Things I Wish I’d Known (and Done) Before I Retired

  

It’s hard to believe that I’ve now been “retired” for three years. That said, there are some things that, in hindsight, I wish I had known and/or acted on sooner. And a couple that I actually did - but might easily have overlooked. 

Here they are:

Do More Roth — Sooner

I’ve long been a huge fan of Roth. It’s not hard to look at the federal government’s finances, the current tax brackets, and figure out that the rates aren’t likely to get any lower in the future.

And yes, for the last decade or so of work, I went all Roth, including catch-ups. In fairness, Roth wasn’t an option for most of my retirement savings career. Even so, in those first years, recordkeepers weren’t really ready — and I, like most of my generation, had by then been so thoroughly coached on the advantages of pre-tax accumulations — well, it was easy to shrug off Roth as one of those things of which only the wealthy could afford to benefit.

But — and particularly as I got closer to retirement — the question has always been, where will your income in retirement line up with those brackets? That said, the closer I got to retirement, the easier it was to make that determination — and even more fully appreciate the benefits of tax diversification, particularly as I look ahead to the implications of required minimum distributions (RMD), when taxes on all those previous years of pre-tax savings come due — with a vengeance.

So, if you haven’t been thinking about Roth — and those new catch-up contribution limits are a good opportunity — do so.

Set Up the Roth IRA Before the Rollover

This one still makes me shake my head.

A few months after retirement, I rolled those balances into an IRA: one for a Roth, another for the pre-tax accounts.

Only to “discover” that the five-year clock on the withdrawal of Roth account earnings without penalty starts with the date of the IRA account opening, NOT the date from my 401(k). This turns out not to be a hidden secret — but I never picked up on it.

Now, as it turns out, I won’t need to pull that money out before the five-year clock resets with the rollover Roth IRA. But I could have spared myself a bit of worry if I had opened that Roth IRA earlier — and THEN rolled over to that account after retirement.

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Lesson learned: Open the account early — even if you don’t think you’ll use it right away.

Future You will thank you.

Know That 1099 Income Is … Messy (and It All Counts)

I assumed income in retirement would be simpler (there’s surely less of it) than working-life income.

That assumption did not survive contact with my new status as a 1099 worker. The good news is that, post-retirement, I’ve had several amazing opportunities not only to continue contributing my writing and expertise, but also get paid for it.

The bad news is, I wasn’t really prepared for the financial challenges of estimated tax payments, and, more critically, the financial toll of self-employment tax, wherein I am — even as a Social Security recipient — expected to pay both the employer and employee portions of FICA withholding. From a practical standpoint, that means that that “extra” income — well, less of it goes into my pocket than one might think.

Without withholding, income timing becomes trickier. Estimated tax payments become real (and, oh so large). Cash flow planning requires more attention. And there’s a persistent, low-grade constant uncertainty about whether I’m underpaying, overpaying, or just guessing until April rolls around. Oh, and the IRS has some pretty specific rules around how much estimated tax is due — and when.

And yes, there are financial penalties for guessing “wrong”.

The More You “Make,” the More They’ll “Take”…in Unexpected Ways

I have previously written about the biggest surprise of my retirement[i] — and I continue to struggle with it.

Like most people (I assume), I never gave much thought to post-retirement healthcare insurance. Oh, I’m aware of the funding issues (it’s actually in a more financially precarious position than Social Security), but as post-retirement healthcare has pretty much evaporated in the private sector, I figured we’d deal with it …when we had to.

Turns out, Medicare health insurance premiums are based on income. And if you’ve filed jointly, BOTH of your premiums are based on your adjusted gross income (AGI). Which means that 1099 income counts, and most particularly those withdrawals of pre-tax savings count. Big time.

Together, they can quietly push you into higher income-related premium tiers for Medicare — increasing Part B and Part D premiums in ways that feel disconnected from the original retirement planning conversation …but absolutely aren’t. That’s where those Roth decisions can really pay off.

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The interaction is subtle, but the dollars aren’t.

File for Medicare Before You Need It

Once you start receiving Social Security benefits, you are automatically enrolled in Medicare Part A. But even if you work past age 65 (as I did) and don’t start taking Social Security (like me), you still have to sign up for Medicare — even if you’re still working, have insurance, and don’t plan to use Medicare (this will, of course, confuse your current health care providers, at least momentarily. Everyone assumes when you turn 65, you’re on Medicare). 

There’s a seven-month initial enrollment period that begins three months before the month you turn 65 and ends three months after your birthday month. Now, there are some exceptions to that timing, but — the bottom line is, you’ll likely find it to be less complicated to sign up around your 65th birthday, and then you don’t have to worry that you’ll run afoul of deadlines that can cost you a lot later on.

The bottom line here is that your post-retirement spending plans need to include something for health insurance (more precisely, your Social Security benefit will be reduced by that amount). You can find out more at: https://www.medicare.gov/basics/costs/medicare-costs

The Sixth “Lesson”

Let’s face it, even those of us who have spent our lives thinking about retirement don’t get everything right when it comes to our own.

The irony is that I spent years telling others to plan — and I did - at least sporadically. Ultimately, I focused more on the accumulation side of the retirement equation and less on the spending side.  The good news is, even with the “surprises” noted above, the accumulations appear to have provided a pretty good buffer.   

Retirement is good. Really good, in fact. But it’s even better when you make the easy moves before they become harder ones. If you’re still working and thinking, “I’ll handle that later,” take it from someone three years in:

“Later” comes faster than you think.

-          Nevin E. Adams, JD

[i] See The Biggest Surprise About (My) Retirement

Let's Stop Shaming the Claiming

  The most recent “debate” was inspired by a recent Wall Street Journal article by Derek Tharp — an associate professor of finance at the University of Southern Maine — titled “Why Delaying Your Social Security Benefits May Not Make Sense.”

Shortly thereafter, Schroders 2025 U.S. Retirement Survey stated that 44% of non-retirees plan to file for Social Security benefits before reaching age 67 (the full retirement age for everyone born in 1960 or later) — and “just” 10% plan to wait until age 70 (when an individual reaches their maximum monthly benefit). And, sure enough, the retirement industry commentary that followed was largely in the vein of “can you believe people are ignoring all this free money?”

But it was the Wall Street Journal article that appeared to draw the most critical fire — largely from academics, and mostly (it seemed to me) quibbling about some of Tharp’s math assumptions (when you’re guessing, even rationally, at things that can’t be precisely quantified, there’s always going to be room for “quibbling”), and his apparent presumptions about relative levels of risk. But the critiques that I saw were more focused on his temerity in suggesting that there might actually be legitimate rationales for not waiting till age 70. Even though the subtitle of the article was a fairly innocuous “Most people don’t actually wait until age 70. For at least some[i] of them, it makes a lot of sense.” 

Indeed, it’s hard to read an article about Social Security these days that doesn’t proclaim the financial benefits of waiting till 70. Oh, there are caveats such as “if you can afford to wait…,” but the clear message is the “right” answer is to wait. And, at least to my ears, anyone who suggests otherwise is just being…dumb at worst, or selfish[ii] at best.

There’s little question that waiting till age 70 gets you a higher monthly benefit. However, waiting till age 70 does NOT guarantee that you’ll collect more in benefits, in that some people don’t live as long as the actuaries predict they will — and likely some choose to claim earlier than they might because they fear (or know) that will be the case. Meaning some simply want to maximize the total dollar value of the benefits (or its “utility”), rather than take a chance on their longevity.

Moreover, some folks can’t afford to wait — some are concerned that Social Security benefits will be reduced and/or means-tested (more) if they wait[iii] — some would rather take the money now and invest it — and some just don’t see any reason to wait to collect their “full” retirement benefit. 

I understand and appreciate that for those who haven’t managed to save enough, it’s been suggested that a good strategy is to use the savings you do have until you’re 70 — bridging that savings gap till you can maximize your monthly Social Security benefits for the remainder or your retirement. There’s also the consideration of a spouse, who might well outlive you, and who would presumably appreciate and/or need the higher benefit you get from waiting.

But it occurs to me that many in the financial services industry — and certainly in the media that quotes them — are increasingly prone to labeling those who take those well-earned benefits “on time” as being foolhardy at best — or stupid.

To that point, I’d like to suggest that there is actually a “right” answer that is not 70 — it’s what the folks that structured the program envisioned — your full retirement age, or FRA.[iv] If you take it earlier than that, you get penalized by getting a smaller monthly benefit. If you wait past that date, you get a proportionately higher benefit, but only until age 70. In theory, the actuaries say those decisions all add up to the same benefit — but for “regular” people, the answer is a reality, not a theory.

That’s not because of the logic or assumptions that Professor Tharp laid out — there’s plenty of “wiggle” room in the math to argue either way. But there’s more to these types of decisions than “the math” — and I think some people get so caught up in a slide rule[v] exercise they forget that there are real, rational, personal reasons for the timing of the claiming decision.

Let’s be straight with people about the tradeoffs — acknowledge the financial realities, and respect — individually, if not collectively — that there actually might be legitimate reasons for claiming those hard-earned benefits at different points in time.

But please, let’s quit “shaming the claiming” until/unless we know the particulars of their individual situation(s).

• Nevin E. Adams, JD

 

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[i] Italics mine.

[ii] Selfish in that they’re — and here the culprit is usually a male — not considering how important that larger benefit will be to their surviving spouse.

[iii] Yes, I know nobody thinks anybody who ever wants to be reelected will ever let current benefits be cut, but these days one can hardly be blamed for opting for a “bird in the hand” solution.

[iv] At this point I should “confess” that I started claiming at MY FRA — with no regrets.

[v] A dated reference, for sure — but check it out.

The Real Retirement Crisis

  I recently picked up a book that states “why (almost) everything you know about the US retirement system is wrong” — and it’s definitely worth a read.

The book — titled The Real Retirement Crisis: Why (Almost) Everything You Know About the US Retirement System Is Wrong — is the work of American Enterprise Institute senior fellow Andrew Biggs — and it’s a comprehensive assessment of any number of the misstatements, mischaracterizations, flawed assumptions and downright obfuscations that plague any realistic assessment of the nation’s retirement system. Indeed, he argues that “factoids, however compelling, are no substitute for facts.”  

The Goal

Biggs outlines the goal of a retirement system as one that “allows individuals to maintain their preretirement standard of living in retirement.” In that regard, he (and academics generally) would say that lower-income individuals' preretirement are well-served by Social Security’s benefit structure. Indeed, the argument — based on a “lifecycle model,” with rational tradeoffs in terms of the present and future — means that some shouldn’t be saving — or expected to save — at the rates promoted. 

“Low earners and younger households are often saving for retirement in a textbook fashion, even if financial columnists and other well-intentioned but not well-informed commentators chide them for doing so,” he writes.

That said, the coverage of the nation’s retirement system in the media (and academia) is often skewered by both a misunderstanding of the past and present state of work and retirement and, sadly, many in the retirement industry itself suffer from the same myopia. 

Cost(s) of Bad Data

In a chapter titled “The Cost of Bad Data is the Illusion of Knowledge,” Biggs references a quote attributed (perhaps incorrectly) to Stephen Hawking — “the greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.” Something that we hope those — both in “the industry” and out — are mindful of going forward.       

In that regard, Biggs devotes a fair amount of the book to delving into those misalignments of perception and understanding that distort an objective evaluation of the system, and its progress. He buttresses those points with actual tax data, sentiment surveys of actual retirees (rather than those who haven’t yet experienced the realities), and any number of studies based on objective, administrative data, which are well-documented in the 31 pages of footnotes. 

Now, if you’ve kept up with Mr. Biggs’ writing over the years (and I have), you’ll find a fair amount of the criticisms familiar, though this format[i] provides more space for things like charts and graphs — and there are those aplenty here. 

In it (among other things) he debunks the notion(s) that:

There was a “golden age of pensions” with data that affirms just how uncommon such things were in the private sector, how few individuals actually qualified for a full pension (due to things like job turnover and steep vesting schedules), and how the costs of those benefits were rationally deemed not to be worth the cost by corporations (later in the book he points out that a similar conclusion might well be drawn by public-sector pensions, were they held to the same funding and accounting standards imposed on the private sector).

A large number of the population is unable to work longer (granted, some can’t — but consider that even way back in 1940, the average Social Security claiming age was 68.1 for men and 67.4 for women — and as Biggs notes, at a time when manual labor was more prevalent, and age/gender discrimination was not barred).

Social Security is the primary income source for the vast majority of Americans. Biggs points out that government surveys (notably the Current Population Survey[ii]) understate income in retirement by only considering “income on a regular basis” — ignoring money drawn from retirement accounts. That, in turn, misstates the average income of retirees, the official poverty rate for retirees, AND the percentage of retirees who receive nearly all their income from Social Security (as it turns out, only 12% of retirees receive 90% or more of their income from Social Security, though 42% receive half or more from that source).

Retirement healthcare expenses — especially long-term care — are a big financial concern for most individuals. It turns out that a small number of households spend a lot — but most spend little or nothing on long-term care. A 2017 study found that 75% paid less than $1,000, 90% paid less than $20,000 — versus the $150,000+ reported in some surveys for long-term care).

Individuals spend as much, and consistently, in retirement (note: families with kids, once those kids leave the nest, they actually spend a lot less).    

The United States’ private retirement system is inferior to those found in other countries. On one of my pet peeves, he also points out the flaws in reports that claim the U.S. system is inferior to other nations (“focuses on a consultant checklist, not actual income”), noting that the U.S. system[iii] produces a disposable income for 65 year-olds that is the highest among 24 OECD countries, and 60% higher than the median.[iv] Moreover, when retirees in these countries are asked about their confidence in maintaining their pre-retirement standard of living, the U.S. comes out well ahead — even besting the Netherlands, which is a perennial “favorite” of these ranking systems.  

That said, however interesting, I doubt that this single tome will persuade those who (want to) continue to proclaim there’s a retirement crisis, though one might well hope there might at least be some acknowledgement that what people think, and what they fear — might not be as dire as their imaginations create.

Ultimately, whether or not one concludes that there is a retirement “crisis,” Biggs quotes Census Bureau economist Josh Mitchell as observing “there is a crisis of retirement plan data.” 

And with this new book, Biggs has, once again, done a great job of filling at least some of those gaps.

• Nevin E. Adams, JD

 

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[i] Biggs does devote about a third of the book to lay the foundation for his solution to shoring up Social Security — one that he has also published previously, and one that includes taking away the current tax preferences for private sector retirement plans. The focus there is on whether those preferences are necessary to encourage worker savings (Biggs says it isn’t) — though there’s an imbedded assumption that it would have no impact on employer sponsorship/adoption — and I’ve seen data that suggests it would, and if that were to be the case, then there ostensibly wouldn’t be workplace plans in which workers could save.

[ii] See also Question Err?

[iii] In fact, towards the end of the book is a chapter titled “The Retirement Savings Gap is Really a Government Funding Gap,” where Biggs basically holds out the notion that the private system has done a much better job than the government-run programs as a cautionary note to those who would advocate shifting responsibility from the private sector, because “voters wish to be promised things without being asked to pay for them, and elected officials are often willing to oblige them.”

[iv] Granted, the firms are entitled to prize/value/rate whatever criteria they want for their rankings, but they never include the cost of those systems in terms of tax structures, nor the restrictions on access to funds prior to retirement that have been proven to encourage higher rates of participation and savings. 

What Happened to the Three-Legged Stool?

Once upon a time, we talked about retirement as having three legs [i]: Social Security, workplace savings/pensions, and personal savings. But to a number of vocal pundits, the full burden has been put …on the 401(k).

But before there was a 401(k)—and even before the advent of ERISA—there was Social Security, a program designed to provide retirement income to working Americans. It remains absolutely integral to even the most rudimentary retirement planning calculation, and with good reason. 

That said, despite a looming financing shortfall—and a fairly widespread notion that those benefits aren't "enough" for a full retirement income replacement, you don't see headlines in the New York Times—or folks going on book tours—proclaiming that program was a "mistake" the way some do about the 401(k). 

The reality is that Social Security­—like the 401(k)—has undergone significant changes in scope, funding, and mission since its 1935 inception.

People are often confused as to the relationship between what they put into it and what they'll receive in benefits (it's a loose connection, at best), but—despite a couple of close calls over the decades, those checks that millions of Americans rely on for a majority of their post-retirement income (at least according to Social Security) have kept coming. 

That said, everyone seems to blithely assume that at some point, some way, someone (else?) will remedy the looming funding issue (if only to have it be another draw on the U.S. Treasury). But a mistake? 

No, despite those funding struggles (even though it's a pretty hefty—and mandatory—reduction of both individual paychecks and that of their employer) —there are (to my ears) no real threats to replace it, no actual condemnation of the mechanics that created the current situation—and nobody calls it a "mistake."

And no wonder—by all accounts, even in its current form, Social Security does a pretty solid job of replacing pre-retirement income levels for lower-income individuals. It might not be a luxurious retirement for them, but it seems to be doing what it was designed to do—even though that design has been allowed to morph/expand over the years to provide more benefits to more individuals. 

Indeed, most recent calls for a defined benefit plan "comeback" seem oblivious to the fact that Social Security provides exactly that type of benefit, adjusted for the cost of living, and not just for the lowest incomes.

So, what about the other two legs of that three-legged stool?

Well, personal savings has always been a challenge for American workers—and for many, the opportunity to save through payroll deduction at work has become their personal savings as well. There's a hazard in that reliance, of course—but many are likely saving more (and, thanks to the company match, gaining more) than they might otherwise.    

As for that third leg, the reality is that the 401(k) actually does a pretty good job of what workplace savings was always designed to do—supplement the foundation that Social Security provides—and yes, even for lower-income individuals. 

It has been—and continues to be—an essential element of retirement security for middle-income workers, for whom Social Security benefits alone likely fall short of their pre-retirement income levels and needs. 

Those of us who help people plan and save for retirement every day know that the 401(k) is, and remains an essential element of retirement security for most American workers.

Yet certain pundits—who seem to have no problem being handed a microphone (even by those who should know better)—continue to dismiss it as a "mistake." 

So, what happened to the three-legged stool? 

It's still very much with us—and we're all better off when we have access and opportunity to lean on them.

The 401(k) alone was never designed to be "enough." While its critical role in retirement security may well have been an accident, it's surely no mistake—and where would we be today without it?

 - Nevin E. Adams, JD

[i] According to Social Security, "the earliest use of this metaphor which we have been able to document was by Reinhard A. Hohaus, an actuary for the Metropolitan Life Insurance Company. Mr. Hohaus, an important private-sector authority on Social Security, used the image in a 1949 speech at a forum on Social Security sponsored by the Ohio Chamber of Commerce. Hohaus, however, had a slightly different "stool" in mind than came to be understood in later years. His three-legged stool consisted of private insurance, group insurance, and Social Security."