Retirement

Australia is asking workers to work longer. Would it work in the United States?

Americans are quite familiar with the challenges threatening the Social Security system, with an aging population starting to retire and putting more strain on the shrinking group of workers paying the Social Security taxes that support their benefits. But America isn’t alone in facing a retirement crisis, and other countries are taking much more dramatic steps to shore up their systems for providing financial assistance to people in their old age. In particular, Australia plans to force its workers to stay in their jobs for years beyond their current retirement age in order to qualify for benefits — and it’s giving employers incentives to make sure older workers can get the jobs they need to hold out that long.

The Australian solution: Work until you’re 70

Australia has seen many of the same things happen to its old-age pension system that the U.S. has seen with Social Security. When Australia first implemented what it calls its age pension more than a century ago, only 4% of the nation’s population lived to the age at which they could claim benefits. Now, though, life expectancies have grown, with the typical Australian living 15 to 20 years beyond the official retirement age of 65. As a result, 9% of the Australian population gets benefits from the age pension, and the potential for some of those recipients to get support from the program for two decades or more has threatened the financial stability of the system. Currently, 2.4 million Australians receive about $35 billion in benefits from the program, making it the Australian government’s largest expenditure.

As a result, Australia has made plans to increase its official retirement age. Over the next 20 years or so, Australians will see the age at which they can officially retire climb to 70 if the plan is approved, putting the land down under at the top of the world’s list of highest retirement ages.

When you just look at the age-pension portion of Australia’s retirement system, that sounds draconian, and plenty of Australians aren’t thrilled about the move. With a significant part of Australia’s economy based on extracting natural resources like oil, natural gas, coal, and various metals, the back-breaking work that many Australians do makes the prospect of staying on the job until 70 seem almost physically impossible. Proponents of the measure counter that argument with the fact that 85% of Australians work in the services industry, and many of those jobs don’t require the physical exertion that makes them impractical for those in their 60s.

Moreover, younger Australians worry about the need for older workers to stay on the job longer. Many fear a “jobless generation” of young adults who can’t get their older counterparts to give way and make room for them to start their careers.

What Australians have that the U.S. doesn’t

Yet before you bemoan the fate of the Australian public, it’s important to keep in mind that the age pension system isn’t the only resource they have going for them. In addition, Australians participate in what’s known as the superannuation system, under which employers are required to make contributions toward superannuation retirement accounts equal to 9.5% of their pay. Like American 401(k)s, employees are allowed to select investment options for this money, with default provisions usually investing in a balanced-

Over time, superannuation assets have built up impressively. As of June 30, assets in superannuation accounts rose to A$1.85 trillion. Australia is also seeking to have those fund balances rise more quickly by requiring more from employers on the superannuation front. Over the next seven years, the employer contribution rate will rise to 12%, accelerating the growth of this important part of Australians’ retirement planning.

Like 401(k)s and IRAs in the U.S., Australians can make withdrawals from their superannuation accounts at earlier ages than they can claim pensions. For those born before mid-1960, access to their retirement savings opens at age 55. That age is slated to rise to 60 over the next decade, but it will still give Australians access to money well before age pensions become available to help them bridge the financial gap.

Should America follow Australia’s lead?

Calls to increase Social Security’s retirement age have met with strong opposition in the U.S., and the Australian plan won’t change that. Yet without the backstop that superannuation provides, raising the retirement age to 70 in the U.S. would be even more painful for aging Americans. Some workers are fortunate enough to have employer matching and profit-sharing contributions that mimic what most Australians get from superannuation, but it’s rare for anyone to get anywhere near the 9.5% to 12% that Australian workers have contributed on their behalf.

Many see Australia’s answer to its retirement crisis as brutal, but given the aging population, it’s consistent with the original purpose of old-age pensions. If the U.S. wants to make similar moves, American workers need the same outside support for their retirement that Australians get — and that will also require more effort on workers’ part to save on their own for retirement.

Q: My wife is 62 and I am 65. She has a small pension of $21,000 and can take it as a lump sum or an annuity of $154 a month. We also have a credit card with $17,000 at 8% and two car loans of $17,000 at 8%. Should we use the money to pay off debt or roll it into an IRA? – Joe Skovira, Cheshire, Conn.

A: Choosing the right way to handle a pension payout is critical to your retirement success. It’s all too tempting to use that money to pay off debts, when your other sources of cash run short. But raiding your pension could be a mistake. “You should pay off the debt but don’t sacrifice the pension to do it,” says Rich Paul, a certified financial planner and president of Richard W. Paul & Associates.

Even though the pension income is small, that $154 monthly check adds up $1,800 a year, or a 9% payout. It would be hard to generate that consistent income on your own in an IRA. “Those are guaranteed dollars that you’ll receive for the rest of your life—you can’t get that kind of return with conservative investments,” says Paul.

There are also taxes to consider. If you take the pension as a lump sum, and don’t roll it over into an IRA, you’ll likely owe capital gains or income taxes. Moreover, the income from that lump sum might push you into a higher tax bracket, further eroding its value.

As for your debts, they’re clearly a drain on your cash flow. So look for ways to free up cash to pay off those bills by cutting your spending. For strategies on getting on top of that debt, see here and here.

It also makes sense to prioritize your credit card debt over the car loans, says Paul. That way, if you ever need extra cash, you’ll have a bigger credit line to tap. You could even use the $154 to step up payments on the credit card.

“It all comes down to cash flow. You’ll feel a lot more comfortable in retirement with more guaranteed income and less debt,” says Paul.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

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Just because the kids are gone doesn't mean it's time to splurge. Here are some ways to treat yourself well without compromising your comfort in retirement.

The phrase “empty nest” may sound sad and lonely. But—shh!—don’t let the kids know that when they clear out, Mom and Dad have fun. Often too much fun. A study by the Center for Retirement Research at Boston College found that empty-nesters spend 51% more than they did when their children were home. “We have clients who go out to lunch and dinner every day,” notes Cincinnati financial planner John Evans.

Certainly after surviving Little League, teenage attitude, and the colossal cost of college, you ­deserve to splurge. But you also don’t want to compromise your finances as you begin the final sprint to retirement. Here are three ways to keep feathering your nest while still enjoying your freedom.

First, Keep Your Spending in Check

• Rerun your numbers. While you can likely afford to let loose a bit, make sure your retirement plan is in order before you go wild. “You should save a bare minimum of 10% a year, really more like 15%—and if you’re behind you may need to save 20% to 30%,” says Boca Raton, Fla., financial planner Mari Adam. Use T. Rowe Price’s retirement income calculator to see what you need to put away to get your desired income.
• Make a payoff plan. Erasing your debts before retirement will require sacrifice now—but will take pressure off your nest egg and allow you to have more fun later. Figure out how to do it with the debt calculator at CreditKarma.com.
• Plug the kid leak. One in four affluent parents ages 50 to 70 surveyed recently by Ameriprise said that supporting adult children has put them off track for retirement. Lesson: Get your priorities (retirement and debt elimination) straight first, and build gifts into your annual budget proactively vs. giving willy-nilly.

Second, Free Up Even More Cash to Stash

• Downsize. Convert Junior’s room into a better tomorrow: Moving from a $250,000 house to a $150,000 one could boost your investment income by $3,000 a year while reducing maintenance and taxes by $3,250, the Center for Retirement Research found.
• Cut your coverage. If your kids are working, you may not need life insurance to protect them. You may be able to take them off health and auto policies too.
• Moonlight. Besides increasing your income and helping you establish a second act, “self-employment makes a huge difference in what you can do on your taxes,” says Tony Novak, a Philadelphia-area CPA. That’s especially valuable in these peak earning years when you’ve lost the kid write-offs.

Finally, Supercharge Tax-Efficient Savings

• Catch up on your 401(k) and IRA. Once you hit 50, you can sock away $5,500 more in your 401(k) this year, for a total of $23,000, and an extra $1,000 in your IRA, for a total of $6,500. In 2015, you’ll be able to put an extra $6,000 in your 401(k), for a total of $24,000; IRA caps remain unchanged. If you start moonlighting, as suggested above, you can shelter more money in a SEP-IRA—the lesser of 25% of earnings or $52,000.
• Shovel cash into that HSA. Got a high-deductible health plan? Families can contribute $6,550 ($7,550 if you’re 55-plus) to a health savings account. Contributions are pretax, money grows tax-free, and you don’t pay taxes on withdrawals for medical expenses. If you can pay your deductible from other savings, let your HSA grow for retirement, Novak says.

Sources: Employee Benefit Research Institute, PulteGroup, MONEY calculations­

Young adults aren't saving as much as they think they should for retirement. But paying off debts is just as important.

Millennials are pretty stressed out about their long-term finances, according to Bank of America’s latest Merrill Edge Report. Some 80% of millennials say they think about their future whenever they pay bills. Almost two-thirds contemplate their financial security while making daily purchases. And almost a third report that they often ponder their long-term finances even while showering.

What’s eating millennials? Student loan debt. Even the very affluent millennials surveyed by Bank of America feel held back by student debt—and these are 18-to-34 year-olds with $50,000 to $250,000 in assets, or $20,000 to $50,000 in assets and salaries over $50,000. Three-quarters of these financially successful Millennials say they are still paying off their college loans.

Among investors carrying student debt, 65% say they won’t ramp up their retirement savings until they’ve paid off all their loans. But with that choice comes a lot of guilt: 45% say they regret not investing more in 2014.

Contrary to popular wisdom, millennials are committed to investing for retirement. Bank of America found that the millennials surveyed were actually more focused on investing than their elders. More than half of millennials plan to invest more for retirement in 2015. But 73% of millennials define financial success as not having any debt—and by that measure, even relatively wealthy millennials are feeling uneasy.

Fear not, millennial investors. You’re doing just fine. First off, you’re saving more — and earlier — than your parents’ generation did. A recent Transamerica study found that 70% of millennials started saving for retirement at age 22, while the average Baby Boomer didn’t start until age 35. On average, millennials with 401(k)s are contributing 8% of their salaries, and 27% of millennials say they’ve increased their contribution amount in the past year. Even if you can only put away a small amount at first, you can expect to ramp up your savings rate during your peak earning years.

For now, here are your priorities:

Save enough to build up an emergency fund. You could be the biggest threat to your retirement savings. A recent Fidelity survey found that 44% of 20-somethings who change jobs pull money out of their 401(k)s. (That’s partly because some employers require former workers with low 401(k) balances to move their money.) Fidelity estimates that a 30-year-old who withdraws $16,000 from a 401(k) could lose $471 a month in retirement income—and that’s not even considering the taxes and penalties you’d owe for cashing out early. If you have to make the choice between saving and paying off debt, at least save enough to get through several months of unexpected unemployment without draining your retirement accounts.

Pay off any high-interest debt first. When you pay off debt, think of it this way: You’re making an investment with a guaranteed return. Over the long term, you might expect a 8% return in the stock market. But if you have a loan with an interest rate of 10%, you know for certain that you’ll earn 10% by paying it off early.

Save enough to get your employer’s full 401(k) match. The 401(k) match is another investment with a guaranteed return. Invest at least as much as you need to get the match—typically 6%—with the goal of increasing your savings rate once you’ve paid off the rest of your debt.

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People on the streets of New York — including a visitor from the planet Vulcan — describe their perfect retirement to our Mannes on the Street.

First-time 401(k) plan enrollees are soaring as young workers enter the labor force. This is a positive development. But it won't solve our savings crisis by itself.

Young workers have received the message about long-term financial security—and with increasing assistance from employers they are doing something about it, new research shows.

In the first half of 2014, the number of Millennials enrolling for the first time in a 401(k) plan jumped 55%, according to the Bank of America Merrill Lynch 401(k) Wellness Scorecard. This twice-yearly report examines trends among 2.5 million plan participants with $129 billion of assets under the bank’s care.

The brisk initial enrollment pace is due partly to the sheer number of Millennials entering the workforce. They account for about 25% of workers today, a figure that will shoot to 50% by 2020. But it also reflects a broader trend toward 401(k) enrollment. Across all generations, the number enrolling for the first time jumped 37%, Bank of America found.

One key reason for the surge in 401(k) participation is the use of auto-enrollment by employers, as well as other enhancements. The report found that number of 401(k) plans that both automatically enroll new employees and automatically boost payroll contributions each year grew 19% in the 12 months ended June 30. And nearly all employers (94%) that added automatic enrollment in the first half also added automatic contribution increases, up from 50% the first half of last year.

Enrolling in a 401(k) plan may be the single best financial move a young worker can make. At all age levels, those who participate in a plan have far more savings than those who do not. Another important decision is making the most of the plan—by contributing enough to get the full company match and increasing contributions each year.

Other added plan features include better educational materials and mobile technology. In a sign that workers, especially Millennials, crave easy and relevant information that will help them better manage their money, the bank said participants accessing educational materials via mobile devices soared 41% in the first half of the year.

The number of companies offering advice online, via mobile device or in person rose 6% and participants accessing this advice rose 8%. A third of those are Millennials, which suggests a generation that widely distrusts banks may be coming around to the view that they need guidance—and their parents and peers may not be the best sources of financial advice.

Millennials have largely done well in terms at saving and diversifying. They are counting more on personal saving and less on Social Security than any other generation, the report found. They seem to understand that saving early and letting compound growth do the heavy lifting is a key part of the solution. Despite its flaws, 401(k) plans have become the popular choice for this strategy.

Yet this generation is saddled with debt, mostly from student loans and credit cards, and most likely to tap their 401(k) plan savings early. Millennials are also least likely take advantage of Health Savings Accounts, or HSAs, which allow participants to set aside pre-tax dollars for health care costs. Health savings account usage jumped 33% in the first half, Bank of America found. But just 23% of Millennials have one, versus 39% of Gen X and 38% of Boomers.

Still, the trends are encouraging: employers are making saving easier and workers are signing up. That alone won’t solve the nation’s retirement savings crisis. Individuals need to sock away 10% to 15% of every dime they make. But 401(k)s, which typically offer employer matching contributions, can help. So any movement this direction is welcome news.

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