September 2012

Paying Mortgage Faster Not Best Option

Americans have been paying down their high-interest credit cards like crazy. Once you do, financial advisers say, think hard about the best use of that spare cash.

With mortgage interest rates at historic lows – they’re scraping 3.5 percent on 30-year fixed loans and 2.8 percent for 15 years – paying extra on the mortgage should no longer be a priority. This simplifies what is a difficult decision for many of us: what’s next?

Saving for retirement and paying off student loans are now the top priorities, in that order, according to two financial advisers interviewed by Squared Away. But paying off the mortgage is a mistake that many people continue to make: mortgage debt outstanding has also declined in recent years, from $11.1 trillion in 2008 to $10 trillion currently, according to the Federal Reserve.

“Paying off a mortgage – I’m not a big fan of that,” said John Scherer of Trinity Financial planning near Madison, Wisconsin. He proposes that his clients funnel the extra money that had been used to pay credit cards into other personal finance “buckets.” …

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401(k) Fund Choices: Less is More

New research suggests that the more mutual funds your 401(k) offers, the more likely you are to take the easy way out to escape the mental gridlock.

The typical 401(k) has seven mutual fund investment options, but some have as many as 21 funds. We may think we like choices, but behavioral research has shown that people simply can’t handle so many options – that’s why some employers have turned to auto enrollment in their 401(k)s or picking investments for workers who can’t or won’t make the decision.

A new study building on prior research finds that the more investment options an employee has the more likely he or she is to simply divide the money evenly among those options. This can potentially reduce the diversification in employees’ retirement portfolios, with long-term consequences.

“We find that considering a larger number of funds to invest in may be overwhelming for many investors,” said the research, by Gergana Nenkov and colleagues at Boston College, as well as Rutgers University, the University of Pittsburgh, and the University of Texas, Austin. Splitting the money evenly is how we cope.

“We just don’t have enough capacity to sift through the options that are out there,” Nenkov explained in an interview. Employees aren’t financial experts, and asking them to make these decisions is often “too much,” she said, and may even be “making us unhappy.”

The focus is on 401(k) choices in this study, recently published in the Journal of Marketing Research, But the argument may apply to the proliferation of all kinds of complex financial products, including credit cards charging different rates for balance transfers, purchases and cash advances, as well as debit cards with hidden fees and mortgages with complicated terms.

Multiple products act to prevent consumers from comparison shopping. But the demise of the defined benefit plan and the sudden responsibility thrown on employees to manage tens or hundreds of thousands of dollars in their personal investment portfolios is clearly more than many of us can handle. Don’t feel bad either – Nenkov, who has a PhD in marketing, admits to feeling overwhelmed by the choices. (As does this blog writer.) …Learn More

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Social Security: There is a Better Way

Married couples have up to 567 options for deciding when and how to file for their Social Security benefits. Yes, 567!

“They are faced with a bewildering array” of choices, said David Freitag, vice president of Impact Technologies Group Inc. in Charlotte, North Carolina, which just released a spiffy, user-friendly Social Security calculator to help.

No wonder people just throw up their hands and claim their benefits at 62, when they first become eligible. But in the midst of the baby boomer retirement tsunami, oodles of calculators are coming online to simplify the decision for couples. Impact is offering a 14-day free trial to anyone who wants to test its calculator.

Couples’ strategies have become more complex, because today’s boomer wives have spent a lifetime working and because they may earn wages rivaling or exceeding their husband’s, said Jim Blankenship, a financial planner in New Berlin in central Illinois. There is also more money at stake in making the right decision, he said.

“Before, it was much easier to have a rule of thumb to go by,” he said. “The decisions are different than what they used to be.” …Learn More

A Modest Solution to Your Financial Woes

Perhaps because our summer vacations are over and it’s time to increase our 401(k) contributions, Squared Away is on a jag about saving money.

Amitai Etzioni is one of the last old-school public intellectuals.  He has done everything from writing 24 books to serving in the Carter White House and currently directs George Washington University’s Institute for Communitarian Policy Studies.  But this video captures the wisdom of an 83-year-old man who taps deeply into the psychology of money in the 21st century. 

Etzioni also wonders why, when he suggests his prescription to people, they “get angry with me.”

Since everyone is unique – and uniquely motivated – you may prefer a video that ran last week. 

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

It Pays More Than Ever To Delay

Single people can receive tens of thousands more from Social Security over many years of retirement and couples can receive nearly $125,000 more by waiting until their late 60s to sign up.

The most common age for starting up Social Security is 62, when individuals first become eligible, even though monthly benefit checks would rise sharply if they’d wait. But it’s becoming increasingly worthwhile financially to hold out, according to economist Sita Nataraj Slavov of the American Enterprise Institute, who presented her research findings at the Retirement Research Conference in Washington last month.

 

 

 

 

 

 

 

 

This contradicts the conventional wisdom that no matter when people file, they’re going to essentially receive the same total amount over their entire retirement. The trade-off has always been between filing early and receiving a smaller check for a longer period of time, or filing later and receiving a bigger check for fewer years. Financially, it’s a wash.

But an economic fluke has changed all that: historically low interest rates. Slavov and co-author John Shoven, a Stanford University economist, have determined that, increasingly, there’s a payoff to holding out in this unusual rate environment. (More later on how that works.)

“There’s real money at stake here. This is not a trivial amount for most people,” Slavov said in a telephone interview. “What we’re trying to communicate is, it’d be good to think more about what you’re giving up when you claim early.”

At Squared Away’s request, Slavov calculated the present values for retirees who file for Social Security at the age at which they would maximize their benefits – she did so for the average single man, single woman, and two-earner couple. The payoff is largest for married couples who delay filing for benefits: …Learn More

Motivation to Save: A Simple Solution?

Quiz: by socking away $400 per month, earning 10 percent on your money, you can save $302,412 in 20 years. So, how much would you have in that same account in 40 years?

Yes, it’s more than double. But how much more?

Most Americans can’t do the math, explains Craig McKenzie of the University of California, San Diego’s Rady School of Management, in this video. And if they can’t do the math, then they are unable to comprehend how much easier their lives would be if they took advantage of the enormous benefits of starting to save early for their retirement.

That’s hardly surprising. What is surprising, however, is that McKenzie, a cognitive psychologist by training, experimented with a “simple, straightforward intervention” to get the point across to research subjects of the large boost to saving of earning compound interest over many years. Even better, it succeeded in motivating them to save, he said.


The solution is, as promised, simple – so easy that employers who offer 401ks, as well as mutual fund companies, banks and credit unions, could easily implement it…
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Campaign Discourse Misses Major Issue

Retirement-income security is receiving little attention as the presidential campaign heats up, despite a mound of evidence that Americans’ retirement prospects are stagnating – or worse.

While Medicare has been at the center of the debate, there has been little emphasis on the broader topic of income security for what remains the largest demographic bulge in U.S. history – the baby boomer generation – and now the largest block of retirees.

In the retirement community, however, debate swirls constantly about how bad the situation really is. These debates are slicing the onion awfully thin when one research paper or report after another contains a new aspect of the troubling fallout from the final years of a transition from secure, employer-guaranteed pensions to DIY retirement. Sometimes it seems that Wall Street’s collapse in 2008 was just the kickoff for the bad news on the retirement front.

A new report from Boston College’s Center for Retirement Research, which funds this blog, finds that just 42 percent of workers in the private sector had pension coverage in their current jobs in 2010 – that’s coverage of any kind, including the defined-contribution plans that now dominate. Yikes!…Learn More

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