring them to the tight budget of $134,400 annually. We should all have such worries!
      While I am certainly happy for the dentist's good fortune - and good fortune it is, whatever the relative reduction in cash flow - it contrasts rather sharply with the prospects for the vast majority of aspiring retirees. A February 19, 2011 article in the Wall Street Journal ("Retiring Boomers' 401(k) Plans Fall Short") cites data that households whose head is aged 60 to 62 have a mean value of $149,400 in 401(k) accounts (remember: "mean" means half of all such households have more and half have less...). That amount is 1/20th (5%) of the nest egg held by the dentist and his wife. Yet that is the condition of the vast majority of folks approaching retirement.
     So, if you find yourself with a financial profile that looks less like that of the dentist and more like that of, well, just about everyone else nearing retirement (otherwise known as "the rest of us"), this is disheartening news. However, don't despair. Retirement may not be nearly as out-of-reach as it seems. We'll explore alternatives in the days ahead. In the meantime, keep your dreams alive!