(The opinions expressed here are those of the author, a columnist for Reuters.)
By Mark Miller
CHICAGO, July 17 (Reuters) - The Twitterverse has questions about retirement. What’s the best way for young people to get started saving? Are target date funds good or bad? Should we expand Social Security to help low-wage workers?
Those are just a few of the great questions I fielded during a retirement Tweet-up convened this week by my colleagues at Reuters. Since my column allows for responses beyond Twitter’s 140-character limit, today I‘m expanding on answers to five questions I found especially interesting. You can view the entire chat - which included advice from personal finance gurus from Reuters and Charles Schwab - on Twitter at #ReutersRetire.
Q: What’s the best way for parents to help young adult children save for the long term? How about Roth IRAs?
Roth IRAs are no-brainers for young people. With a traditional IRA, you pay taxes at the end of the line, when you withdraw the money. With a Roth, you invest with after-tax money, and withdrawals (principal and returns) are tax-free in most situations. That’s especially beneficial for young retirement investors, since most people move into higher income-tax brackets as they get older and make more money.
Q: How would you expand Social Security? Any current proposal appealing?
This question was posed during Twitter chatter about the difficulty low-income workers face building retirement saving, and ways to make our retirement system more equitable. Expanding Social Security may fly in the face of conventional wisdom, which argues that rising longevity should dictate reductions in future benefits, not increases. But this is a case where the conventional wisdom is wrong.
An expanded Social Security system is the most logical response to our looming retirement security crisis because of its risk pooling and progressive approach to income distribution. Social Security replaces the highest percentage of pre-retirement income for workers at the low end of the wealth scale.
Several ideas are kicking around Congress. Most would raise revenue by gradually phasing out the cap on wages subject to the payroll tax ($117,000 in 2014) and raising payroll tax rates over a 20-year period. Some advocates also would like to see a surtax on annual incomes over $1 million. On the benefits side, advocates want to increase benefits across the board by 10 percent, recognize the value of family caregivers by awarding work credits toward Social Security benefits and adopt a more generous annual cost-of-living adjustment formula.
Q: With the myriad questions about retirement, can “live” advisers really be replaced by automated advice and data-driven programs?
Online software-driven services - so-called robo-adviser services - can’t fully replace human advice. But they address a key problem: how to deploy retirement guidance to mass audiences at a low cost. Services like Wealthfront and Betterment interact with clients online using algorithms, with low fee structures - typically 0.25 percent of assets under management or less.
Another variation on this theme: services that deliver advice through a combination of software and human advice, such as LearnVest. One of the most interesting tech-enabled experiments is Vanguard’s Personal Advisor Services, which provides access to a managed portfolio of Vanguard index funds and exchange-traded funds, along with portfolio management services from a human adviser.
Vanguard charges just 0.3 percent of assets under management for the service. The service is in test mode with a small group of clients, and only available to clients with $100,000 to invest. The minimum will be reduced when the service expands, and it should be rolled out more broadly over the next 12 to 18 months, a spokeswoman says. Given Vanguard’s huge scale, it’s a venture worth watching.
Q: What’s the final verdict on target date funds - good or evil?
We don’t have a final verdict yet, but target date funds (TDFs) are doing more good than evil - though they generate plenty of controversy, confusion and misunderstanding. The general idea is to reduce the risk you’re taking as retirement approaches by cutting your exposure to stocks in favor of fixed-income investments - the “glide path.” But some TDFs glide “to” your retirement date, while others glide “through it.” Experts debate which is better, but you should at least know which type of fund you own.
Many retirement investors misuse TDFs by mixing them with other funds, a recent survey found (reut.rs/1r412c9). These funds are designed as one-stop investment solutions that automatically keep your account balanced; doing otherwise will hurt your returns.
Bottom line? TDFs do more good than harm by automatically keeping millions of retirement portfolios balanced with reasonably good equity-to-fixed-income allocations. And they are the fastest-growing product in the market: Some $618 billion was invested in TDFs at the end of 2013, according to the Investment Company Institute, up from $160 billion in 2008.
Q: Anyone know what the highest Social Security income is for a retiree today versus what’s expected 30 years from now?
This year’s maximum monthly benefit at full retirement age (66) is $2,642. The Social Security Administration doesn’t have projections for future benefit levels, but the answer certainly will depend on how Congress decides to deal with the program’s long-term projected shortfalls. Solutions could include tax increases (discussed above) or higher retirement ages. Boosting the retirement age would mean a lower benefit at age 66.