August 2012

What You May Have Missed

A few articles Squared Away readers might’ve missed while they were on vacation are listed below.

A link to each article appears at the end of these summer headlines:

Couple Reach Across Financial Divide

Little Thought Put Into Retirement Date

How Can Debt Enhance Self-Esteem?

Progress Stalls for Young Adults

Free Financial Advice Goes Online

10 Student Loan Prevention Strategies

To support our blog, readers may want to sign up for our unobtrusive alerts – just one per week – by clicking here. And there’s always Facebook and Twitter!
Learn More

What’s Up With Women?

The share of women enrolled in college is increasing, and more women are breaking into the top tier of business, government and non-profits.

But at the same time that women are achieving more status than at in any time in history, we still know much less than men about money and finance. What’s up with that?

Financial literacy is important to women, because they live longer and need more retirement savings. Another reason this matters is that women are, according to a recent federal report, more financially vulnerable than men, particularly when they become divorced, widowed, or retired.

Anyone who is not savvy “will have a much tougher time preparing themselves for retirement,” Roger Ferguson, the president of the TIAA-CREF retirement system, said at the retirement research conference in Washington.

In a now-famous survey designed by Annamaria Lusardi, a professor at the George Washington University School of Business, and Olivia Mitchell at The Wharton School, only one in five American women who were asked three simple financial questions got them all right.

And the problem of financially illiterate women is universal. Lusardi recently fielded her survey on a global scale and found the same abysmal results. “Whether you look at the Netherlands or Sweden or Italy or the U.S. – these are very different countries – women know less than men,” she said.

She is, nevertheless, optimistic, because women are also more likely to admit what they do not know. Half of women in a separate U.S. study said they didn’t know the survey answers, while only one-third of men did. This admission can be viewed as “a good thing for women,” Lusardi said.Learn More

Image: cartoon of letters 401k

401(k) Tax Break May Be Weak Incentive

The typical American household approaching retirement age had just $42,000 saved in its 401(k) in 2010. This raises the question: Does the federal tax incentive designed to spur savings even work?

In what one retirement expert called “landmark” research, a new study has found that employers’ automatic enrollment and other employee mandates are far more effective ways to increase retirement savings than the federal tax exemption granted for retirement-fund contributions.

Harvard University Professors Raj Chetty and John Friedman, together with Soren Leth-Petersen and Torben Nielsen at the University of Copenhagen, tested the impact of both types of incentives on an enormous sample of 4.3 million people in Denmark. Chetty said the findings also hold implications for the United States.

They found that every $1 increase mandated for retirement savings – in this case, by a temporary Danish policy that required workers to contribute 1 percent of their earnings to government pension savings accounts – spurred 86 cents in additional savings by individuals. In contrast, the Danish government’s tax subsidy, which is very much like our own 401(k) tax break, spurred only 20 cents more in savings.

“This is a landmark study,” Dartmouth College professor Jonathan Skinner said about the paper, presented during the Retirement Research Consortium’s conference in Washington in early August. “I can’t emphasize enough how important this study is in terms of how retirement policies work.” …Learn More

Less Smoking Trumps More Obesity

Smoking cigarette

Since the 1950s and 1960s, the number of cigarettes smoked in the United States has plummeted by one-half but the number of obese Americans has tripled.

So which megatrend has a greater impact on U.S. health and life expectancy? Remarkably, the winner is the positive effect of the decline in smoking. And the additional longevity, as fewer Americans light up, will continue to play out at least through 2040, according to new research.

“The advantages of smoking reductions are expected to outweigh the disadvantages of increases in obesity for both sexes,” according to findings by University of Pennsylvania sociologist Samuel Preston and his colleagues at UPenn’s Population Studies Center and at Emory University’s Department of Global Health.

The declining popularity of smoking has driven down deaths due to lung cancer to 18 percent of all U.S. deaths. But currently obesity is nearly running neck and neck, causing 16 percent of all deaths.

“We have a horse race going on,” said Christopher Ruhm of the University of Virginia’s Batten School of Leadership and Public Policy, who commented on Preston’s paper at the Retirement Research Consortium’s conference in Washington earlier this month. “The winner of the horse race is that the smoking effect is going to dominate.” (The Center for Retirement Research, which sponsors this blog, is a consortium member.)

Estimates of longevity, in this particular case, should be viewed with caution. The mortality impact isn’t easy to calculate, Ruhm and Preston said, because many conflicting things are going on at the same time. For example, although obesity is rising, cholesterol-lowering statins and blood pressure medications are reducing the risk that any individual will die from obesity. …Learn More

Out-of-Pocket Medicare Costs Bite Deep

The bite taken out of Social Security checks to pay Medicare premiums and co-payments for doctor visits has more than doubled, from just 7 percent of benefits in 1980 to 15.5 percent currently.

People born on the tail end of the baby boom wave are suddenly waking up to retirement, which is barreling towards them. While many have no idea how Medicare works or how much they will pay for health care, the program’s future has emerged as a key issue in a presidential campaign with competing notions of how best to slow Medicare’s growth to a more sustainable level.

Whatever your political stripe, the costs of retirement health care are rising “significantly,” according to a forthcoming report by the Center for Retirement Research, which sponsors this blog.

Medicare covers a large portion of health costs, but retirees must pay Medicare premiums, which are deducted from their monthly Social Security checks, as well as copayments for doctor visits and other medical services such as some tests. These additional expenses are often, though not always, covered by employer-sponsored or private “Medigap” insurance policies, which smooth out these expenses for retirees…Learn More

aluminum

Hard Labor Spells Earlier Retirement

Men with the most physically demanding jobs retire earlier – by choice or due to exhaustion or chronic pain – increasing the financial pressures facing this segment of the workforce once they reach old age.

The retirement age for most Americans continues to float upward as people delay the date so they can sock more money away or boost the eventual size of their Social Security checks. But that’s often not a viable option for people with highly physical jobs, such as the 1,500 Alcoa plant workers in a new study.

The retirement pattern for Alcoa workers studied by the Stanford University School of Medicine suggests that men in manufacturing jobs face a unique set of retirement issues related to the physicality of their work. Most of the workers in Stanford’s 2001-2008 study were employed in aluminum smelters. The study found that men in these demanding jobs retired, on average, at age 60 and six months – a full year earlier than their male Alcoa coworkers with jobs such as floor inspector or shipping clerk.

“Those with heavier jobs retire earlier. Those with more sedentary jobs retire later,” Sepideh Modrek, a Stanford medical school lecturer, said at the recent Retirement Research Consortium conference, where she presented the results of her working paper. [The Center for Retirement Research, which sponsors this blog, is a consortium member.] … Learn More

Social Security Advice That Harms Wives

Most financial advisers give troubling advice to married couples about when to claim their Social Security benefits, advice that can substantially reduce the wife’s income during retirement.

Social Security rules generally make it more beneficial for the higher-earning spouse – usually the husband – to delay signing up for his benefits well past age 62. By delaying, he boosts the size of his monthly Social Security check, automatically increasing his wife’s “survivor benefit” after he dies. This holds true for most couples, whether the wife works or not.

A new survey of U.S. financial advisers provided them with hypothetical couples’ situations and asked how they would advise them on when to start receiving Social Security. For the couple in excellent or average health, only 20 percent recommended “that the man delay claiming as long as possible.” This advice leaves most widows with a substantially smaller monthly benefit for years or even decades.

The survey’s finding demonstrates “the lack of understanding of both the benefits of delaying and the compounding factor it can have on the spouse,” said Lisa Schneider, research director for Greenwald & Associates, a private research firm that conducted the study with researchers at the University of Pennsylvania. …Learn More

12