In the days when defined benefit pensions roamed the land, retirement income was automatic: you worked for a company, the company contributed to the pension fund. Checks started arriving when you retired, and didn't stop until you did. End of story, for the most part.
Plenty of retirees still have traditional pensions, but they are on the decline - and that leaves a greater share of today's workers - and tomorrow's retirees to manage retirement planning on their own. That's the underlying thesis of Emily Brandon's new book, "Pensionless: The 10-Step Solution for a Stress-Free Retirement" (Adams Media).
Brandon, senior editor for retirement at U.S. News, writes about the cornerstone elements of putting together a plan - how to get the most from Social Security and Medicare and employer-sponsored benefits. She also - appropriately - focuses on the expense side of the equation, offering strategies for managing lifestyle costs. The book has the benefit of being smart and to the point - that is, very digestible. I also very much like her holistic approach to the topic - we're on the same page on that score.
I caught up with Emily recently and asked her five questions on some of the key concepts in "Pensionless."
Q: Strategies available to couples to maximize Social Security have changed in light of the legislation passed last year curtailing file-and-suspend and restricted claims. What's your message to people who no longer qualify to use those strategies about how they can maximize benefits?
A: While retirees recently lost two Social Security claiming strategies, there are still a variety of ways you can increase your Social Security benefit. If you sign up for Social Security after your full retirement age, which is 66 for most baby boomers, you will accrue delayed retirement credits that will increase your Social Security payments by 8 percent for each year of delay. Members of married couples continue to be eligible for spousal and survivor's payments, and can coordinate their payments to maximize their lifetime benefit as a couple. Also, retirees between ages 66 and 70 continue to be eligible to suspend their payments, earn delayed retirement credits, and qualify for higher Social Security payments later on in retirement. Your monthly payments will increase by 32 percent if you suspend them for four years between ages 66 and 70.
Q: You have a chapter called "Make the Most of Medicare." What are the choices people can make to optimize their coverage?
A: It's incredibly important to sign up for Medicare during your initial enrollment period. If you sign up later, you could be charged higher premiums for the rest of your life. Remember to take advantage of the services Medicare offers without any out-of-pocket costs, including a wellness visit once every twelve months, cardiovascular disease screenings, mammograms, and flu shots.
Medicare Part D prescription drug coverage offers a variety of plan choices, and the covered medications and cost-sharing requirements can change each year. Even if you are happy with your current coverage, it's important to examine how your medical needs and the plan's covered medications will change, and to switch plans if another Part D option better meets your needs. Medicare beneficiaries can switch prescription drug plans once per year between October 15 and December 7.
Q: In your chapter on boosting 401(k) balances, you talk about the need to keep fees to a minimum - but also mention the option of using higher-cost actively-managed mutual funds (compared with low-cost passive funds). Since active funds generally underperform passive funds, are there ever situations where you think workers should choose active funds - if so why?
A: You can't control your investment returns, but you do have a measure of control over how much you pay to invest. Choosing low-cost investments is one of the best ways to help your retirement savings grow faster. Each 401(k) plan provides a limited number of investment options, and might include both actively and passively managed funds. Passively managed index funds typically have much lower fees and thus tend to produce higher long-term returns for investors than actively managed mutual funds.
Your 401(k) plan is required to send you a 401(k) fee disclosure statement, which lists every fund in your 401(k) plan and how much it costs to invest in it. You can use this statement to identify how much you are paying, what might trigger additional fees, and to shop around for lower cost funds that might meet your investment needs.
Q: Let's talk about Roth IRAs, since your book has a chapter on how to use them. For the typical worker already saving in a 401(k) plan, what factors should drive a decision to put an available dollar into a Roth IRA, rather than the 401(k)?
A: Your first priority should be to get any 401(k) match that's offered. After that, compare your current tax rate to an estimate of your tax rate in retirement. If your tax rate is higher now than you expect it to be in retirement, it's often better to take the tax break while you are working by saving in a traditional retirement account.
If you think you will pay a higher tax rate in retirement, paying the tax now using a Roth account will lock in today's low tax rate. You can also hedge your bets about future tax rates by saving for retirement in both types of accounts. Having some money in traditional and Roth retirement accounts will give you options to control your tax bill each year in retirement.
Q: I was glad to see a chapter devoted to reevaluating expenses in retirement - this is an aspect of the retirement story that often gets ignored. Do you see much evidence that this is catching on as a more important aspect of planning for retirement?
A: You can retire sooner and with less money in the bank if you are willing to cut your expenses. One of the fastest ways to significantly improve your retirement finances is to pay off your mortgage, thus eliminating what is likely one of your biggest monthly bills. Another way your home can help finance retirement is if you move to a house that costs significantly less than your current home and add the savings to your nest egg.
Retirees can use some of their newfound free time to save money by negotiating for better deals on the products and services they use or taking on household chores they had to outsource while working. There are also many financial benefits of aging you might qualify for ranging from senior discounts to tax breaks for people who are above a certain age.
Mark Miller is a journalist and author who focuses on retirement and aging. He is the author of "The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living." Mark also edits and publishes RetirementRevised.com.
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