Archives for August 1, 2019

Many older adults worry about going broke in retirement, about outliving their assets. But they don’t have to worry if they follow two key steps outlined in new research from the Stanford Center on Longevity and the Society of Actuaries, those chipper folks who study how long you might live.

What are those steps?

1. Delay Social Security benefits

Whether you’re the primary wage-earner of a married couple or a single retiree, you should delay claiming Social Security for as long as possible, though no later than age 70.

Doing so, the researchers say, does two things:

One, the beneficiary will receive the largest possible monthly benefit. That’s because Social Security retirement benefits are increased by a certain percentage (depending on your date of birth) if you delay your retirement beyond full retirement age or FRA. So, for instance, those born in 1957 could get 128% of their scheduled FRA monthly benefit if they delay getting benefits from age 66 and six months (the FRA for someone born in 1957) to age 70.

And two, the increased benefit could represent two-thirds to more than 80% of a retiree’s total retirement income. And for many middle-income retirees, this may represent all the guaranteed lifetime income they need, according to the researchers.

2. Use withdrawal rules

The second step is for you, the retiree, to generate income from your savings using the IRS’ required minimum distribution (RMD) rules, coupled with a low-cost index fund, target-date fund or balanced fund.

The IRS requires that IRA and 401(k) account owners start taking mandatory distributions from their accounts starting at age 70½. Though complicated, the RMD rules say you must start withdrawing a certain amount of money from your retirement accounts each year based on your life expectancy and the amount of money in your accounts.

A few caveats. These two steps, which the researchers refer to as the “Spend Safely In Retirement Strategy” (SSiRS), are intended as a “baseline” approach for middle-income workers who: won’t have much if any traditional pension/defined benefit plan income; have accumulated $1 million or less in their 401(k), IRA or other accounts earmarked for retirement; and might not work with a financial adviser.

Pros. Among the SSiRS’ advantages, the researchers say, is that the approach is easy to understand and implement, and doesn’t require the ongoing involvement of a financial adviser. Plus, optimizing Social Security benefits will mitigate some of the more common retirement risks such as longevity (the risk of outliving your assets), inflation, and declines in the value of your retirement portfolio.

But this strategy is not without its disadvantages.

SSiRS doesn’t work all that well when living expenses are uneven and vary from year to year. For instance, the decision to use RMD rules for withdrawals – rather than say the 4% rule where one withdraws a fixed percentage per year from retirement accounts – means your income could fluctuate year to year. So, for example, let’s say you are 70 and had $1 million in your IRA as of Dec. 31 of the previous year. In year one of the strategy, you would withdraw $36,496  from your account. But in year two, let’s say you had $950,000 in your account. Now your RMD would be $35,849. So, the RMD strategy might not work for retirees who have to cover essential and/or unexpected expenses with the money in their retirement accounts.

Often, actuaries and others will say essential living expenses ought to be covered by fixed sources of guaranteed lifetime income such as Social Security, a pension and/or an income annuity rather than income from retirement accounts.

Another possible disadvantage: You might have to create what the researchers call a “retirement transition fund” in order to delay taking Social Security until age 70. In other words, you might have to withdraw money from your retirement accounts to make up for the Social Security benefit you delayed receiving. And doing so could reduce the amount of money you’ll have for retirement.

What else to consider? SSiRS likely needs to be customized and refined for your own facts and circumstances, as monitored and tweaked when necessary.

You might claim Social Security at FRA instead of 70 and still benefit from the strategy. And you might want to purchase more guaranteed income in the form of a single premium annuity with the assets in your retirement accounts. Or you  might need to consider other ways to create income in retirement. A reverse mortgage or an annuity funded with the cash value of a whole life insurance policy could be used to generate income.

Also, if you have an adviser, consider a personalized plan as an alternative to the SSiRS.

What others say about this strategy? Tim Steffen, director of advanced planning at Baird Private Wealth Management, says the SSiRS concepts can certainly work. Using an RMD method for withdrawing assets ensures the money never runs out, he says.

But the key thing the SSiRS strategy tries to protect against is  overspending in retirement.

“By having the Social Security and retirement accounts provide an automatic cash flow stream, the retiree knows what they have to work with each year, making budgeting easier,” Steffen says.

First making her name as the ‘broke millennial’ blogger, Erin Lowry has grown up since her early twenties. With a personal finance book under her belt, as well as TV spots, snazzy profiles and guest-spots on podcasts, Lowry turned her focus from money 101 to investing…and boy are we glad she did.

With succinct prose and personal anecdotes, the personal finance writer aims to demystify investing with her latest tome, “Broke Millennial Takes on Investing: A Beginner’s Guide to Leveling Up Your Money.”

Written as a prescriptive advice, the book progresses from the basics (like, what exactly is an ETF?) to more advanced concepts (like the best way to whether a market downturn). The millennial wanted to write something both for the person who didn’t know the first thing about a 401 (k) as well as the person who knows about investing but wants to advance their knowledge.

Fresh off her book tour, I caught up with Lowry over the phone. Our interview was edited and condensed.

Alexandra Talty: In the book, you talk about the concept of being risk adverse. There are countless studies on how women can be more risk adverse than men when it comes to investing. Do you have any tips to over come that initial fear?

Erin Lowry: It’s natural to be risk adverse in the beginning…regardless of gender

You don’t know what you’re doing yet. It’s not something that we are taught in school. There’s not often someone there to hold our hands.

Most of us start investing with our retirement accounts. I don’t know about you, but I was not given any sort of assistance by my employer. It was just me and the name of a ton of different investments options. That’s a little overwhelming and intimidating.

There are a couple of things you can do when you are first getting started. One thing to consider is a target date fund which is sometimes known as an all-in-one-fund or a lifecycle fund.

The advantage of doing a target date fund when you’re getting started is that it makes sure your money is actually invested. There are horror stories of people just leaving their retirement money in cash, thinking that it was invested.

A target date fund is simply put, a fund that is tied to an approximate year when you are planning to retire. It removes the burden of having to make a decision of what you’re investing in. So hypothetically, if you’re planning to retire in 2045 then it’s automatically going to invest more aggressively in the beginning, then a bit more moderately and then to the more conservative investments towards your 2045.

The downside of the target date fund is that the fees are typically higher. It’s not tailored specifically to you and your goals and your risk tolerance.

If you have no idea what you’re doing and just want to make sure your money is invested, a target date fund is a good option. You can always re-balance your portfolio at a later date. There’s no rule that says once you go into a target date fund that you have to stay there forever.

Another thing that I recommend people do is to go to Investor.gov. Go to the compound interest calculator play around with the numbers. See how much less you have to save if you are investing your way to a million dollars. It’s really hard to save your way to wealth.

AT: You’ve talked about some tools like micro-investing or practice investing apps. Do you think using those can help people become less risk adverse?

EL: I think they can. The only concern I have is if you get into the market at a bad time. Say your first three months of investment are a time when we happen to be going through a market correction. You’re just seeing negative numbers and negative returns and red arrows pointing down. I would hate to have someone’s first at bat be a very negative experience like that.

Couple whatever you are doing with a lot of reading and education. I love going through the history of the stock market. It is cyclical. There are ups, there are downs. That is part of the economic growth cycle.

With micro-investing, put in at least $25 to $50 a month into the app to make sure that you’ll actually see returns. Because it is easy for us to say, oh it only costs $1 a month, it’s a great deal. If you’re only investing $5 a month, that $1 month is eating up all your returns.

Also, micro-investing shouldn’t be your primary means of investing. It is a good way for people to get started and get some learning.

ACT: You use this term in the book “having your financial oxygen mask on” to refer to people who’ve paid off most of their student loans or at least the ones above 5% interest, who have an emergency funds and aren’t carrying any credit card debt.

Sometimes, these people will just be investing in their retirement and not investing in other things. What advice would you give to someone who is ready to make that pivot?

EL: If you’re ready to be investing in what’s called taxable accounts I would say the very first step is setting your goals.

What do you want this money to be doing? Because that is going to dictate how much risk you are putting on your money and what kind of investments you are selecting. Without that information, you cannot be making educated choices.

It is also easy to say, ‘oh my car is going to quit on me in the next two to three years, well I want to be earning more than my average savings account, let me invest this money.’ Truthfully, you probably don’t want to invest that money that you know you’re going to need in two years.

If it’s a goal that is seven to ten years away – then yeah, it makes sense to be investing at least in the beginning. Get some growth on it and then you can get it into something a bit more conservative as you start to reach the end of what we call your time horizon.

ACT: There’s a lot of talk about the gender pay gap and the retirement saving shortfall for women. But there’s also this idea of getting in the investment game early on as a way for women to offset these economic realities.

EL: It would be wonderful for the wage gap to close. For all sorts of inequality for parity to take effect. But we can’t wait around for that to happen.

Investing is one of the great wealth equalizers. Now, thanks to technology, it is easier than ever toto start to invest. You don’t need large sums of money to start. You just need to be consistent about it.

The advantage of starting young is huge. Then you’re taking advantage of time and compound interest.

FOR MANY PEOPLE, BEING poor feels more like an identity or series of experiences than a measure of income.

You may feel poor if you’ve overdrawn your account at the grocery store or spent nights sleeping in your car. You may feel poor if your parents were impoverished or if you can’t afford new clothes or a good education.

But the definition of poverty also goes beyond a feeling or an experience. There are governmental poverty measures and various income thresholds separating the impoverished from the lower-middle class. The definition of poverty can be complex. “You can feel that you’re really struggling, and you, in fact, may be really struggling, but your income could be well above the poverty line,” says Gregory Acs, vice president for income and benefits policy at the Urban Institute.

So, are you poor? Is asking this question a useful exercise? Here’s what to know about where you fall in the American economic class system.

Breaking Down Poverty by the Numbers

There are a range of measures individuals and families can use to determine whether they fall within a determined definition of poverty. The official poverty rate was 12.3% in 2017, according to the U.S. Census Bureau, and even higher for African-Americans and Hispanics. The 2017 poverty threshold published by the U.S. Census Bureau says an under-65 individual with no kids falls under the poverty level at $12,752 in annual income. That number increases as household size increases. A four-person household with two children under 18 years old reaches the poverty threshold at $24,858.

Another metric, the supplemental poverty measure, aims to improve the approach to measuring income and poverty in the U.S. with updated methods and data. In 2017, the supplemental poverty measure rate was 13.9%. The two-adult-two-child poverty threshold for 2017, according to the supplemental poverty measure, for households without mortgages was $23,261 and $27,085 for two-adult-two-child households with mortgages.

The Economic Policy Institute has its own Family Budget Calculator that strives to measure the income necessary to maintain an adequate standard of living in specific locations, including paying for health care, transportation and housing. For two adults and two children in the Chicago area, for example, that amount would be nearly $89,000 annually, a vastly higher number than the federal poverty thresholds.

Looking at Poverty Beyond the Data

Understanding whether you fall within a certain income threshold, based on family size and income, can be important to knowing whether you can tap certain state of federal anti-poverty programs such as the earned income tax credit or food stamps.

But the official metrics and figures don’t tell the whole story. “Our government’s official definition of poverty has very little to do with the day-to-day lived experiences of many Americans,” says Jeremy Rosen, director of economic justice at the Shriver Center on Poverty Law in Chicago.

For example, experts say that many people are working full-time jobs but cannot make ends meet due to high medical bills, child care expenses and housing costs. “I think we hear a narrative about a strong economy with very low unemployment, but what that tends to overlook in most cases is that so many people are technically employed but are working in jobs that just don’t allow them to earn enough money to pay for basic necessities,” Rosen says.

Additionally, people may fall in and out of poverty during the course of their lifetimes. “It happens at different parts of the life cycle and at different times,” says Elise Gould, senior economist at the Economic Policy Institute, a nonprofit and nonpartisan think tank based in the District of Columbia. For example, one 2015 study found that, by age 60, 6 in 10 Americans will experience a year in poverty, defined by occupying the bottom 20th percentile of the income distribution. But, Gould adds, “If you come from a poor household, you’re more likely to be poor as an adult.”

The definition of poverty can go beyond data. Not falling below the poverty line doesn’t guarantee that you don’t feel strapped for cash or that you don’t need assistance. Conversely, someone who earns a low income but has family support or access to wealth and assets may not be – or feel – impoverished at all.

How to Seek Help

Depending on your financial situation, there may be programs available to you on the federal or state level to assist with housing, food and educational expenses. Social Security, unemployment insurance and refundable tax credits such as the earned income tax credit are governmental programs designed to lift people out of poverty. Understanding whether you qualify and how to tap these benefits can be useful for forming a safety net.

Doing what you can to remain employed in a good job with promotion potential is also useful. “For folks who are poor but they are able-bodied and relatively healthy, the surest, best thing to do is to work and to work at a job that has not only has decent pay but also prospects for moving up,” Acs says. One study even shows that working for a company that doesn’t offer paid sick leave is linked to poverty, so finding or advocating for these benefits can be crucial.

But there are other larger-scale social and economic factors that can make individuals more likely to fall into poverty and stay there. Advocating for political and systemic change, such as a higher minimum wage, depending on your political leanings, may help make a larger difference.

Still debating whether you’re poor? You can look at your income, official poverty measures or the day-to-day struggle of covering your expenses. If you feel that you’re struggling, you’re certainly not alone and it’s worth looking into the social, political and federal programs designed as safety nets.

Retiring as a millionaire may seem like a fantasy rather than a practical financial goal, yet it’s possible with savvy monthly saving.

Reaching that milestone, however, takes determination, especially if you don’t start until later in life. Luckily, personal finance site NerdWallet crunched the numbers, broken down by age group, to demonstrate how much you’ll need to stash away on a month-to-month basis.

First, let’s go over how they got the numbers. The math assumes you are starting with no money in savings, that your investments will earn six percent in annually, and that you plan to retire at the age of 67.

Saving programs to help you reach that mark could include your employer’s 401(k), which is a tax-advantaged retirement savings account, or a Roth IRA or traditional IRA. Investment options include low-cost index funds.

Now let’s dive into the figures.

If you start saving when you are 20 years old, you’ll need to stash $319 a month toward retirement to hit your goal of a million dollars in 47 years. That might seem like a lot to someone so young, but putting off your savings will only cost you more in the long run.

If you are 40 with no savings, that number jumps all the way to $1,240 a month straight to savings to reach a million for retirement. That’s almost quadruple the amount than if you had started saving at 20.

As you can see, the longer you wait, the more you will have to pay. Do yourself a favor, and start saving early.