Have You Been Listening? Retirement is Broken.

If you aren’t aware that our retirement financing system in this country is broken, then you haven’t been paying attention. People have been shouting it from the rooftops for a long time now.

Google “retirement shortfall” and you’ll find a boatload of articles on the subject beginning a decade ago or even earlier. This shouldn’t come as a surprise to anyone at this late date.

How do we know it’s broken? Because most households will need to save at least $200,000 to maintain their pre-retirement standard of living after leaving the workforce and according to the Employee Benefits Research Institute (EBRI), only about 10% of workers will retire with that much. Almost one-half of Baby Boomers and Gen Xers were determined to be at risk of not having sufficient retirement income to cover even basic expenses and uninsured health care costs.

Lest you think this is a Baby Boomer problem, EBRI studies show that younger “cohorts” are even worse off.

Why haven’t people saved enough?  There are no doubt many reasons, but in general the problem is that out current “system” for retirement funding demands far more from most families than they can possibly save, investing skills that most don’t have, and a whole lot of luck.

Teresa Ghilarducci explained the problems quite well in “Our Ridiculous Approach to Retirement.” Wall Street money manager and former neurologist, William Bernstein put it this way in a Money magazine interview in September 2012:

“I did a little thought experiment in which I calculated how many years it took people starting work in different years to make their number. I realized that the cohort that started working during the worst of economic times is the one that did the best. The last cohort that actually was able to make their number started their careers in 1980, and they made their number in 19 years. And the graph ends in 1980, because no cohort that started work after 1980 actually made the number. “

In February 2011, the Wall Street Journal reported, “the 401(k) generation is beginning to retire, and it isn't a pretty sight.”

And in case you thought Social Security would bail you out, the New York Times ran a story on the prospects of living off the benefits alone.

It isn’t pretty, either.

Our retirement system is in deep trouble. It doesn’t work. And if you are still avoiding the issue, it isn’t because the media have been trying to keep it a secret. As two-time Pulitzer Prize-winning editorial cartoonist and columnist David Horsey recently put it, Time to Wake from the American Dream and Face Retirement Reality.

I’m not trying to scare you. . . well, maybe I am. If you’re still young I hope I scare you into saving every penny you can for retirement. As Bernstein says, “Save as much as you can as early as you can and don’t ever stop.” And who knows, conservative politicians have been trying to undo Social Security since it became law in 1935 and maybe one day they will.

If you’re closer to retirement, then scaring you isn’t going to help. There are things you can do, though.

Read my series, Inadequate Retirement Account (IRA), for ways to make the best of your situation.

Inadequate Retirement Account (IRA): Investing After You Retire

Note: This is the sixth and final installment of a series of posts with advice for the 90%-plus of American households that haven’t been able to save enough for retirement. The first post was Inadequate Retirement Account (IRA).

My feelings about post-retirement investment strategies (and for the decade prior to retiring, actually) for households who haven’t saved enough are based on four principles:

1.        If you weren’t able to save enough and invest successfully enough for retirement over three decades that featured the greatest bull market in history — while you were earning an income and not withdrawing from your portfolio — then it is unlikely that your previously unsuccessful investing skills are going to come to your rescue now.

If you found it difficult to accumulate wealth while you were working and adding savings to your portfolio constantly, you’ll find it tremendously harder to grow wealth with no additional savings coming in and constant withdrawals (spending) going out. To add to the pain, most economists forecast lower stock market growth ahead.

Over the past thirty years, you were in a sailboat with a strong, accommodating breeze. After retirement, you’re sailing into the wind and taking on water. There’s a world of difference.

2.        You should never, at any age, invest money in the stock market that you cannot afford to live without, because you may well end up having to.

You can lose money when you’re young and accumulating wealth without it having an impact on your standard of living. Losing wealth after you retire often means a permanent reduction in your standard of living. This is money you cannot afford to lose.

3.        William Bernstein says that after you win the retirement savings game, you should stop playing. I would add that once it becomes obvious that you can’t win, you should stop losing.

It takes a lot of stock market growth to improve your standard of living. One dollar of income per year for thirty years costs around $22. If you have minimal retirement savings, doubling that amount in the stock market probably won’t have a big impact on your standard of living, but losing half of it may.

The Bernstein recommendation is that you not risk losing your already-adequate retirement portfolio in a market crash just before you retire, as many households did in the 2007-2009 market crash.

4.        Retirees should first secure income to cover their non-discretionary spending needs, then set aside an emergency fund, and only then should they consider investing in the stock market.

Many economists recommend a “Floor and Upside” strategy, also known as the “Theory of Life-Cycle Saving and Investing”. In part, that theory recommends that you secure your non-discretionary retirement spending with safe investments (like government bonds) before investing what’s left over in riskier assets like the stock market.

In other words, when you go to Las Vegas, set aside enough cash for dinner and a plane ticket home and don’t bet from that stash. (Economists do, I confess, state this more eloquently.)

Retirees with inadequate savings, by definition, don’t have enough assets to secure a “floor” of spending that would let them live like they did before retiring, let alone having some left over to take to the casino.

When I consider my four principles, I conclude that retirees in this group should not invest any sizable portion of their wealth in stocks.

If you decide that you simply must bet on a better standard of living in the stock market — and I hope you don’t — then limit stocks to 40% or 50% of your portfolio at most and invest in low cost index funds. At least give yourself a fighting chance.

Ultimately then, my advice for households that have inadequate savings for retirement is:

·       Invest little or none of your savings in stocks after retirement

·       Begin investing less in the market about ten years before you retire

·       Make sure you have the equivalent of a couple of years of expenses saved in liquid assets for emergencies

·       Lastly, invest any additional savings in TIPs bonds and/or lifetime fixed annuities to generate a floor of secure income as best you can.

I realize that there are no attractive alternatives for safe income in the current environment, and that includes fixed annuities and TIPs bonds, but that won’t last forever. You have two choices in the meanwhile: take more risk or accept about zero percent interest for a while. Since zero gain is better than a loss, I’d wait. Keep your money in money market funds or short duration government bond funds until rates go back up.

So ends my six-part series of posts of retirement advice for the 90%-plus of American households who have been unable to adequately save for retirement. If you have lots of savings, then you have lots of options, but that’s usually the way things work, isn’t it?

That doesn’t mean there’s nothing you can do if you haven’t saved enough. In fact, it makes your decisions more critical. In a nutshell:

·       Work longer

·       Spend less

·       Manage your home equity and mortgage

·       Maximize your Social Security benefits, and

·       Don’t expect the market to save you.

How much difference can these decisions make? I ran a scenario through E$Planner Basic that consisted of a single male, age 60, who earns $50,000 a year and contributes 6% to his 401(k). His company matches 3%. He could retire at age 63 with a $12,708 per year standard of living. He could increase that amount 31% to $16,644 if he could work to age 66.

He could increase his standard of living 83% to $23,220 per year if he could work to age 70, but not many workers will be able to hold onto their job that long.

As someone commented on my last post, finding a competent, fee-only financial planner to help might be a great investment unless you're really good at these kinds of calculations. We're talking about tens or hundreds of thousands of dollars over your lifetime and you really need to get the decisions right the first time.

One last piece of advice: don’t beat yourself up if you haven’t been able to save the hundreds of thousands of dollars needed to maintain your standard of living after you retire. Fewer than one out of ten American families did.

Just make the best of it.

Inadequate Retirement Account (IRA): Claiming Social Security

Note: This is the fifth installment of a series of posts with advice for the 90%-plus American households that haven’t been able to save enough for retirement. The first post was Inadequate Retirement Account (IRA).

If you have lots of money saved for retirement, then my advice to you for claiming Social Security benefits would be pretty straightforward — delay claiming your benefits until you are 70 if you are single or are married and have a larger benefit than your spouse, and delay claiming until your full retirement age if you have a smaller benefit than your spouse. But, this is a series of posts for people who haven’t saved enough for retirement and that’s more complicated.

If you had lots saved for retirement, you could retire and live off your savings while you waited for your Social Security benefits to grow about 8% for every year you postponed claiming. That’s a deal that’s too good to pass up if you can get it.

Without huge savings, postponing claiming benefits probably requires working longer and, as I explained in my post Inadequate Retirement Account (IRA): Working Longer, that decision isn’t always up to you. Half of recent retirees report that they were forced to retire earlier than they had planned by unforeseen layoffs, closings, health problems or a need to care for family members.

With inadequate retirement savings, chances are very good that you will need to claim your benefits long before you turn 70, but I still recommend that you postpone as long as you can hold out.

I know that many people believe they should collect Social Security benefits at the earliest age (62), but that isn’t a wise decision for healthy people. Usually the basis for this belief is that Social Security benefits might be taken away at any time so you need to grab them while you can, but those arguments aren’t convincing. 

Conservatives have been trying unsuccessfully to kill the program since it was created in 1935. When George W. Bush tried to privatize part of it in 2005, in his words, “I did more than touch the third rail. I hugged it.” There is no political will to end the program and even proposed changes have always considered grandfathering for current participants.

The second argument for claiming early is that the break-even age is around 80. If you don’t live that long, you will receive less money by claiming later. I've heard many people say, "Heck, I probably won't live to 80, so I should take the money now."

I have no idea how those people know when they're going to die.

On the other hand, if you claim early and live longer than about age 80, you will receive far less in benefits. Since healthy people have no idea how long they will live, the best approach is to take the worst-case scenario (one or both spouses living a very long time) off the table by claiming as late as possible.

If claiming your benefits at the earliest possible age whether you absolutely need them or not will help you to sleep at night, go for it. But be forewarned that it isn’t the best bet from a financial risk-reward perspective. Many elderly widows will tell you that having their husband claim benefits at the earliest age possible was the worst financial mistake of their life.

T. Rowe Price has an online calculator that lets you play with a few different scenarios to find the best age to claim benefits for you (and your spouse, if married). I used it to calculate cumulative lifetime benefits for a married couple of the same age. The husband expects $2,300 a month in benefits at full retirement age and the wife expects $1,940 in monthly benefits at full retirement age.

If both spouses claim at the earliest age (62), and the husband lives to age 83 and the wife to 95, their cumulative lifetime benefits total $1,050,000.

If both spouses claim at the latest age (70), and the husband lives to age 83 and the wife to 95, their cumulative lifetime benefits total 28% more, or $1,346,000. 

The wife’s survivors benefit would increase from $20,700 per year if benefits are claimed at age 62 to $36,450 per year if claimed at age 70 — a whopping 76% more!
 
(Now you see why those widows are complaining.)

Postponing Social Security benefits as long as possible is a very powerful way to maximize your retirement income, and one of the few available ways if you have limited retirement savings.

Of course, maximizing Social Security benefits can be far more complicated than this example, and more complex than the T. Rowe Price website tool can handle. For example, the optimizers told me that my wife should claim and suspend benefits at age 66 and I should simultaneously claim spousal benefits. Two years later, my wife should claim her own benefit. Two years after that, I should file for my own benefit. As you can see, optimizing benefits can be very complicated. You’ll probably need help.

The company that provides the E$Planner software I mentioned in previous posts in this series also provides a package entitled Maximize My Social Security. While the T. Rowe Price tool is free, Maximize My Social Security currently costs $40. An alternative is to work with a financial planner, but that will likely cost more than the software. Reuters describes a number of other sources of help in this article, including AARP’s free tool.

My recommendations for claiming Social Security, which apply equally to those who have saved enough for retirement and those who have not, are first to not claim benefits at age 62 if you can live without them. And second, use one of the tools mentioned above or contact a financial planner to make sure you will get the maximum benefits to which you are entitled.

That leaves us one topic, investing, to conclude this series of posts on retiring with inadequate retirement savings.

Inadequate Retirement Account (IRA): Home Equity

Note: This is the fourth installment of a series of posts with advice for households that haven’t been able to save enough for retirement. The first post was Inadequate Retirement Account (IRA).

If you're approaching retirement and haven’t saved enough in retirement accounts, it's likely that the majority of your wealth is home equity[1]. You may find yourself in your early 60’s with the prospect of living primarily off Social Security benefits while residing in your largest financial asset.

Maybe you’ve had the thought in the back of your mind that you saved for retirement by paying off the mortgage. If so, you have some serious planning to do because home equity is difficult to spend. Even if you sell the house to free up the equity, you will still need a place to live. If the new place doesn’t cost significantly less than where you live now, you’re back where you started.

Should you sell your house when you retire? Should you pay off the mortgage? Should you buy a smaller house or rent?

Housing and mortgages in retirement are complicated issues because there are several factors, financial and non-financial, to consider, including:

• Emotional value. Houses are often more than a financial asset; they’re our homes. It may be impossible to put a price tag on the memories. Is it important to you to leave your home to your children?
• Changing housing needs. You may need a larger home for the children and grandchildren to visit for several years after you retire. You may find at some point that you don’t need all that room and you could do without the maintenance chores. Later in life, you may find that your home isn’t well suited to your physical limitations. Can it be modified to work for you? Your housing needs may change significantly once or even twice during a 30-year retirement.
• Taxes. The tax deductions you enjoyed before retirement may have far less value after you retire. You may have to pay a capital gains tax when you sell your home, though the first $250,000 of gain is excluded ($500,000 for a married couple) in most cases. If your home has lost value since you purchased it you cannot deduct a capital loss on your main home sale.
• Liquidity. Real estate is highly illiquid, which means that an asset can take a long time to sell or that it has large costs associated with selling, or in the case of your home, probably both.
• Risk. A home with a mortgage is exposed to foreclosure risk.

The issues surrounding the emotional value of your home are purely personal. Only you can know if keeping your home has more value to you than moving and thereby gaining the ability to spend some of your wealth that is currently in the form of home equity.

The income tax deductions for home mortgage interest and property taxes are the most popular deductions among the middle class. Should your income tax rates drop after you retire, which is likely if you have limited savings to invest, those deductions will be less valuable and your after-tax housing costs will increase accordingly. Furthermore, you may have been paying mortgage payments for many years by the time you retire so that those payments will consist largely of principal and will provide diminishing tax savings.

You also need to be aware of property tax costs and home insurance costs if you continue to own a home after you retire. Paying off the mortgage doesn’t make these go away and both increase fairly constantly along with inflation and property values. Check your latest mortgage payment statement to see what percentage of it is escrowed to cover these two costs. The principal and interest will go away when you pay off the mortgage but taxes and insurance remain and grow over time.

The biggest housing issue for retiring homeowners who haven’t been able to save enough for retirement may be one of liquidity.

I have a client who has been able to save enough for retirement and he recently asked if I thought he should pay off his mortgage. Doing so would take a third to a half of his liquid assets (mostly stock investments) and convert that amount into illiquid home equity. As he pointed out, though, he would reduce his spending by the amount of interest on his mortgage (currently under 4%).

I asked him if he might one day need the cash he would use to pay off the mortgage for living expenses.

"Probably," he replied.

“How, then,” I asked, “will you get the money back out of your home to spend?”

There aren’t a lot of fast and cheap ways to get the cash back once it becomes home equity. He could sell his house and buy a smaller one or rent. He might take out a reverse mortgage. A home equity line of credit doesn’t make much sense because you have to start paying it back immediately and the rates are higher than a mortgage.

He realized that if he paid off his mortgage he would lose access to a lot of liquid assets and it wouldn’t be easy to get that liquidity back. If he could pay off his mortgage with say, 10% or less of his wealth, the mortgage interest savings might have been worth it. He decided it was not in his case.

On the other hand, Laurence Kotlikoff, an economist I respect and the creator of E$Planner software, uses a tool called consumption smoothing to calculate the amount of consumption (the amount you can spend) over your lifetime. He claims that he has run many scenarios through E$Planner and rarely finds one where paying off the mortgage isn’t a winner.

It isn’t always a big winner, though.

You might want to run your scenario through E$Planner's free web software and see what works in your situation[2]. The amount of annual spending you might free up from home equity may help you make up your mind about selling or staying.

Keep this in mind, though: $100,000 of home equity isn’t the same as $100,000 in a retirement savings account. You don’t live in your 401(k).

You can spend your 401(k) or IRA savings on whatever you please, but after you sell your home to free the equity, you’ll still need to pay for somewhere to live, unless you move in with the kids. Presumably, part of that replacement housing cost will be paid from the home equity you just liquidated.

A reverse mortgage is an alternative that frees up home equity and allows you to remain in your home. According to the Federal Trade Commission, "In a regular mortgage, you make monthly payments to the lender. In a reverse mortgage, you receive money from the lender, and generally don’t have to pay it back for as long as you live in your home. The loan is repaid when you die, sell your home, or when your home is no longer your primary residence."

There are pros and cons to reverse mortgages, though, so analyze them carefully before making them part of your retirement plan.

One last thing to consider is foreclosure risk. Anytime you have a mortgage there is a possibility that it will be foreclosed in bad economic times, as happened in the recent housing crisis.

People without mortgages rarely lose their home to foreclosure, but it happens. People have lost their homes for relatively small amounts of unpaid back taxes. Still, a paid-off mortgage may give you a sense of financial security that helps you sleep at night.

E$Planner or a similar consumption-smoothing tool can help you determine if selling your house, renting, downsizing, or paying off the mortgage or keeping it will increase the amount of money you will be able to spend in retirement.

Whether or not you want to sell your home and how much financial risk you can live with is something software isn’t going to help you with.

My advice regarding homes and mortgages for households with inadequate retirement savings is that you create some possible scenarios like “pay off the mortgage and stay put”, “sell the house and relocate at age 65”,  “sell the house and relocate at age 75”, and “reverse mortgage and stay put”. Then run E$Planner to get an understanding of your maximum potential spending in each scenario before you exclude any of the alternatives. The results may surprise you.

With the numbers in hand, you have an objective way to decide how important keeping your home really is to you and the value of paying off your mortgage (or not).

What to do with your home and home equity may be the biggest financial decision you make if you don’t have much retirement savings, with the possible exception of what to do about your Social Security benefits.

We’ll talk about that next.

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[1] Home equity is the amount of cash you would have if you sold your home and then paid off all encumbrances (first mortgage, second mortgage, home equity line of credit, etc.). To calculate home equity, we don’t usually subtract home selling expenses such as realtor fees or taxes, but in this case I do because we’re considering the net cash you could take away from the sale to fund retirement.

[2] Please don’t let my multiple references to the product give the impression that I have an incentive for hawking E$Planner. I mention it repeatedly because it is one of the few software packages I know that performs consumption smoothing. A free Excel spreadsheet, created by Sherman D. Hanna, Professor, The Ohio State University, is also available but I find E$Planner far easier to use. A free (but simplified) version of E$Planner is available here.

Inadequate Retirement Account (IRA): Spending Less

NOTE: This is the third post of a series suggesting ways families who haven't saved enough can improve their retirement finances. The initial post was "The Inadequate Retirement Account (IRA)".

For households who weren't able to save enough for retirement one thing is certain: they will spend less after retirement than they did before, simply because they will have far less to spend. A reduced standard of living is inevitable. In fact, many households will drop out of the middle class after they stop working.

Social Security benefits alone won't keep them there. Social Security is intended to replace only about a third of a family's pre-retirement income. For households at the lowest pre-retirement income levels, the number may approach 50%, but that is simply replacing a larger percentage of a much smaller income.

The goal of Individual Retirement Accounts, 401(k) plans and other retirement savings tools is to help families generate enough personal wealth to fill the shortfall between Social Security benefits and the family's standard of living while they were working. For more than 90% of American households, that savings goal wasn't met over the past three decades. 

About half of that 90% has no retirement savings, at all, and living off Social Security benefits alone is a harsh prospect, as is chronicled in this 2012 New York Times article, "The Tightwire Act of Living on Social Security". 

There are thousands of ways to reduce your living expenses after you retire, some useful suggestions and some not. I suggest you Google the topic and see where browsing the Web takes you.

Here is an MSN Money article, for example, entitled "Retiring? Two Dozen Ways to Cut Costs". However you do it, plan to spend a lot of time thinking about cutting expenses because you can't make retirement work with inadequate savings unless you do some serious cost cutting.

How much will you need to cut? Take your current annual income and subtract any amount you are saving for retirement. Then subtract your annual amount of FICA taxes. This is roughly your current annual spending.

Now go to the SSA.gov benefits calculators and estimate your annual Social Security benefits. The difference between these two numbers is roughly the amount your spending will need to decline, for example:

Some of the cuts you will need to make are necessarily large. Relocating to a less expensive locale has long been recommended. Strongly consider that option if you are in even a moderately expensive region now. (I have a friend who recently retired in Ecuador and seems to be happy with it, though I'm not sure I would recommend something quite that extreme.)

A major expense that you will need to address is health insurance and healthcare. When I retired seven years ago, I was very concerned about how I would pay for my family's healthcare. In fact, it was my biggest concern. Nonetheless, it turned out to be even more difficult to obtain coverage and far more expensive than I expected.

Medicare isn't available until you turn 65, so if you retire early by choice or for reasons beyond your control (there's around a 50% chance that you will have to), finding affordable healthcare will be important. Line it up before you leave the job.

And don't simply decide to risk your finances by betting that you'll stay healthy. By some estimates, more than half of personal bankruptcies begin with catastrophic medical expenses.

Another major expense in retirement will be housing, but mortgages are a complicated issue that deserves its own blog post in the near future.

Still another critical expense in retirement is consumer debt. Don't stop working until you have paid off all credit cards, car loans and similar expensive debt.

Debt is deadly in retirement. Pay it off before you retire and severely limit it after you retire.

So, there you have my recommendations for spending less after you retire. I have intended my suggestions primarily for families who weren't able to save enough for retirement, but the spending part of the advice applies almost equally to those who have:

• Look everywhere for places to cut expenses
• Consider moving somewhere with a lower cost of living
• Figure out where you'll find healthcare until you are eligible for Medicare at age 65
• Don't stop working until all consumer debt is paid off

I'll cover housing expenses in my next post.

The Inadequate Retirement Account: Working Longer

This is the second post of a series suggesting ways households that weren't able to save enough can improve their retirement finances. The series began with "Inadequate Retirement Account (IRA)".

One of the ways to compensate for inadequate retirement savings is to work longer. Working longer is actually a highly leveraged strategy because it helps in several ways at the same time. Working longer can:

·       Reduce the cost of retirement by shortening it,

·       Give you time to save more,

·       Give your savings and investments more time to grow,

·       Extend your healthcare benefits, and

·       Increase your eventual Social Security benefits.

First, the longer you work, the longer you can delay spending down your savings and that makes them last longer. Your retirement will be shorter. While shortening your “golden years” may not be the most fun strategy, retirement will cost less.

(The bad news is your vacation is going to be shorter; the good news is it will cost less.)

Second, you may be able to save more while you’re working. Perhaps your employer will have a 401(k) plan, for example, and you can contribute to that. Maybe your employer will even match your contributions.

Third, postponing retirement will provide more time for your retirement savings to earn interest and grow. Fourth, your employer may provide healthcare benefits, one of the largest expenses you will have after retiring.

Finally, working longer may allow you to postpone receiving Social Security retirement benefits and each year you do that increases your eventual benefits by about 8%. (Maximizing your Social Security benefits will be covered in greater detail in a subsequent post.)

Working longer is not the ideal fix, however, for inadequate retirement savings for several reasons. First and foremost, working longer simply means not retiring. It’s like telling you that the solution to your problem of not being able to retire is to not retire.

Furthermore, most households will find that their retirement savings shortfall is far too great to fix by postponing retirement a year or two. The initial response of the financial trade press to the 2007-2009 stock market crash that devastated the retirement savings of millions of Baby Boomers was, “No problem — you’ll just have to work a few years longer.”

Upon further review, as they say, the problem is often too big to fix by working longer, even if you can work longer. See, for example, “Work to Age 70? For Many, That Still Won’t Pay for Retirement” from the Employee Benefit Research Institute.

According to EBRI, the lowest-earning 25 percent of Americans would have to work until age 84 so that 90 percent of them would have even a 50-50 chance of having enough money to afford basic living expenses and out-of-pocket medical care.

Perhaps the biggest problem with the “work longer” strategy will be your ability to do so. Also according to EBRI, “consistent with prior Retirement Confidence Survey findings, half of current retirees surveyed say they left the work force unexpectedly due to health problems, disability, or changes at their employer, such as downsizing or closure”.

In other words, half of retirees consistently report that they wanted to work longer but were forced to retire for reasons beyond their control. You may plan to work to age 70 or beyond, but whether you will be able to or not is a coin toss.

If you decide to work and collect your Social Security retirement benefits at the same time, you need to be aware of two potential Social Security-related problems.  For workers who begin receiving retirement benefits before full retirement age and continue to work, SSA may withhold some benefits¹ under the Earnings Test rule.

Once you reach full retirement age, the SSA will permanently increase your benefit to compensate for the benefits that were withheld. You won’t get back a lump sum, though. The withheld benefits will come back in drips and drabs.

Regardless of the age you elect to receive benefits, if you earn enough money from non-benefit sources, a portion of your Social Security benefits will become taxable.

It is even possible to have both some portion of your benefits withheld because you claimed early benefits and earned more than the Earnings Test limit and some portion taxed because you earned more than the tax-free limit.

These are issues to discuss with your tax professional, but you can generally avoid the Earnings Test withholding by:

·       Earning less than the limit ($15,120 annually in 2013),

·       Not claiming benefits until after you stop working, or

·       Not claiming benefits before you reach your full retirement age.

Your benefits won’t become taxable if most of your income comes from Social Security benefits. I wrote more on the topic in “Will Your Social Security Benefits be Taxed?”.

Working longer won’t fix the retirement savings problems facing most American households, but it can certainly help. My first piece of advice to families who find themselves approaching retirement with inadequate savings would be to work as long as you can, postpone Social Security benefits as long as you can get by without them, and save as much as you are able.

If you expect to earn more than the Earnings Test limit or the benefits taxability limits (see links above), then talk to your professional tax planner. It may pay to postpone claiming Social Security benefits.

And invest conservatively while you’re doing it — don’t risk making your shortfall worse.

In my next post, I’ll talk about the spending side of the retirement equation.

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¹ If you begin receiving benefits before your full retirement age and earn more than a set limit ($15,120 in 2013), the Social Security Administration (SSA) will withhold $1 for every $2 you earn above the $15,120 limit.