Wednesday, June 15, 2011

Three Myths about Social Security

As AARP The Magazine's personal finance columnist, Liz Weston offers
 advice on everything from car loans to home sales.

I've been writing about Social Security for nearly two decades.
But even I still have trouble wrapping my brain around some of the system's
 complexities — from how benefits are calculated to how the trust fund works.
So it's not surprising that myths about Social Security persist,
often fed by the program's critics. With the debate about Social Security's
 future once again heating up, these three myths need to be put to rest —
 so we can focus on the real issues.

Myth #1: By the time I retire, Social Security will be broke.

If you believe this, you are not alone. More and more Americans have
 become convinced that the Social Security system won't be there when
they need it. In an AARP survey released last year, only 35 percent of
 adults said they were very or somewhat confident about
 Social Security's future.

It's true that Social Security's finances need work, because over the long
 term there will not be enough money to fully cover promised benefits.
But radical changes aren't needed. In 2010 a number of different proposals
were put forward that, taken in combination, would put the program back
 on firm financial ground for the future, including changes such as raising
 the amount of wages subject to the payroll tax (now capped at $106,800)
and benefit changes based on longer life expectancy.

Next: More myths: Are the trust fund assets worthless? >>

Myth #2: The Social Security trust fund assets are worthless.

Any surplus payroll taxes not used for current benefits are used to purchase
special-issue, interest-paying Treasury bonds. In other words, the surplus in
 the Social Security trust fund has been loaned to the federal government for
 its general use — the reserve of $2.6 trillion is not a heap of cash sitting in
 a vault. These bonds are backed by the full faith and credit of the federal
government, just as they are for other Treasury bondholders. However, Treasury
 will soon need to pay back these bonds. This will put pressure on the federal
 budget, according to Social Security's board of trustees. Even without any
 changes, Social Security can continue paying full benefits through 2037.
After that, the revenue from payroll taxes will still cover
about 75 percent of promised benefits.

Myth #3: I could invest better on my own.

Maybe you could, and maybe you couldn't. But the point of Social Security
isn't to maximize the return on the payroll taxes you've contributed. Social
Security is designed to be the one guaranteed part of your retirement income
 that can't be outlived or lost in the stock market. It's a secure base of income
 throughout your working life and retirement. And for many, it's a lifeline. Social
 Security provides the majority of income for at least half of Americans
over age 65; it is 90 percent or more of income for 43 percent of singles and
22 percent of married couples. You can, and should, invest in a retirement
 fund like a 401(k) or an individual retirement account. Maybe you'll enjoy
strong returns and avoid the market turmoil we have seen during the past
decade. If not, you'll still have Social Security to fall back on.

Money in your 60's-12 steps to take !
Sponsored by
Plan Your Retirement
Updated: 9/8/2010 9:00 AM ET|By Liz Weston, MSN Money
Money in your 60s: 12 steps to take
This is your last chance to get retirement-ready. Here's the game plan to make sure
your numbers add up before you call it quits at work.

Money in your 60's-12 steps to take !
Sponsored by
Plan Your Retirement
Updated: 9/8/2010 9:00 AM ET|By Liz Weston, MSN Money
Money in your 60s: 12 steps to take
This is your last chance to get retirement-ready. Here's the game plan to make sure
your numbers add up before you call it quits at work.

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Related topics: retirement, retirement planning, health insurance, financial planning,
 Liz Weston

Traditionally, this decade in your life would be all about retirement.

And traditionally, you'd do it sooner rather than later. In recent years, half of all
retirees left the work force by age 62.

Ongoing turmoil in the stock markets and serious declines in home equity have
 changed the equation. Only 13% of workers now feel very confident they'll have
enough money for a comfortable retirement, according to a recent survey by the
Employee Benefit Research Institute. Those already in retirement are worried,
too: Just 20% believe they'll have enough money, down from 41% in 2007.

The best cities for retirees

Today's 60-somethings face other challenges. Compared with their parents, they
 are much less likely to have guaranteed retirement checks through defined-benefit
plans, which means their own savings are critical to funding retirement. Yet the
median amount saved in 401k's, IRAs and other retirement accounts in this age
group was just $100,000 in 2007, according to the latest Federal Reserve Survey
 of Consumer Finances -- and that's before the massive damage stock market drop
of 2008 did to retiree nest eggs.

Liz Weston
Today's 60-somethings also are more likely to be carrying debt. Three-quarters of
people in their 60s owed money, with a median debt of $50,000, the survey found.
 Forty-five percent carried balances on credit cards, and the median amount owed
was $4,000, more than any other age group.

Clearly, today's near-retirees have the wind in their face. Here's your game plan
 for getting your finances back on track.

1. Zero in on a retirement date
To know if you can comfortably retire, you'll need to have a target retirement date
, because how much money you'll need and how much you'll get (from Social
Security and other options) depends on this. But you need to stay flexible, in
case the day you'd like to quit working -- or phase into part-time work -- turns
out to be too early.

Working even a year or two extra can boost your nest egg and increase your
 retirement income enormously. But there's also no point in hanging around
longer than you have to.

2. Figure out where you're going to live
Will you stay put in a paid-off home, or will you still have a mortgage? Will you
 move to a cheaper area or downsize to a smaller place? Or will your move be
 lateral, to an equally expensive (if lower-maintenance) condo or retiree village?

Where you spend your retirement will have a huge effect on how much income
you'll need. If your retirement plan doesn't pencil out one way, you may need to
 consider other alternatives. Although more than 80% of retirees "age in place"
 -- living in the same house in which they retired -- moving to a cheaper area
or downsizing to a smaller house can free up home equity for investments
or income

Thinking about tapping your equity through a reverse mortgage? These mortgages
, which give you a lump sum, a line of credit or a stream of monthly checks, don't
have to be paid back until you die, sell the house or move out permanently. But
 the amount you get is inversely proportionate to your age: The younger you are,
 the less you get. That's why the typical age for getting a reverse mortgage is
 about 75 and why real-estate expert Tom Kelly doesn't usually recommend them
 when you're in your 60s unless you have no other choice.

"I believe people in their 60s . . . simply don't qualify for enough cash under the
present (reverse mortgage) programs," said Kelly, the author of "The New Reverse
Mortgage Formula."

Then again, a reverse mortgage may be the best of bad options if you still have
 equity, can no longer work and your retirement income isn't enough to pay the bills.

"There's a needs-based group. Some folks have no other option to pay for meals
and meds (or) a new roof," Kelly said. "This group doesn't really care how much it
costs to get the (reverse mortgage); they simply need it now."

3. Consider long-term-care insurance
There is no expert consensus on when you should buy this coverage, if you buy
it at all. Consumer Reports doesn't recommend the coverage before age 65, but
adviser Robert Pagliarini, a certified financial planner and author of the book
"The Six-Day Financial Makeover," prefers his clients buy a policy before they
 turn 60.

"Unfortunately, the longer you postpone the decision, the greater your chances
of suffering an illness or developing a condition that will disqualify you from
coverage or cause the premiums to be too expensive," Pagliarini said. In the
 60-to-65 age range, "rates will not necessarily be attractive, but they should
still be reasonable." In the 65-to-70 age range, "premiums start going up
 dramatically." Do some serious research before you buy: Look for companies
 with sound financial ratings from, Fitch, A.M. Best or Standard
 & Poor's and review the insurers' complaint records with your state insurance

The National Association of Insurance Commissioners, a group that represents
state insurance regulators, offers information on this coverage, including a free
 brochure, "A Shopper's Guide to Long-Term Care Insurance," that you can order.

4. Don't forget to include medical costs
Paying for health insurance before age 65, when you qualify for Medicare coverage,
can be extremely costly.

But even once you qualify for Medicare, your expenses aren't over. Those age 65
and older spent an average of $4,888 per capita for deductibles, co-payments,
 premiums and other health care expenses not covered by insurance, according
to the 2004 National Health Expenditure Survey, the latest year available. That's
 more than twice as much as the typical nonelderly adult, the survey found.

It's not unusual for a couple, even in relatively good health, to spend $1,000 or
more a month on these costs.

The average expenditure climbs with age: $3,851 for those 65 to 74, $5,066 for
those 75 to 84 and $8,304 for those 85 and older.

5. Deal with your debt
Ideally, you'll enter retirement with no debt, but you definitely want to blitz any
credit card balances or other consumer loans before you get there.

If you're having trouble paying off this toxic debt, contact a legitimate credit
counselor (one affiliated with the National Foundation for Credit Counseling)
 or a bankruptcy attorney to discuss your options.

6. Draw up a retirement budget
Now that you're almost at the finish line, you can replace the usual retirement
rules of thumb ("plan on spending 70% to 80% of your pre-retirement income")
with concrete figures.

Not sure if your budget will work? You might take it on a trial run for a few months
 by living with it as if you really were retired (just keep showing up for work).

7. Review your Social Security and pension options
You can draw on Social Security as early as age 62, but the longer you wait to
start taking payments, the bigger your benefit checks will be. You can check
your annual Social Security benefit statements (which you should receive
about three months before your birthday) for the amount of your expected
checks starting at various ages.

Signing up at 62 basically means locking in a lower benefit for the rest of
your life. If you don't expect to live very long or you can't work and need
the money, then by all means, sign up. Otherwise, think twice.

If you'll continue working, definitely hold off on Social Security payments
unless you won't be making much. If you sign up before full retirement age
and earn more than a certain amount -- $14,160 for 2009 -- you'll have to
give up $1 in Social Security benefits for every $2 you earn.

You also should check with current and former employers to see if you qualify
for any traditional pension benefits and, if so, how much you can expect. You
may have a choice on how to take the money: as a lump sum, as a lifelong
string of monthly checks or as a string of monthly checks that lasts for your
lifetime plus that of your spouse.

If you're thinking of taking the lump-sum option, talk to your human-resources
department about how it would calculate the amount. You also might want to
schedule an appointment with a fee-only financial planner who's experienced in
 handling pension payouts for some advice on your situation.

8. Check your withdrawal rate
The consensus among financial planners has been that you shouldn't withdraw
more than 3% to 4% of your retirement savings the first year, though that has
 its critics.

The earlier you retire and the longer you expect to live, the more conservative
you'll want to be about tapping your savings.

9. Consider an immediate annuity
For clients who don't have traditional pensions and who can swing the cost,
financial planner Sheryl Garrett, the author of "Just Give Me the Answers,"
recommends taking a portion of their nest eggs and buying an immediate
annuity. This is an insurance product that promises you a lifetime stream
of income in exchange for a lump-sum investment.

When combined with Social Security checks, an immediate annuity can help
guarantee that you're able to pay your basic expenses regardless of how your
other investments perform.

Let's say you have a $300,000 nest egg and expect your essential expenses in
retirement -- shelter, utilities, transportation, food, health insurance, etc. -- to be
about $2,300 a month. Your Social Security check might provide $1,600 of that
amount. If you're a 66-year-old man, you could buy an immediate annuity from
Vanguard for $100,000 that would pay you about $727 a month for life. If you
wanted inflation protection -- in other words, a payment that would rise along
 with the cost of living -- your guaranteed initial check would drop to $554.
(You can play with the numbers yourself at Vanguard's annuity website.)

You could use what's left in your retirement accounts to provide the "extras,"
such as travel or a new car. The annuity would ensure that you could pay
your basic living costs even if your investments turned against you or you
lived longer than you had expected.

If you opt for the annuity route, you'll want to make sure the insurer you pick
 has rock-solid finances and low expenses.

10. Stress-test your plan
You now should have enough facts and figures to see if your plan will work.
 Garrett recommends using a post-retirement return rate of no more than
6% or 7%. That's the historical norm for a relatively conservative portfolio of
stocks, bonds and cash.

"You want any surprises to be on the upside," Garrett said.

Then consider checking out T. Rowe Price's retirement income calculator, which
can estimate your plan's probability of succeeding.

What if you're falling short? See what would happen if you worked a little longer,
or adjust your budget to see whether you could live on a little less. If you're
determined to retire and the numbers don't work, consider more-drastic options,
such as moving to a cheaper area or a smaller home.

11. Meet with a fee-only financial planner
The decisions you're about to make are too important to your future not to get
a second opinion. Look for an objective planner who's experienced with
retirement-income calculations.

You can get referrals from Garrett's organization, the Garrett Planning Network,
 or from the National Association of Personal Financial Advisors.

12. Review your estate plans
Your chances of being incapacitated -- too ill or injured to make your own
decisions -- rise as you age. Make sure you have updated durable powers of attorney for
finances and for health care (the latter document is known as a health care directive in
some states), so that someone you trust can take over for you.

Also consider a living will, which outlines what kind of end-of-life care you'd want if you weren't
able to speak for yourself. Though they're not as foolproof as they're often portrayed, they can
 give your loved ones a road map for what you might have wanted.

Dealing with these issues can be difficult and emotional, Garrett said, so don't try doing it
 while you're sitting in your attorney's office. She recommends getting a copy of the workbook
brochure "5 Wishes," available for $5 from Aging With Dignity, and taking time to review
your options. (Another nonprofit group, HELP, has free resources at its website.)

You also should review any wills or trusts and update beneficiaries on retirement, bank and
 investment accounts and on life insurance, preferably with the guidance of your attorney
and financial planner.

"If you haven't updated your will since the kids were born," Garrett said, "now's the time."

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books,
 most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy."
Weston's award-winning columns appear every Monday and Thursday, exclusively on
MSN Money. Click here to find Weston's most recent articles and blog posts

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