With Donna Rosato, Senior Editor at Consumer Reports
Donna Rosato is Senior Editor at Consumer Reports and the past Senior Writer at Money Magazine who writes frequently about personal finance and money issues.
One of the questions she hears often in our culture of high divorce rates concerns collecting social security benefits from an ex-spouse. The answer to that is, yes, if the marriage has lasted at least ten years, and you are at least 62 years of age and not currently married. Even if the ex-spouse has remarried, you are still entitled to 50% of the benefits (if you wait until the age of 66) and a lower percentage if you take the benefits before that age. Special circumstances do sometimes apply, so it’s advisable to check with Social Security for these matters.
Running out of money in retirement is another issue Donna frequently encounters, and she always stresses the importance of planning for a cushion to ride you through the unexpected. Although many expenses, such as housing or taxes, may stay the same after retirement, many won’t, so it’s important to calculate a number that makes sense for your income level and lifestyle.
Coming up with a budget that factors in both fixed expenses and those more arbitrary costs such as travel plans, unexpected household repairs, etc. are key to feeling secure after the paychecks stop coming. Donna goes on to explain that in retirement “…you’re no longer saving. There are some costs associated with working, like commuting and eating out. Spending more money for the things that you don’t have time for so you pay for conveniences, but a lot of retirees that I speak with, they live just fine on less than that. 70% of your income, even 60%, and if you run some of those numbers, so say you need to accumulate 10 times your final income but you only want to save, say 60%, now you’re talking about maybe if you’re earning $75,000 a year, saving $500,000. Or if you could work a little bit longer to 67, then you could save $400,000. Those are more attainable.”
Since life throws out curve balls in the form of unexpected expenses, Donna strongly advises having that comfortable cash reserve to dip into without upsetting your monthly budget, and that is generally an amount of cash to cover a period of 12 to 18 months. Even if you have a healthy portfolio, the importance of keeping a cash reserve can not be discounted.
The balancing act here, however, according to Donna “is the danger of having too much of your savings in cash. As we all know, you can’t earn a whole lot in a bank account these days. You kind of want to balance that cash cushion out with investments that are really going to keep growing.”
The best way to take the guesswork and the panic out of your retirement planning is to seek the advice of a trusted financial advisor.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: I love Q & As, and I’ve decided to do a segment of Q & As with none other than Donna Rosato who is senior writer at Money Mag where she writes about financial challenges facing retirees today, along with some other things. Welcome to the show, Donna.
Donna Rosato: Hey, Steve. Great to talk with you.
Steve Pomeranz: You know the first question that is asked is, “Can I collect social security from from my ex? I’ve been divorced twice, currently not married, can I draw social security off either ex-husbands?” And she goes on to explain some of the details. What is the answer for her?
Donna Rosato: I just want to say that is one of the most popular posts that we have had on our website. I guess the issue is even if your marriage didn’t work out, you can still benefit from this relationship. The bottom line is yes. You can collect social security benefits based on the earnings of a former spouse. You have to have been married at least 10 years, so the marriage had to have some staying power, and you have to be at least 62 just like anybody else who wants to start collecting social security and not currently married.
Steve Pomeranz: Okay, so no short-term marriages just to collect social security, right?
Donna Rosato: Yeah. Unfortunately, not. You’ve got to keep it together for about 10 years.
Steve Pomeranz: Okay, so you better have the right reasons because 10 years can be a pretty long time if you’re married for the wrong reason, right?
Donna Rosato: Yeah. I would give a nuance to the question of, “Can I draw social security on either of my ex-husbands?” This person has been married a couple of times, but she was married to the first one for 16 years, the second to 11, so she does qualify. What it comes down to is you can collect on this ex, but there are a couple of nuances, too. One of the things is for you to think about, what is your own social security, and measure it against what you would get for the ex. Even if your ex is remarried you are still entitled to the benefit and it’s 50% of the benefits, but just like anyone else collecting social security, you’ll get less if you start taking that money before you turn full retirement age, which is 66, right now. This reader was 62, so one other piece of advice I have is… sure you could collect, but wait as long as you can and you’ll get more.
Steve Pomeranz: Donna, here is our 2nd question. “I’m in my 8th year of retirement. A few years in, I found myself spending a considerable amount on repairs and upkeep on my old house. I also have to replace my car, but luckily I was able to build up a reserve fund to cover costs, so I didn’t have to dip into my investments for these life events, or ‘life happens’ events”, she says. What is your advice on how much cash a retiree should have on hand to feel secure?
Donna Rosato: One of the biggest fears folks have is running out of money in retirement. If you have these situations that come up, big repairs, maybe it can be a medical crisis, you can go through your cash pretty quickly. What I advise is, of course, everyone should have an emergency fund to handle these unexpected expenses. When you’re no longer earning an income and you’re a retiree, you’re going to need to have a larger cash reserve.
Steve Pomeranz: Many financial advisors will say 6 to 12 months is a good cushion. I know you interviewed other financial planners for this article. What did some of the others say?
Donna Rosato: As you said, folks really recommend 6 to 12 for someone who is working in a stable job, but for retirees, folks I’ve talked with, financial advisors recommend at least 12 to 18 months of cash. That should be enough to cover not just your daily expenses, but any emergencies that crop up. One of the financial advisors that I talk with said it’s like a safety valve. Here is the thing, if you don’t have the money, you might have to dip into your retirement savings that you really didn’t want to touch. You’re going to really miss out on some of that gross if you have to pull that money out.
Steve Pomeranz: Especially if the need coincides with the bear market, then you’re pulling money out at the worst time ever.
Donna Rosato: That’s exactly right. One thing I have found interesting is that behaviorally, people save, save, save for retirement. At least you should be. When those folks enter retirement, they tend to have most of their money tied up in their investments, whether it’s a 401k or an IRA. You want to start building up some cash before you’re actually in retirement. You actually need money to pay your bills. You should start putting money into savings accounts while you’re still earning money, trying to build up that cash cushion. If you need to move a portion of say an IRA into that cash account when you enter retirement, that’s fine, but you don’t want to have to dip into it all at once.
Steve Pomeranz: Right. You know, I think another caveat is the degree to which you have a pension which will smooth out your income stream. I wouldn’t think that you’re going to need 18 months worth of cash sitting around if you’ve got a very good pension that’s covering a good portion of your living expenses. I think there are more personal caveats to this because for me, to think about having 18 months of cash sitting around, especially at 0%, I think that may have a detrimental effect on your portfolio for a long period of time. Final words on that?
Donna Rosato: Yeah, that is a really on point observation. That how much you need really depends on your individual circumstances. Maybe you don’t have to set aside as much as someone who doesn’t have enough to cover their daily expenses necessarily with a cash cushion, but maybe just want to save enough for an emergency. Yes, the danger of having too much of your savings in cash, as we all know, you can’t earn a whole lot in a bank account these days. You kind of want to balance that cash cushion out with investments that are really going to keep growing.
Steve Pomeranz: I’m talking to Donna Rosato, senior writer at Money Magazine. Here is another question, Donna. “I am a 52 year old single mother. I have no savings at all for any kind of retirement. What can I do? Where should I start? I also want to start something for my daughter who is 13. Please, I would really love your help.”
Donna Rosato: This is a question that a lot of folks have and a situation that a lot of people are in.
Steve Pomeranz: I know. I see it, too.
Donna Rosato: I need to save for retirement. I have nothing saved at all. I’m in my 50s. You’ve got a lot of company there. What I do believe and financial planners say, “It’s never too late.” There is a lot you can do. If you’re at the point in your 50s where you may be at your peak earning year, or your kids are grown and gone and they don’t need so much money from you, you can really, if you’re disciplined, start saving. I think you have to start at what’s your goal? If you’re 52 and you have nothing saved, you have to probably work, at least, until you’re 65 and perhaps longer, if you want to have a certain type of lifestyle when you retire.
Steve Pomeranz: In a response in a Money Magazine article there were some numbers thrown around here. I wanted to discuss them with you. There was one planner that estimated that to maintain your current living standard, you need to accumulate 10 to 12 times your annual income by age 65. If you’re earning $75,000, a year you might need $750,000 to $900,000 at age 65. Do you really think that’s a correct number? I’ve heard much higher numbers than 10 times your income.
Donna Rosato: Those are some scary numbers. Those are big numbers. The data assumes that your expenses will be the same in retirement as they were before. Those estimates are based on replacing 80% of your pre-retirement income. You don’t need 100%. You’re no longer saving. There are some costs associated with working, like commuting and eating out. Spending more money for the things that you don’t have time for so you pay for conveniences, but a lot of retirees that I speak with, they live just fine on less than that. 70% of your income, even 60%, and if you run some of those numbers, so say you need to accumulate 10 times your final income but you only want to save, say 60%, now you’re talking about maybe if you’re earning $75,000 a year, saving $500,000. Or if you could work a little bit longer to 67, then you could save $400,000. Those are more attainable. One other thing I just wanted to know is, don’t forget, those numbers don’t include social security.
Steve Pomeranz: Right.
Donna Rosato: You will receive social security. That is a regular form of income that you should count on.
Steve Pomeranz: I think the lesson is don’t panic. People figure it out. We see it time and time again. They spend according to their resources. Let’s go to another question here. I really like this question. “I have an investment portfolio outside of my retirement plans. That portfolio kicks out dividend and interest income. If I roll all that income back into my portfolio, can I count that towards my retirement savings rate?”
Donna Rosato: This is a really interesting question. A lot of older investors, especially, have investments that produce dividends and interest-bearing income. Once you’re retired, you want to say that those tend to be a little bit more conservative investments, but, as much as you might want to count that income, even if you reinvest it, it’s not something you should include in your savings rate.
Steve Pomeranz: No.
Donna Rosato: The reason is there are really two parts to the return on your savings. The appreciation—how much it grows—and the income. Now you hope your investments increase over time, that what you’ve invested in, whether it’s a stock, a bond, or a mutual fund grows, but your growth and your potential for it to grow is also the income. That is figured into your return.
Steve Pomeranz: Right. You can’t, it would amount to what would be considered double-dipping. If you’re looking for a 7% rate of return and your dividends are 2%, that 2% is part of the 7% rate of return. You can’t include it in terms of that’s money put aside. Adding money to your savings means taking money from the outside and then adding it to it. Let’s go to the next questions. “My employer offers a 401k plan with a match, but all the funds in the plan have fees greater than 1 and a 1/2%. That seems expensive. What should I do?”
Donna Rosato: Well, certainly one of the top things you should look at in the 401k plan—unfortunately, it’s something a lot of people don’t think about so kudos to this reader who has looked at it—but it’s tough to understand. A couple of years ago in 2012, there were federal rules that were passed, that went into effect, that required people who administer 401k’s to give better disclosure and transparency about what kind of fees they’re paying. There are a lot of fees. There are fees for just the record keeping and the administrative costs. Then some of the funds charge management fees. That could be quite hefty.
Steve Pomeranz: Right.
Donna Rosato: To put this into perspective, this reader says, “Every single fund in my plan has more than 1.5%.” That does seem pretty steep. If that fee doesn’t include administrative costs, you’re on the high end. Generally 401k, when you put all the fees together, range from about 0.5% of the assets in your account to 1.5%. 1.5% is on the high end if it doesn’t include additional fees for administration, yes. This person is paying a lot.
Steve Pomeranz: You also mentioned a website that I wasn’t aware of. I think it’s a website. Bright Scope, which rates more than 50,000 401k’s, and it gives you an idea of how your fees compare to other plans. That’s Bright Scope. As reflected in the article. I would say finally on that note, if you find that you’re paying very high fees, say something. Go to human resources and complain, and maybe bring some statistics along with you because a decent sized firm is going to be worried about the department of labor and staying within correct parameters. They’re going to want to … sometimes they take their eye off the ball, so you want to put their eye back on the ball. Well, Donna, unfortunately we are out of time. Again my guest has been Donna Rosato, senior writer at Money Magazine where she writes about financial challenges facing retirees today. That’s Donna Rosato, you can see her online. Donna, that was fun. Thanks so much.
Donna Rosato: Yeah. Really enjoyed talking with you. Thanks a lot Steve.