Financial Futures

Martha M. Hamilton
Washington Post Columnist
Tuesday, June 26, 2007; 12:00 PM

Washington Post columnist Martha M. Hamilton was online Tuesday, June 26 at Noon ET to answer questions about making smart financial decisions while preparing for retirement.

She was joined by Alicia Munnell, director of the Center for Retirement Research at Boston College.

This week's column focuses on ways to fix Social Security.

A transcript follows..

To read past Financial Futures columns, click here.


Martha M. Hamilton: We have an incredibly distinguished guest today, Alicia Munnell, who in addition to heading Boston College's Center for Retirement Research, has been a member of the President's Council of Economic Advisers and assistant secretary of the Treasury for economic policy. She is also one of the authors of the The Social Security Fix-It Book. Let's get started!


Vienna, Va.: Any chance the federal govt would ever allow people to opt for a buyout (i.e., one-time, lump-sum payment) of their expected social security benefits? If the payment were discounted in a way to reduce long-term expected costs to the government, wouldn't that strengthen the actuarial soundness of the problem? I've been paying into the system for 22 years, if the govt gave me an even signficantly discounted payment today, I'd take the money and run.

Alicia Munnell: The beauty of Social Security is that it provides an inflation-indexed monthly benefit for life. A source of income almost impossible to duplicate in today's financial markets. You don't want a lump-sum payment!!


Alexandria, Va.: Hi, I'm 38 and I'm planning to retire at 68. I'm assuming I'll receive no Social Security benefits at retirement, because there's no telling if these will be around 30 years from now. Is this a wise strategy or am I stressing out unnecessarily?

Martha M. Hamilton: I don't believe Social Security will disappear. It's too important to too many folks' well-being. If I'm remembering the figures right, it accounts for 90 percent of more of income for about 40 percent of retirees. So, save, but don't stress.

Alicia Munnell: The important thing to remember is that even when the Social Security trust fund is exhausted around 2040, scheduled Social Seurity payroll taxes can continue to provide 75 percent of promosed benefits. So even if we do nothing, benefits will continue.


Omaha, Neb.: Submitting early because of work. I am 27 years old with a net worth of approximately zero dollars. I am considering how I would like to invest my 401K, which will begin in a few months. I have been advised by several people that, given my age, I should be fairly aggressive with my 401K...putting 20-30% in aggressive funds (they have a wide variety to choose from). My boyfriend, whose fiscal advice I usually trust, says because my net worth is zero I should be fairly conservative, sticking to the SNP 500 and some bonds, and wait until I have built additional savings to get more aggressive. What are your opinions? Thanks so much!

Alicia Munnell: You're young, you can handle the greater risk associated with equities in order to get the higher return. Higher returns are key to accumulating an adequate nest egg.


Rockville, Md.: When I retired (last year) it seemed clear to me to convert my savings into annuities. I now have four sources of income and with two linked to inflation will be able to maintain a good life in the future. Why is all the advice for those who keep the cash? I did not have a fee to transfer from my Thrift Savings Plan. My taxes will be lower. And no foolish decision will rob my future.

Alicia Munnell: You're right. Inflation indexed annuties are the key to a secure retirement. That's one reason Social Security is so valuable.

Martha M. Hamilton: Inflation-indexed annuities are great, but some people want to allow their accumulated savings to continue to grow or just want to be able to used their savings in a more flexible way than they can with annuities.


Laurel, Md.: Ms. Munnell, I saw an online interview with you in which you discuss the cultural (if you want to call it that) significance of the switch from traditional pensions to 401k's.

I used to be a not uncommon practice in some companies to find ways to get rid of workers before they became vested. Has the 401k mitigated the effect of "un-pensioning" as a personel management tool?

Alicia Munnell: The advantage of 401(k)s is that workers have an account that they can take with them. Their contributions are vested immediately and employer contributions are vested relatively quickly. Thus, workers who spend only a few years with a company have something to take with them when they leave. Of course, the disadvantage of 401(k)s is that they shift all the risks and responsibility from the employer to the employee.


Hyattsville, Md.: Hi, Martha and Alicia,

I'm 30 and am planning to open a Roth-IRA this summer. What are your opinions on targeted-retirement funds where you pick your date of retirement and the fund automatically becomes more conservative as the date approaches? Does the Post have any articles on the benefits/dangers of these funds? I really like that I wouldn't have to think about rebalancing my retirement fund, but I wonder if they're not as aggressive as other mutual fund options.


Alicia Munnell: People tend to be very bad about re-balancing their investments when left on their own, so targeted retirement funds are probably helpful for most people.


Kensington, Md.: Did I correctly understand you to say, in a past column or discussion, that when one must start to withdraw money from IRAs, one must withdrawal the IRS age-specific proportion from each and every IRA? Or maybe you said if one didn't do that the trustee would report you to the IRS?

I ask because that seems at odds with recent Wall Street Journal columns which specifically state that the IRS views all IRAs as one big lump sum, and as long as the right proportion is withdrawn from the total (whether from one account or from many) the IRS doesn't care.

Thanks! Substantial Penalty For Messed-Up Withdrawal (By Martha M. Hamilton, June 10, 2007)

Martha M. Hamilton: No, I didn't say you must withdraw from each, but I did say that the custodians of you IRAs will probably send you information about what the correct percentage to withdraw from that account would be. But you don't have to take that amount or any other amount from a particular IRA as long as you withdraw the correct amount for others, or another.


Alexandria, Va.: Is it a good idea to stash 100 percent of my retirement savings in a tax-deferred 401k -- or should I include a Roth IRA (with contributions from my taxed earnings) as part of my retirement savings strategy?

Martha M. Hamilton: It's a good idea to diversify your tax strategies. If you are within the earnings limits and can open a Roth, I would suggest adding one to your portfolio. For one thing, your tax-deferred accounts eventually will be subject to required mandatory distributions, while the Roth won't be.

Alicia Munnell: Diversify by all means. A Roth has a lot of appeal if you believe tax rates will be higher in the future than they are today. Higher tax rates seem like a sure bet given the deficts in Medicare and Social Security and the current shortfall in the budget.


Vienna, Va.: I recently read an article in the WSJ that implied that buying an annuity was better than living off the interest of your principal. Do you agree?

Alicia Munnell: An immediate annuity provides a higher monthly income than just living off the interest and guarantees an income for life. The disadvantage is that you will not have the funds to leave as a bequest. But for most families it makes sense to annutize some portion of their portfolio.


Response to the 27 year old: That was a funny question-I love the way the writer put the zero dollars. I have news for them--they are going to be fine if they do the following: save right now, dont buy a home til really ready, dont marry unless you are really sure and dont buy a car that is expensive.

At 27--they will be working for four more decades--and some years on top of that. Even at 7%--they can retire with a decent chunk of change if they start NOW.

Martha M. Hamilton: a little reassurance from another reader.


Princeton, N.J.: I am a mathematician and I want to challenge the belief that we can rely on the projections that Social Security will surely be in trouble during the next 75 years. I want to apologize for cutting and pasting in arguments I have written before and for the length of this comment, but I believe this is important.

1. The demographics: Doom sayers say, "In 1945, for every Social Security beneficiary, we had 42 workers paying in. By 2002, we had just 3.3 workers per beneficiary. By 2030, we'll have only 2.2 workers per beneficiary." So what. I presume they somehow want us to conclude that Social Security is going to pot just by looking at this one statistic, i.e. this single statistic (workers per beneficiary) dominates all other inputs. Since they do not tell us the state of Social Security at any point, we actually can conclude nothing from this argument, and if we put in its current state, this argument shows exactly the opposite of what they want us to conclude!

Today Social Security is in the best state it has ever been in-the yearly surplus last year was the largest in its history. The SS Trust Fund is $1.5 TRILLION which is also its maximum. I don't have the figures for 2006, but they are similar. So what we have is that from 1945 to 2002, the number of workers per beneficiary decreased by 92%, but the health of Social Security is vastly better. Clearly there are other factors that dominate this one demographic statistic. Furthermore, if Social Security could improve its condition with a 92% decrease in this statistic, why should we worry about the 33% decrease they predict for the period 2002 to 2030?

2. The projections: Dr. Steven Goss, the chief actuary of the Social Security Administration is careful to point out that what he makes are _projections_, not _predictions_. They are based on assumptions, i.e. he says that _if_ this happens _then_, this will happen. These assumptions cannot be computed, he says, because they are event driven. You would have to be a fortune teller to even make an estimate. Because of this, he actually makes three projections. The one you are quoting is the "middle" projection. If you look at the record, you will see that his "high" projection has been consistently and significantly more accurate than the middle one. The high projection says that the SS Trust Fund will not go to zero during the next 75 years, SS will be able to pay all promised benefits, and there will be a surplus in the trillions at the end of the period.

3. An assumption: The middle projection of the Social Security Administration (the one you quote) assumes that the average growth in the GDP will be 1.78% over the next 75 years. If you just change this one assumption, keeping all the horrible demographics that you believe in, to 2.7% and do the exact same computation, then you get that the SS Trust Funds never goes to zero, all promised benefits can be paid, and there is a huge surplus at the end of the period. The average growth in the GDP over the last 75 years was 3.1%. I am not saying what the growth in the GDP will be (that would not be mathematics, but fortune telling), I am just saying that the exact same mathematics that gives you the bad forecast with the very low assumption, gives you a good forecast with a more reasonable one.

4. We must act now: In 1983, the SS Trust Fund was _one year_ from depletion. The government convened a commission that looked at the problem, made a few minor changes in SS (can you even name them?), and, behold, SS was safe for at least 30 years and maybe forever.

To sum up: The projections of the demise of SS are no more accurate than reading the entrails of a goat and we would be foolish to make any great changes because of them.

Alicia Munnell: All projections -- especially those made over 75 years -- involve some uncertainty. But given what we know, the Actuary's intermediate estimates are a reasonable best guess. They show that the problem is manageable, and we should definitely take steps to solve at least the 75-year problem -- sooner rather than later, since the longer we wait the larger the required adjustment. I would be very surprised if we were able to 'grow' our way out of the shortfall.


Pessimists: Social security will be around in some form. If you are scheduled to get $2900 a month--you might only get $1800 but at least it is something.

I think the key is not to plan on living on that money. We should consider it more of a bonus. My F-I-L considers his SS to be just a nice extra amount he gets every month.

Martha M. Hamilton: Many people don't have the luxury of considering Social Security as a bonus. That's why it's important to keep it intact.

Alicia Munnell: I agree. For most people, Social Security serves as the base of their retirement income. That is, it is essential, not just 'nice to have.' It will be around in the future because taxes are already scheduled to pay about 75 percent of promised benefits. The debate is whether we want benefits cuts or not. That is, are we willing to put more money into the system.


Hague, Va.: Hello Martha, I heard former Senator Bill Bradley promoting his new book on NPR and he said people need to save $150,000 for retirement. What do you think?

Alicia Munnell: Senator Bradley may be 'low balling' the required amount. People in the middle of the income distribution probably need more than that. Social Security even under current law will replace less of pre-retirement income in the future than it does today. The reasons are that the Normal Retirement Age is moving from 65 to 67, which results in larger actuarial reductions for people reting early, and Medicare premiums will take an increasing bite out of your Social Security check.


Raleigh, N.C.: Two questions: 1. Assuming there would have been enough in the national SS trust fund had Congress and Presidents not spent it, why not take a national level solution such as a VAT tax to procure the revenue to fix it? 2. How much of the problem could have been addressed by the money we have squandered in Iraq? I have seen ecnonmist's projections that suggest all costs including on going care for the wounded, lost salaries and long term interest on the debt accumulated could be as high as two trillion ! Thanks

Alicia Munnell: We could have solved a lot of problems with the money spent in Iraq.

Martha M. Hamilton: Amen.


Winston Salem: I've been reading a bit about "over-saving" ... that is, some experts say people are putting away TOO MUCH in their 401Ks. What's your take on that?

Right now, I contribute 22 percent of my salary to my 401(k) ... my wife contributes only 10 percent to her own. In addition, I put another $300 a month towards a life insurance policy I can draw against. And I try to put away $1000 a month for savings. I earn about $70,000 a year.

Alicia Munnell: In general, people are not over saving. Most boomers will not have enough to retire comfortably in their early 60s. You, however, appear to be a major exception!!


Charlotte, Va.: I retired from local government at the end of the year and have a traditional pension that is adequate. I have a 401(K) with about $8500 and a 457 with $135,000. Right now I'm not hurting for cash but I wonder if it would be good to start taking out the 401(K) and deplete the account. Your opinion? I'm 54, if that matters.

Alicia Munnell: If your local government pension is not fully indexed for inflation, it may not seem so adequate when you're 75 or 80. I would be careful about spending your 401(k)or 457 balances.

Martha M. Hamilton: If you don't need the money now, why not let it continue to grow for you?


Anonymous: Is it better to start receiving my social security pension at age 62 or wait until full retirement age?

Martha M. Hamilton: I recommend waiting. Then, when you receive the cost-of-living adjustments, it will be on a bigger base.


Washington, D.C.: What are the pros and cons of merging several 401K accounts. I have $48K in one account and just started a new job that provides a 401K but through a different company.

Martha M. Hamilton: The pro is that it's easier to keep an eye on how you're doing and to manage your asset allocation (risk v. conservative) if the funds are in one plan. A possible con is that it may narrow your investment options. In addition to moving your old 401k to your new one, you may want to consider moving it to an IRA where your investment options would be even wider.

Alicia Munnell: One other consideration is administrative cost. For example, people in the government's Thrift Savings Plan might experince a significant increase in expense if they moved their funds.


End-of-Month Blues: Help! Both my husband and I get paid at the beginning of the month, via direct deposit. At the end of every month, we are struggling to make it to pay day -- down to the last hundred dollars or so in our checking account. We have good savings and money market accounts, so there is a cushion in case of emergency. We are also contributing to our employee retirement plans. Still, I feel like we should be able to make it to the end of the month on our salaries. Is there some way I could automatically set aside a little bit to be transferred into our checking account towards the end of the month?

Martha M. Hamilton: I spent many years in the same situation. And what I did was just cut expenses to the bone and look for additional sources of income (including selling things through consignment shops) until I got to the point where I could carry a little extra money in the checking account into the next month and then a little more. It took a long time. You're doing well that you have the money market accounts for emergencies. In that stage of my life, I didn't. I wish I had more satisfactory advice, but I think that's the only way to do it. Setting aside a little bit to be transferred into your checking accounts toward the end of the month sounds a bit like trying to hide the money from yourselves so that you don't spend it. You need to look it in the eye and not spend it. And I know how hard that can be when you're barely living on what you make. What's the old saying? I've got more month at the end of my money than money at the end of my month.


Laurel, Md.: Ms. Munnell,

I recently read a couple of books by finance writer Stephan Pollan. His advice is "don't expect to retire." In over-simplified summary, he says that retirement was invented in the 1930's and that three generations got or will get to retire, each by figuring out a way to steal from their children.

In the 30s-50s they retired on Social Security that they didn't pay into

In the 60s-80s they retired on pension benefits

In the 90s-about 2010 they'll retire on stock market and real estate income

Those of us who are younger and PAID Social Security, pension contributions and high stock and real estate prices, don't have another source of income to take from OUR children.

Even if this is a slight exageration, doesn't it summarize why people now less than about 50 should expect to work until disabled?

Alicia Munnell: It's not that bleak, but the retirement income system is contracting. Social Security replacement rates will decline under current law, and most people have only modest 401(k) balances. This is a serious problem given that people are living longer. The way out of the box is to work longer -- 2 to 4 years makes a big difference. You don't have to die at your desk.

Martha M. Hamilton: Another answer is to start saving earlier. Most of those who are approaching retirement now didn't have 401k plans and IRAs when they were just starting out as today's younger workers do.

_______________________ Your Age to Benefit (By Martha M. Hamilton, Oct. 29, 2006)


Gaithersburg, Md.: Your recent articles, and the articles of other authors, dealing with retirement, and the advice to "Contribute the maximum amount allowed to your 401(k)" to prepare for a comfortable retirement remind me of an old Steve Martin comedy bit about how to become a millionaire which starts with, "First, get a million dollars." If I could afford to contribute the max. to my 401(k)and still keep a roof over my family's head and food on the table, I would not be worried about retirement. Give us some realistic advice.

Alicia Munnell: If maxing out is too hard, then at least contribute enough to receive the entire employer match. That is, if your employer matches up to the first 6 percent of your contribution, then try to contribute 6 percent.


Laurel, Md.:"I really like that I wouldn't have to think about rebalancing my retirement fund, but I wonder if they're not as aggressive as other mutual fund options."

These funds are for people who are too scared or unkowledgeable about asset classes to allocate themselves. If you think a fund is too conservative, you probably know enough to do your own allocation, and shouldn't be swayed by the default option given offerd to those less knowledgeabe than you.

Alicia Munnell: Most people -- including me -- do not make very good investment decsions when left on our own. We tend to panic when the market goes down and sell; when the market bounces back, we buy back in at a higher price. Selling low and buying high -- a very typical pattern -- is not a good way to accumulate a retirement nest egg. You might be fine on your own, but you're the exception.


Silver Spring, Md.: Hi, I'm a relatively young professional who is looking to open an IRA. However, I have no idea about who I should be going to for such services. How does one go about "shopping" for an IRA? Do I simply find a bank/fund manager I like (using what criteria?), or look for a specific IRA plan I like (again, using what criteria?)? How are IRAs different between competing banks/fund managers?

Martha M. Hamilton: The NASD has some good information on its website for investors who are just starting out, including a tool that allows you to compare fees for funds.


Rockville, Md.: I read a piece from Frontline in which Alicia disucsses the difference between being a front-end and back-end baby boomer. Being the latter msyelf, I'm quite sensitive about being lumped in with those a little older and, IMO, more fortunate than I.

How much has the income of back-end boomers been held back by lack of promotion vacancies, because the front-end boomers already have the jobs?

Martha M. Hamilton: If The Washington Post is typical, the younger boomers are doing well in terms of promotions. I think the leading edge boomers would tell you they are worried about being pushed out to make way for younger workers. We all have our worries....

Alicia Munnell: In terms of retirement income, late boomers will have a harder time than early boomers. You late boomers will almost always have to rely on a 401(k) plan, where balances tend to be very modest. Social Security will also provide less relative to pre-retirement earnings than it will for the early boomers. Also, I'd be surprised if you will see another runup in house prices like the one we saw in recent years. Plan to work longer -- the early boomers will be gone! -- and you should be fine.


Princeton, N.J.: Me again(somewhat cooler). How can you tell the person that it is better to wait to get his SS? It depends on his situation (e.g. his health) and how well he expects to be able to invest the money. You can compute how long you would have to live until the larger payments you get by waiting exceed the money you got early, but you don't know how much the early money would earn for you. I made some guesses, did the computation and it came out a wash. Fortunately for me, I took the money at 62 because I got an extra $10,000 a year because my daughter was under 18. I didn't know about this when I made the decision

Alicia Munnell: Social Security provides a unique benefit -- an inflation indexed annuity. Since it is virtually impossible to duplicate this stream of income, it makes sense to maximize the amount.


Washington, D.C.: I hate to admit my ignorance, but what exactly IS an annuity?

Martha M. Hamilton: There are several variations. I think the one the reader was talking about is a single premium annuity. You make one payment, say with a lump sum received in a buyout, and the annuity makes monthly payments for the rest of your life. Some are adjusted for inflation.


Hague, Va.: OK, so Senator Bradley may have been low balling on the savings of $150,000 for retirement for someone on the middle income distribution. What is the middle income distribution and how much do they need to save?

Alicia Munnell: A couple approaching retirement earning about $55,000 is in the middle of the income distribuution. To be comfortable, this couple should have about $250,000 -$300,000.


Bowie, Md.: What's the justification for the "you need 70 percent of working income in retirement" adage?

My aunt lives well on about $25k, since she owns her condo and doesn't pay income taxes.

Martha M. Hamilton: The percentages you hear range from 70 to 90 percent, but I don't think any pat formula fits everyone. For instance, if you've been living (through credit) on 120 percent of your income before you retire, 90 percent will leave you short. You need to look at what your fixed and anticipated expenses will be in retirement and use them, not an arbitrary figure, as the guage.


Virginia Beach: I'm in my mid-40s and am concerned that the burden of the "fix" is shared evenly among the generations in light of politicians unwillingness to say/to do much that offends likely voters (particularly, the elderly). No offense, but Martha's proposed fixes in her column the other day primarily focused on hitting me and those younger than me. What do you propose that's a fair fix for everybody?

Alicia Munnell: I am very concerned that people will not have enough retirement income going forward. Social Security will provide less -- relative to pre-retirement -- income even under current law. But there is no silver bullet, maintaining even diminshed benefits requires putting in more money. It is hard to cut the benefits of those already retired because most have no way to adjust to a sudden drop in their income. In 1983, Congress delayed the COLA for six months. That would be the most that could possibly be done.

Martha M. Hamilton: My rationale in my choices was to make the changes in a way that gave those for whom the rules would be changed enough time to adjust. Just as I had when the rules for drawing full Social Security were changed in the 1980s.


Kids and your future: The guy complaining that he would save more for retirement if he could is looking at it all wrong.

We don't have kids. We have plenty of money but everyone can have more. Kids are very expensive. I am going to need 2-3 million to retire decently. I can't afford kids.

I dont get why I can figure that out at only 34 with significant cash reserves yet other people can't??

Alicia Munnell: That's what happened in Europe and the population is declining. Go ahead, have kids. Some day they will give you grandchildren.

Martha M. Hamilton: And they may help take care of you when you're old. My 93-year-old mother would be spending way more money without the care that my sister and I provide.


Shepherd Park, D.C.: Do you think there's any hope of raising the contribution limits on IRA's and other retirement plans? I'd be happy to fund more of my own retirement if I were allowed to.

Alicia Munnell: Only about 10 percent of people covered by 401(k) plans are constrained by the caps, and only a fraction of those eligible to contribute to an IRA do so. Caps aren't really the problem.


Rockville, Md.: What advice do you have for someone age 61 whose entire life savings have been wiped out due to the cost of catastrophic illness in the family? Everything saved is gone and credit is maxed out, there is no house or car to sell, no restaurant or vacation habits to curb because there has been no money for these things for years. Holding two p/t jobs and a f/t one does not even come close to making a dent in the costs.

Martha M. Hamilton: I'm so sorry to hear about your problems. Please e-mail me, and let me see if I can think of any resources.


Silver Spring, Md.: My parents are in their early-to-mid 50's and are getting to a point where they want to retire soon. However, they are also looking to put about $50,000 worth of upgrades into their home (some necessary, like new windows, and some more cosmetic, like granite countertops). I don't know (and it's, to some extent, none of my business) how much they have saved for retirement, but I'm pretty sure it's not much. I know my dad has a pension from a former employer coming, and that they probably put away something (although not the IRS maximum) in their 401ks now. Should they be taking out a home equity loan for these improvements? I know they don't have the cash to do it, but it seems to me that they would be better off in retirement with a laminate counter top than $50,000 in debt on their home. Thoughts?

Alicia Munnell: People spend a lot of time in their home in retirement. So if they are not really strapped, let them have a nice retirement nest. Moreover in the future, the market for reverse mortgages may let them access some of the money that they have in their house to cover living costs as they get older.


Martha M. Hamilton: So many good questions, so little time. Thanks for joining us, and special thanks to Alicia Munnell. If you have ideas for future columns, please e-mail me at See you next time!


St. Cloud, Minn.: I would be interested in hearing your views on annuities, and on any resources you know that discuss the pros and cons in detail. I plan to retire at age 69, with a solid TIAA-CREF account. I am thinking about converting part of it to a lifetime annuity. If I don't, I will have to withdraw the minimum distribution within a year or so of retiring. TIAA tends to recommend their annuities. Other advisors are more skeptical. I have yet to find anyone who goes into much detail.

Any thoughts you have along these lines would be greatly appreciated. Playing It Too Safe ( By Martha M. Hamilton, Dec. 10, 2006)

Alicia Munnell: It makes good sense to convert some of your accumulations to an anuity. It is the best way to guarantee a benefit for life and gives a higher monthly income than living off the interest.

Martha M. Hamilton: Whoops. An answered question I overlooked before I said goodbye.


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