The Money Class Part 9

- Can you afford to stay in the house? Please stand in the truth here: Even if you pay off the mortgage, will your retirement income be enough to cover property tax, insurance, and maintenance costs? I know it is hard to contemplate moving from a home you love and have put so much into, but what would be even more heartbreaking would be to realize at age 75 or 80 that you really can't afford the upkeep of your home and then be forced to uproot yourself at a time when moving may be more trying, both physically and emotionally. If your taxes and maintenance costs are eating up a significant portion of your income today, you have to question how you will be able to handle the payments when you retire; unless you have a big inheritance or have been squirreling away tons of money, it's likely you will have less income in retirement, not more. If that is your truth, please stand tall and be realistic. Rather than worrying about your mortgage in retirement, you should think about downsizing to a less expensive home sooner rather than later. The faster you get into a less expensive living situation, the more time you give yourself to save more because of your reduced expenses. Please stand in the truth here: Even if you pay off the mortgage, will your retirement income be enough to cover property tax, insurance, and maintenance costs? I know it is hard to contemplate moving from a home you love and have put so much into, but what would be even more heartbreaking would be to realize at age 75 or 80 that you really can't afford the upkeep of your home and then be forced to uproot yourself at a time when moving may be more trying, both physically and emotionally. If your taxes and maintenance costs are eating up a significant portion of your income today, you have to question how you will be able to handle the payments when you retire; unless you have a big inheritance or have been squirreling away tons of money, it's likely you will have less income in retirement, not more. If that is your truth, please stand tall and be realistic. Rather than worrying about your mortgage in retirement, you should think about downsizing to a less expensive home sooner rather than later. The faster you get into a less expensive living situation, the more time you give yourself to save more because of your reduced expenses.

THE BENEFITS OF PAYING OFF YOUR MORTGAGE.

If you answered an emphatic yes yes to both of the questions above, then I have to tell you that paying off your mortgage is an especially smart move in today's investing environment. Right now safe bank and credit union accounts such as certificates of deposit aren't paying more than 1% or so. If you were to use savings to pay off a mortgage that is costing you 5% or 6% (the mortgage interest rate) you would have just earned a higher return on your money: You wiped out owing that 5% or 6% with money that was sitting around earning just 1%. Now, of course you could also use your bank CD for other investments that you think could earn you 5%, or 6% or even more. But let's stand in the truth here: There is no investment in today's market that can give you a risk-free guaranteed 56% return. A dividend-paying stock or ETF might earn that much might, but it could also fall in value too, right? There's no such risk when you pay off your mortgage. to both of the questions above, then I have to tell you that paying off your mortgage is an especially smart move in today's investing environment. Right now safe bank and credit union accounts such as certificates of deposit aren't paying more than 1% or so. If you were to use savings to pay off a mortgage that is costing you 5% or 6% (the mortgage interest rate) you would have just earned a higher return on your money: You wiped out owing that 5% or 6% with money that was sitting around earning just 1%. Now, of course you could also use your bank CD for other investments that you think could earn you 5%, or 6% or even more. But let's stand in the truth here: There is no investment in today's market that can give you a risk-free guaranteed 56% return. A dividend-paying stock or ETF might earn that much might, but it could also fall in value too, right? There's no such risk when you pay off your mortgage.

I also need you to tune out any naysayers who tell you it never makes sense to pay off a mortgage ahead of schedule because you will lose the valuable mortgage interest tax deduction. Be smart here: In the early years of a mortgage it is true that the bulk of your monthly mortgage payments go toward paying the interest on your loan, and those interest payments are what is tax-deductible. But as the years go by your payments pay off more princ.i.p.al than interest, so the value of that deduction gets smaller and smaller.

For example, let's say you are 50 years old and you just bought a home or refinanced with a $200,000 mortgage. Let's say your interest rate is 4.5% on a 30-year fixed-rate mortgage. That means your monthly payment is $1,013, or $12,156 a year.

If you just keep up with the monthly payment for 20 years, you will reach age 70 still having 10 years of payments left to make. And even though you are two-thirds of the way into paying off the mortgage, your remaining balance is still nearly $100,000, because your payments in the early years mostly went toward paying interest, not princ.i.p.al.

So here you are at age 70, ready to retire. Your plan is that you will just make annual withdrawals from your 401(k) to cover the mortgage. To generate the $12,156 you will need each year requires that you start with a 401(k) balance of at least $500,000. That in itself is a tall order.

As I will explain later in this cla.s.s, a solid rule of thumb is to aim to withdraw no more than 4 percent of your retirement a.s.sets in your first year of retirement. (You then adjust that for inflation in subsequent years.) So 4 percent of $500,000 is $20,000. But remember, there will be federal income tax, and possible state tax as well, if the money is withdrawn from a traditional 401(k). I am going to a.s.sume you will have no more than $15,000 left after paying the tax. Granted that's more than your annual mortgage cost, but please realize that the $15,000 or so is probably going to need to cover not just your mortgage but also your other housing-related costs, such as property tax and insurance on the home. At the end of the day, that could be a tight squeeze-and that's making the a.s.sumption at the outset that you have a sizable retirement fund to work with. And bear in mind that these are just costs a.s.sociated with the home. We haven't yet accounted for other living expenses, such as food, electricity, clothing, healthcare, entertainment, etc. And if you were to use most of your 401(k) to cover the mortgage, are you confident your other income sources-such as Social Security-would be enough to allow you to live comfortably in retirement?

The truth is, I know that many of you will not have ample savings in your retirement funds to cover your mortgage and other living costs, no matter how much you can manage to save between now and retirement. So that is why my advice is-if you answered an unequivocal yes to both of those major questions above-that you make it your goal to get the remainder of your mortgage paid off now. Going back to my example, I think it is more sensible to set as a goal paying off the $100,000 or so left on your mortgage before retirement, rather than hoping you will have enough income in retirement to cover the mortgage and and your other living costs in retirement. your other living costs in retirement.

HOW TO PAY OFF YOUR MORTGAGE AHEAD OF SCHEDULE.

Get a New Amortization Schedule At what age do you think you will retire and by when would you like to pay off your home? Later in this cla.s.s I will make a case that you consider working at least until age 66 or 67 in order to maximize your other retirement benefits, including Social Security. I recommend you use that as a general target. But if you think you may need or want to retire earlier, or you know enough about your industry that it is unlikely you will be able to stay at your current job-and your current salary-all the way until 67, then please stand in the truth and aim to have your mortgage paid off even earlier.

The next step is to call your mortgage company and ask them to send you a new schedule of your payments-called the amortization schedule-that would allow you to have the loan paid off by the date you choose. This will tell you what you need to send in each month to get the loan paid off by that target date.

You can get an idea of what your payments would need to be to accelerate paying off your mortgage by using the mortgage payoff calculator at www.bankrate.com.

Let's say you are 55 years old and have 25 years left on a $200,000 30-year, fixed-rate mortgage that you took out with a 6.0% interest rate. I realize interest rates as of this writing are considerably lower, but I also know that many of you who took out mortgages during the last gasp of the real estate bubble may have been unable to refinance because of lost equity or a lost job, or maybe the new tighter lending standards banks are currently imposing meant you were turned down.

EXTRA PRINc.i.p.aL PAYMENT ADDED TO $1,200 BASE PAYMENT.

AGE WHEN MORTGAGE IS PAID OFF AGE WHEN MORTGAGE IS PAID OFF.

TOTAL SAVINGS (INTEREST PAYMENTS YOU AVOID) TOTAL SAVINGS (INTEREST PAYMENTS YOU AVOID).

$0 a month 80 80.

$0 $0.

$200 a month 71 71.

$79,800 $79,800.

$300 a month 69 69.

$101,100 $101,100.

$500 a month 65 65.

$129,150 $129,150.

If you don't add extra payments you will have the mortgage paid off when you are 80 years old. So the question you should be asking yourself is whether you will be able to keep making that payment through your 60s and 70s, or would it make more sense to find $500 a month today while you still have a paycheck coming in, so you could be mortgage-free by age 65? Let's really think about that: Find $500 more a month today, or else put yourself in the pressure-packed situation of needing to keep paying $1,200 a month from the age of 65 to 80-years when we both know you will not be working at all, or just working part-time-before the mortgage is fully paid off. Stand in your truth: Of course it makes sense to try to pay off the mortgage sooner rather than later. And an added benefit to keep in mind: By accelerating your payments you will avoid owing more than $100,000 in interest payments. That's a huge savings. But the real savings here in my opinion is the money (and stress!) you won't need between the ages of 65 and 80 to keep paying off the mortgage.

How to Come Up with the Extra Money Accelerating your mortgage payments is something to be considered only if you are in good financial shape. That means: - You have an eight-month emergency savings fund.

- You do not have any credit card debt.

- You own your car outright, and you are saving for when you will need to purchase another car.

I realize there may be other pressing financial needs for your dollars today, such as lending a hand to adult children who could use help paying their own mortgage as they grapple with a layoff, or a.s.sisting parents who are struggling to make ends meet when the income they can earn in this low-rate environment has been reduced so drastically from a few years ago. I am not going to tell you what takes precedence; this is your truth to work through. Instead I would suggest that you spend time in the Family Cla.s.s, where I discuss how to work through the how and when of offering a.s.sistance to your loved ones.

For those of you who are able to take on the goal of paying off your mortgage ahead of schedule, here's your game plan: * If you have more than eight months in your emergency fund: If you have more than eight months in your emergency fund: You may use that excess amount to pay down the mortgage. Your emergency savings are likely earning just 1% or 2% these days. Using that money to retire a 5% or 6% mortgage is a great use of your money. But you must never reduce your emergency savings below eight months. You must always have eight months of liquid cash available to cover life's surprises. You may use that excess amount to pay down the mortgage. Your emergency savings are likely earning just 1% or 2% these days. Using that money to retire a 5% or 6% mortgage is a great use of your money. But you must never reduce your emergency savings below eight months. You must always have eight months of liquid cash available to cover life's surprises.

* Reduce your monthly expenses so you can add more to your mortgage payment Reduce your monthly expenses so you can add more to your mortgage payment. If you are ready to stand in the truth that paying off your mortgage before retirement is the best way to ensure a secure retirement, then you must also stand in the truth that having more income available at the end of the month to add to your mortgage payment is how you make this particular dream come true.

After taking those steps, if you are still looking for more money to use to pay off your mortgage, you can carefully consider scaling back contributions to your retirement funds. Here is a game plan: * If you contribute to a 401(k) up to the point of the match: If you contribute to a 401(k) up to the point of the match: Keep contributing enough to continue to get the match. But if you have been contributing more than that to your 401(k), redirect anything beyond what's needed to get the match toward paying off your mortgage. Keep contributing enough to continue to get the match. But if you have been contributing more than that to your 401(k), redirect anything beyond what's needed to get the match toward paying off your mortgage.

* If you have less than $100,000 in your traditional IRA: If you have less than $100,000 in your traditional IRA: Keep investing in your IRA, but once you get within 10 years of retirement, consider reducing your IRA contribution by 50% and use that money to pay down your mortgage. For example, let's say you are contributing $500 a month to your IRA. My advice is to reduce that to $250 a month and then put the remaining $250 into accelerating your mortgage payments. Keep investing in your IRA, but once you get within 10 years of retirement, consider reducing your IRA contribution by 50% and use that money to pay down your mortgage. For example, let's say you are contributing $500 a month to your IRA. My advice is to reduce that to $250 a month and then put the remaining $250 into accelerating your mortgage payments.

* If you have less than $100,000 in a Roth IRA: If you have less than $100,000 in a Roth IRA: Same advice as with the traditional IRA, above. Same advice as with the traditional IRA, above.

* If you have more than $100,000 in a Roth IRA: If you have more than $100,000 in a Roth IRA: Figure out how much you need to accelerate your mortgage payments to get it paid off by your expected retirement date. If that monthly sum is more than your current monthly Roth IRA contributions (or the annual equivalent), stop the Roth contributions and use the money to pay down the mortgage. If the amount you want to use for your accelerated mortgage payment is less than your current Roth contributions, great. You can put more money into paying off the mortgage and still continue to make smaller Roth contributions. Let me ill.u.s.trate that with an example: If all you need is $300 more a month to pay off your mortgage by the time you retire, and you are depositing $500 a month into your Roth, continue to deposit $200 a month into your Roth and add $300 to your mortgage payments. However, if you need all $500 to pay off your mortgage before retirement, stop the contributions altogether and put all that money toward paying down your mortgage. Figure out how much you need to accelerate your mortgage payments to get it paid off by your expected retirement date. If that monthly sum is more than your current monthly Roth IRA contributions (or the annual equivalent), stop the Roth contributions and use the money to pay down the mortgage. If the amount you want to use for your accelerated mortgage payment is less than your current Roth contributions, great. You can put more money into paying off the mortgage and still continue to make smaller Roth contributions. Let me ill.u.s.trate that with an example: If all you need is $300 more a month to pay off your mortgage by the time you retire, and you are depositing $500 a month into your Roth, continue to deposit $200 a month into your Roth and add $300 to your mortgage payments. However, if you need all $500 to pay off your mortgage before retirement, stop the contributions altogether and put all that money toward paying down your mortgage.

* Use money from a Roth IRA Use money from a Roth IRA. Money you invested in a Roth IRA-your contributions-can always be withdrawn in any amount at any time without a penalty or tax. And your earnings on those contributions can be withdrawn tax- and penalty-free once you are at least 59 and have had the account for at least 5 years. If you converted a traditional IRA to a Roth IRA and paid the tax, you need to leave the amount you originally converted inside the account for at least 5 years or until you turn 59-whichever occurs first-to avoid all tax and penalty. The earnings on your converted money must stay untouched until you are 59 to avoid tax and penalty.

In any case, I strongly recommend that you do not touch any retirement savings before age 59. You want that money to grow as long as possible. It is better to aim to get your mortgage paid off by using other income sources while you are working. Once you are within a few years of retirement, tapping your Roth is fine. But please think carefully about how much you can truly afford to withdraw. If you will need income from your Roth to help pay your ongoing expenses in retirement, then it makes no sense to deplete the account. This goes back to my stand-in-the-truth challenge: You are only to pay off the mortgage if you can truly afford to stay in the home.

Later on in this cla.s.s I am going to ask you to work through an exercise that will give you an estimate of what your monthly retirement income sources may be-from Social Security, from a responsible rate of withdrawal from your 401(k)s and IRAs, and perhaps from a pension. When you go through that exercise, I want you to run the estimates based on a few different scenarios for your Roth IRA: if you don't touch it at all right now, if you were to use 20% of it to pay off your mortgage, if you were to use 40%, etc. The challenge here is to not use so much of your Roth IRA today that it reduces your potential income in retirement to a level that makes you nervous. It's a balancing act. If you have a big pension or you are confident that your Social Security and 401(k) a.s.sets will provide plenty of retirement income, then you can afford to tap more of your Roth IRA today.

* Under no circ.u.mstances are you to take an early withdrawal from a traditional 401(k) or IRA Under no circ.u.mstances are you to take an early withdrawal from a traditional 401(k) or IRA. It makes no sense to withdraw money if you will have to pay the 10% early-withdrawal penalty. Moreover, remember that withdrawals from these traditional accounts count as income in the year you make the withdrawal. A large lump sum withdrawal could put you in a higher income tax bracket for the year. That is not a wise move. Even once you turn 59 I do not recommend you make large lump sum withdrawals simply to pay off your mortgage. The tax hit will invariably b.u.mp you into a higher tax bracket. My advice is to start today with the intention of finding extra monthly income or focus on reducing your expenses so the income you do have can be put toward accelerating your mortgage payment so the mortgage will be paid off before you retire.

STAND IN THE TRUTH.

Paying off your mortgage before you retire has an undeniable allure. What greater security is there than knowing no one can take your home from you? And if, later in retirement, you find you need more income, you will be able to take out a reverse mortgage. (See the Home Cla.s.s for a lesson on reverse mortgages.) So if you are in the home you intend to retire in and your financial truth makes it possible to accelerate your mortgage payments, I think this is a great step to take, beginning in your 50s.

But please promise me that if you reach this conclusion, you have made the decision while standing in a very real and responsible truth. I know you love your home. I appreciate that the idea of having a family home for your children and grandchildren to return to is a cla.s.sic part of the American Dream. The allure of this image is incredibly powerful. So I recognize that it will take a great amount of fort.i.tude to face up to the reality of your situation as a homeowner. And if you have to rewrite this part of the American Dream for yourself, it will no doubt be a painful and disappointing reckoning. It may be the most difficult kind of letting go to relinquish the dream of a family home and replace it with a more modest living arrangement. The consolation I can offer you in return, however, is security and peace of mind, in knowing that you have made a difficult but correct decision that is in accordance with your truth. You will know you did what was right, not what was easy.

LESSON 2. HAVE A REALISTIC PLAN FOR WORKING UNTIL AGE 6667 HAVE A REALISTIC PLAN FOR WORKING UNTIL AGE 6667 If there has been one singular s.h.i.+ft in America's retirement dream since the onset of the financial crisis, it is that many of us must plan on working longer to make up for the money lost in the market crash, for the loss in home equity, or to make up for years when we may not have been saving as much as we needed.

For those of you who fit any of these descriptions, I want to make sure you have a realistic game plan for how you will leverage working longer into a secure retirement. I realize that many of you may in fact want want to work longer, for reasons that have nothing to do with finances; you want to stay engaged in work for the sense of satisfaction and vitality it provides. I think that's great. But my lesson on delaying retirement and working longer is focused on those of you who to work longer, for reasons that have nothing to do with finances; you want to stay engaged in work for the sense of satisfaction and vitality it provides. I think that's great. But my lesson on delaying retirement and working longer is focused on those of you who need need to work longer. to work longer.

Frankly, I am concerned that many of you may be heading for big trouble by overestimating your ability to work longer. As much as I believe that we should all plan to work longer, we also must keep saving, and saving aggressively, today in case we cannot continue to work as long as we might like.

According to the nonpartisan Employee Benefit Research Inst.i.tute, more than 40% of workers today say they expect to work past age 66-nearly double the percentage that said the same in 2000. But the reality is that 40% of people end up retiring before they expect to; the most common reasons are poor health or being laid off. It's also interesting to see that while 70% of workers near retirement today say they intend to work in some capacity after they retire, the data shows that in fact just 23% of current retirees continue to work. I mention all of that because it is important to recognize that even if your intention is that you will work longer, you must also plan for the possibility that you may not be able to.

DOWNSIZING TO A LOWER-PAYING JOB IS A FACT OF LIFE.

Even if you do keep working through your 60s, it is dangerous to a.s.sume you will be working in the same high-powered job that paid you a top salary in your 50s. Downsizing is a fact of life we all must be prepared for. And if you have been with one firm for a long time, there's a good chance that a new job in your 50s or 60s will not pay as well. And let's be sure to stand in another important truth: Working 40, 50, 60 hours a week in your 60s may not be something you want to do. Sure, you want to work, but at a less hectic pace. You may make less in your 60s because you choose to s.h.i.+ft to a less demanding job. A 2008 study by the Center for Retirement Research (CRR) at Boston College found that the percentage of men between the ages of 58 and 62 who were still with the same employer they worked for at age 50 had dropped from 68% in 1983 to 46% in 2006. And that was even before the economic downturn in 2008 left so many across all age brackets unemployed. Moreover, the CRR also found that those who changed jobs after age 50-whether the switch was voluntary or not-made on average about 25% less in their new job.

Add up all those factors and the lesson here is that you cannot a.s.sume you will be able to maintain the same pay and same vigorous work schedule that you kept in your prime. You must aggressively save for retirement in your 50s so that you can afford to earn less in your 60s, and if necessary, stop working altogether at an earlier-than-expected age.

Yet here's what I hear so often these days from so many of you: Your plan, you say, is to never retire. I have to tell you, that is simply not a realistic plan. Please do not make the mistake of not saving for retirement (or not saving as much as you can) on the a.s.sumption you will be able to work forever-even if that's what you want.

YOUR WORK-LONGER GAME PLAN.

* Plan on making less in your 60s than you did in your 50s Plan on making less in your 60s than you did in your 50s. Maybe this won't come to pa.s.s, but now is the time to do as much saving as you can so in the event you can't work as long as you expect, or you take a lower-paying job, your retirement plans won't be thrown off course. That's another reason why I recommend paying off your mortgage sooner rather than later; if you are still saddled with a hefty mortgage payment in your early 70s or 80s you are walking quite a financial high wire.

* Aim to delay your retirement until age 66 or 67 Aim to delay your retirement until age 66 or 67. When it comes to Social Security, your goal should be to wait until you reach at least your full retirement age (FRA) so you can claim your full retirement benefit. While your grandparents' FRA was 65, the system was tweaked in the early 1980s to gradually raise the FRA. Anyone born between 1954 and 1959 has an FRA between age 66 and 67; it depends on the exact year you were born. For example, someone born in 1957 has an FRA of 66 years and 6 months, while someone born in 1959 has an FRA of 66 years and 10 months. Everyone born in 1960 and later has an FRA of 67.

A Note About Potential Social Security ReformIn 2010, as our government began to debate possible fiscal reforms to address the national debt and deficit, raising the FRA for Social Security was one of the options thrown into the conversation. Please understand that none of the current proposals-and they are just that, proposals that have yet to garner any momentum-would change the age requirements for people already in their 50s. One proposal to raise the FRA to 69 would impact today's toddlers, not you.

I'd love for you to keep working until you reach your FRA, if possible, so you don't feel tempted to draw your Social Security benefit beginning at age 62. As I will explain in the next lesson, delaying your Social Security start date is a great strategy to give you more income in retirement. And trust me, most of you will need it.

Delaying your retirement just 3 to 4 years-or more if you're willing and able-can have a tremendous impact on your retirement security. It reduces the number of years you will be living off your retirement income and allows your investments to continue to grow. So often the "How Am I Doing?" segment on my CNBC show involves a couple who want to retire in their early 60s and seek my opinion. In the vast majority of these calls my advice is to keep working. Here's what they and you need to understand: According to research by T. Rowe Price, if you retire at age 67 rather than 62 you could have nearly 40% more retirement income, and that a.s.sumes that from age 62 to age 67 you don't save a penny more for retirement. Delay retirement all the way to age 70-again a.s.suming you stop saving at age 62-and your retirement income can be more than 60% higher than what you would have if you retired at age 62. The big increase is a function of your savings continuing to grow a bit longer, the fact that you will be living off your retirement savings for fewer years, as well as the benefit of waiting to take your Social Security payout at a later age. (We will cover this important step in the next lesson.) * Spend your 50s planning for your 60s Spend your 50s planning for your 60s. Waking up at age 62 laid off or sick of your job is not the ideal time to think about what you might do to bridge the gap to age 66 or 67. You want to be planning for that day at least a decade before. If your dream is to transform a hobby into a part-time job that will bring in some income during those transition years, you need to start testing the waters and picking up any necessary new skills you may need. Or if you want to do something entirely different that requires formal training, get that schooling now, before you need it. In fact, if your employer offers education benefits, have your company help you pay for your next-stage career. If you antic.i.p.ate you will want to segue into a consulting role in your area of expertise, well, now is the time to start doing a little bit of that on the side (a.s.suming your employer has no objections), or focusing on building industry relations.h.i.+ps that will make it easier to bring on clients when you do start your consulting work.

I also recommend you make an effort to develop relations.h.i.+ps with the 20- and 30-somethings in your office and at industry networking events. Those are the folks who 10 to 15 years from now will be running the show when you are looking for a late-career job in your 60s.

LESSON 3. DELAY YOUR SOCIAL SECURITY BENEFIT DELAY YOUR SOCIAL SECURITY BENEFIT.

Nearly two-thirds of Americans rely on Social Security retirement benefits as their primary source of retirement income. Yet most Americans settle for a Social Security benefit that can be 30% to nearly 80% less than what they are ent.i.tled to because they choose to start receiving their benefit at an early age.

For our parents and grandparents, Social Security was a no-brainer-the benefit started to kick in and subsidized their retirement. But for baby boomers who are suddenly staring down retirement, it is a whole new ball game and it is so very important to learn the ins and outs of how Social Security works. And learning about this in your 50s is very important. If you decide that waiting until age 66 or 67 to begin your Social Security payments makes the most financial sense, that may impact other decisions, such as whether you will want to keep working-even if just part-time-until the time is right for you to start drawing your Social Security benefits.

I want to call attention to the fact that this is a whole new strategy I am presenting here, different from what I've written about in my previous books.

Changes in the economy and our retirement system necessitate this s.h.i.+ft. For example, most of you will not have a steady pension to rely on in retirement; that ratchets up the need to be as strategic as possible in how you take your Social Security benefits. Moreover, taking early benefits used to mean a maximum 3 years of early benefits, as past generations had an FRA of age 65. Today the FRA for people currently in their 40s and 50s is somewhere between the ages of 66 and 67. That stretches the period-and the penalty-for early benefits from 3 years to as much as 5, and thus it changes the calculus of this important decision. Social Security to our parents and grandparents was a cornerstone of the American Dream. For my generation and the generations that follow, Social Security is still a part of the American Dream of retirement, but because you may not have that steady pension, or because you may not have been able to save up enough on your own through your 401(k) and IRA, squeezing the absolute maximum amount from Social Security becomes one of your most important retirement planning strategies.

The time to learn how best to take your Social Security benefits is right now, when you are still young enough to be able to adapt.

SOCIAL SECURITY BASICS.

We are all eligible to begin receiving our Social Security retirement benefit at age 62. But what you may not fully appreciate is that the Social Security program will give you a higher benefit for every month you wait to start, between the age of 62 and age 70.

The payment scale pivots around your full retirement age. As I explained above, the FRA for today's worker is somewhere between age 66 and 67; everyone born after 1959 has an FRA of 67.

If your FRA is 67, that is the age at which starting to draw your benefit will ent.i.tle you to 100% of what you have earned. If, however, you decide to start drawing an early benefit at age 62, it would be just 70% of your full benefit. In other words, when you start your benefit at age 62 you are locking in a 30% reduction compared to what you could earn if you waited a few years. Another way to look at this is that between the age of 62 and 67 Social Security will pay you 6% a year if you delay starting your benefit payments.

Even if you were to take the money early with the intention of saving it for your later retirement years, I think you'd be making a mistake. That 6% bonus each year is guaranteed. There is no way you could be absolutely a.s.sured your investments would generate that return. Maybe yes, maybe no. But either way you would have to invest in far riskier investments than what you can get guaranteed by delaying when you start to draw your Social Security benefit.

But that's not all. Let's say you reach age 67 and you are still happy to be working, or you have enough retirement savings you can rely on, so you don't need to begin receiving your Social Security payout. The Social Security Administration will pay you an 8% bonus for every year between the ages of 67 and 70 that you continue to defer your start date. That is, if you wait until age 70 to begin receiving your Social Security benefit it will be 124% of the benefit you would be eligible to receive if you started at age 67 and about 80% more than the benefit you would be ent.i.tled to at age 62.

There is indeed talk of "reforming" Social Security to help address our fiscal shortfalls, but there is no proposal being discussed that would alter the benefit formula for Americans who are already in their 50s; any changes would be slowly phased in over many years; they may impact your kids and their kids, but not you. And as I explained in the previous retirement cla.s.s, Social Security is not going belly-up. The reality is that beginning in 2037, Social Security will not have enough money to pay 100% of the current benefits; it would be able to pay out at about 75% of its current promised benefit level. I am not suggesting that a 25% reduction is "nothing," but it is also far different than no payment at all. And in fact, if and when Was.h.i.+ngton chooses to look seriously at fixes, there are some reasonable ways to tweak the system that would keep the program on solid footing well past 2037.

How Your Start Date Affects Your Social Security Payout* Benefit at age 62: Benefit at age 62: 70% 70%* Benefit at FRA Benefit at FRA*: 100%* Benefit at age 70: Benefit at age 70: 124% 124%

*a.s.sumes FRA of 67 It is also important to understand that Social Security benefits are indexed to inflation; every year there is inflation, your benefit will be adjusted higher.

So how come the Social Security Administration is so generous if you delay? Well, it's nothing more than some actuarial math at work; the older you start, the less time, on average, you will collect that benefit. So the program can afford to pay you more.

That raises an important question I imagine you're pondering right now: If you die before you reach age 67 or age 70, won't you have "wasted" all that money you didn't ever get because you waited? Or what if you don't start to draw your benefit until age 70 and then you die at age 73? Won't you have left a lot of money on the table?

Given the changes in the economy, that's the wrong way to think about Social Security. If you have an illness or disability that makes it difficult or impossible to work past age 62, then of course it makes sense to draw your Social Security benefit at an earlier age if your other sources of income aren't sufficient. If you need need to draw a reduced benefit starting before your FRA, that is always the right move. But for those of you who can in fact delay when you start receiving your benefit, it is hands down one of the best ways to improve your retirement finances. to draw a reduced benefit starting before your FRA, that is always the right move. But for those of you who can in fact delay when you start receiving your benefit, it is hands down one of the best ways to improve your retirement finances.

That's especially true given our longer life spans. Remember, half of today's 65-year-olds will still be alive in their 80s. If your health and your family history suggest you might be in that pool of people who enjoy a long life, then it makes tremendous sense to consider delaying your start date; you are essentially buying yourself a higher payout during those later years.

MY SOCIAL SECURITY STRATEGY.

* Between Age 62 and Your FRA Make it a priority to hold off on starting your Social Security benefit. Of course, if you are unable to work, and you have no other a.s.sets to support you, then drawing a reduced early benefit is what you must do. But if you can afford to wait, you should.

I know that many of you simply do not want to keep working full-time once you hit age 62. If that is your truth, that is what you must follow. But I am still going to tell you that you should not start your Social Security payout. My recommendation is to work part-time at a job that will pay you the equivalent of what you would be ent.i.tled to receive from Social Security. Let's consider someone who is age 62 in 2011 and is eligible for a $1,500 a month benefit. Rather than collect that benefit, how about a part-time job for a few more years that brings in $1,500 a month? Not a 50-hour-a-week high-powered job, but something that provides the income you would otherwise be receiving from Social Security.

Note: If you decide you need to take your benefit before you reach your FRA, and you will still be working, you need to understand how your Social Security benefit may be impacted. In 2011, if you have not yet hit your FRA, you can earn $14,160 without any impact on your Social Security benefit. Your benefits will be reduced $1 for every $2 you earn above this amount. If you reach your FRA in 2011, you can earn up to $37,680 without any reduction in your benefit. Above $37,680 your benefits will be reduced $1 for every $3 above that limit. Luckily, once you reach your FRA the amount of any reduction you had because of your earnings while you were drawing early benefits is added back to your benefit. However, I still think it's best to put off taking your benefit-so you can qualify for a bigger payout at a later age-particularly if you have other income coming in. If you decide you need to take your benefit before you reach your FRA, and you will still be working, you need to understand how your Social Security benefit may be impacted. In 2011, if you have not yet hit your FRA, you can earn $14,160 without any impact on your Social Security benefit. Your benefits will be reduced $1 for every $2 you earn above this amount. If you reach your FRA in 2011, you can earn up to $37,680 without any reduction in your benefit. Above $37,680 your benefits will be reduced $1 for every $3 above that limit. Luckily, once you reach your FRA the amount of any reduction you had because of your earnings while you were drawing early benefits is added back to your benefit. However, I still think it's best to put off taking your benefit-so you can qualify for a bigger payout at a later age-particularly if you have other income coming in.

* At Your FRA At Your FRA Once you reach age 6667 I am fine with you beginning to take your Social Security benefit. Your patience will give you a payout that is 30% more, and that's a great achievement. But I also want you to consider if you can possibly delay further, all the way until age 70. If you can and want to keep working, then delaying your benefit makes tremendous sense. But even if you are ready to stop working, that doesn't automatically mean you must start your Social Security payout. I'd rather you live off other a.s.sets; remember that between age 67 and 70, for every year you delay starting your Social Security payout, you earn a guaranteed 8% increase in your eventual benefit. And that benefit could also be adjusted annually for inflation. That's a risk-free return you can't earn anywhere else given where interest rates are as I write this in early 2011.

* Special Strategy for Married Couples Special Strategy for Married Couples If you and your spouse are both eligible for a Social Security benefit you can create a best-of-both-worlds strategy that gives you some Social Security income before age 70 while also allowing you to earn the maximum age-70 benefit as well.

The way Social Security works, when both spouses are eligible for a Social Security benefit they have the option of claiming a benefit based on their individual earnings, or they are ent.i.tled to a benefit that is 50% of their spouse's benefit. When one spouse dies and the surviving spouse has reached her FRA, she can choose between her benefit or receiving 100% of her spouse's benefit, whichever is more.

Let's use an example where a husband is the primary earner. I would recommend he delay drawing his benefit at least until his FRA, but ideally wait until he reaches age 70. Given that women on average outlive men, that will leave his wife with the highest possible payout if she is widowed.

But if the couple wants to start receiving some Social Security income prior to the husband turning age 70, the wife can begin to claim a benefit. If she has paid into Social Security and is eligible for a benefit based on her own record she can collect a benefit as early as age 62. Or, once her husband reaches his FRA, she can claim a benefit that is 50% of his. (The husband does not need to collect his benefit; he can opt to "file and suspend," which ent.i.tles his wife to claim a benefit based on his earnings record while his own benefit continues to grow until he decides to start receiving a payment, ideally at age 70.) Now let's say that the wife starts claiming a benefit based on her own earnings record, and her husband is indeed waiting until age 70 to collect on his own earnings record. Once the husband reaches his FRA, say at age 67, he can start to pocket some Social Security income by claiming a 50% spousal benefit based on his wife's earnings record. So from age 67 to 70 he and his wife are collecting 150% of her benefit.

Then when the husband turns 70 he can suspend his spousal benefit and start claiming on his own maximum age-70 benefit. Depending on the wife's own benefit at that juncture, it can also make sense for the wife to stop claiming her own benefit and start to receive 50% of her husband's benefit. If the wife survives the husband she would then be eligible to receive 100% of his benefit. Because he waited to start claiming his benefit until age 70 he has ensured his wife will receive the highest possible payout.

I realize that is a lot to absorb. The most important point to focus on is that married couples should aim to have the higher-earning spouse delay drawing a benefit on his or her earnings for as long as possible, preferably until age 70. You can learn more about spousal claiming strategies at www.ssa.gov.

LESSON 4. ESTIMATE YOUR RETIREMENT INCOME: HOW ARE YOU DOING? ESTIMATE YOUR RETIREMENT INCOME: HOW ARE YOU DOING?.

Early in your career you would need a powerful zoom lens to look far into the future and see what your retirement savings and income might be. But now that picture can be viewed in a more refined close-up. With just a decade or so to go until retirement we can get a clear sense of what your savings and other retirement income sources might be worth in retirement. Perhaps you have a plan to pay off your mortgage early; perhaps you have found a way to save more and reduce your expenses; and you now know when you can expect to draw a Social Security benefit. So let's see how it all falls into place.

In this lesson I want you to actually calculate what you might realistically expect your income sources to be in retirement. For those of you familiar with my CNBC show, this exercise is your personal "How Am I Doing?" segment.

In retirement most of you will have two primary sources of income: - Your Social Security benefit - Your personal savings, be it in 401(k)s, IRAs, or regular taxable savings Some of you will also have: - Income from a traditional pension If you work for the government or in the public sector this is probably your situation. And while private-sector firms rarely offer pensions to new employees these days, older workers may have been grandfathered into an old plan.

Let's walk through how to get a rough estimate of what your various sources of retirement income may be worth when you retire: 1. Estimate your Social Security benefit. If you have been paying into the Social Security system, you should receive an annual benefits statement; it's typically mailed out a few months before your birthday. Please pull that out to find your estimated benefit. Or you can get the information at the Social Security Administration website: www.ssa.gov/estimator.

Your estimated monthly Social Security benefit at your FRA: $____________________.

2. Estimate the value of all of your retirement accounts at your FRA. Next, we want to know what all your current retirement savings might be worth when you reach your FRA, and from there we can estimate how much monthly income you might be able to generate from those savings.