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A brief history of Social Security benefit claiming goes like this: In the beginning, benefits were available only at age 65. In 1956, reduced benefits were made available to women as early as age 62. In 1961, this treatment extended to men. Over time the age people claimed benefits steadily decreased and the average age for retirement stuck at 62 years old. In 1983, when facing an imminent shortage of funds, the age for full benefits increased from 65 to 67. While this reform did not change the earliest age you could claim Social Security, it reduced benefits further for early claimers. Currently, claiming benefits at age 62 instead of age 67 results in 25 percent less in every monthly check. So, $938 per month rather than $1,250 per month. Get it? Good!

In the past decade, the age of claiming Social Security benefits steadily increased as people began to comprehend how much money they lose by retiring early. That is, until the recent economic recession. A brief from the Center for Retirement Research at Boston College shows a large increase in early benefit claims from 2007 to 2009. More than 5 percent of the eligible population were enticed to claim Social Security at age 62, which was not part of their plan before the crisis. These individuals will now receive a reduced benefit for the rest of their lives.

Simulations by the authors suggest that compared to experiencing no recession, people claimed benefits about 10 months earlier than they planned, which reduced their monthly benefit by 8 percent. This many not seem like much now but every little bit helps when living on a fixed income. Ask an 82-year-old and she may tell you her Social Security check was plenty of income 20 years ago. Now she finds herself struggling to stay out of poverty.

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A recent post by the CRR shows that non-working Baby Boomers age 55 to 61 (ages ineligible for Social Security benefits) are wealthier now than non-working 55 to 61 year olds of the past. The post explores how they’ve accumulated the wealth and why they chose to leave the labor force. An important point of the article is that, though they find themselves wealthier than non-workers of the past, they still only have a median wealth figure of $98,000. This “isn’t a lot of money for a boomer with a long spell of retirement ahead of them.  Boomers who leave the labor force often put themselves at risk of depleting their 401(k) assets too soon.”

Full post from the Center for Retirement Research.

Post Introduction: “Baby boomers who’ve left the labor force in their pre-retirement years are in better financial shape than they once were.

The wealth of non-working Americans between ages 55 and 61 increased from $83,000 in 1992 to $98,000 in 2008, according to new research from the Urban Institute in Washington.  (Comparisons are in constant dollars.)

Potential explanations for this trend range from greater U.S. inequality that launched more boomers into the top wealth tier to a rise in the numbers of married men who don’t work – but have wives who do.  Barbara Butrica, a senior research associate at the Urban Institute, said her study did not look into the “why” for the emerging group of voluntary non-workers who are approaching traditional retirement ages, married and single men in particular.  One possibility, she said, is that “they are leaving the labor force because they can afford to.”

…Read the full story

During my study of retirement income security something has always bugged me.  Countless articles and reports suggest smart asset allocations are the tried and true way to have a successful retirement (and still say this even after the economic recession). They talk about the value of investing and give financial advice that is clearly geared toward those with ample resources. Advice for the little guys is rarely provided, though arguably they need it more. Most people try to save for retirement but end up with little financial wealth. They’ll probably spend at least some of their retirement struggling financially.

A recent article by the Center for Retirement Research explores ways individuals can leverage their savings and assets so they are more likely to have a secure retirement. They suggest financial planning should not only include building retirement portfolios but:

  • Delaying retirement and taking more time to contribute to retirement accounts
  • Controlling spending and using the money saved to increase your savings
  • Investing assets in ‘riskless equities’ after retirement
  • Taking out a reverse mortgage

In other words, when all your financial adviser tells you is which stocks and bonds to put your money into, they are missing the big picture. There is an array of tools that people should explore and, based on their situation, employ to help them build a secure retirement. In fact, asset allocation was found to have the smallest effect on retirement security. The paper found working six months longer produces the same outcome as moving all investments into ‘riskless equities.’

However, I’d like to bring it back to my original point: do we provide advice to those who need it most? Recently, I gave a talk on women’s retirement security to a local Council on Aging community event. Community members had wonderful questions after the talk. One question struck me most: “I didn’t know about saving when I was young, my husband did that. But we spent most of it on his illness and now he’s gone. I have nothing but my Social Security check, do you have any financial advice for me?”  Later we had a chat and I asked her some questions about her situation. I found that she had been a homemaker, she did not own her home, and she was physically incapable of working. Her monthly check was also ‘too much’ for her to qualify for government services and benefits. What advice do we have for people like her?

Researchers and financial experts are starting to explore ways low- and middle-income workers can make the most out of their savings and assets. But still, there are people currently in retirement who live on little income, own next to nothing, and would love some advice. This is particularly true of older women. Many never needed to care about their finances until their husband passed away. If anyone knows an organization or service that advises these people (for free!) please educate me…because I don’t know of one.

Many older workers would like to retire slowly, decreasing their hours at work before completely retiring. With the current economic downturn, people are expressing interest in working longer. People have a lot of their identity wrapped up in their careers, so reducing your hours can be a smoother transition both psychologically and financially. But is this option available to everyone? The Boston College Center for Retirement Research answered this question in a report titled Phased Retirement: Problems and Prospect.

Phased retirement is a white-collar phenomenon and high income individuals who are White, wealthy and educated are more likely to be able to reduce their hours with their employer. Interestingly, 73% of employers interviewed said they would ‘work out’ a phased retirement plan for certain managerial or higher level employees. These informal policies dominate over formal procedures with older workers being kept on to train colleagues or new staff. Unfortunately, not all workers are given the same options.

Employers point to a variety of constraints that make it difficult for them to provide phased retirement options. Pension plans or paying health insurance for older part-time workers is a frequently named drawback. Employers also express interest in only keeping certain employees. In fact, phased options are often offered to the best or favored employees allowing the employer to weed out undesirable workers. Still, one of the main reasons a company did not have phased retirement was simply because their business did not want or need part-time work.

The good news is that phased retirement options continue to increase among companies. If you are interested in phased retirement talk to your employer. Many different arrangements can be made to accommodate both the worker and the company. Here are some tips:

  • Double check – does your employer already have a phased retirement program in place?
  • Determine your needs – what do you want and what options are realistically available to you?
  • Pension impacts – does your plan provide for phased retirement? how could it impact your benefits?
  • Health insurance – what will happen to your health benefits if you reduce your hours?
  • When can I start – does your employer have policies that could affect your decision? (for example: 6 months after you retire you can come back and work part-time)
  • Employer expectations – what will be expected of you and how will your role and responsibilities change?
  • Find more information from the Wall Street Journal and AARP’s Public Policy Institute

Today, after listening to the President speak, I started thinking about the economy’s impact on older Americans. I found an interesting report from The National Academies Press titled:  Assessing the Impact of Severe Economic Recession on the Elderly. You can read the document here, which summarizes a workshop called by The National Institute on Aging. The report’s main goal is to reflect on what we already know and what we need to learn about the current recession’s effect on older adults. Unfortunately, what we already know is quite bleak.

How People are Coping: All age groups are being affected by the recession but older workers are often unable to completely recover from these kinds of financial shocks. The most common ways people are coping with income loss are to reduce spending, reduce saving, utilize unemployment benefits, withdraw money from savings, get financial assistance from friends or family, and borrow money (i.e. credit cards, loans). Some older workers are also choosing to delay retirement as an additional coping method.

Our Health and Well-Being: Our health is being negatively effected by the economic recession. GDP is strongly, inversely related to mortality over the long term, and older workers who lose their jobs are at greater risk for certain health conditions than those who remain employed. Still the Gallup Well-Being Index found that people’s well-being significantly declined in the fall of 2008 but went back up substantially by May 2009. I am nervous, now that we lost our AAA rating and the current stock market is in turmoil, if people’s well-being will again decline.

Unemployment or Retirement: Unfortunately, older adults who lose their job are less likely to get hired back into the labor force compared to younger workers. Those who do find work are often making significantly less than they made at their previous job. Researchers find that age discrimination in the workplace continues to exist, particularly for older women. It is therefore not surprising that many older adults who lost their jobs are deciding to retire. This early retirement, however, could hurt future finances. Increases in Social Security’s full retirement age, less time to invest in your retirement accounts, fewer vested years with your employer, or simply having less in wages over your lifetime can all have negative effects on your finances in old age.

What Can You Do: The report summarizes a depressing situation and then has limited suggestions (and most of them seem pretty intuitive to me). I don’t know if it will tell you anything new but here they are along with my own comments:

  • Buy low, sell high – Experts suggest raising your contribution rates (if you can) to your stocks, bonds and pension accounts while the market is doing poorly. If the markets bounce back before you retire you may gain substantially (the younger you are the more you are likely to gain). If you are retired and have spare cash, consider moving it into low-risk funds so that you too may gain from the markets being low (Please consult a financial adviser who will learn about your personal situation. Do not take this as professional advice).
  • Reduce your spending – A no-brainer but often hard to do. Consider what you really need now and what can wait. Did you know that “I don’t need it” is the most common reason eligible individuals refuse welfare? Figure out what you really need, what you can live without, and what is most important to you.
  • Stay in your home – Selling now is not a great idea, so consider modifications if your home is currently not a safe place to grow old.
  • Keep your job – If possible, consider waiting to retire. If you have been laid off, consider looking for new employment and working a few more years before you retire. Collecting your Social Security benefits early will mean a lower monthly paycheck for the rest of your life.
  • Utilize family – Your family may be able to provide some insurance against financial shocks. It’s important to have someone you can call on for help, even if you don’t use them.
The report highlights a ton of questions we need to research before we can understand what is going on. Unfortunately all that means is the recession’s impact on older workers will be understood after it’s all over, providing them little support in the meantime.

Recently I’ve been working on this crazy data analysis for my professor. I say crazy because it involves 9 waves of data (different interview time points), a sample of over 22,000 Americans nearing retirement, and over 400 calculated Dow Jones scores representing changes in the stock market from 1992-2008 (That took me a better part of a week!) Our data comes largely from the Health and Retirement Study (HRS), a nationally representative, longitudinal data set  that looks at people over 50 and follows them through the end of their working lives and into retirement.

This all started with an idea about the lasting effects of the 2008 stock market crash. All else being equal, whether you were interviewed by the HRS in March or December should have no bearing on your retirement plans. Unless, of course, historical time and place played a role in your decisions. By December you may have been listening to the news, watching your stocks drop, and talking to your spouse about an unanticipated future. Did the changes in 2008 influence people’s plans for retirement? Preliminary results indicate, Yes. Many people who were planning on working till 62 or 65 are now planning to work longer or are no longer sure when they can expect to retire.

So we’ve taken it a step further (enter my hundreds of stock calculations) to examine stock market fluctuations from 1992 to 2008 and see whether or not economic conditions at the time people are interviewed have any effect on individuals’ plans for retirement. I mean sure, people may be thinking and worrying about it but have they really changed their plans? The answers are yet to come!

The Normal Retirement Age (NRA) in the Social Security system is the age at which full benefits are received upon retirement. Retirement before the NRA results in a reduction of benefits, and you cannot retire before 62. Since the beginning of the program, age 65 as been the NRA. This was a fixed and constant number. Recently, in 1983, legislation was past that would gradually increase the retirement age to 67 by 2027. How it works is starting in 2003 the age for full benefits will be increased by 2 months. Each year after than an additional increase of 2 months will be added on. It results in those born in 1960 or later getting full retirement benefits at 67. The Early Retirement Age of 62 still remains the same.

There is a debate going on regarding this raise in the retirement age. Many disagree with raising the NRA at all, stating it is not fair to future retirees. The one truth people cannot deny is that life expectancy is dramatically different now than it was at Social Securities beginning. Since 1940, when the system was created, the life expectancy after retirement age 65 has increase by 4 years for men and 6 years for women and to top it off, we are healthier than ever before. In addition, a trend has emerged where people are deciding to retire earlier than 65. Thus, Social Security is paying out benefits over a longer period of time, while the payroll taxes are collected for a shorter period of time. People are essentially spending a fourth of their life in leisure. It is unreasonable to expect each of these additional years of longevity should be spent working, but is it not also unreasonable to expect these years should be spent in leisure?

The benefits of raising the NRA are numerous. It would add on years of solvency to the system, it would increase the number of workers in the system, and encourage older adults to continue working. To soften the impact of such a change, a gradual increase like the one implemented, is key. Therefore, people are retiring later little by little. Raising the NRA, however, could negatively affect low-income workers who, because of lower skills, poorer health, and physically laborious jobs cannot continue to work. Therefore, to help these individuals perhaps the disability definition can be altered to include these workers over age 62, or vocational jobs perhaps will be exempt from the NRA raise completely. In addition, raising the NRA is essentially cutting benefits. However, if individuals are working longer they have more time to save. Regardless of how you look at it, raising the NRA to help restore Social Security’s long-range solvency should at least be considered an option in our struggle to fix the system.

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