Reuters Money

Working longer helps build retirement security

The following excerpt is from my book, The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living, and is reprinted by permission of John Wiley & Sons, Inc.

Work in retirement? It might sound like a contradiction in terms, but we’re looking for ways to achieve financial security over a retirement that could last 20 years or more. One of the best ways to do that is to work just a little longer than you might have planned. Working for even a few additional years can pay a surprisingly large bonus.

Most people say they don’t plan to retire until age 65 at the earliest, but this is one of those cases where words and actions don’t match. More than half of Americans file for Social Security at age 62-the youngest age of eligibility. Even more striking, just 10 percent of men and women waited until age 66 to file for their benefits.

Working until their Normal Retirement Age (NRA) could have boosted income in retirement by a third, experts say. The reasons are simple:

– Working until your NRA means you won’t incur the early-filing benefit reductions imposed by Social Security.

Social Security COLA complainers should settle down

Let the whining begin.

Seniors learned this morning that they won’t receive a Social Security cost-of-living adjustment (COLA) in 2011.

Seniors vote, and with the mid-term elections approaching fast, many will be furious with Washington, President Obama and other villains real and imagined. The whining was in high gear even before the official COLA news came this morning, with media cranking out stories bemoaning the second straight year without a benefit increase as an injustice to seniors and terrible news for the economy.

Sorry, but it just ain’t so. Social Security is a critical program that keeps millions of seniors out of poverty every year; its benefits should be protected from deficit cutters and beefed up in the years ahead. But there’s nothing inequitable about Social Security payments staying flat next year. That’s because seniors are still enjoying a huge 2009 Social Security raise that was based on an economic fluke.

Social Security has had an automatic annual COLA feature since 1975, which is determined by the third quarter Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). In the third quarter of 2008 — just before the economy crashed — the CPI-W spiked temporarily, the result of a big increase in energy prices.

The result was a whopping 5.8 percent boost in Social Security benefits for 2009 — a raise that was especially generous considering the near-absence of inflation in the post-crash economy. Seniors on Social Security or disability benefits also received a one-time payment of $250 under the 2009 stimulus.

Social Security payments can’t fall under federal law, so benefits were held level in 2010, and will continue that way until the CPI numbers exceed the 2008 CPI-W index level. Today’s final third quarter CPI report determines that payments will stay steady again in 2011.

Young or old: Who’s suffering more in this economy?

The numbers are dismal: the U.S. Census Bureau reports that the poverty rate rose sharply last year to 14.3 percent, the highest since 1994. Forty-four million Americans were below the official poverty line, and one out of every five children were considered poor.

If there’s a silver lining in the annual poverty report, it seems to be this: Seniors were relatively unscathed by the harsh recession that started in the fall of 2008. The poverty rate for Americans over 65 fell from 9.7 percent to 8.9 percent. And, while income was flat or down for every other age group, seniors’ income rose a whopping 5.8 percent.

At first glance, the numbers seem to point to a generational divide, with older Americans in an economic lifeboat at a time when the ship is going down.

Unfortunately, the lifeboat is leaky, too. Social Security has played a critical role lifting millions of seniors out of poverty, but the big gains last year are due to a series of one-time events that won’t be repeated. In fact, the long-term economic prospects for older Americans are no better than those facing younger age groups.

Social Security is one of the few retirement benefits that features built-in inflation protection. In 1975, Congress added an automatic annual cost-of-living adjustment (COLA) to Social Security, which is pegged to the third quarter Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). And in the third quarter of 2008 — just before the economy crashed — the CPI-W spiked temporarily, the result of a big increase in energy prices.

The result was a whopping 5.8 percent boost in Social Security benefits for 2009 — a raise that was especially generous considering the near-absence of inflation in the post-crash economy. Social Security payments can’t fall under federal law, so payments have stayed at that level throughout 2010.

Seniors on Social Security or disability benefits also received a one-time payment of $250 under the 2009 stimulus — a payment that was especially meaning for older couples near the poverty threshold.

Social Security may tighten its do-over loophole on early filing

The Social Security Administration is pushing to tighten a loophole that allows beneficiaries to increase their payments by thousands of dollars annually through a “resetting” of the date when benefits begin.

Under Social Security’s rules, workers can file for benefits as early as age 62, but they receive higher monthly payments when they wait until their full retirement age – currently 66. About half of Americans file at 62, but in most cases it’s a costly mistake.

Lifetime benefits for earlier filers are reduced based on an actuarial projection of longevity. Starting at 62 means you retired four years early, which reduces annual benefits permanently by a total of 25 percent. If you live long, that means forgoing thousands of dollars in lifetime benefits — in some cases, hundreds of thousands.

That is, unless you take back your decision. Under a little known – and little-used — feature of Social Security rules, it’s possible to reverse an early filing decision and re-file at a later age. The catch is that you must repay all the gross benefits you’ve received (before deductions for Medicare Part B premiums), which can easily total $100,000 or more for the average recipient.

Here’s how it works. You start by filing Social Security Form 521, which is a request to withdraw your application for benefits. The Social Security Administration (SSA) suspends your benefits, and sends a letter indicating how much you must repay—a process that can take up to a few months. After you’ve made the repayment, you can reapply for the benefits available at your current age.

But this option could be sharply curtailed soon. SSA is proposing to limit benefit withdrawals to 12 months after an application is first submitted. The new rules also would allow only one withdrawal per lifetime.

An SSA spokesman said the changes have been proposed to the Office of Management and Budget, and stressed that “it’s only a proposal at this time and there have been no changes to current policy regarding application withdrawal and voluntary suspension.”

How to conquer the retirement worry gap

Could you read another report that shows how little Americans have saved for retirement in these troubled times? I know it’s difficult, so I came up with a simple formula for figuring out how much you need.

Pencil in how much money it would take for you to live comfortably for 25 years. Include items that are not covered by insurance – deductibles, travel, home maintenance, taxes. Then project how much Social Security and retirement income you will have by the age in which you cast that not-so-longing last glance at your office door.

The difference between your comfort zone amount and your retirement kitty is the worry gap. That’s the amount you need to make up by working longer, saving aggressively or downsizing your lifestyle.

For millions, the worry gap is a pretty deep crevasse. It’s hard to fill it up with money when your 401(k) is underfunded and the bills keep arriving. In a job-losing, no-raise economy, it looks like a bottomless pit.

A recent survey – one that I always take note of – showed that some two-thirds of those polled in the two lowest pre-retirement income levels will be running short only 10 years into retirement. These folks, as monitored by the annual Employee Benefit Research Institute’s Retirement Readiness study are saving the least for retirement.

Yet even those in the highest-income groups are still going to be facing problems paying for basic expenses and uninsured medical bills. Remember that Medicare has co-pays for hospital and medical services and is in severe fiscal trouble.

The EBRI study also broke down who was most at risk. “Early” boomers (those aged 56-62) had a 47 percent chance of running out of retirement funds. Their younger peers (ages 46-55) and “Generation Xers” (ages 36-45) are about 44 percent at risk.

Selling the big lie on Social Security

Reuters.com contributor Mark Miller is a journalist and author who writes about trends in retirement and aging. The opinions expressed here are his own.

Repeat something often enough, and people start believing it. So it goes with Social Security, the target of deficit hawks who say the program is careening toward insolvency. The benefits promised to millions of Americans are now unaffordable, they say. Therefore, we must scale back the program.

Nothing could be further from the truth, but the percentage of Americans who think Social Security is in a crash-and-burn mode is sharply rising.

A recent USA Today/Gallup Poll found that 56 percent of current retirees expect their benefits to be cut — a dramatic rise compared with 32 percent who felt the same way in 2005. A record-high percentage of working Americans — 60 percent — told Gallup that Social Security won’t be able to pay benefits when they stop working. Skepticism was highest among workers between the ages of 18 and 34. Overall, 77 percent said Social Security is either in a state of crisis or has “major problems.”

The poll reflects the nation’s diminished expectations about Social Security, despite these facts:

• Social Security benefits are not gobbling up the U.S. economy. Benefits are equal to 4.9 percent of gross domestic product (GDP) this year, and will rise to just 6.2 percent in 2035, when all baby boomers will be 65 or older, according to last year’s Social Security trustees’ report. After 2035, Social Security expenditures are projected to stay around that percent of GDP through 2085, according to Virginia Reno, vice president for income security at the National Academy of Social Insurance.

• Social Security had a $2.5 trillion surplus in 2009, a number that will hit $3.8 trillion in 2020, according to the Economic Policy Institute. The surplus has been accumulating since implementation of the last Social Security reform measures in 1983.