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Here's Your Social Security Plan

And it ain't Social Security. Eight ways to get your retirement finances in shape now

It’s Social Security’s 80th birthday, and while news about the program’s financial status is rarely upbeat, most Americans are glad it still exists. Women and lower-earning workers rely particularly heavily on the program.

Here's why you need to pretend it doesn't exist.

Underfunded as it is, Social Security remains a favorite political football and a target for further trimming.

At the same time, we're living longer, and our savings need to last longer. So whatever happens to SS, it's more important than ever to use all the savings strategies at your disposal.

Eight ways to do that, one for each decade of Social Security:

1. Make saving simple

Just how important will your personal savings be in retirement? Take a look at this chart from the National Academy of Social Insurance, a nonprofit group that focuses on “how social insurance contributes to economic security." 

It shows, roughly, how the Social Security program replaces more than 50 percent of income for low-earning workers. It also shows how high earners would need to reduce their lifestyle radically if they need to rely heavily on Social Security income in retirement.

The Social Security Administration calculates income replacement rates for retired workers across a range of income scenarios, from those with very low income to those who hit the maximum annual amount of income taxed by Social Security (in 2015, it's $118,500).  Their calculations assume 35 years of contributing to the program and are based on Social Security's national average wage index (AWI). For 2015, the average is $47,820. 

If you're lucky enough to be at a company that offers a 401(k), you may already be funneling money into it every pay period. Maybe you can even save enough to get all of the company match, if there is one. Saving 12 percent to 15 percent of your salary in a 401(k), up to the 2015 contribution limit of $18,0001, is what many financial planners suggest. That assumes you already have a cash emergency fund of three months, at the very least.

If your budget allows, try setting up automatic deductions from your checking account into other savings accounts, even if it's just $25 or $50 a paycheck. And if you don't notice that it's gone, kick the contribution up a little higher.

If you want someone else to save your money for you, a growing number of online financial companies are offering programs to "personalize" savings. They're doing this with software that assesses how much you need to keep in checking to pay bills and then automatically spiriting the excess into savings or investment accounts. Companies with products like this include Betterment and Digit

2. Keep 401(k) savings sacrosanct 

One challenge millennials face that their parents didn't is handling 401(k) accounts while changing jobs every two to three years. Rather than roll an old 401(k) into a new employer's plan, many young savers just cash it out, which means paying income tax on it and a 10 percent penalty. 

In the year that ended on March 31, more than 40 percent of 401(k) participants between the ages of 20 and 29 cashed out all or part of their plan balance after leaving a job, according to Fidelity. Even for those between the ages of 40 and 49, the cash-out percentage was high, at 32 percent. 

Barring a lottery win or a fat inheritance, starting to save early, so money can compound over many decades, is really the only way most younger savers are going to arrive at retirement age with a decent nest egg. 

3. Wage war on fees 

This means, first, knowing what fees you are paying for different investment accounts. Many people have no idea, particularly when it comes to retirement savings accounts such as 401(k) plans. A Department of Labor rule saying plans must provide participants with fee disclosure has made that information more easily available.

Once you find that information, your plan probably won't note whether those fees are low, average, or high compared to similar funds. You can get a rough sense of it at brightscope.com, or look into a service such as that offered by an Israeli startup named FeeX. Users create an account and connect it to their old and new 401(k) plans. FeeX automatically calculates how much, if anything, a rollover into an IRA, or a switch into a plan's cheaper fund options, could save in fees.

I tested it out with funds I own in the Bloomberg LP 401(k) plan. It flagged the Harbor International Institutional fund (HAINX), an actively managed fund, which has an annual fee of 0.75 percent. It calculated that, over a couple of decades, I could save $10,864 by switching to a lower-cost alternative in my plan, the Vanguard Developed Markets Index Institutional (VTMNX). Vanguard's fund charges 0.07 percent annually.2

4. Check your asset mix 

If you have multiple investment accounts outside your 401(k), or just multiple 401(k)s, it can be hard to know what percentage of your assets is in cash equivalents, bonds, and stocks. What is the optimal mix? Everyone's situation and risk tolerance (more on that in a second) are different, but the asset allocation in target-date funds gives a sense of what some large investment companies think is ideal. 

For someone who is about 45 and wants to retire in 20 years, the asset mix in the Fidelity Freedom Fund 2035 is 90 percent in stocks and 10 percent in bonds. Ten years in, the stock portion will drop to 70 percent, bonds will be 28 percent, and 2 percent will be in short-term funds. At 2035, when the account holder is 65, the stock/bond/short-term funds split is 56, 34, and 11 (more than 100 percent partly due to rounding). The net expense ratio is 0.16 percent.3

Many people think they should start dialing back on equities when they’re 10 years away from retirement. Problem is, if you pare stocks dramatically at age 55 and live 30 more years, your savings may run out. Still, if you suspect you would panic and sell into any dramatic drop in the market—think back to how you felt and what you did in 2008—moving some money out of equities makes sense. 

5. Know your risk tolerance 

Financial advisers will say that clients overestimate their risk tolerance, but FinaMetrica, a firm that runs psychometric risk tolerance tests, says it's the advisers who become more nervous than they expected when markets become volatile. Finametrica says most people are actually pretty good at assessing their risk tolerance.

I am apparently not one of them. I took the company's 25-question test (anyone willing to pay $45 can take it or ask his or her adviser to spring for it). After estimating I'd score 45 out of 100, I scored 39, lower than 85 percent of all scores. As the test report put it, "Most people underestimate their score by a few points. However, yours was an overestimate. When compared to others you are somewhat less risk tolerant than you thought you were." 

To guard against getting too stressed by market swings, investors may want to separate their money in different buckets. Money can be tied to short-, medium- and long-term goals, with each bucket having a different risk profile, says financial adviser Curt Weil. If the market's swinging wildly, and you know your immediate needs are covered in a short-term, conservatively invested bucket, you may feel more comfortable sticking with any higher-risk, higher-return investments in the long-term basket. 

6. Be an employee-benefit ninja

If you’re offered a flexible spending program or the ability to pay your commuting costs with pretax money, take the time to learn about them. You'll get more mileage out of your money and lower your income taxes to boot. Making the most of tax-advantaged perks is a small way to give yourself a raise in a time of stagnating wages. 

Employers have been shifting more costs to employees, often through the use of high-deductible health-care plans. Companies' adoption of such plans may slow next year, according to a survey of more than 100 large U.S. employers. Employers are waiting to see if lawmakers repeal Obamacare’s “Cadillac tax” on high-cost health coverage, which is a levy on individual health premiums greater than $10,200.

Health-care savings accounts (HSAs), which go hand in hand with high-deductible health plans, will likely become a greater part of employee's lives. These are "triple tax-free"—what you put in is sheltered from income tax, it grows tax-deferred, and the money can be used, tax-free, for medical expenses. Companies usually seed the accounts with a few hundred dollars, pretax, and your contributions are tax-deductible. You can contribute up to $3,350 for an individual policy and $6,650 for a family plan. And unlike flexible-spending programs, they are not "use it or lose it," so your money accumulates.

7. Ignore the fancy stuff 

There are many benefits to keeping your finances fairly simple, like having a clear picture of where you stand. Unless you’re a seasoned speculator whose retirement is already more than provided for, avoid any investment with the word “leverage” or 2x or 3x (or more) in its name.  It's been said before, but bears repeating: If you don't understand it, don't buy it. 

8. Eat your spinach 

Health-care costs in retirement are the most likely expense to send your finances into the depths of hell. Fidelity estimates that in 2014 a couple who retired at age 65 could look forward to $220,000 (in today's dollars) in health-care costs. That number didn't rise from 2013, but it's still way more than most people have saved for all of their retirement.

The AARP has a pretty simple calculator, and there are many others, that  will scare you into the gym if you aren't there already. It's like making money. 

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  1. 1 Those over age 50 can make additional "catch up" annual contributions of $6,000. 
  2. 2 Truth be told, I should have switched into the Vanguard index fund long ago, simply because most actively managed funds cannot consistently outperform the market. While Harbor has handily outperformed the Vanguard fund over 10 years—7.4 percent compared with 4.6 percent—the Vanguard fund's returns have been similar or better in the past five years. Vanguard wins on fees. 
  3. 3 Vanguard's 2035 target-date fund takes a more conservative approach. It starts with 82 percent in stocks and 18 percent in bonds, and in 2025 assets should stand at 66.8 percent stocks and 33.2 percent bonds. Its expenses are 0.18 percent.