The problem is that inflation eats away at the purchasing power of retirement nest eggs.  Over the course of 30 years (a very likely retirement period these days), a 3.5% inflation rate will cause today’s dollar to buy about 36 cents worth of goods.  To look at it another way, someone who can live today on $50,000 a year would need about $140,000 a year 30 years from now (if inflation holds at that pace).

Lately, the Consumer Price Index (CPI), the most common measure of inflation in this country, rose to 3.6% annually in July.  That’s above the historical average, and worries many experts that it could discourage the Fed from too much more stimulus for the economy.

With no cost of living increases in Social Security checks over the last two years, many retirees are beginning to feel the pinch of what rising costs can do to someone on a fixed income.

The truth is, the CPI measurement of inflation may not be realistic for some people.  People in retirement years often spend more than average on healthcare.  The cost of medical care only accounts for 6.6% of the CPI index.  At the beginning of retirement, healthcare accounts for about 25% of your essential expenses, and near the end of retirement if can account for almost 50% of your essential expenses.  As you get into the later years of retirement you tend to spend less on other things like travel, entertainment, transportation & clothing, so you still need to plan on at least a 3% overall inflation rate.

The good news is, there are ways to hedge your portfolio against the inflation enemy.  Things like stocks, real estate and commodities have historically outperformed inflation.  More recently, inflation protected bonds have also helped investors stay ahead of rising costs.  Many fixed and variable annuities now offer riders that automatically boost income payouts to policyholders each year.

The bottom line is, you need to plan on doubling or tripling your income over a 30 year retirement, even with modest inflationary numbers.  This can definitely be done with some careful planning, and by using a diversified approach to allocating your nest egg.  Working with a competent financial planner will help you accomplish this.

As summer reads go, it might not prove to be as interesting as “A Dance with Dragons” or “ESPN: Those Guys Have All the Fun.” But for gurus and nerds (like me), it’s pretty darn close.

 Yes, retirement-focused (some might say retirement-obsessed) folks are spending their summer days and nights, and in some cases their vacations, combing through the just-released 2011 edition of “Fast Facts & Figures About Social Security” in search of whatever insights can be gleaned about the current state of retirement in America, and what, if any, items we can put on our collective to-do list.

And the latest edition, which answers the most frequently asked questions about the programs the Social Security Administration (SSA) administers, doesn’t disappoint. The book, among other things, highlights basic data for the Social Security (retirement, survivors and disability) and Supplemental Security Income (SSI) programs.

Here’s what experts say you should do or consider given the facts and figures in the 2011 version of this “book,” which is published by the SSA.

Read the report, “Fast Facts and Figures About Social Security, 2011.”

Social Security is a major source of income for older Americans

It might not come as a surprise, but the first item of note is this: About one in every five Americans, or nearly 60 million people, receive some type of benefit or assistance from Social Security. And about 80% of those beneficiaries are age 62 or older. And for those beneficiaries, it’s an especially important source of income for older Americans.

Consider: In 2009, Social Security represented 38% of all income going to Americans aged 65 and older. That’s up eight percentage points from the 30% in 1962.

“Workers tend to dismiss Social Security as a major source of their retirement income,” said Andy Landis, author of Social Security: The Inside Story, 2011 Edition and the founder of Thinking Retirement. “The data say not so fast. Social Security represents the largest source of their income. Social Security provides more income than any of the other legs of the retirement stool — more than earnings, savings or pensions. Workers need to wake up to the reality that Social Security is vital for their retirement finances.”

Others, including Jason Fichtner, Ph.D., a senior research fellow at the Mercatus Center at George Mason University, are of the same opinion. He noted that 66% of all beneficiaries now rely on Social Security for 50% or more of their income in retirement, while 35% rely on benefits for 90% or more of their income.

For non-married beneficiaries, which includes widows and widowers, the numbers are even more staggering, Fichtner said. Some 73% rely on benefit payments for 50% or more of their income and 43% rely on Social Security for 90% or more of their income. See the chart on page 7 of Fast Facts & Figures, which shows the percentage of aged units receiving Social Security benefits, by relative importance of benefits to total income relative importance of Social Security benefits. (In addition to that chart, Fichtner said he tends to focuses on three other charts when reading Fast Facts & Figures: Receipt of Income, 1962 and 2009; Shares of Aggregate Income, 1962 and 2009; and Relative Importance of Social Security, 2009.)

Not surprisingly, a spokesperson for AARP, the lobbying group for older Americans and which recently called on Congress to protect Social Security benefits, had these observations about Fast Facts & Figures: “The report shows that Social Security is the single greatest source of aggregate income for retirees, and represents a greater share of aggregate retirement income today than it did in 1962,” said Cristina Martin-Firvida, AARP director of Financial Security and Consumer Affairs.

By contrast, she said the share from earnings in 2009 is about the same as it was in 1962, and the share from asset income is lower (15% in 1962 and 11% in 2009). “Undoubtedly, an unpromising job market, depressed housing values, and an unstable equities market have all made retirement today less financially secure,” said Martin-Firvida. “This data underscores the critical importance of maintaining the earned, guaranteed and inflation-protected benefit that Social Security offers Americans in retirement.”

Earned income is a big source of income too

While Social Security represents a large percentage of total income for older Americans, earned income is an important source of income as well. In fact, at 29%, it represents the second largest source of total income for Americans aged 65 and older in 2009. The odd thing about earned income, however, is that the percent of total income that earnings represented in 2009 is about the same as it was in 1962.

But those numbers don’t tell the whole story. According to Fichtner, the percentage of ‘aged units’ (basically those age 65 or over) that report receiving ‘earnings’ was only 26% in 2009, down from 36% in 1962 — while the percentage of people 65 or over receiving Social Security has rapidly increased to 87% in 2009 from 69% in 1962. “What this tells you is that Social Security benefits are now a universal income source for those Americans age 65 and over,” he said. “And, it’s a very important source of income to keep people out of poverty.”

Not all that big a benefit

While Social Security represents a large percent of income for older Americans, the actual amount of the benefit seems somewhat small, according to Alicia Munnell, the director of the Center for Retirement Research at Boston College. The average Social Security benefit amount for new awards in 2010 was $1,193 per month, or $14,316 per year according to Fast Facts & Figures.

According Janet Barr, the chairperson of the American Academy of Actuaries Social Security Committee, Americans preparing for retirement should take the time to learn how their Social Security benefit could be affected by the decision of when to retire.

By delaying retirement, the Social Security benefit amount goes up due to additional earnings and years of service, Barr said. It also increases because an early retirement reduction is not applied (5% or 6.66% per year before Normal Retirement Age or what some call Full Retirement Age or FRA).

In cases when retirement is delayed beyond the Normal Retirement Age, a delayed retirement credit also increases the benefit amount (8% per year after Normal Retirement Age), she said.

“Waiting a few years to retire could provide a 25% increase in benefit, which would boost a $1,200 per month benefit to $1,500 per month,” said Barr.

No increase in OASI filings

The economy is down and the unemployment rate is still high. But the number of people applying for Social Security is flat, according to Landis’ read of Facts & Figures.

“One thing that surprised me is that the number of OASI (The Old Age Survivors Insurance, meaning retirees and survivors) claims were the same in 2009 and 2010 (4.7 million in both year),” said, Landis. “I would have thought with all the unemployed, more people would be filing for retirement. Not so. The data show that retirement-age workers are hanging onto their jobs rather than retiring and filing for Social Security — perhaps a fair measure of financial readiness for retirement, or lack thereof.”

Disability claims and SSI public assistance claims are up

On the contrary, Landis noted that disability claims are up, as are SSI public assistance claims. And to some, including John Laitner, the director of the University of Michigan Retirement Research Center, that spells trouble.

The Old Age Survivors Insurance (OASI) fund, from which retirement benefits are paid, continues to grow modestly, Laitner said. The OASI fund is expected to grow from $2.4 trillion in 2010 to an estimated $2.5 trillion in 2011. (See page 3 of Facts & Figures.) But the Disability Insurance (DI) trust fund is shrinking, and has reached a very low level. The DI fund is expected to fall from $180 billion in 2010 to an estimated $154 billion in 2011.

What’s more, disability awards have grown faster since 1970 than those for retirees, Laitner said. The annual number of awards to disabled retired workers rose from 1.3 million in 1970 to 2.6 million in 2010, while for disabled workers it increased from 350,000 in 1970 to 1 million in 2010. And if that wasn’t bad enough, the average age of retired beneficiaries has risen slightly since 1960, but the average age of disabled beneficiaries has fallen.

According to Facts & Figures: “The average age of disabled-worker beneficiaries in current-payment status has declined substantially since 1960, when DI benefits first became available to persons younger than age 50. In that year, the average age of a disabled worker was 57.2 years. The rapid drop in average age in the following years reflects a growing number of awards to workers under 50. By 1995, the average age had fallen to a low of 49.8, and by 2010, it had risen to 52.8. By contrast, the average age of retired workers has changed little over time, rising from 72.4 in 1960 to 73.7 in 2010.” (See page 17.)

Said Laitner: “In my opinion, long-run concerns about the financial solvency of both OASI and DI are warranted, but between the two, DI seems to raise the most immediate alarm.”

Elderly households not slipping behind

After correcting for inflation, both married couples and singles in 2009 have roughly double the income of those aged 65 and older in 1962. According to Facts & Figures, the median income of a married couple aged 65 or older was $43,114 in 2010, up 111% from $20,424 in 1962.

By contrast, wage growth has lagged in past decades, said Laitner. According to the Economic Report of the President for 2011, average wage and salary income for 25-65 year old college graduates rose, after correcting for inflation, 60% from about $50,000 in 1963 to about $80,000 in 2009. And that high school graduate wage and salary income showed almost no gain for the same period.

“We all wish that economic growth could be faster,” said Laitner. “Nevertheless, the data offers some reassurance that elderly households are not slipping behind younger households in a difficult period.”

More than a retirement program

Another often overlooked fact about Social Security is that it’s much more than a retirement program, said Munnell. “Some 31% of benefits go to those under 62,” she said.

Here’s the breakdown according to Fast Fact & Figures: There are more than 54 million beneficiaries in current-payment status. And 64% of those beneficiaries were retired workers and 15% were disabled workers. The remaining 21% were survivors or the spouses and children of retired or disabled workers.

Room to raise the maximum annual wage base

Experts often recommend a combination of increasing taxes and lowering benefits as a way to save Social Security from going bankrupt. And one of the ways to increase taxes has to do with maximum annual wage base subject to Social Security tax. For 2011, the wage base subject to Social Security tax is $106,800, which is the same as what it was in 2009 and 2010.

Given his read of Facts & Figures, Landis figures Uncle Sam has some leeway to raise the maximum wage base. “One issue being discussed today is the growing wealth gap between the top quintile and all other quintiles,” said Landis. “The Social Security taxable earnings ceiling — $106,800 this year — sheds some light here: It has not kept pace with higher incomes. Currently about 84% of all earnings are taxable for Social Security, trending steadily downward from 89% in 1990. That leaves some ‘headroom’ to raise the earnings ceiling to capture more earnings, strengthening Social Security’s solvency.”

The payroll tax gift

One other item of note about Fast Facts & Figures is this: The publication reports that the Social Security payroll tax is normally 6.2% for OASI and DI combined. A special provision has lowered this to 4.2% for 2011. Said Munnell: “The employee payroll tax is 2 percentage points lower than employer (for 2011). Does everybody know they’re getting a tax cut?”

In other words, keep on working. “Actuaries and other retirement experts suggest that those close to retirement might want to continue to work in 2011 to take advantage of the lower tax rate,” said Barr. “Their Social Security benefit amount will not be impacted by the lower tax rate since general revenue reimburses Social Security for the lower tax rate.”

Longer life expectancy

Social Security actuarial studies show that Americans are living longer after reaching age 65 than they have in the past. “Because of this, actuaries have said that we need to either save more for retirement or work longer than we have in the past,” said Barr, who also noted that the American Academy of Actuaries often points to the traditional model of a three-legged stool for a secure retirement — Social Security, employer-sponsored plans and personal savings. “All three elements need to work together to support a longer life expectancy,” she said. “Retirees should not rely on only one leg of the stool to support their entire retirement. As you said, this means they may need to consider working longer or saving more.”

Many retirees are getting ready to pay more for your Medicare.

Medicare recently announced it’s 2011 rates for Part B coverage of doctor’s visits and outpatient treatments and for Part D prescription drug coverage.  Higher income individuals have always paid more for Part B premiums, but for the first time, they will also pay a surcharge for Part D drug coverage.

Also, new Medicare beneficiaries in 2011 will pay higher Part B premiums than current beneficiaries, who are protected from premium increases in year like this in which Social Security cost-of-living adjustments aren’t large enough.

Here’s what you’ll pay in monthly premiums in 2011, depending on your income level and year of enrollment:

Modified adjusted gross income less than $85k for individuals, and less than $170k for married couples:

Modified adjusted gross income from $85k to $107K for individuals, and married couples filing jointly with incomes from $170k to $214k:

Individuals with income from $107k to $160k and married couples filing jointly with incomes from $214k to $320k:

Individuals with income from $160k to $214k and married couples filing jointly with income from $320k to $428k:

Individuals with income of more than $214K and married couples filing jointly with income of more than $428K:

With Medicare, every beneficiary gets the same coverage and benefits no matter who you are.  I would love to hear if you think this is a good way to help pay for Medicare.  Or, do you think this is penalizing those who have worked and saved to put themselves in a position to have higher incomes during retirement.  What is your opinion?

Both sides of the isle voted last night to approve a 2 year extension of the Bush tax cuts.

Late last night, just before midnight in fact, Congress finally approved the Bush tax cut extension for two more years. This means that workers of all tax brackets will pay less in taxes than previously planned for 2011 tax rates. This includes an extension of the $1000 per child tax credit, tax breaks for college students, and lower capital gains and dividends tax rates. Also included is a 2% cut in the social security tax, which will go from 6.2% down to 4.2%. That means for someone making $100,000 per year, they will have an extra $2000 to take home. Overall, this should be a good thing for the economy and hopefully stimulate job growth in the end.

The downside of this is that there were not any spending cuts to offset the lower tax revenues that will be coming in. Government spending will continue at the same pace, which means our nation’s deficit will continue to grow. So basically, both sides of the isle got their way for now.

One obvious question that comes to my mind is this: With social security already on the brink of bankruptcy, should we really be cutting it’s funding?

I would love to hear your comments and opinions on this matter. Feel free to comment below. Your identity and contact information will not be visible on this site.

You can restart social security benefits to increase your monthly pay.

Many people choose to begin recieving their social security benefits at age 62, the earliest age possible. When you do this, you receive a reduced monthly benefit for the rest of your life. This is often a great idea, and I often recommend it to my clients if: 1. They could use the extra income to help them meet retirement expenses. Or 2. They have a family history of not living well beyond life expectancy. By waiting till full retirement age to start receiving your social security benefits, you get more money per month.

In some cases, it makes sense for you to restart social security benefits and thereby increase your monthly income. Doing this requires that you first pay back all of the social security benefits that you’ve received up to that point. Some experts say that doing this can increase your monthly benefits by as much as 76%. Here’s what you have to do to make this happen:

Consult your CPA or Financial Planner

You need to meet with your CPA or personal financial planner to help you make this decision. You will need to run some calculations to see if it makes sense for you to pay back a big chunk of money in exchange for a higher monthly benefit. This monthly benefit will be increased over time with inflation. So that’s a good thing. Also, the government doesn’t charge you interest on the amount you’re paying back, another good thing.

Consider the financial impact

Consider your general health and life expectancy before restarting social security.

Having to pay back all of your social security benefits all at once could be a huge amount of money. For example: let’s say you started your social security benefits at age 62 and you’re getting $1100 per month. If you’re not 66, you would need to pay back $52,800. Again, you don’t have to pay back any interest on this amount, so it’s like you’ve had an interest free loan from the government.

File the appropriate form

Now you need to file SSA form form 521, “Request for Withdrawal of Application.” Send the form, along with the the check for the full amount of benefits received, to the Social Security Administration. Once the form is processed, you’ll begin receiving the benefits you’re entitled to at your present age. For example, if you were born between 1943 and 1954, your full retirement age is 66. For each month before full retirement you began taking benefits, they are reduced by .75%. If you began benefits at age 62, you receive 75% of your full benefits. For each month you delay benefits beyond full retirement age, they are increased by .75%. If you restart social security at age 70 in this scenario, you receive 132% of your full benefits.

A word of caution

A few things you need to consider, and your personal financial planner should address this with you, is your life expectancy. If your family has a history of people living to or beyond life expectancy, then this strategy might make more sense for you. If you pay back all this money, and then you don’t live long enough to recoup your outlay of cash, then restarting social security was not a good deal. None of us know how long we’re going to live, but your family history should be a pretty good indicator of what is likely to happen with you.

The other consideration related to your health is that you may end up needing that lump sum of money for health care or long-term care needs. The last thing you want to have happen is you increase your income by restarting social security benefits, but then you run out of money early because you tied it up. Make sure you and your financial advisor consider all the options before electing to do this.

If you look at your most recent social security statement, on the front page, right hand column, there is a paragragh that reads:  “In 2016 we will begin paying more in benefits than we collect in taxes.  Without changes, by 2037 the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 76 cents for every dollar of scheduled benefits.  We need to resolve these issues soon to make sure Social Security continues to provide a foundation of protection for future generations.”

However, changes could be made to the program that could put Social Security on firmer financial ground for at least 75 more years, according to a U.S. Senate Special Committee on Aging report released in May. Potential fixes currently being considered by Congress include tax increases, benefit cuts, and pushing back the retirement age.  While none of these options are great, I guess they wouldn’t be the end of the world. 

The bottom line is, you need to make sure that you’re not counting on Social Security as your ONLY source of retirement income.  As you do your financial planning for retirement income, plan on getting a portion of what your Social Security statement says you’ll get.  That way, if you get more, it will be a nice surprise.  Saving more for retirement and setting up multiple sources of income will help secure a solid financial future for yourself and your family.  My “Income For Life” post is a good one for more information on this topic.

The instability of the Social Security system makes all of us think a lot harder about other ways that we can provide ourselves with safe, lifetime streams of income.  We have to rely less on money that will come from the government, and more on our own planning and savings.  Fortunately, there are many investment vehicles available today that allow us to secure a long and stress-free retirement.  I recently helped a client do just this with part of his IRA.

The particular vehicle that we used was a fixed index annuity with an income rider issued by a very stable and well rated insurance company.  These types of fixed annuities are very different from the traditional pension-type annuity that most people think of.  Fixed index annuities are designed to grow and accumulate money on a tax-deferred basis.  At some point in the future, determined by the investor, these annuities can be converted into a stream of retirement income.  These annuities pay interest each year based  on how a stock index performs.  However, one of the big benefits of them are that in years when the market goes down, you don’t lose anything.  The trade off is in years when the market is up, your returns are capped at a certain level.  Here are some of the basic features of this annuity:

• You earn an up-front 8% bonus on your premium
• Any indexed interest is locked in once a year, and can never be lost due to market declines
• Your income account value earns a guaranteed 7.2% compound interest per year for the first 20 years (this means it will double every 10 years!)
• You can start taking lifetime guaranteed income at any time
• You can stop taking the income at any time
• If you become confined to a nursing home, your income amount DOUBLES for the rest of your life
• When you pass away, your beneficiaries would get whatever amount is left in your accumulation account.

This annuity provides a very safe, guaranteed source of income that will last as long as you live.  The longer you wait to start taking the income, the higher your withdrawal percentage will be.  And the Confinement Income Doubler Benefit offers a great way to protect yourself from the high costs of long-term care, without the hassle of buying traditional long-term care insurance.  No matter how long you live, the income will never stop or be reduced.  But if you pass away early and there is still money left in the annuity, your beneficiaries would receive it.

In planning for retirement income, diversification is still the key.  Just as you would never invest all of your money into one stock or one mutual fund, you don’t want to have all of your retirement income coming from one source.  The more you can diversify your retirement income sources, the better.  Having income from a pension, social security, dividends, rental properties, annuities, bonds, etc. is a good idea.

Fixed index annuities can have many variations and moving parts, and some are better than others.  We can help you evaluate the world of fixed and variable annuities to help you understand all the details and find the best one for your situation.  If you would like to find out if an annuity makes sense for part of your retirement income plan, please call us at 1-866-983-4222.  We offer free consultations to help investors evaluate their entire situations and find solutions that work.

Pay Now

When you convert part of your IRA or 401(k) to a Roth, you have to pay taxes now on the amount you convert.  Many people feel that tax rates are likely to go higher in the future (especially since our tax rates today are the lowest we’ve seen in decades).  Everyone knows about our government’s debt situation…it’s not good,  not to mention social security and Medicare.  To pay for all these things, they’re going to have to increase taxes at some point.  So to pay your taxes now may end being a pretty good deal.

Play later

Paying taxes at a lower rate today may sound nice, but the real benefits of the Roth IRA conversion are long term.  As you know, Roth IRA’s grow tax free.  That means that when you eventually pull your money out of the Roth at some point down the road, you don’t have to pay any taxes on ANY of the earnings!  This is especially attractive for younger individuals who have time to let the money grow and compound tax free.  In general you need to plan on the money growing for about 10 years or longer before you plan to use it in order to benefit from paying the taxes now.  The more tax rates go up in the future, the sooner you will “break even” so to speak, and come out ahead.

Out of Pocket, But Spread Out Over Two Years

When you convert part of your IRA or 401(k) to the Roth you have to pay the taxes out of your pocket.  You cannot have the taxes taken out of your IRA account.  This can limit the amount you may realistically be able to afford to convert.  If you have savings in an after-tax account, you could use money from that to pay the taxes also.  The best part is, you can spread that tax payment over the next 2 tax years!  So you don’t have to pay them all this year, which helps.

A Higher Tax Bracket?

Be careful as to how much you convert.  Not only do you have to pay the taxes on it out of pocket, but converting to the Roth could bump you into a higher tax bracket for this year.  Whatever amount you convert will be added as taxable income to the rest of your taxable income for the year.  So if you make $80,000 at your job, and you convert $20,000 to a Roth, your taxable income is now $100,000 for the year.  Be sure to consult a tax professional before you make a conversion so that you don’t regret doing it later.

Here are the 2010 tax rates:

Talk to your personal financial planner today to see if making a Roth IRA conversion might make sense for you in 2010.