If you’re nearing retirement, chances are you’re not financially prepared.
Two-thirds or more of Americans close to retirement age simply are not ready, according to Mark Miller, a retirement expert and author of the new book Retirement Reboot: Commonsense Financial Strategies for Getting Back on Track.
“Retirement security boils down to your ability to maintain your living standard in retirement,” he said. “And it's pretty clear that a very substantial portion of households that are getting close to retirement, let's say 10 years out, are doing so without significant savings.”
In his new book, Miller provides ways for everyday folks to get back on track even if they're very behind, and he lays out Social Security policy changes that could help even more people. He offered more insights and advice in a conversation with Yahoo Finance. Here are the highlights of that conversation:
Why this book now?
There's a lot of debate in the U.S. about whether we're facing a retirement crisis. Because people are unprepared, that means they're going to be living primarily on Social Security. Social Security typically replaces anywhere from 40% to 50% of pre-retirement income.
Most retirement planners generally say you need to replace 70%, maybe more. As a starting point, it's not a bad way of looking at it. So clearly there's a gap for many households in terms of maintaining the standard of living.
Traditional wisdom for retirement planning is to get an early start, and there's no disputing that starting early is very beneficial because you benefit from all that compounding growth over the years of saving. Nonetheless, there are things that can be done relatively late in the game.
You pride yourself on being a contrarian, how so?
I am contrarian on a couple of points. Let's look at Medicare. The enrollment trends over the past decade have been strongly in the direction of the commercial, managed care alternative to traditional Medicare, which is called Medicare Advantage. But I’m a fan of the traditional fee-for-service program for a few reasons. In the book, I lay out an argument for using traditional Medicare for anyone who can possibly afford the somewhat higher upfront premium costs.
Simply put, traditional Medicare is the gold standard of health insurance in the United States. If you enroll in traditional Medicare and then add a Part D prescription drug plan and Medigap supplemental coverage, you’ll have access to the widest possible network of health care providers. And you will have the greatest degree of predictability in your health care costs, because Medigap will cover most of your copays and deductibles.
When you’re signing up for Medicare at age 65, you’re probably in pretty good health. I urge people at that point to think ahead about their future selves, when you’re older and likely to be dealing with more health issues and in need of more care. Having access to the widest possible network of providers, without the hassle of a Medicare Advantage plan getting in between you and your doctors to decide what care you can and can’t have, is a huge plus.
Where do you stand on Social Security’s future?
The other point which I would call myself contrarian is I run in the completely opposite direction of where I think most mainstream media certainly is on Social Security. I argue for the expansion of Social Security. Most of the conversation out there about Social Security is we don't have enough money. We have to cut Social Security. We have to raise retirement ages and so on.
I argue that it's really not a matter of dollars. It's a matter of values. We find money in this country when we want to do big things.
A big thing we could do with Social Security is to make it bigger, not smaller. The 401(k), IRA experiment is now four decades old. It's clear that it works really well for more affluent households that have been able to save and amass significant dollars to use in retirement. That's probably about a third of households. And everybody else is approaching retirement with either nothing saved or small amounts, maybe enough that that would last a few years in retirement.
Why the dearth of savings for the lower and middle-income households?
There are clear reasons for that. The dollars aren't available. Middle-income households have faced financial pressures over the last few decades, and they simply have to meet other, more immediate expenses.
The Elder Index produced at the University of Massachusetts indicates about half of single people aged 65 and older struggle to meet basic living expenses. We're not talking about fancy stuff here. We're talking about paying utilities, buying food, keeping the car running, that sort of thing. The figures are considerably better for married couples. But those are troubling statistics.
What financial moves can people make now to catch up?
Make a plan. If you don't have a plan, you don't really know where you are. The goal is simple. You're trying to figure out if you're going to have enough income from your working years to live comfortably or not. And taking the time to write a plan, either on your own or with some assistance is super valuable. It's not a crystal ball, but it gives you a context in which to think about decisions you might make.
Time your retirement. That is one of the biggest levers available if you're able to control the timing of when you retire. Various things come into play that can affect it. But the idea of working somewhat longer can improve your outlook for retirement because you can delay your Social Security claim and continue to fund your retirement savings, perhaps do some catch-up saving late in the game. It might mean more years of employer-subsidized health insurance, and fewer net years of living off of your resources in retirement.
What about home equity as a cushion in retirement?
For middle-class households and lower middle-income households, the most significant financial asset on the balance sheet is home equity. The percentage of older Americans that own homes is quite high. It's north of 75%. And to a varying extent, they actually have equity in those homes.
Home equity is a different story than a financial asset. It's not as liquid, obviously. And lots of personal and lifestyle considerations come into play here that are different from simply selling assets in an IRA. Nonetheless, it would be foolish not to at least consider ways to tap into home equity since it's such an important asset. One strategy is downsizing and moving to a less expensive home and or less expensive location.
The other is the possible use of a reverse mortgage. A reverse mortgage is not my favorite solution. It's a product that's had a troubled history. It has been subject to tighter regulation and some reforms over the last decade that I think have made it quite possible to use in a safe way. The downside is that it's a very complicated product. So it's not my favorite tool in the toolbox. But for people who are really dead set on staying in their current homes and who need a way to tap home equity, it's something that can be considered.
How do we build savings if we're coming to this a little late in the game?
A very simple way of doing this is to watch the fees you pay on your retirement accounts. Keep it simple. You need to be invested in a low-cost index fund or ETF and save regularly. And that's the end of the story. Fees can be so damaging over time. They can add up to a significant drag on your account.
One of the things that strikes me about the transition to retirement is that many people who are approaching it have been in full-time jobs that have really taken up all their mental space for years and haven't begun to sort of branch out into things that they'll want to be doing in retirement. Hitting retirement can be somewhat of a brick wall. It's like, “oh my gosh, what do I do now?” People need to start earlier to develop additional interests that are outside the realm of work that can be dialed up in retirement.
Second, the personal finance media, for the most part, tends to focus on and be written for people who need the least help. They're folks who are looking for that extra edge. “How do I save a few bucks on my taxes this year” or “boost my returns.” All that's great, but these are the folks who are basically going do fine in retirement with or without the edge. I hope this book can find its way to people who really need some basic help or they're going to struggle.
Kerry is a Senior Reporter and Columnist at Yahoo Finance. Follow her on Twitter @kerryhannon