The Pension Benefit Guaranty Corporation, the government agency that insures private sector pensions, is holding almost $197 million in unclaimed pension benefits for over 36,000 people. The money is from private sector terminated pension plans now administered by PBGC.
Unclaimed benefits average about $6,550 and range from $1 up to $676,436. In New York, the state with the most unclaimed benefits, 7,215 people are owed $40.65 million. And in California, 3,078 former pension participants are eligible for $7.82 million. Other states with significant amounts of unclaimed retirement money include Texas ($11.52 million), New Jersey ($14.22 million), Ohio ($15.56 million), Illinois ($16.78 million), and Pennsylvania ($11.32 million). Workers who are owed benefits are primarily former employees of the airline, steel, transportation, machinery, retail trade, apparel, and financial services industries.
Employees who have lost track of a pension earned during their career can try looking it up in the PBGC’s online pension search directory. Potential pensioners can search by their last name, company name, or state. Since the search tool went online in 1996 about 37,000 people have found nearly $252 million in missing pension benefits.
The PBGC becomes responsible for administering pension benefits when the retirement plan is underfunded or an employer voluntarily chooses to close the plan. Workers who find their names in the directory will be asked to provide proof of age and other information. Useful documents to collect include a notification that you are vested in the plan, an individual benefit statement, an exit letter, or a summary plan description. Confirmed pension participants could receive an annuity from a private insurance company, funds set aside by their former employer, or benefits directly from the PBGC.
Workers who were vested in a pension plan at a former job are entitled to pension benefits, even if the pension fund no longer exists or the company went out of business or merged with another firm. Vesting schedules can range from immediate to requiring 20 or more years on the job before pension benefits are earned. The worker’s spouse may also be entitled to a benefit. Only traditional pensions, not 401(k)s, are insured by the PBGC.
Search PBGC’s list of pensions that have been earned, but are unclaimed – click here
How to Find Money in an Old 401(k) Account
Instructions – Locating Accounts
1. Follow up on any moves or previous address changes you have made since opening your 401k account. Since statements go out quarterly at most, and yearly at least, you may not be getting your statements at your new address. If you have recently moved, file a change of address form with the post office.
2. If your address is up to date but you haven’t been receiving statements, follow up with your previous employers. Ask them for the name of the company that held the 401k account, and request a statement from directly from the company.
3. If the company has dissolved, or your employer has terminated or abandoned that particular 401k plan , run a search through the Department of Labor, Employee Benefits Security Administration, for free.
4. Even if your previous employer has declared bankruptcy or undergone a merger, your money is protected by federal laws. It is your property–not the property of the employer. However, if the amount in the account was less than $5,000, they may have rolled the funds into anIRA account . You can search for free on the FreeERISA website for 401k pension plans and IRA accounts.
5. Several websites offer free unclaimed property searches, which include money still invested in old 401k pension plans, rolled over to IRA accounts or being held in a trust account. Use a site such as UnclaimedAssets or FreeERISA to search for unclaimed money from accounts that have moved or changed.
TIP: You can file a change of address with the post office any time; you do not have to be moving to do it. Search for accounts under the correct name and spelling, especially if your name has changed because of marriage or divorce.
How can I be sure I won’t outlive My Money?
The solution to that retirement equation is not math; it is control. Regardless of how many times we run the financial projections for potential retirement outcomes, the answers are always just educated guesses.
We are in the retirement solutions business; so we hate to be the bearer of bad news. But, we take our mission statement seriously to “help our clients build and preserve their family’s quality of life through the generations.” Our job is not to pretend that we can perform magic to sell financial products, but to help our clients develop and execute a realistic plan to achieve as much of their hoped for retirement success as is possible.
The only way we know of to turn the projections into reality is for the client to take control of the outcomes. While advisors and clients may be able to influence the personal rate of taxation and investment returns to a certain extent, they have no control over Medicare, Social Security payments or the rate of inflation. The only thing under the client’s absolute control is how much he or she spends. Rather than place unwarranted faith in computer calculations based on educated guesses, the focus should be on controlling current and future outlays and adapting to circumstances.
Long Life Expectancy
When we add in the prospect of a long life expectancy coupled with continued inflation, the amount rises to even greater heights. Oddly, long life is now considered a risk called “longevity risk” instead of a blessing. It is the rising level of fear that a person might run out of money before he runs out of breath.
Due to the incredible number of variables in planning for the very long term, there is no such thing as a “magic number”. However, these advance calculations are helpful to give you an idea of the adjustments that may be necessary to meet your future needs.
Many people unrealistically assume that the needed funds will come from some employer or government provided benefits. That is becoming increasing less likely to ever happen. In the words of many retirement advisors it is now the YO-YO retirement plan – You’re On – Your Own.
One of the greatest fears that most people consider is the possibility of running out or money in their advanced years. Most people can do something to avoid that prospect, but it takes action – not just hope. Anyone with a sense of reality knows that means making some compromises. They also know that the sooner they start the greater the chance of making a meaningful difference.
In preparing for retirement, the method that we advocate with the highest probability of success is what we call the Glidepath to Retirement Success. This is a series of actions designed to help you cruise into a realistic retirement life. This is similar to an airplane gradually descending to the runway for a smooth landing. The alternative for many people may be more akin to a plane dropping suddenly out of the sky.
Glidepath to Success Action Plan:
1. Track your current total after tax spending pattern (record carefully for 3 months and multiply by 4 and add in any semi-annual or annual expenses to get the annual figure).
2. Divide your cash outlays into two classes: Committed and Discretionary.
3. Determine your Margin of Error (That is how much you could easily cut from Discretionary spending if need be).
4. Subtract the Margin of Error from the total spending.
5. From that figure subtract the annual amount to be received from any defined benefit (pension) plans and/or fixed annuities.
6. Multiply the remaining figure by 20 to get a wild guess at the amount of capital required to support that lifestyle after paying income taxes and accepting Social Security.
7. Subtract that amount from the amount of invested capital you realistically expect to have if you continue what you are doing now.
If the result is a positive number congratulations! If not, you will have an idea of what it will take to get on your glidepath.
The key to the Glidepath to Retirement Success is accepting the extremely high probability that you will not be able to maintain your current standard of living when you retire. We often remind people that, in retirement, failure are simply not an option. The consequences are just too painful!
With that knowledge then you have two choices. You can continue to do nothing different and hope for the best. Or, you can take action by beginning a long-term plan to make sure your retirement cash will meet your retirement expenses.
1. To have a GOOD retirement, Get Out Of Debt (it sucks the life out of your finances).
2. Commit your family to reducing your spending (even if it requires radical action).
3. Don’t try to “keep up with the Joneses.” (They may be on the path to retirement failure).
4. Quit worrying about what other people think.
5. Drive your cars for several years longer until they start needing serious repairs.
6. Reduce your discretionary expenditures (e.g. entertainment, eating out, vacations and gifts).
7. Consider downsizing your home if it is eating too much money.
8. Take advantage of tax-deferred savings plans and forced savings plans at work, such as 401(k) plans, especially making sure to get the maximum employer matching.
9. Don’t gamble; choose sound long-term, diversified investments and keep investing.
By gradually reducing your expenditures, getting out of debt, optimizing your taxes and steadily increasing your commitment to sound long-term investments, you will be gliding into a comfortable retirement. It may be at a reduced level from what you had previous dreamt, but you will be able to sleep. As you continue to build confidence in your plans you will gain a growing feeling of success that you are progressively achieving a worthy ideal.
Once you have determined how your glidepath will lead to a comfortable retirement, the next step is to consider your contingency plans. In the S-T-A-R-S System for Retirement SuccessSM we always urge people to live for the best, but plan for the worst. That means doing the unpleasant work of considering various “what if” scenarios. Most people have a preferred retirement date in mind, say age 65. Unfortunately, a significant number have been forced into retirement well before achieving that date. In recent years many have been affected by company mergers, closures and layoffs. Others, especially business owners, are forced to leave be an extended illness or disability.
Best Annuities to Guarantee Income for Life
You probably don’t lie awake at night worrying that you’ll live too long. But maybe you should. The biggest financial risk retirees face isn’t volatile investment returns — it’s longevity. Will your money last as long as you do?
In a world of increasing life spans, disappearing pensions, and crashing markets, immediate annuities almost look sexy. An immediate annuity is an insurance policy against a man-made disaster: that you run out of cash. You give the insurer a chunk of change, and, in exchange, you receive a contracted amount every month for the rest of your life, like a pension. (The monthly payout is net of the fees the insurer keeps.) The longer you live, the better the deal is for you. But buying an annuity requires faith that the insurer will be financially sound enough to make the payouts for decades. And once you purchase an annuity, you generally can’t change your mind, at least not without paying a hefty penalty.
That’s why MoneyWatch did a rigorous analysis of more than 100 insurers to find the seven sturdiest ones paying the most.
You do have some protection — state life insurance guaranty funds rescue annuitants when insurers go belly-up, with the equivalent of federal deposit insurance. But most state guaranty funds limit payouts to $100,000. That’s why you shouldn’t invest more than $100,000 with any single annuity company. Since a $100,000 annuity will only provide about $9,000 a year for a 70-year-old, you may want to buy multiple annuities from assorted safe companies, says Hersh Stern, publisher of Annuity Shopper and ImmediateAnnuities.com.
How We Chose the Best Annuities
Our methodology: First, we eliminated insurers that don’t offer immediate annuities in most states. Next, we axed ones with ratings below A for financial safety from Moody’s, Standard & Poor’s, and A.M. Best. (Not all ratings companies rate all insurers; if an insurer didn’t have ratings from at least two of these services, it was dropped.) To be conservative, we then screened the remaining insurers through the more critical lens of TheStreet.com, which grades insurers the way you were judged in school. A’s are rare; C’s are average. To make our best-annuities list, a company had to have a TheStreet.com rating of at least a B-.
Once we had our safe-insurers list, we then ranked them by the size of their monthly payouts. To do this, we needed to create a hypothetical annuitant, since the size of the checks hinges on the insurer’s calculation of how long you’ll live, plus some other factors. We chose a 70-year-old man investing $100,000. (If you’re under 70 or a woman, your payout would be less than the figures below, since insurers expect you’ll live longer and collect more payments. Conversely, an 80-year-old would get larger payments.) Although some analysts recommend inflation-adjusted annuities, we didn’t shop for them because many companies no longer sell these products, and those that do would charge our man about $150 a month for the privilege. There are a host of other options, too, such as a guarantee that the checks will last for your spouse’s lifetime as well, but each extra benefit results in a smaller monthly payout.
Most people would naturally like to continue to live at their present lifestyle level when they retire. However, when they find out how much invested capital it would take to support that level, they often suffer panic-filled “sticker shock”. For an oversimplified example, to obtain a spendable income of $75,000 after taxes, even after collecting Social Security, they might realistically need at least $1,500,000. Surveys have consistently told us that few pre-retirees have even a fraction of that amount.
How to Buy the Annuities
Two insurers on our list, USAA and MetLife, sell annuities themselves, but the others require you to go through their authorized agent, ImmediateAnnuities.com or AnnuityAdvantage.com. Those two sites are also useful if you want to set your own criteria and find annuities that meet it. But if you plan to go this route, check with financially sound USAA and MetLife for their immediate annuity rates, too.
The Best Immediate Annuities
We ranked insurers according to the size of the monthly lifetime payout for our 70-year-old man. Just in case you’re looking for only a few years of payments — maybe to hold you over until your pension kicks in — we also note each insurer’s 5-year payouts for the 70-year-old. Prefer to stick with the very safest company on this list? Then drop down to No. 5, USAA, which gets the highest financial-soundness grades from all the raters and also happens to offer the most generous 5-year payments.
How to Retire Early
by Dave Roos
Money Dictates Most of Your Retirement Decisions
It’s every working stiff’s dream: saying Sayonara to the daily grind while you still have your own teeth. In our early retirement fantasies, we’re traveling the world, healthy and in the prime of our lives, visiting those hard-to-pronounce countries we’ve always talked about and sampling the finest local fare.
Surveys show that more than half of workers between the ages of 30 and 50 plan to retire before they’re 60 [source: MSN]. But there’s only one problem with this wishful thinking: Retiring early is easy, but making your money last is hard.
One problem with saving up for early retirement is that we tend not to think beyond those first few glorious years of good health and full checking accounts — we don’t do the long-term math. If the average male life expectancy is 75.2 and we retire at 55, then our savings, stock market investments and 401(k) accounts need to last for 20 years. And what if we live even longer than average?
Discount Utility Bills
Government Food Assistance
What Are You Entiteled To?
* Senior Health Care
* Social Security Benefits
* Senior Discounts
* Senior Housing
* Home Security
And don’t forget that life can get tricky during those last five or 10 years. Very few fortunate souls drift away in their sleep at age 88 without ever having major surgeries, hospitalizations or chronic (and expensive) conditions to manage — not to mention the ever-increasing costs of medical insurance and prescription drugs. While we tend to overestimate our health, we underestimate our post-retirement financial needs. A 2002 survey found that only 17 percent of workers thought they’d need 80 percent of their salary after retirement. Forty percent thought they’d be fine with 60 percent of current earnings [source: MSN]. That might suffice for a few good years, but the longer you live, the less chance your money will last. Furthermore, isn’t it possible that traveling the world and living out of a suitcase could get pretty tedious? Did you ever think that you might be bored without a day job? Do you have enough hobbies and interests to sustain you for 20 to 30 years without business trips, deadlines and daily meetings? But don’t get discouraged. If you’re serious about retiring early and dedicated to making it work, you can make it happen. All it takes is some serious financial planning, a strict budget and some good old-fashioned luck. So how do you start planning for an early retirement? What are the most important calculations? What are some common mistakes? Read on to find out.
The first step when planning for an early retirement is to figure out exactly how much money you have right now. This is called your net worth. Net worth is calculated by adding up all of your assets (cash, stocks, retirement accounts and the value of your home) and subtracting all of your outstanding debt (mortgage, student loans and credit card debt).
When you know how much you have, you need to figure out how much money you’ll need when you retire. This amount depends on several factors: what you want to do when you retire, how early you want to retire and what standard of living you want to enjoy when retired.
If you want to keep up your current standard of living as a retiree, the rule of thumb is that you’ll be spending monthly at least 80 percent of what you’re spending now [source: MSN]. That other 20 percent you won’t be spending accounts for work-related expenses: gas or public transportation fares for your commute, dry cleaning bills, lunches and the like. But if you plan to travel, play more golf or fix up a classic car as a retiree, you’ll quickly make up that 20 percent you thought you were saving by not working.
Perhaps the most important factor when calculating how much you’ll need is how early you want to retire. There’s a big difference in planning for a 20-year retirement and a 40-year retirement. Plus, the earlier you retire, the longer you’ll have to wait to get Social Security benefits. This isn’t a problem for people who retire after the minimum age for collecting Social Security (currently 62). But if you retire too early, you might not have enough to get by on until Social Security kicks in.
Another serious consideration when planning for an early retirement is health insurance. When you’re employed, you pay part of your monthly insurance premium and your employer pays the rest. When you retire, you’re guaranteed coverage under the same insurance policy for the next 18 to 36 months through the Consolidated Omnibus Budget Reconstruction Act, also known as COBRA. COBRA is meant as a temporary protection for employees who lose or change jobs. But even with COBRA, you’ll be paying the full premium, including what your boss used to pay.
You’re not eligible for Medicare benefits until you’re 65 [source: MSN]. So, until you reach that age, you’ll need a supplementary insurance policy. When you apply for a new policy after COBRA runs out, you might be surprised at how expensive it is to insure a 60-year-old with pre-existing medical conditions. The cheapest policy for a 62-year-old nonsmoker is $300 a month, and it increases if you smoke, have a history of heart problems, high blood pressure, diabetes and other conditions [source: MSN].
One way to get started on your early retirement budget is to use one of the many free online retirement calculators to figure out how much you’ll need in net worth to retire at a certain age. But the only way to know if your planned retirement spending will work is to try a dry run [source: Kiplinger]. Try to live for three months on the projected monthly amount that you hope to live on when retired. If it’s not working now, it certainly won’t work when you factor in increased healthcare and insurance costs.
How can you start saving for an early retirement now? What are the best long-term investments for building up a retirement nest egg? Keep reading.
Investing for Early Retirement
Compound interest is a beautiful thing. The best thing you can do right now to ensure an early retirement is to invest as much of your earnings as possible in safe, long-term investments and tax-deferrable retirement savings accounts
A good place to start is with a tight budget. As we learned in How to Make a Million Dollars, one of the quickest ways to become rich is to live a frugal lifestyle. Instead of living beyond your means — buying things on credit that you can’t immediately pay back — live below your means. Buy a used car instead of a new one (or better yet, take the bus). Choose the two-bedroom house instead of the five-bedroom one.
So, how much money should we be saving from each paycheck? MSN Money describes a 20/20/20 system. Starting at age 20, if you invest 20 percent of each paycheck, you could retire in 20 years and live on the interest from your investments [source: MSN]. As we’ve already asked, can you live right now on 80 percent of your income, like you’ll be living on in retirement? Try setting up an automatic withdrawal from your checking account. Whenever a paycheck is deposited at the bank, 20 percent will automatically be deducted before you even have a chance to see it, let alone spend it.
Now you need to take that money and invest it in something with guaranteed long-term growth. MSN Money recommends a stock market index fund that tracks S&P 500 companies. So as long as the stock market goes up over the next 20 years — which it historically has, at a rate of 12 percent annually — your money will grow. Also, if you can increase your earnings slightly every year through pay raises and promotions, you’ll see even more growth.
Stock investments are smart if you plan on retiring before you’re in your 60s. When you start cashing in stocks at age 40, you’ll have to pay only long-term capital gains taxes, which are currently at 15 percent. But other common retirement investments, like 401(k)s and Roth IRAs, have stiff penalties for withdrawing money early. The minimum age to start withdrawing from a 401(k), a Roth IRA and a traditional IRA is 59.5
And remember, don’t touch the interest on your stock investments. For the magic of compound interest to work, you need to reinvest every penny of interest.
Next, let’s look at some common mistakes people make when planning for an early retirement.
Common Early Retirement Mistakes
There are some traps to avoid when planning for early retirement. The first has to do with Social Security and how your retirement benefits are calculated. The Social Security Administration (SSA) bases your monthly benefits on the average of your salary during your 35 highest-earning years of work. If you retire too early — before you’ve worked for 35 years — then your nonworking years will be counted as zeros.
It’s also important to understand when you should start collecting Social Security. The SSA allows you to start collecting Social Security benefits at 62, but that’s not considered “full retirement age.” If you were born before 1937, your full retirement age is 65, but if you were born after 1960, it’s 67. Full retirement age means that you’ll receive your full Social Security benefits only if you wait to collect until you’re 65 or 67. If you start collecting at 62, you’ll receive only a partial benefit. Calculated over the length of your retirement, you’ll receive 25 percent less Social Security benefits if you start collecting at 62 as opposed to waiting for your full retirement age [source: SSA].
Inflation is another hidden trap when planning for your financial future. The average annual inflation rate is around 3 percent. At that rate, your money will be worth considerably less 30 or 40 years down the road. One million dollars in 2008 will be worth less than half that amount in 30 years. Wages tend to keep pace with inflation but not investments. If an investment has a 5 percent rate of return, that’s really a 2 percent rate over the long term when adjusted for inflation.
There are also some important tax considerations to keep in mind when planning your future finances. As we’ve mentioned, there are tough tax penalties for withdrawing money early from a 401(k) or IRA. For both 401(k)s and IRAs, there’s a 10 percent penalty for withdrawing funds before the age of 59.5. There are some exceptions to that rule: disability, the purchase of a first home, hardship withdrawals for medical expenses, and a 72T. A 72T allows you to withdraw money from a 401(k) or IRA in even disbursements based on the amount of money you have and your projected life expectancy.
If you need or want to go back to work after you retire, be wary of earning too much. If you file individually and make between $25,000 and $34,000, you’ll have to pay income tax on 50 percent of your Social Security benefits. Earn more than $34,000 a year, and you’ll be paying on 85 percent [source: SSA]. Also, if you retire before your full retirement age and pick up a part-time job, Social Security can reduce your benefits by $1 for every $2 you earn until you reach age 65 or 67.
So what exactly are you going to do when you retire? And where are you going to retire? Keep reading to see what the experts have to say about retiring early and staying busy.
If you’re thinking about retiring early, you should ask yourself why. Is it simply because you don’t like working? Maybe you’d be better off looking for a job that’s more fulfilling so that you could enjoy more of your time and money now, rather than saving it for an unpredictable future.
Strong motivation is the key to a successful early retirement. Maybe it’s always been your dream to move to the South of France and write a novel, to dedicate your time to charity work or your church or maybe you just want to spend every day fishing. A powerful motivation won’t only make your early retired life more enjoyable, but will also make it easier for you to stick with a strict financial plan until you get there. Some experts even suggest getting a psychological evaluation to help discover what type of early retirement fits your personality type [source: MSN].
More and more retirees are planning to work through the early part of their retirement, whether full- or part-time. According to a 2006 survey by the Pew Research Center, 77 percent of today’s workers plan to do some kind of paid work past their full retirement age. Interestingly, those numbers don’t reflect the current reality. Right now, around only 12 percent of retirees are working, although 27 percent have worked at some point during retirement [source: Pew Research].
Working at least part-time during retirement can be a smart move for people whose friends and spouses are still working or for those who don’t have established hobbies or interests. Plenty of retired business executives pick up post-retirement work in sporting goods stores, and retired teachers might choose to work at local daycare centers.
The stark reality is that many of today’s retirees didn’t plan on being retired so young. A 2006 survey found that 40 percent of retirees were forced to stop working earlier than they had planned for reasons ranging from illness to unemployment [source: USA Today]. And now that they’re retired, they realize that they don’t have enough savings and investments to support themselves for the long-term. So, it’s back to the want ads to find something to make ends meet — at least until Social Security kicks in.
If you figure that you have about 20 to 30 years to enjoy retirement, you can find ways to stretch your dollar and your time. While you’re freshly retired, you can explore hobbies and part-time work, and when you start collecting Social Security, you’ll have more financial wiggle room to indulge in lifelong dreams like world travel or volunteer work. And if you plan wisely, you’ll have enough savings stashed away to cover unforeseen medical expenses and possible long-term care.
The Basics Of Retirement Planning
When planning your retirement, it is important to remember that money, more than any other factor, will dictate most of your retirement decisions. Your level of financial preparedness for your retirement years will determine when you retire, what type of lifestyle you and your family will enjoy during retirement, and what might be left as a legacy to your heirs.
He Who Fails to Plan, Plans to Fail
It has been said that no one plans to fail, they simply fail to plan. Nowhere is this idea more applicable than when it comes to meeting our retirement objectives. A sound financial plan can be the difference between meeting one’s retirement objectives and facing the discouraging surprise of one caught unprepared and with too little time remaining to change their financial course.
At the very least, ongoing retirement planning will help you understand the financial demands of retirement, and make those decisions that are best suited to applying limited resources to potentially unlimited demands.
Retirement Income Needs
Recent studies have found that during retirement the average American needs between 60 and 80 percent of their pre-retirement income in order to maintain their pre-retirement standard of living. Almost everyone needs less money during retirement than before. How much you need during retirement will be a function of your personal spending habits. Consider the following factors in estimating your retirement income needs:
- You may be supporting children now who will be self-sufficient by the time you retire.
- Your work related expenses would be dramatically reduced, if not eliminated, once you retire (commuting costs, daily meal expenses, licensing fees, etc.).
- For many, their mortgage will be paid off either by the time they retire, or within a matter of a few years after retirement, reducing housing expenses.
- Hopefully you are saving money on a monthly basis for retirement. During retirement you can plan your needed monthly income without factoring in a “retirement saving” amount.
- Many retirees find themselves in a lower income tax bracket. This is due, in part, to having their main sources of income change from fully taxable earned income to tax advantaged income sources.
Sources of Retirement Income
Once you have estimated your target retirement income, you are ready to begin to evaluate what sources of income will be available to you to meet your monthly needs. Generally speaking, your sources of retirement income fall into three categories, which we will discuss below.
Government Sources. The federal government has created something of a “safety net” for retirees called Social Security. Social Security is available to everyone, but the amount you receive will be based on how much you earned during your working years.
Company Sponsored Plans. Many employers offer company sponsored retirement plans. These plans come in many forms but generally can be broken into two categories. Defined Benefit Plans are normally funded entirely by the employer and guarantee a retirement benefit based on a combination of years of employment and employment earnings. A Defined Contribution Plan may be funded by the employer, employee or a combination of the two. The employee owns an account balance (subject to vesting) made up of contributions and earnings. At retirement, the employee decides how they will withdraw the balance they have accumulated.
Personal Savings. The most important, and often most overlooked, source of retirement income is one’s own personal savings. Savings directed to IRA accounts, directly held assets, home equity, etc. will largely determine how financially secure your retirement years will be.
Changing Your Current Course
There are many ways that proper planning can improve your current retirement outlook. The more time you have to prepare, the more change you can effect in your retirement income. A sound financial plan and ongoing professional advice can help you obtain your retirement objectives
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.
How to maximize your Social Security payouts
(MoneyWatch) One of the smartest things you can do to prepare for your retirement is to make your Social Security income as large as possible by delaying benefits for as long as you can (but no later than age 70). Seems simple, right? But according to the Social Security Administration, about half of all Americans start Social Security at age 62, the earliest possible age with the lowest income, and nearly three-quarters of Americans start before their full retirement age (FRA).
Let me show you why it makes sense to postpone starting your Social Security benefits. We’ll take a look at people born in 1950 This year, those folks will turn 62 and become eligible for Social Security benefits. The following table shows estimates of the total lifetime Social Security income for a single person earning $75,000 per year in 2012 for three different starting ages: age 62, your full retirement age and age 70.
The first row shows projections of the initial annual Social Security income for the three different starting ages. I estimated these by using the Quick Calculator on the Social Security website. In this example, if you start Social Security benefits at age 62, your annual income would be $17,700. Your income increases to $23,940 if you wait until age 66, the FRA for people born in 1950. And if you wait until age 70, the oldest age at which you can start benefits, your annual income increases to $32,100.
The second row shows the total income you’d earn from Social Security over your lifetime if you live just to age 70 and then die. In this case, starting Social Security at age 62 is the best strategy, since the total lifetime income — $141,600 — is the highest. If you wait until age 70 to start Social Security income but then die at the same age — well, that’s a bad move, because then you get nothing.
The third row shows the total lifetime income if you live to age 80 and then die. In this case, starting Social Security at your FRA is the best strategy, because it provides the highest total lifetime income: $335,160.
The fourth row shows the total lifetime income if you live until age 90 and then die. In this case, starting Social Security at age 70 is the best strategy, since your lifetime income is highest at $642,000.
Note that these estimates are in current dollars — the totals haven’t been adjusted for the time value of money or to reflect future cost-of-living adjustments. Adding these refinements in the calculations only complicates matters but doesn’t change the main conclusions.
The ideas in this post apply to single people; the considerations get more complicated for a married couple. However, it’s usually the case that the best strategy is to have the highest wage earner — often the husband — delay taking Social Security benefits for as long as possible.
This table shows why it’s good to have an estimate of your life expectancy. My earlier post, How long do you have to live, showed that the average age at death for Americans currently in their 50s and 60s is their mid-80s. This suggests that delaying Social Security benefits until FRA or beyond is the best strategy.
And keep in mind, these are just average life expectancies across the entire population. If you have above average education, above average income and you don’t smoke, chances are good you’ll live beyond the average life expectancy for the population at large. Your life expectancy also depends on your particular family history and the lifestyle choices you make. You can estimate your life expectancy taking these factors into account at the websites www.livingto100.com or www.bluezones.com.
Here are answers to a couple common questions — and misconceptions — about when to take your benefits:
Wait to take Social Security? No way! Take it as early as possible. After all, you never know when you’ll die.
I can’t tell you how many times I’ve heard that mistaken reaction to the ideas in this post. Yes, you don’t know for sure when you’ll die, but it’s more likely you’ll live close to your life expectancy or beyond, and the odds are pretty small that you’ll die in the next few years.
I don’t need the Social Security income, but I’ll start it early anyway and invest the money.
Another bad idea for most people. To win this bet, you’ll need to die early, or take a lot of risk in the stock market.
One of the best ways to determine when to start your Social Security benefits is with online software that analyzes the decisions that will give you the largest lifetime payout. Examples include www.socialsecuritytiming.com and www.socialsecuritysolutions.com.
Boost your Social Security payout by $100,000
Social Security strategies: How to get $90,000 more for your spouse
Start Social Security early and invest? Ask the actuary
It may take a few hours to analyze the information and determine the best age for you to start collecting Social Security, but it can increase your lifetime payout by thousands of dollars. In effect, you’ll be paying yourself hundreds or thousands of dollars per hour for the time you spend doing your homework now. That’s a pretty good return on your investment!