For the third straight year, the economic recovery has stalled in the spring after showing promise early in the year. Job creation is anemic. The stock market seems poised to do nothing--at least nothing good. Interest rates are still so low that lots of so-called "safe" investments are losing money. Whatever you call it, it's bad news for retirees and would-be retirees concerned about living on a fixed income. As economists restart their advisory machines, so are we. Here are the major realities of the new retirement, updated to reflect stronger doses of conservatism and defensive postures.
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Continue employment. Continuing to work is the most recommended strategy of the new retirement. Lots of experts say 70 is the new 65. It keeps a paycheck coming, and if you're lucky, employer-provided health insurance, retirement-account contributions, and other benefits. And for each year you work, you cut a year off the time your retirement nest egg must last. Finally, continuing to work may also provide you the ability to delay claiming your Social Security benefits. Each year you can put off taking Social Security, your benefits will rise by about 8 percent. Benefits do not increase once you've turned 70.
Go back to school. Even if you leave the workforce, it may not be a permanent decision. Many people get bored in retirement and also miss the discretionary spending that a paycheck can provide. Or, you may simply want to embark on a new career. Whatever the reason, your enjoyment and workplace choices can be enhanced by going back to school. Community colleges have been a great bargain but many of them have been hit by budget cutbacks, so shop carefully when considering classes.
Social Security claiming strategy. As noted, each year you wait--from the earliest eligibility at age 62 until you turn 70--your Social Security benefits rise by about 8 percent. For most people, this means the benefits they would receive at age 62 would be only 75 percent of what they're entitled to if they wait until age 66, which is considered "full retirement age" for most baby boomers. And if you wait until age 70, that amount goes up to 132 percent of your age 66 benefits. These are real annual gains, because overall benefits are also adjusted each year to account for inflation. Of course, your health and family situation may argue for an early claiming age. Another key aspect of claiming strategy involves couples. It may be possible for one spouse to begin drawing half of the other spouse's Social Security benefits while still delaying his or her own claiming date (and thus enjoying those 8 percent annual benefit increases). Check out the Social Security Claiming Guide at Boston College's Center for Retirement Research.
Taxes. The economic and political weight of enormous budget deficits makes it all but certain that your taxes will rise. Now that the U.S. Supreme Court has affirmed the constitutionality of the Affordable Care Act, aka Obamacare, it's looking more likely that two new related tax hikes for affluent taxpayers will occur next year: a 3.8 percent investment tax and an 0.9 percentage-point increase in the Medicare payroll tax. Both levies will apply to joint filers with adjusted gross incomes exceeding $250,000 a year ($200,000 for single filers). The 2-percentage point cut in Social Security payroll taxes will expire at the end of this year. And so will the biggest tax item, the Bush-era tax cuts. It is unlikely that all these tax changes will happen in their current form. But as you think about your future after-tax income needs, you should create some alternative budgets that feature 5-percent and even 10-percent cuts in your spending money. What would those trims do to you?
Health insurance. Medicare beneficiaries have been clear winners--to date--from health reform. While there are concerns about long-term cuts in some Medicare spending, the nearer-term impacts have been very positive for seniors. Prescription drug prices have been sharply cut for Medicare users. And a raft of free preventive health services was mandated by the law as well. Take advantage of these features.
Reverse mortgages. Reverse mortgages are worth a look, but it should be a very careful and deliberate one. These loans permit homeowners who are at least 62 to get out from under mortgage payments and remain in their homes. They do so by effectively using the owner's remaining equity in the home to make loan payments to a reverse mortgage lender. Reverse mortgages have been controversial and have carried high fees. Many experts see their growth as a sure thing, driven by rising numbers of seniors and studies showing big shortfalls in retirement nest eggs. And there is a federally insured program that has provided stability and credibility to the product. But these loans have not taken off and several lenders have left the business. The new federal Consumer Financial Protection Bureau recently issued a cautionary report on reverse mortgages.
Revised glide paths. "Glide path" is the name given by retirement investment funds to the changing mix of stocks and bonds held by the funds as investors age. Simply stated, most experts advise retirees to adopt more conservative investment objectives as they get older. The reason--illustrated painfully in the market crash--is that older investors are very vulnerable to market losses and need more defensive investment strategies. However, while many investors have turned conservative, more people are living well into their 90s. To guard against outliving your assets, some investment advisers say, retirees should not make the mistake of becoming too conservative in their holdings.
Spending retirement assets. The most common advice in making retirement assets last a long time is to spend down no more than 4 percent of your assets a year. That way, you can be confident that you won't outlive your money. A lot of financial advisers think this is overly conservative advice. Whatever number makes sense to you, it needs to be accompanied by a strategy to actually manage your retirement assets to produce whatever level of payouts you've selected. This "spend down" or "decumulation" plan receives too little attention from many retirees. But it's crucial to your future financial stability as well as your peace of mind.
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