November 2016

Two-faced woman

Financial Distress is Set Early in Life

Young adulthood is the staging ground for financial success later in life, and today the stakes are higher than they’ve ever been.  Young adults are managing the burden of paying back student loans or feeling an urgency to save – and many are trying to do both.

According to a study linking economics and psychology, what most strongly separates young adults who start out on the right foot from those already experiencing financial distress is whether they are conscientious or neurotic individuals.

University of Illinois researchers followed more than 13,000 teenagers and young adults between 1994 and 2008 in the National Longitudinal Study of Adolescent to Adult Health.  The survey asked questions about both their psychology and finances.  The six measures of financial distress in this study were determined by survey questions such as whether the respondents were keeping up with their rent and utility bills, whether they were worried about having enough food, and whether their net worth was positive or negative.

The personality measures were based on the Big Five traits widely used in psychology research: conscientiousness, agreeableness, neuroticism, openness to new experiences, and extroversion (known collectively as CANOE).  The survey respondents were grouped in this way based on the extent to which they agreed or disagreed with various statements. Examples included “I get chores done right away (conscientious),” and “I get upset easily (neurotic).”

The researchers found clear links between two of the Big Five traits and financial distress.  Being conscientious – following through, controlling one’s impulses, and being organized – strongly reduced the likelihood of having all six of the study’s financial distress outcomes. …Learn More

Housing Bust Still Plagues Pre-Retirees

NRRI Housing figuresIn 2013, almost 40 percent of all households ages 55 and over had not paid off their mortgages, up from 32 percent in 2001. These borrowers were also carrying a lot more housing debt by 2013.

During that time span, the housing boom first encouraged homeowners to borrow against their newfound home equity.  Then the 2008 bust hammered house prices from Miami to Seattle, reducing home equity and leaving many people holding relatively large mortgages.

By 2013, these two factors had combined to exacerbate Americans’ poor preparation for retirement, according to a study by the Center for Retirement Research, which supports this blog.

The researchers analyzed the impact of the bursting of the housing bubble on the National Retirement Risk Index (NRRI) through its effect on home equity, the largest store of non-pension wealth for most retirees.  The baseline NRRI estimate, using 2013 data from the Federal Reserve’s Survey of Consumer Finances, was that 51.6 percent of working-age households were at risk of having a lower standard of living in retirement. Housing is part of the index, because retirees are assumed to convert their home equity into income by taking out a reverse mortgage.

The 2013 NRRI baseline was adjusted to see what would’ve happened if households had not run up their housing debt during the bubble and if house prices, rather than jump up and then plunge in 2008, had kept up their historic pace of increases since the 1980s. In that case, the researchers found, the share of households at risk would have been 44.2 percent – not 51.6 percent.

In other words, had the housing bubble and subsequent crash not occurred, fewer households would be at risk of having insufficient retirement income.

The middle-class was hardest hit by the crisis, probably because they’re more likely to own homes than people with low incomes and because housing wealth is more important to them than it is to wealthy people. …Learn More

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