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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

Risky Pension Bets

You might be making one if you take a lump sum early

Would you rather have a monthly pension guaranteed for life or a lump sum of money now? Before I address that question, let me say that you’re lucky if you have the choice. Private pensions are on the way out, even among old-line companies. In older age, there’s nothing more comfortable than a check in the mail every month.

Normally, you’re not offered the choice of a pension or lump sum until you retire. Rising numbers of companies, however, are extending this offer to former employees who haven’t taken their vested pensions yet. They want to shift the burden of retirement investing over to you.

In fact, they’d like to get rid of you in the next 12 months.

That’s because the size of your pension or lump sum depends, in part, on how long the people in your age group are expected to live. Currently, pension plans are using outdated life expectancy tables. Starting in 2017, however, they’ll have to use newer tables, which show that people are living longer. That will require them to pay you more. Hence the rush.

If you take a lump sum in place of a lifetime monthly pension, you’re making at least one of three risky bets.

Bet 1: You are betting that you can provide yourself (and your spouse) with a guaranteed monthly income for life that’s at least as high as you’d get from your pension. To check this, go to a website such as immediateannuities.com, which shows you what insurance company annuities pay. Enter the lump sum you’re being offered, your age and when you want the payments to start, then choose the type of annuity you want. Compare that payment with your vested monthly pension amount. Odds are, the pension will pay you substantially more, especially if you’re a woman, says Tony Webb, senior economist at the Center for Retirement Research at Boston College.

Bet 2: That your life span will be shorter than average. The lump sum is intended to last your expected lifetime, not your actual lifetime. If you live longer, you’ll need extra money in reserve.

Bet 3: That you can invest the lump sum in stocks and bonds and earn even more than the pension will pay. To check this, look at the “interest rate” in the fine print of your lump sum offer. (If it’s not there, ask the company for it.) Your investments have to grow by at least that percentage annually, after fees, to equal a pension that covers an average lifetime and much more, if you live longer than that.

Lump sums make sense if you’re terminally ill, if you have so much in other savings that you’ll never have to worry about running out of money or if the amount is small. To avoid taxes, roll the money into an individual retirement account.

But to assure yourself of an income for life, without taking stock market risk, pensions are hard to beat.

If the lump sum offer confuses you or leaves you anxious, don’t take it, says Ari Jacobs, senior retirement solutions leader at the benefits consultant Aon Hewitt. “You’ll be in the same spot you were before.”

For more information, go to pensionrights.org. In the search box, type in “Should you take your pension as a lump sum?”

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Personal Financial Planning 101

How to take those first steps in dealing with your money issues

How do you learn about personal finance? This question came from a reader tussling with money issues that were new to her. You can pay the bills and manage a checking account for years without ever having to confront planning and investment issues.

From a distance, those issues look mysterious, even impenetrable. Anyone with math anxiety shies away. But personal finance is not — not! — about math. If it were, I’d be in a different line of work. I’m terrible even at arithmetic (embarrassing but true).

Successful personal planning depends on old-fashioned common sense. That means listing your priorities in life and using super-simple financial strategies to get you there. You don’t even have to think about investing your savings until you’ve figured out the basics. And forget about the complex stuff, like variable annuities. You never, ever have to consider an investment that’s complex. Believe me, it will cost too much and won’t accomplish what the salesperson says. I have relied almost entirely on bank accounts and the low-cost mutual funds called index funds — and I’ve done just fine, thank you very much.

To get started on your financial plan, get your records together. Create separate files for bank statements; insurance policies; the latest reports from your mutual fund company or brokerage firm; statements from your pension, annuity or retirement plan; records of any other source of income you receive; and a list of your debts.

People who have been single for a long time usually have a handle on their money. The problems arise when you’re married and your spouse has always managed the money. Sit down with him (sadly, it’s almost always a him) and go through the files one by one. He can tell you what he’s been up to. If you have consumer debt, what’s the plan for paying it off? How has he been investing the retirement savings, and why? If your spouse isn’t organized himself, now is the time to find out. You especially need to know how much income you’ll have from Social Security and savings if he dies first, and what kind of lifestyle it will support. If he has life insurance, check the annual statement to learn how long the policy will last (not all insurance lasts for life).

If you’re widowed, you can leave his arrangements in place while you figure out what you want to do. While you’re learning, put any life insurance proceeds in the bank. For higher interest rates, check online banks such as Ally and Synchrony, both FDIC insured.

While you’re at it, find out where your money goes. If you don’t have a working budget already, go over your bank statements and bills to see how much money is coming in and going out. This will take time, but without this information it’s not possible to plan. If too much money is going out, well, you know what to do.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Plan Ahead for Continuing Care

Don’t wait to have the talk about living arrangements in your later years

Where will I live when I start to need help with the daily business of living? I don’t want to wait for my children to open “the conversation,” in carefully casual tones. (“Ahem, Mom, we were wondering …”) I want to start that conversation myself. Their input will influence me, but I want the decision to be mine.

As do we all. But we can blunder into decisions simply by doing nothing. Most of us want to “age in place” with occasional side trips to other nice places. That works fine as long as we can take care of ourselves. When we can’t, however, we’ll start depending on someone else. That’s the decision I’m thinking about. Who will be there to help, and what can I do, in advance, to ease the transition? I don’t want to be stubborn about aging in place if it’s going to create caregiving problems for my children (not to mention medical risks for me).

If you don’t have children, or have children you can’t depend on, the question becomes even more important. Kindly neighbors running errands isn’t a permanent solution.

People hoping to stay in their homes should look at the floor plan as if they were already using a walker. You might have to add a bedroom downstairs with a bathroom whose door can accommodate a wheelchair. A pretty front porch will become a trap if there’s nowhere to build a ramp to the sidewalk. If you don’t want to renovate, perhaps you should simplify — sell the house now and buy a condominium in the same community, to stay close to your friends and social activities.

Whether in a house or a condo, you might eventually need caregiving services, if a spouse or child isn’t constantly available. You’ll also need someone you trust to supervise home-care aides — to be sure they’re always doing right by you. Who is that likely to be? This shouldn’t be a snap decision made under duress. The whole family should plan.

Some older people expect to move in with an adult child. If you have a house to sell, consider using the proceeds to put an addition on the child’s home, to provide each of you with some privacy.

Setting an example

My own parents set an example for me. In their 70s and in reasonably good health, they decided to sell their house and move to a lovely apartment in a continuing care retirement community (CCRC). These communities may provide housekeeping, laundry, meals in a common dining room, fitness centers, new friendships, entertainment and activities. They’re also safe places to live. If you start to fail physically, there’s help with bathing, dressing, medications and so on. A skilled-nursing unit cares for the bedridden or those who develop dementia.

CCRCs relieve adult children of the minutiae of parent care, which is a special gift to kids who live far away. They’re also a serious financial commitment. You usually pay an entry fee — the median currently stands at $211,625, according to the National Investment Center for the Seniors Housing & Care Industry in Annapolis, Md. (Half the CCRCs charge more and half charge less.) Median monthly charges run $2,825.

Costs vary

The cost depends on the particular property and type of contract you choose. Some contracts cover all your health and living expenses. Others provide residential services but charge extra for health care. For checklists on how to evaluate CCRCs, go to the AARP Caregiving Resource Center and CARF.org, the website of CARF International, which accredits these communities. On the CARF site, type “financial performance” into the search box to read the organization’s “Consumer Guide to Understanding Financial Performance & Reporting in CCRCs.” There have been some bankruptcies among CCRCs, so get audited reports for your lawyer or accountant to read.

For people who stay in their homes until the last possible minute, the best option might become a residence for assisted living. There, you live as independently as possible but can get help with basic physical needs such as dressing and bathing. Like CCRCs, they usually provide activities and a social life. There might be a nursing-home wing attached. You can find a directory of local facilities at Assisted Living Federation of America.

The key is to plan ahead. What can you afford? What’s a reasonable way to live? Today I’m OK, but tomorrow? I want to be prepared.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

When to Pay Off Your Mortgage

A low-interest home loan may be worth keeping — or not

My husband and I paid off our mortgage years ago. We planned to burn it while toasting our achievement with champagne. But we couldn’t get our bank to produce a burnable piece of paper. It filed a document with the county, releasing its claim on our home, and that was that.

Burn the mortgage? What kind of 1950s world had we been living in?

Today, some financial planners say that homeowners shouldn’t prepay, even if they can. Interest rates are so low, they say, you can get richer by keeping the loan and investing spare money somewhere else. Fixed 30-year mortgage rates average 4.2 percent, at this writing, and the interest is tax-deductible. Five-year adjustable-rate mortgages run around 3.1 percent. Long-term investors in stock-owning mutual funds hope to earn far greater returns.

Mortgage debt has become much more of a worry than it used to be for people in middle and older age. More than half of the households headed by someone age 55 to 64 carried debt secured by their homes in 2010, according to the Federal Reserve’s latest Survey of Consumer Finances. That’s up 45 percent over the past two decades. Among those 65 to 74, almost 41 percent carried home loans — up 87 percent. Monthly payments get harder to make after your paycheck stops.

So what’s the best decision? Use any spare money to reduce your mortgage debt? Or use it to bulk up your savings, in hopes of retiring with more spendable wealth? The best choice depends on your circumstances. Here are some guidelines to help you decide:

If you’re carrying credit card debt, pay that off first. It saves you much more money than prepaying your mortgage, and interest on consumer debt isn’t tax-deductible.

If you’re working, add your extra dollars to tax-favored retirement accounts such as IRAs or 401(k)s. Traditional accounts give you a current tax deduction, with earnings tax-deferred. Roth accounts let you accumulate your gains tax-free. And you can invest that money for long-term growth. Consider mortgage prepayments only after you’ve reached the maximum retirement contribution.

Don’t prepay your mortgage with a lump sum of money taken out of an individual retirement account or 401(k). You’ll owe income taxes on it, if you hold a traditional account. Withdrawing a large amount not only depletes your savings but might even bounce you into a higher tax bracket. You’d also lose the opportunity for those precious retirement savings to grow tax-deferred.

Don’t leave yourself house-rich but cash-poor. At retirement, you want to be certain that you’ll have enough income to cover your monthly bills. It’s nice to be free of a mortgage when your paycheck stops, but not if you’re so squeezed that you worry about having enough money for food and fuel.

If you sell your house for a substantial profit and downsize, consider buying the new place for cash. Provided, of course, that you have enough cash left over to live on comfortably. If needed, you can usually tap this home equity at a later date by getting a reverse mortgage. Reverse mortgages provide current income and don’t have to be repaid until the last surviving homeowner dies or the house is sold.

Once you’ve paid off any consumer debt and funded your retirement account, it can make financial sense to invest extra savings in the market. But only if you’re going to put a substantial amount of that money into stock-owning mutual funds. Historically, stock funds with dividends reinvested have done much better than the 4.5 percent you might be paying on your mortgage loans. You’ll probably come out ahead.

It’s another story, however, if you’re keeping those savings in certificates of deposit, or in high-quality taxable bonds or bond mutual funds. At today’s interest rates, prepaying the mortgage looks like a better deal.

Prepayments on a 4.5 percent loan give you a 4.5 percent return, guaranteed. (The return on any debt repayment always equals the interest rate.) After-tax yields on quality bonds and CDs are lower than 4.5 percent. Bond fund yields are lower, too. If interest rates rise, you can stop your mortgage prepayments and switch back to bonds.

Finally, here’s the one argument in favor of mortgage prepayments that might trump everything else: gaining peace of mind. There’s nothing like owning your own home, free and clear.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

What a Financial Adviser’s Credentials Mean

Not all designations are the same — or a sign of quality

The invitation comes by mail or phone, or maybe via a poster in the community center. You’re invited to a free “financial survival” seminar, run by someone who claims to specialize in retirement issues. Scrumptious lunch will be served. But what kind of expertise do these advisers actually have?

Most likely, they boast an alphabet soup of credentials — something like CEPC (for certified elder planning consultant) or perhaps CSP or ASP (chartered or accredited senior planner). Unfortunately, the vast majority of these designations are primarily marketing tools with little or no training behind them. The adviser might have purchased the title at the price of a weekend workshop. The designation might even be self-awarded. A study last year by the Consumer Financial Protection Bureau found more than 50 senior specialist titles on the market — a few requiring a year or two of hard work, the rest not much more than pieces of paper. “Alphabet soup does not necessarily make a good senior planner,” says Deena Katz, cofounder of the Florida-based wealth management firm Evensky & Katz and associate professor of financial planning at Texas Tech University.

Advisers go for these titles because they project an image of knowledge and impartiality. Often, however, they mark someone peddling a high-commission product who may be misleading you about the costs and risks. Variable and fixed-indexed annuities are the “senior” investments most likely to be mis-sold, according to a 2012 survey of financial planners.

When looking for retirement advice, you don’t need a “senior specialist” at all. You can get the answers you need from a certified financial planner (CFP) who trains in all aspects of financial counsel. Ideally, you want a fee-only CFP, who sells no products and charges only for advice. Another good set of initials is RIA — registered investment adviser.

A few of the senior designations do have rigorous academic work behind them, says Wade Pfau, a professor of retirement income at the American College in Bryn Mawr, Pa., which trains financial professionals. He thinks you can feel comfortable if your adviser’s business card says that he or she is a certified retirement counselor (CRC), retirement income certified professional (RICP) or retirement management analyst (RMA). You’re also good with a chartered advisor for senior living (CASL), whose focus includes broader issues such as health care and estate planning. The College for Financial Planning, which originated the CFP, offers the mark chartered retirement planning counselor (CRPC).

Even these titles, however, are frosting on the cake. You should be fine with a fee-only CFP. Any additional designations just deepen the knowledge that he or she has already acquired.

More than half the states have a law on the books restricting the use of self-serving or misleading senior designations. But the CFPB study found them largely ineffective. Consumers don’t understand the various designations, many of which sound alike. There’s no central information spot, no rating system for designations and little attention paid to the investment claims dished out with lunch.

You can find bare-bones information on many of these credentials, including the mere “paper” ones, on the website of the Financial Industry Regulatory Authority; type “professional designations” into the search box. FINRA doesn’t evaluate their quality but gives you some minimal information.

Here are three things to check:

  • Is the program accredited by a national or regional nonprofit agency? This isn’t a guarantee of expertise but helps you make the first cut. Many “accredited” designations get their rating only from the organization that promotes them.
  • Is genuine academic work required, with many hours of classwork? A designation that you can “earn” in a weekend implies a level of knowledge that the adviser simply doesn’t have.
  • Do the advisers have to pass a real test to get the title? That means an in-person, proctored, closed-book exam of considerable length. It doesn’t count if the adviser takes the test online with reference materials at hand. Many designations require no testing at all.

You probably don’t know it, but salespeople have a contemptuous name for people who attend their free lunches and fail to buy their products. They call you a “plate licker.” I say, lick the plate and run. On the way out, you can award the “adviser” a designation of your own: BS.

(Originally appeared 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

You’re Moving: Should You Rent or Buy?

Here’s how to figure out which option makes more sense

It’s zero hour. You’ve decided to sell your house and move to something smaller or to another town. As a homeowner, you naturally think of buying again — a house or maybe a condo. But should you? Maybe you should rent instead.

Ownership is solidly entrenched among retirees. They weren’t even shaken by the real estate collapse. From the peak of the housing bubble in 2006 to the present, the rate of homeownership for people 65 and up has held steady at about 80 percent, the Census Bureau reports. It runs to over 90 percent among married couples in which one person is 65 or older.

For those 55 to 64, however, it’s another story. The portion who own the place where they live has dropped to 76 percent, compared with 81 percent in 2006. Some in this age group switched to renting because they couldn’t manage a mortgage anymore. Others, however, rent by choice.

It’s all about income

When might it make more sense to rent instead of buy? And how do you decide?

I start with the view that, later in life, your home, as a real estate investment, grows less important. You’re no longer hoping to sell at a profit in order to trade up to a bigger place. It’s nice for your kids to inherit an appreciated property. But for you and me, it’s more important to nail down enough income to keep us comfortable for life.

That leads to the question of how to dispose of the proceeds when you sell a house. You can use part or all of it to buy another house or condo, with or without a mortgage. That pot of money is now tied up. You could tap it at some point in the future, by taking a home equity loan or reverse mortgage, but that probably isn’t your plan.

Alternatively, you can put the proceeds into a mix of bank accounts and mutual funds and tap those savings and investments for rent. This choice provides ready access to your money, without borrowing.

Here’s where the sharpest of pencils comes in. Estimate your retirement budget with and without the home purchase. Where will the money come from to pay your housing expenses? Rents will go up (about 3 percent, currently) but, for homeowners, so will insurance, taxes and upkeep costs. If you can pay cash for a house or condo and still have plenty of money to live on, you’re a good candidate for buying. But if homeowning strains your lifestyle — even if you conserve cash by taking a new mortgage — you’re a candidate for renting.

In a very general sense, renting is cheaper than buying on the two coasts, where housing is especially expensive, and buying is cheaper than renting in the middle of the country, says Nicolas Retsinas, real estate lecturer at Harvard Business School (although some markets in the country’s middle are expensive, too).

Renting’s rewards

Becoming a renter has other attractions, even if you can afford to own. It’s a way of checking out a new area if you’re thinking of moving far away. It’s a safety net, if you move to be closer to your kids — in case your kids decide to move. It also makes it easy for you to travel because no one has to take care of the house while you’re away. It might be a temporary move — say, to an apartment in a culturally rich city — before making a final decision on the type of lifestyle you want. There’s a landlord to handle chores and no sudden expenses, such as a new furnace or roof.

For a longtime homeowner, however, the negatives are often strong. You can’t modify the space to suit your style of living. The landlord might decide to sell, forcing you to move out. Pets might not be allowed. Emotionally, you might not feel as comfortable as you did in your own place.

You might also resist the change because rent is supposedly “money down a rat hole.” It’s not, if it frees up cash to keep you living well. Besides, insurance, upkeep and most of your real estate taxes go down the rat hole, too. Why own a house and build equity for your heirs if housing expenses crimp your income and limit what you can do during your freedom years? I’m not renting now, but I can imagine doing so if I ever wanted to stretch my savings or travel more. Stay tuned.

(Originally published in 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

How to Financially Protect Your Spouse

When faced with decisions about pension benefits, shortsighted choices now can cause harm in the future

I had lunch recently with a friend whose husband, a teacher, retired five years ago. “We made a big mistake with his company pension,” she told me. “We took the wrong one.”

Pensions come in two versions — a larger check that covers only the lifetime of the person who earned it, and a smaller check that also covers the lifetime of his or her spouse. They chose the larger check to give themselves more money to spend. Now, they both wish they’d taken the version that covered her, too. The prospect of losing his pension income if he dies first has left her a little scared.

Unfortunately, that’s a common story — and not only for pension decisions. Caring partners each want the other to be financially protected, if left alone. But sometimes they make shortsighted choices or accidentally cut a spouse out of money that he or she needs by failing to submit the right paperwork. Here are four things couples should think about that can save a spouse from financial harm:

Leave a larger income

When will you start taking Social Security? A relative of mine, who retired (with pension) at 60 and now has a different and well-paying job, intended to take his Social Security at 62. When I heard that, I yelped. His wife has savings and a pension of her own, and they don’t need extra money now. If he waits until 66 to collect, his Social Security check will be 33 percent larger (plus inflation adjustments) than if he starts at 62. It will be a fat 76 percent higher if he waits until 70.

Money Matters

It’s common to say, “I’ll take Social Security at 62 so that, if I die early, I won’t have lost income that I should have had.” That could be a two-way mistake. First, if you’re healthy, you’ll probably live longer than you expect. By waiting to file for Social Security, you’re storing up extra income for your retirement’s later years. Second, married people shouldn’t think only of their incomes today. If the husband, say, was the main breadwinner, the longer he waits before collecting, the larger the income he’ll leave to his surviving spouse, if he dies first.

Check your individual retirement account beneficiary

Whoever you name on your IRA’s beneficiary form will get the money, whether it’s fair or not. Say that you divorced and remarried, named your new spouse as your heir in your will, but forgot to take your ex’s name off the IRA form. Your ex will get the money, even if the divorce decree said otherwise. You should clean up all your beneficiary forms when you divorce or marry, to avoid accidentally disinheriting a spouse.

Have the power of “I do”

Who will inherit the savings in your 401(k) or similar plans? Here, spouses have super-protection. When you marry, your spouse is entitled to every penny in your 401(k), from the moment you both say “I do.” That’s federal law. The beneficiary form is irrelevant, and so is your will. If you want a different outcome — for example, to leave part or all of your 401(k) to children of a previous marriage — you can ask your spouse to waive his or her rights. The waiver has to be in writing, notarized or witnessed by a plan representative, and filed with your plan.

This can’t be done in advance of the wedding — only a spouse can waive these rights. If you have a prenuptial agreement, it should include a promise to sign. And get thee to a notary right after the honeymoon or even before. In my personal case, there was a notary at the ceremony. My lovely husband signed even before the music struck up.

Guarantee lifetime benefits from a variable annuity

These annuities combine an investment with a guaranteed lifetime income. But the income normally lasts only for the buyer’s lifetime and ends if he or she dies. Any spousal benefits might cover only the annuity’s current investment value or a death payout, says annuity expert Kevin Loffredi, a vice president of investment research firm Morningstar. If you want the annuity to cover both lives, you generally have to pay more or accept a lower income guarantee. Couples often don’t realize that their annuity cuts out the survivor, says Mark Cortazzo of annuityreview.com, which evaluates variable annuities. Some salespeople also have no idea. If you venture into one of these complex contracts, think “spouse first.”

(Originally published in The AARP Monthly Bulletin.)