October 2011

Occupy Wall Street protesters holding an American flag and a sign reading "We are the 99%"

How Rich is Rich?

Occupy Wall Street protesters have made their feelings known about the widening U.S. wealth gap.

So, what do the rest of us think?

A Harvard Business School professor – Michael Norton – and a behavioral economist – Dan Ariely – teamed up to ask people their preferences when it comes to the distribution of wealth. They found that Americans of all types and political affiliations “vastly underestimated” the magnitude of the difference between rich and poor in this country.

At a time many people are suffering in the slowing economy and languishing job market, it’s interesting to see a comparison between what Americans believe about U.S. wealth distribution and the reality they inhabit.

The American rags to riches myth endures – young adults are inspired by it; immigrants come here to pursue it; and millions play state lotteries every year in hopes of hitting the jackpot. Not surprisingly, the authors found that both rich and poor said some level of inequality is okay.

“This is an admirable part of America,” Norton said in a recent interview with Squared Away. “It’s just that people overestimate the extent to which it happens.” …Learn More

CFPB Integrates Outreach, Regulation

A top official in the federal Consumer Financial Protection Bureau (CFPB) said educational outreach to four vulnerable populations – college students, seniors, members of the military, and low-income earners – will be integral to the bureau’s research, regulatory, and legal enforcement efforts.

CFPB’s consumer division will “work with regulators to make sure people know what they are signing” and to help “clean up the marketplace” by ridding it of abusive products, Gail Hillebrand, who heads the consumer division, said at a Massachusetts Financial Education Collaborative conference held Friday at the Federal Reserve Bank of Boston.

Citing the subprime mortgage crisis, Hillebrand said it began “one mortgage at a time” – in large part due to poor disclosure by salesmen or on mortgage forms. Many borrowers who ultimately went into foreclosure failed to realize that their payments would rise sharply after the period of the initial, discounted interest rate ended. … Learn More

Annual Health Expenses in Retirement: blog writer's Kim Blanton's estimated average annual expenses in five year increments - Graph

Calculate Your Retirement Health Costs

Mid- and late-career professionals staring into their futures, eyes glazed, often don’t have a clue how much their health care will cost them during retirement.

Few pre-retirees know how many holes exist in Medicare coverage. One MetLife survey this year found that 42 percent of pre-retirees age 56 to 65 believe, incorrectly, that their health coverage, Medicare or disability insurance will pay for their long-term care. Such knowledge gaps make it virtually impossible for most people to take a stab at tallying their total costs, out of pocket, for Medicare, Medigap, and private premiums and copayments over years of retirement.

Retiree healthcare is “the elephant on the table,” said Dan McGrath, vice president of HealthView Services outside Boston. The omission amounts to hundreds of thousands of dollars per retiree.

Calculators that estimate retiree health expenses are scarce, according to a 2008 AARP brief. But HealthView’s calculator, recently upgraded, estimates total out-of-pocket health expenses, which are tailored to an individual’s specific medical traits – diabetes, cholesterol, blood pressure etc. – and health habits – smoking, exercise etc.

Squared Away readers can obtain a free trial by emailing McGrath at dmcgrath@hvsfinancial.com. …Learn More

A pile of different colored credit cards.

People Make Mistakes When Paying Cards

Myth: I should pay off the debt with the highest interest rate first to get out of debt quickly.
Truth: You should pay off the smallest debt first to create the greatest momentum in your debt snowball.

— DaveRamsey.com

Behavioral economist Dan Ariely might agree with Dave Ramsey’s second statement: Ariely and fellow researchers for the first time have established that people do, indeed, pay off their small card balances first, because it gives them a feeling of accomplishment.

“We have a desire to close things, to feel we’re making progress,” Ariely said in a recent interview. As each card is knocked off the list, “it’s something you can count.” The strategy also dovetails with people’s natural inclination to break down overwhelming tasks into sub-goals to make the task feel more manageable.

But the mathematical truth remains that holders of multiple cards get out of debt faster and cheaper if they first pay down the cards with the highest interest rates. In other words, it’s not in a card holder’s financial best interest to pay off the small balances first, even if it does make them feel better.

The researchers’ first experiment confirmed this behavioral tendency by testing 162 undergraduates…Learn More

Thaler: Employers Should Do More

The pioneering behavioral economist Richard Thaler said employers and the financial industry should increase their efforts to help people prepare financially for their retirement.

“Making it easy isn’t the most profound thing anyone has said. But if we want people to do a better job saving for retirement, make that easier,” he said last week at a Retirement Income Industry Association conference, backed by a wide-angle view of Boston’s skyline.

Thaler is co-author of the bestselling “Nudge: Improving Decisions About Health, Wealth, and Happiness” and a pioneer in a branch of economics that rejects the convention that people are “rational” when it comes to making decisions. Behavioral economists acknowledge that people are psychological beings who don’t always act in their best interest and often do downright perplexing things. One prominent example is employees who do not sign up for their 401(k) retirement plan, leaving the money from their employer’s savings match on the table.

To nudge people to save, about half of U.S. corporations now automatically enroll their employees in their 401(k), according to consultants Callan Associates, though many offer it only to new employees. Before auto enrollment came into vogue, companies gave employees the option of signing up if they wanted to participate in the plans. With auto-enrollment, they must choose to opt out of saving, a strategy behavioral economists argue helps overcome the powerful inertia of doing nothing.

But employers typically deduct only 3 percent from employees’ paychecks. Thaler said this is nothing more an arbitrary percentage that a US Treasury Department official once mentioned in passing but that has now been accepted as gospel. It’s also too low by financial planners’ standards, particularly for mid- and late-career workers. “It’s time to get over that” and raise the rate, he said. …Learn More

Less equals more.

Less is More

In this humorous Ted video, Graham Hill advocates minimalism as an alternative to consumerism and showcases his 420-square-foot apartment in Manhattan. His living arrangement may seem extreme but residents of Tokyo have been living small for years, and his main point is well taken: he has reduced both his living expenses and his environmental footprint.

Hill is a modern Renaissance man. He studied architecture, founded Treehugger.com to take environmental sustainability mainstream, and dreamed up the idea for those ceramic Greek coffee cups, a replica of the paper cups, found in art museum gift shops.

“From his New York home, he schemes daily about how he can help humanity avoid rapid extinction,” according to his bio.Learn More

Women Lag in Retirement Readiness

When it comes to retirement, we women are in lousy shape.

We live longer, so will need more money when we retire. Yet we work less over our lifetimes and earn 80 percent of what men earn while we are working. As a result, we’ve saved less in our 401(k)s and IRAs.

Not surprisingly, the rising economic insecurity among all Americans ushered in by the Great Recession is more pronounced among women, according to reports Monday by the Institute for Women’s Policy Research (IWPR) in Washington:

  • 58 percent of women interviewed by IWPR were concerned they would not have enough to live on in retirement, compared with 43 percent of men;
  • 47 percent of women lacked confidence that their resources would last throughout their retirement, compared with 35 percent of men;
  • 51 percent of women worried they would not be able to afford retiree healthcare, compared with 44 percent of men.

Financial data support women’s concerns. In 2010, the average balance in defined-contribution plans managed by Vanguard Group, one of the nation’s largest mutual fund companies, was $58,833 for women and $95,675 for men. The median balance was $21,499 for women and $33,547 for men.

Women’s personal retirement savings are even lower, relative to men’s, when one considers that women live much longer. Among women born in 1935, 51 percent are expected to live until age 85 – just 36 percent of men will, according to the Center for Retirement Research at Boston College, which hosts this blog. Fully 13 percent of women will make it all the way to 95 – only 6 percent of men will. …Learn More

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