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AARP Article

Is Marriage a Good Financial Move for Older Couples?

It’s not as clear as you might think

Thousands of same-sex couples flocked to say “I do” as soon as their right to marry became the law of the land. Thousands of others, however, considered their options, yawned and stayed home. The case for marriage isn’t as solid as it often sounds, especially for older couples of any sex. Sometimes it pays to live together in unwedded bliss.

Those who tie the knot summon traditional values and romance — flowers, rings and a whale of a party. Financially, marriage provides access to state and federal spousal and survivor benefits, including Social Security. You’ll get Medicare if you didn’t qualify on your own. Spouses have a right to inherit if their mate dies without a will (but surely, nobody reading this column lacks a will!). You can generally make medical decisions for each other even though you neglected to sign an official health care proxy. You get better tax benefits when inheriting an individual retirement account and might even save some money by filing a joint income-tax return.

Sometimes, however, marriage comes at a cost. Widows and widowers of public employees who receive a pension might lose it if they remarry. That’s also true of certain veterans benefits. Before marrying, check your plan’s rules, taking nothing for granted. If you’re collecting survivor benefits on a late spouse’s Social Security account, you’ll lose them if you remarry before you reach 60 (50 if disabled). You can keep them if you remarry at a later age, but you might become eligible for better benefits on your new spouse’s account at age 62 or older. Ask Social Security what your options are and which choice will produce the higher check.

You don’t have to walk down the aisle to get many of the protections of marriage. A “living together” agreement, legally signed and notarized, provides for the division of property if you break up. A will can provide a partner with financial support. You can designate your partner as your health care advocate, if that’s your choice. Marriage might not even improve your financial security if you both have adequate pensions and Social Security earnings. In some cases, filing jointly might drive your tax bill up.

Here’s another reason not to marry: In many states, spouses are responsible for each other’s medical bills — potentially including bills for long-term care. These laws generally trump any prenuptial agreement. So how is your beloved’s health? Does he or she have long-term care insurance? Unless one of you lost a previous spouse after a long illness, these potential expenses probably aren’t on your radar screen.

State Medicaid programs cover most or all of the nursing-home expenses for people of modest incomes and assets. The spouse who is well keeps the house, car and a certain amount of income and other assets, but might have to surrender property of higher value to help pay the bills. A live-in partner would not be liable but would lose the use of the ill partner’s income and assets, including possibly the home. Meet with an elder-care attorney to see what your options are. To find one locally, try the National Academy of Elder Law Attorneys.

In relationships, feelings ultimately rule. Marriage confers social approval and a sense of security. Living together reflects the trust built up over many companionable years. But it is best to know how that choice affects your finances.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Securing Income for Life

A bucket investment strategy may help savings last longer

We all know — or think we know — that the older we get, the more our money should be kept safe. We gradually hold less in stocks and more in bonds.

But is your caution risking your future? Yes, says Michael Kitces, director of research for the Pinnacle Advisory Group in Columbia, Md. On average, we’re living longer and not earning much on quality bonds and bank CDs, he says. If we huddle around investments that cannot grow, the risk rises that we’ll run out of money.

What if we reversed the conventional rule and gradually held more money in stocks, rather than less, after we retired?

When I first heard that idea, I said, “Nuts. High risk.” But as I read the new research, I changed my mind. It’s actually an approach that could make your retirement savings last longer and, potentially, leave more for heirs.

Lower your risk

Think of it as a “three-bucket” strategy, Kitces says.

In one bucket you hold cash to help cover expenses for the current year. That’s grocery money. Keep enough to pay bills not covered by other income, such as Social Security, a pension or part-time work.

In the second bucket, you own short- and intermediate-term bond mutual funds, with dividends reinvested. You gradually add to your bonds during your preretirement and immediate post retirement years. By age 60 or 65, these first two buckets might hold 70 percent of your retirement investments. Every year, you take money from the bond bucket to replenish your cash. If interest rates rise, you’ll be using your dividends to buy higher-rate bonds, which will partly offset your market losses. (Prices of existing bonds fall when interest rates rise.)

The remaining 30 percent of your money goes into the third bucket, invested in mutual funds that own U.S. and international stocks. You don’t expect to touch these stock funds for 10 to 15 years.

As time passes and you sell bond shares to pay your expenses, that bucket shrinks. The percentage of savings that you hold in stocks will gradually rise. You won’t have to sell when the market drops. In fact, your dividends will be buying you more stocks on the cheap. By the time your bond bucket runs low, your bucket of stocks will have grown in value, maybe by a lot. That’s money for your later years.

When withdrawing cash from your bond funds, follow the 4 percent rule for making money last for life. Start with an amount equal to 4 percent a year of all your savings (counting both stocks and bonds) and raise it by the inflation rate in each subsequent year. For example, say you have $100,000 — $70,000 in bonds, $30,000 in stocks. Your first withdrawal would be $4,000, and would rise from there. (If you take more than 4 percent, your savings might run out too soon.)

If your investments are mainly in a 401(k) or individual retirement account, it’s easy to switch between stocks and bonds. If not, you’ll have to consider taxes when you make a change or use new savings to bring the stock or bond bucket to the right size.

What makes this three-bucket strategy low-risk? First, your bonds secure your grocery money for at least 15 years. Second, if the market crashes when you first retire, you have only a modest amount in stocks and can afford to wait for a recovery. (People who sold after the 2008 crash came to regret it.)

Focus on growth

Wyatt Lee, portfolio manager for the mutual fund group T. Rowe Price, agrees that relying on “safe” investments won’t work. “You need a substantial amount of equities to maintain your income for life,” he says. Assuming a 30-year retirement, you’d spend half your money in the first 15 years and half in the second 15 years. The later money should be invested for growth.

Lee takes a more familiar approach — reduce your exposure to stocks as you age. But he starts out high. At age 65, he advises a stock fund allocation of 55 percent. Your 4 percent withdrawals would come from both stocks and bonds. At 75, you’d still have 42 percent in stocks. If a bear market hit just when you retired, you’d take a larger loss than with Kitces’ approach. You’d gain it back but might be more tempted to sell.

Follow Kitces or Lee. Either way, you can’t give up on stocks.

(Originally published by The AARP Monthly Bulletin.)

AARP Article

Make Your Money Last

How much can you safely withdraw from your nest egg each year?

How long can your savings last? That’s a critical question if you’re planning to retire or have already left the full-time workforce. You have Social Security income and perhaps a pension. Maybe you have a part-time job or are collecting rents from a property you own. But sooner or later, you may have to rely on whatever financial nest egg you have accumulated — mutual funds, bank CDs, stocks, bonds and so on. How much can you withdraw each year and still expect your money to last for life?

For financial planners, the gold standard is 4 percent. You can afford to spend 4 percent of your savings in the first year you retire. In each subsequent year, you’d withdraw the same amount that you took in the previous year, plus an increase for inflation. If you stick to that rule and are properly invested, your money should last for at least 30 years and, in most cases, much longer. You should be financially safe.

Why 4 percent?

The 4 percent rule was developed by financial planner Bill Bengen of La Quinta, Calif., more than two decades ago. Looking back, it would have carried retirees successfully through the worst 30-year periods of the 20th century, including those starting in 1929 and 1973 (the year stagflation began). It’s too early to know the 30-year outcome for people who retired in 2000, but Bengen says that the rule is working so far.

The hitch, for many retirees, is in the words “properly invested.” Most withdrawal-rate research is based on the longtime performance of leading U.S. stocks, represented by Standard & Poor’s 500-stock average, and intermediate-term Treasury bonds. It assumes that you keep half your money in each (or in low-cost mutual funds that track those market indexes). If you diversify — 42.5 percent of your money in large stocks, 17.5 percent in small stocks and the rest in bonds — the initial “safe” withdrawal rate rises to 4.5 percent, Bengen says.

Many retirees wouldn’t dream of being that heavily invested in stocks. Some don’t trust stocks at all. You’re limiting your future, however, if you don’t invest at least some of your long-term money for growth. Those who rely entirely on fixed-income investments can safely withdraw no more than 2.5 percent of their savings in the first year plus annual inflation increases, says Wade Pfau, a professor of retirement income at the American College in Bryn Mawr, Pa.

Josh Cohen, head of the institutional defined contribution business at Russell Investments in Seattle, has a different approach. He says you can use the 4 percent withdrawal rate while keeping just 32 percent of your money in stocks with the rest in bonds. After 20 years, you should still have a large enough nest egg to buy an inflation-adjusted annuity that supports you for life.

Prepare to be nimble

But what if a 4 percent withdrawal rate isn’t high enough to pay your bills? If you’re 65 percent invested in stocks, says financial planner Jonathan Guyton of Cornerstone Wealth Advisors in Edina, Minn., you could safely start your withdrawals at 5.5 percent. The key is flexibility. You have to be prepared to cut back if the markets turn bad for several years — say, by refraining from taking inflation increases for a while.

Pfau, by contrast, thinks we might be entering a long period of poor performance for long-term investors, with stocks currently overvalued and interest rates too low. He advises retirees to start withdrawals at 3 percent and raise them only if the markets perform well.

All these calculations, by the way, are pretax. Whatever taxes you owe would be paid out of the withdrawals.

To make these spending rules work, stay the course. That means following the withdrawal plan and taking extra money only if markets go up for several years. If you overspend when you first retire, you should be prepared to cut spending later.

Conversely, if you sell when the market falls and miss the upturn, you’re way behind. You’ll have to begin again with the money you have left. You’re also off the charts if you own individual stocks or funds that don’t keep up with the market average. The simpler your investments, the more reliable your spending plan will be.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Divorce after 50 Will Cost You Money

As gray divorce surges, more 50+ people prepare for a leaner life

Families and friends are often shocked when long marriages — including long, bad marriages — fall apart. You endured each other for 30, even 50, years, so why give up now?

I’d say it’s for all the reasons that younger people divorce. The partners bore each other, harbor grudges, seek a different kind of life or fall in love with someone else. Being surprised at gray divorce strikes me as a form of ageism — as if one or the other of a couple (perhaps both) are somehow too old for disappointment, folly or hope.

Whatever the reason, older couples are definitely doing it. The divorce rate among people 50 and older doubled between 1990 and 2010, at a time when the rate for the general population was pretty flat. As an age group, they accounted for roughly 25 percent of all 2010 divorces, according to a study by Susan Brown and I-Fen Lin of the National Center for Family & Marriage Research at Bowling Green State University in Ohio.

A greater willingness to end unhappy marriages suggests that older couples today have more financial resources to fall back on. People usually have to see a way forward financially, no matter how slim, before splitting up. Women, in particular, are more apt to have paychecks and 401(k)s.

How the property is divided depends on state law and your personal negotiation. The starting place, after long marriages, is half the money for each. You can roll your share of your ex’s individual retirement account into an IRA of your own, tax-free. The same is true of a 401(k) or similar plan. If there’s a traditional pension, you can choose a lump sum or a portion of each monthly lifetime payment when your ex retires. Attorney Maria Cognetti, president of the American Academy of Matrimonial Lawyers with a practice in Camp Hill, Pa., advises dependent spouses to take the monthly payments if they don’t know much about investing. The lump sum might not last as long as they thought.

If the amount of property is modest, dependent spouses, usually wives, will probably get alimony. Cognetti advises women to try to settle their claim in negotiation, even if it’s for a little less money than they want. That provides certainty. You don’t know what a judge will decide in court.

When estimating your budget as a single person, take a deep dive into your Social Security options. If the marriage lasted at least 10 years, you can collect on your ex’s account. Spousal benefits can be claimed as early as age 62, provided that your ex has filed for benefits, too. If not, you can claim if your spouse is eligible for benefits and you’ve been divorced for at least two years, says Robin Brewton of SocialSecuritySolutions.com. Note that filing at 62 locks you into a lower check. You’d do better by waiting until your full retirement age, probably 66. If your ex dies, you can collect survivor’s benefits.

However you slice it, life will likely be financially leaner for you both. That’s divorce’s bottom line — at any age.

(Originally published in The AARP Monthly Bulletin.)