Dear Liz: What is the best way to protect my 401(k) now and in the future when I draw from it for retirement? What is the least risky place to "bank it"? I have a fear of a crashing stock market in the middle of my retirement years.
Answer: The bigger risk is that the stock market will crash early in your retirement years. Starting withdrawals from a shrunken pool can dramatically increase the odds of running short of money in your later years.
But first things first. Understand that it's not possible to keep your money safe and get it to grow at the same time. Keeping your money "safe" means accepting returns that are below (often well below) the level of inflation, which means steadily losing buying power.
Typically, the only money you want in "safe" investments is the money you expect to tap within a few years. In your working years, you should keep your emergency fund in a low-risk, easily accessible place such as an FDIC-insured bank account. When you're ready to retire, you might want to have one to two years' worth of expenses in such an account, to insulate you somewhat from stock market swings.
If you want your money to grow, you'll need to have the majority of it in stocks. With stocks comes the risk of losing principal at times. Stocks fell by about half from their peaks in the 2008-09 crash, and by 90% during the Great Depression.
Scary, right? Yet over time, accepting that risk pays off. In every 30-year period since 1928, which includes the Great Depression years, stocks as measured by the Standard & Poor's 500 eventually grew enough to offset losses and create annual returns that averaged out to at least 8%.
As you get closer to retirement, you'll probably want to add more bonds to your investment mix to cushion your retirement fund from violent market swings. Your 401(k) plan probably has an option that will do that automatically for you, known as a target date retirement fund. Your plan also should have plenty of information about what you need to know as an investor. If you want more personalized advice, you can hire a fee-only planner who charges by the hour to review your financial situation and offer recommendations.
Maximizing your survivor benefit and your own benefit
Dear Liz: My husband passed away two years ago at age 56. He had cancer and was receiving disability pay. I am now 59. Can I start collecting a survivor benefit on his account at 60 or 62 and then switch to my own benefit at 70? Or vice versa — can I collect on my own benefit starting at 60 or 62 and switch to a survivor benefit on his record at 66?
Answer: Yes, to both questions.
You can start reduced widow's benefits at 60 and switch to your own benefit later, if it's larger, said economist Laurence Kotlikoff, author of "Get What's Yours: The Secrets to Maxing Out Your Social Security." You also could start your own benefit at 62, the minimum age to begin retirement checks, and switch to a widow's benefit later.
Starting benefits early means accepting a reduced amount. That's not good if you're locked into that reduced amount forever, as you would be if you started spousal benefits early. But survivor benefits are different in that they allow you to switch. Survivor benefits also stop growing sooner than retirement benefits.
Survivor benefits for widows and widowers max out when the recipient reaches full retirement age — currently 66 but rising to 67 for those born in 1960 and later. If you were born in 1957, your full retirement age is 66 years and 6 months.
Your own retirement benefit, meanwhile, continues to grow until age 70. It grows at roughly 7% annually between age 62 and your full retirement age, and then 8% annually after that, until age 70.
If your own benefit at 70 would exceed what you'd be receiving as a widow, then taking your widow's benefit at 60 and your own at 70 is likely the best course, Kotlikoff said.
Your situation is complicated enough that a free Social Security claiming calculator may not be able to help. The math in these calculations can be complicated, so consider spending $40 at Kotlikoff's MaximizeMySocialSecurity.com site to get a better feel for your options.