leaky pipe

Tapping 401(k)s, IRAs Early Is Costly

It’s fairly easy to withdraw money prematurely from 401(k)s and IRAs – a practice that depletes roughly one-fourth of account balances over a worker’s lifetime.

U.S. workers on average withdraw 1.5 percent annually from their retirement account assets.  When they do, they forgo years of investment gains they could have earned had they left their money alone.

Early withdrawals can pose a problem for many Americans at a time financial security in retirement increasingly hinges on these defined contribution plans.  The potential for leakages has also grown in recent years, in part due to the shift away from traditional employer pensions to 401(k)s that place control in employees’ hands.  Further, the assets being held in IRAs, which have more liberal withdrawal policies, are increasing as workers changing jobs and retiring baby boomers roll their employer-sponsored 401(k)s into IRAs.

Figure: Sources of Premature Withdrawal This chart shows the sources and relative amounts – as a percent of total plan assets – of different types of these premature and permanent withdrawals from defined contribution plans.  These estimates, by the Center for Retirement Research, which supports this blog, are based on data from the mutual fund company, Vanguard. They total slightly less than 1.5 percent, because plan participants in Vanguard’s client base earn more than the general population and may have somewhat lower withdrawal rates.

To help preserve workers’ savings, the study proposed ways these premature withdrawals could be restricted: …Learn More

Procrastinators Are Not Big Savers

The Greek poet Hesiod, circa 700 B.C.

Saving for retirement is a modern-day imperative, but even the ancient Greek poet Hesiod – quoted in a new study – advised us not to tarry:

Do not put off till tomorrow and the day after; for a sluggish worker does not fill his barn.

So what about procrastinators, who place more importance on today’s enjoyment than on preparing for the future?  The new study asked whether people with this personality trait make different decisions about retirement saving than non-procrastinators and found that they do.

Up to one in five people were procrastinators in the study’s data base of more than 155,000 workers at numerous employers.  The researchers identified procrastinators in the sample as the people who waited until the final day of open enrollment to choose their health plan from among their employer options.  (To separate them from employees who intentionally delayed so they could collect enough information, the researchers looked at how often people used various online employee benefit tools – these strategic delayers were very active; procrastinators were not.) …Learn More

Coin stacks

Why I Dropped My Financial Adviser

My financial adviser is smart. She’s ethical. And her special IRS tax certification has come in handy at tax time.

So why did I drop her? Fees.

Every year, her firm extracted 1 percent of my modest retirement account balance. This is less than some advisers charge, but on top of that I pay between 0.8 percent and 1.2 percent in fees to various mutual fund firms for the mostly stock funds she selected for my investments. These aren’t exorbitant fees, either, for actively managed funds. But when you add this up, I was shelling out at least 2 percent of my account every year.

Thanks to fees and my penchant for some international stocks, which were sluggish or declined last year, my retirement portfolio did not grow at all in 2014, despite a booming U.S. stock market that gained nearly 14 percent, based on the Standard & Poor’s 500 index.

I used a simple fee calculator to estimate my savings in fees, and the resulting increase in my investment returns, from letting my adviser go. If I don’t tap my IRA funds until age 70, I would save nearly $40,000. This sum won’t radically improve my retirement. But it’s not chump change either. It would pay for a few really big trips my husband and I hope to take – or a large chunk of a year in a nursing home. …Learn More

The Influence of Language on Saving

If so many human characteristics are universal, why does something so basic as the household saving rate vary from 10 percent in Belgium to 4 percent in the United States?

Traditional economic explanations point to built-in retirement account defaults, government mandates or financial incentives. But UCLA behavioral economist Keith Chen mines the study of linguistics for an unorthodox explanation of the wide global disparities in saving.

Discussing his early findings in this new field in the video above, Chen explains one aspect of grammar that may influence saving.

To find out what that is, watch the video. This Ted talk was filmed in Edinburgh, Scotland in 2012. …Learn More

Savings Products Deter Senior Fraud

Ken Osborne with his mother.

Ken Osborne became vigilant about safeguarding his 81-year-old mother’s savings as her memory loss set in. She often failed to recall what she’d said during frequent, unsolicited phone calls from people prying into her personal life and financial affairs.

“She’s vulnerable,” Osborne, a resident of Jacksonville, Florida, says about his mother who lives 140 miles away.

Osborne took preventive action. He signed his mother up for a debit card funded by, but segregated from, her primary bank account.  Osborne maintains a $500 balance in the card account, giving his mother the freedom to spend her own money – whether for groceries or a church excursion to North Carolina – while giving him control of the nest egg to protect her from herself and others.

Sold by True Link, the debit card is among a handful of new financial products capitalizing on what the Senate Committee on Aging called an “invisible epidemic.”  The incidence of fraud is rising, especially online, and experts warn that aging baby boomers will increasingly be the targetsTrue Link chief executive Kai Stinchcombe was moved to form his San Francisco start-up after his grandmother started writing small checks adding up to more than $1,000 a month to a multitude of soliciting charities.

Banks, which often become aware of fraud against seniors, are also in a position to help.  California now holds bank employees liable for failing to immediately report suspicious transactions and elder financial abuse to local law enforcement or adult protective agencies.

The Bank of American Fork in Utah went further, introducing anti-fraud accounts for seniors in 2011 after seeing problems ranging from an older woman who repeatedly wired money to a lottery in Spain to a man with a drug problem looting his elderly mother’s account. …Learn More

Navigating Taxes in Retirement

IRS logo

The tax landscape shifts suddenly when most Americans leave the labor force to retire.  The single most important thing to remember is that income taxes can fall dramatically, because retirement incomes are typically lower and because all or a portion of your Social Security benefits will be tax-exempt.

This was among the tax insights supplied by Vorris J. Blankenship, a retirement tax planner near Sacramento, California, who has just finished the 2015 edition of his 5-inch thick “Tax Planning for Retirees.”   The following is an edited version of tax information he supplied to Squared Away:

Lower taxes in retirement. Brian and Janet are a hypothetical couple renting an apartment in Nevada, a state with no income tax. In 2013, Brian earned $40,000 at his job, and Janet’s wages were $20,000, for a total income of $60,000. They took the standard deduction on their federal tax return and paid income tax of $5,111.

Brian retired on December 31, 2013. In 2014, he received Social Security payments of $15,000 – $2,750 of which was taxable – and a fully taxable pension from his former employer of $10,000. About one-third of retirees pay some income taxes on their Social Security benefits, because their retirement income exceeds certain thresholds in the tax code.

In 2014, Janet again earned $20,000, but the couple’s total household income declined to $45,000 from $60,000. They took the standard deduction on their federal tax return and paid income tax of only $1,248.

The 75 percent reduction in their taxes is much larger than the 25 percent decline in their income after Brian retired. …Learn More

9 Measures of U.S. Economic Inequality

The interactive chart above illustrates the increasing U.S. disparity over the past 50 years between how much wealth the rich own – shown on the right side of the chart – and everyone else on the left.

The vast majority of Americans build wealth week by week, saving a little bit of their paychecks. Workers set aside wealth in less obvious ways too, by contributing some of that paycheck to Social Security and possibly paying down a mortgage.

Differences in earnings add up over a lifetime and contribute to how much wealth people are able to accumulate.  This is explored in the Urban Institute’s series of nine charts, including the one above. Take the earnings trend over a half century shown in Chart No. 2 on the Urban Institute’s website: the nation’s top-paid workers have enjoyed increasing incomes, while wages have essentially been flat for those at the bottom. [All income and wealth data are in constant 2013 dollars and are comparable.]

The charts, when taken together, also illustrate how much larger is the wealth disparity between the top and bottom than is the earnings disparity. This is especially true of racial inequalities, even when the researchers control for income and age.

In Chart No. 5 on the Urban Institute’s website, the total value of the lifetime earnings of the typical white baby boomer born between 1943 and 1951 is $2 million – 30 percent more than African-Americans’ lifetime earnings of $1.5 million.

The typical white American families’ retirement savings (Chart No. 7) is $130,472 – seven times more than African-American families at $19,049.   [Wealth data were provided only for families, not for individuals.] A report by the Federal Reserve Bank of St. Louis reached similar conclusions about the income and wealth gaps for black families.

To see all nine of the Urban Institute’s charts and its report, click here.Learn More