The retirement-minded have been glued to the developing bailout of Wall Street knowing that the side-effects are going to impact their retirement.  Whether you’re just thinking about retirement or are already there, the bailout of Wall Street, banks and mortgage holders will have consequences – and so will no bailout if that is the way the cookie crumbles.  What’s more, as the financial malady spreads world wide the magnitude of the downside effects worsen.

If the bailout occurs and massive amounts of money are injected to absorb bad loans and right the economic ship, the soaring deficit will further weaken the dollar, boost the need for tax hikes and ratchet inflation to an even higher level.  While these consequences augur poorly for folks on fixed incomes already in retirement, a south-sailing economy will dampen the need for employees of all ages.  As the economy grinds to a lower gear under the extra weight of higher prices, lower disposable income and slack job opportunities, saving extra for retirement to compensate for earlier over-consumption will be impossible for most.  What was once a tenuous retirement will develop into a dependency on others or continued employment.

What will be the fate of the retirement money currently invested?  If in the market, the purchasing power could be severely eroded by a depressed market that is struggling to climb the hill back to break even – assuming it was not exposed to total loss from bankruptcy, forced merger or regulatory confiscation.  If in the safest port of all – bank deposits insured by the FDIC – the rate of return is anemic when compared to inflation and purchasing power will suffer a torturous fate of shrinking in value.  The ace in the hole – home equity – could be difficult to unlock as buyers become scarce and/or the supply-demand imbalance melts away equity.

The bailout means higher taxes, increased inflation and most likely a weaken economy – none of which are good for retirees or the near-retired.  What’s more, the severity of the downturn and the period of adjustment needed to return to normal could indeed be steeper and longer than most economic cycles.

What if the bailout is aborted?  The credit markets are likely to freeze with the consequences that money cannot be borrowed and commerce cannot be efficiently conducted.  Credit to the economy is analogous to motor oil for an engine – the lack causes the engine to seize up and not function.  As money dries up so does the ability to finance the expansion of businesses and payrolls are more difficult to meet.  Again, the economy grinds to a lower gear with unemployment rising and payroll dropping.  The government will have the option of raising taxes to balance the budget or risk run-away inflation by monetizing the debt by printing more money.  The balancing act of just enough government intervention and the right amount of free market latitude will be exceedingly difficult to engineer. Accordingly, the economy is likely to head off in the direction of abyss or go the opposite way toward runaway inflation.  Either way, retirees and those near-retirement will be worse off.

Regardless of whether the bailout is funded or withheld, there will be undesirable consequences for the retirement-minded.  In the long-run the market will come back and many of the anemic investments will recover and be just fine.  The only problem is that when the “long-run” has played out most of retirement may be distant memory.  What you can do now is crunch the number to determine if you can afford to lock up an adequate guaranteed lifetime income that will give you a comfortable retirement.  Don’t leave your retirement in the market and watch it melt further if you still have enough to “buy” a good retirement – seek out your financial advisor and talk about converting what you have to a safe investment that can be turned into a guaranteed lifetime income.  Outliving your money is called longevity risk and most insurance companies will insure that risk by issuing you an annuity that can be converted – usually on your time frame – to a guaranteed lifetime income for you and/or your spouse.  Check it out before it is too late.  How you reward your elected politician when you cast your ballot is your business – but by my way of thinking we need a political housecleaning more than we do an economic makeover.  Cast your ballot wisely because our leaders do make a difference.

Shelby J. Smith, Ph.D.
September 30, 2008

Despite the current trauma associated with all financial markets, most boomers still harbor an aspiration to retire on-time and in good financial shape. However, since October 2007, as mentioned in this retirement blog, they’ve witnessed a decline of almost 23% in the value of their 401(k) plans and are frightened at the prospect of further losses. Confidence in their investment providers is at an all-time low and they’re looking for new ways to protect their retirement savings.

Brokerage firms and plan administrators have done a good job of keeping secret from small businesses the ability to withdrawal or transfer certain 401(k) money while still working. In fact, when asked about withdrawing money from employer-sponsored defined contributions plans – even ones where the employer does not match or make profit-sharing contributions – brokerage firms and administrators have reported that withdrawals are not permitted prior to retirement. It is absolutely inexcusable that the brokers and administrators have not volunteered the information that a simple, no-hassle, cost-free change in a plan permits in-service withdrawals and transfers.

Any money rolled into a plan from another qualified plan can be withdrawn or transferred without restriction by the employee. Yet, the investment managers and administrators require a mountain of paperwork and refuse to cooperate with employees wishing to take advantage of this privilege. They delay and hassle employees until many give up in disgust. In the meantime high fees, risky choices and zero advice is provided. The government regulators and FINRA (the self-regulatory organization governing brokerage firms) turns a blind eye toward these abuses.

ERISA provides that matching contributions and profit-sharing provided by employers can be withdrawn or transferred at any age by employees while still working and participating in the plan BUT they allow employers to stipulate an age if they desire. On the advice of the brokerage firms and administrators, most smaller businesses have stipulated that normal retirement age must be reached before such withdrawal are allowed. The prohibition on withdrawals is only in the best interest of the brokerage firms because they charge fees based on the amount of money in the 401(k) plan. Naturally the small business owner is not aware of this ERISA in-service withdrawal provision and those charging the fees are not about to volunteer the information. In the meantime, employee participants, especially those nearing retirement, are taking unsuitable risks, paying high fees, choosing from very limited options and getting zero investment advice.

ERISA does not allow voluntarily employee contributions to be withdrawn from 401(k) plans while continuing to work at the employer until age 59½ is reached. However, the employer is permitted to stipulate an older age which most have done on the advice of the broker and administrator. Again, hard-working employees and employers are unaware of this more liberal withdrawal option permitted by ERISA. Employers are taking undue risk as trustees and fiduciaries of the 401(k) plan because the best interest of employees is not being served. The result is more risk, higher fees, fewer options and endangered retirements.

The greed of Wall Street is alive and well in most 401(k) plans for small businesses. The firms managing the money harass employees who want to transfer their money with extra paperwork, delaying tactics, misinformation and outright untruths. The ability to make in-service, non-hardship withdrawals is absent most plans of small businesses simply because money managers value their fees more than the best interest of their clients. It is shameful that the regulators sit on their hands and condone such behavior – yet they do.

Small business owners and their employees must rise up and take matters into their own hands. They employ the plan administrators and can fire them – the same is true for the brokerage firms that manage the money entrusted to them. To protect themselves and their employees, business owners must add the in-service withdrawal provision authorized by ERISA and they must insist that brokers and administers cooperate in helping concerned employees withdraw or transfer their money to more suitable options. The in-service withdrawal provision can be added at the direction of the employer at no cost and without delay by simply informing the third party administrator to change the prototype plan. To do otherwise is irresponsible and exposes the employer to undue liability as a trustee and fiduciary. Employees should absolutely insist in writing that employers make this change to their 401(k) plan.

Shelby J. Smith, Ph.D.

If you’ve read my book Guide to Social Security… and A Better Retirement and I talked about it in my retirement blog, you know that postponing Social Security until age 70 makes a great deal of sense for most healthy, married Americans that can do without the income.  Of course, there are numerous exceptions, and before postponing your benefits you should seek professional guidance.  Obviously most haven’t because about two-thirds of current Social Security recipients started taking benefits before their normal retirement age.  For the vast majority, this was not what they should have done.  Is there a way to reverse this mistake and start again?

Yes!  The Social Security Administration allows you to pay back the money you’ve received in Social Security benefits – without interest and without adjustment for inflation – and reapply for higher benefits.  All you need to do is complete form 521, “Request for Withdrawal of Application”.  You’ll be asked the reason for your action but don’t worry because any answer is acceptable.  Let’s say you started at age 62 and have been drawing $1,000 a month for eight months but now want to reapply.  Along with form 521 you’d repay the $8,000 and then you can reapply when ready.  If you filed a tax return during the period, you’ll want to report any overpaid taxes on your next tax return.  If you wait until age 70 to reapply, your benefits will grow about 8% annually, plus cost-of-living adjustments, which means your benefits will more than double those at age 62.  My Guide to Social Security gives several other good reasons to postpone Social Security if you can afford to do so.  In fact, the typical family may be able to add as much as $200,000 to their lifetime retirement income if the primary breadwinner postpones Social Security until age 70.

Let’s look at Fred and Sue, both aged 66 (normal retirement age for both) and eligible to start SS benefits.  Both worked outside the home, and at age 66 each is entitled to $1,500 in monthly Social Security benefits, plus annual cost-of-living adjustments, for the remainder of their lifetime.  A Mortality Table shows that Sue is expected to outlive Fred by several years.  The Social Security regulations say that one spouse is entitled to what they qualify for based on their own earnings record or 50% of what the higher earning spouse will receive, whichever is greater.  Since Sue is expected to outlive Fred, wouldn’t it be nice if Fred postponed benefits until age 70 so that Sue would get a big raise in Social Security benefits if Fred dies first?  Is there a way for Fred to get benefits based on Sue’s lifetime earnings record and then apply at age 70 for higher benefits based on his lifetime earnings record?

Due to a little-known glitch in the Social Security regulations, there is a way.  Fred would apply for spousal benefits and receive 50%, or $750, based on Sue’s earnings.  He would draw this amount, increased annually for cost of living adjustments, and at age 70 reapply based on his earnings record.  Presto, he will get substantially higher benefits for postponing and these, too, will be adjusted annually for inflation.  At Fred’s death, Sue will be entitled to the greater of the two and her benefits will ratchet up to what Fred was receiving.  If you think this is “on the edge”, think about the combinations for divorced spouses.  If you were married for ten years, been divorced for two years, are age 62 or more and have not remarried, you are eligible to apply for dependent benefits based on the working record of your ex-spouse.  If you have several ex-spouses that meet the foregoing qualifications, they can all be drawing SS benefits simultaneously with no impact on your, or a current spouse’s, future benefits.  Even if a qualifying ex-spouse gets remarried and subsequently divorced, they can still file for dependent benefits based on a former spouse’s work record.

The foregoing shows two easy ways to maximize your Social Security benefits by taking advantage of little known glitches in the rules.  More and more married couples are realizing that postponing Social Security is the wise move, because there is an increasing probability that at least one of them will live well beyond age 90.  Since Social Security is a lifetime annuity promised by the U.S. Government with benefits indexed to inflation and tax-favored, making them a relatively larger part of your retirement income is smart.  This is done by postponing until age 70, if possible, and taking advantage of the two “loopholes” we’ve discussed.  By using these loopholes, you’re adding to the financial woes of the Social Security System, but until Congress closes the gate you should exercise your options.

Shelby J. Smith, Ph.D.