In her popular money book, How to Retire with Enough Money: And How to Know What Enough, Teresa Ghilarducci recommends that everyone take advantage of free money in two ways. First, she recommends that everyone invest in their 401(k) accounts to the maximum of the employer match. To do so, she notes, is to take advantage of free money.
On the other hand, if there is no corporate match, it may be better to save for your retirement separate from your corporate 401(k). In a 2015 study, Ian Ayres at Yale University found that out of 3,524 pension 401(k) plans, the fees on one in six (16 percent) plans were so high as to negate any possible tax advantages from the plan. The people who placed the money in the plans would have earned more by investing directly in the stock market, rather than through the complicated 401(k).
High fees on retirement plans have also been the subject of political comedy, for example by John Oliver’s Last Week Tonight. The show from June 2016 has been viewed on youtube more than 8.3 million times.
The second way to take advantage of free money, as suggested by Ms. Ghirardelli, is to delay taking Social Security until the age of 70 if at all possible. While the target retirement date is age 65, the Social Security Administration allows withdraws starting at age 62. By age 70, all participants are obliged to start withdrawing funds. The Social Security Administration makes this offer very attractive. The estimated that for every year (from 62 to 70) you delay taking Social Security, you will receive an 8 percent more – for life. The Center for Retirement Research at Boston College estimates that more than two in five Americans take their Social Security benefits at age 63. Alicia Munnell and Anqi Chen noted that in 2013, 42 percent of eligible men and 48 percent of women took Social Security at the first possible date of 62 years. Most Americans take Social Security at age 65. Only three percent of women and two percent of men wait until age 70 to start receiving payments from Social Security.
Just one note — you do not need to receive Social Security to have Medicare health insurance coverage – you need only to be eligible for Medicare. However taking Medicare but not Social Security is complicated since you have to separately pay the Medicare Part B premiums (for office visits, lab tests etc.) rather than having the premiums automatically deducted from your Social Security monthly check. Furthermore if you are a high income recipient, you must separately pay the Income-Related Monthly Adjustment Amount (known as IRMAA) supplements for Part B and Part D (i.e. on prescription drugs).
My own experience with trying to separately pay the Medicare supplements was more than frustrating. In the first six months after registering for Medicare in August 2017, every Medicare bill was incorrect. One bill failed to charge the IRMAA premium for Part B and then charged it several times. Part D failed to start two months after registering for Medicare and then either charged a multiple of the correct amount or failed to charge it entirely. An accumulated three hours on telephone calls to Medicare and Social Security failed to clarify my billing.
Finally I prepared a detailed calculation for CMS, showing my estimate of the correct amounts (month-by-month) and a comparison to the amounts billed and the amounts paid. With that, CMS and I developed a close bond – we were down to a difference of less than $100. However if you are someone who doesn’t love spreadsheet analysis, you might want to try to set up automatic debits to your checking account from your first date of registration.