August 2017

401k Saving Harder at Lower Incomes

Sales assistant working in a supermarketOur 401(k) retirement system doesn’t work as well for lower- and middle-income workers as it does for those at the top.

That’s because they face more severe headwinds in pursuit of their retirement goals, concludes a new study.

Consider what happens when a worker’s earnings drop 10 percent or he experiences a bout of unemployment. These episodes are more common among lower-paid workers, and when they hit, they hit their 401(k)s harder than the 401(k)s of people who earn more, according to the study, “Defined Contribution Wealth Inequality.”

In theory, 401(k)s could work for everyone – if everyone had access to an employer savings plan (which they don’t).  And while people who earn more money obviously have more to sock away in their retirement plans at work, smaller paychecks aren’t necessarily a problem either.

The key to retirement for any worker is whether he or she has saved enough, along with Social Security, to cover about 75 percent of what they earned at work during the years leading up to their retirement. It’s true that lower-paid workers can’t save as much, but less could still be enough to reach their more modest retirement goals.

But earnings declines, unemployment, smaller employer contributions, and unwise investment choices – these “barely affect earners in the top 10 percent of the earnings distribution but are associated with less DC [defined contribution] wealth accumulation for those at the bottom,” concluded the researchers, Joelle Saad-Lessler at the Stevens Institute of Technology and Teresa Ghilarducci and Gayle Reznik at the New School for Social Research.

This disparity, they argue, has increased the retirement wealth gap in this country.  In the post-recession period 2009-2011, for example, more high-income workers saw their DC account balances increase than did workers in the bottom half.

The researchers tracked the same people over time in two groups – the bottom 55 percent of the earnings ladder and the top 10 percent. They were able to more precisely compare each group’s ability to save for retirement by using the actual earnings and employer contributions to individual workers’ retirement plans. Here are their other findings: …Learn More

Houses

Reverse Mortgage: Yes or No?

The older people who either consider a reverse mortgage or actually get one don’t have much else to fall back on.  Their primary assets – outside of their homes – are a car worth no more than $7,000 and about $2,000 in a checking account.

This was one salient fact unearthed about reverse mortgage users – or people who’ve looked into them – in a 2014-2015 survey led by Stephanie Moulton at Ohio State University. This supports a later study by Moulton that found that people who take out the loans tend to be in worse shape financially than other homeowners. The survey provides a more complete picture of who is turning to reverse mortgages – and why other people find alternatives to solve their financial issues.

Federally insured reverse mortgages, known as Home Equity Conversion Mortgages, or HECMs, allow homeowners over age 62 to borrow against their often-substantial home equity. These loans do not have to be paid back until the older homeowners sell the house or die.

Despite these attractive financial features, reverse mortgages are not popular: fewer than 60,000 were sold in 2015.  Many elderly homeowners are appropriately wary of a complex financial product. The fees and interest rates are also higher than on a standard mortgage.  But the idea behind HECMs is to allow cash-strapped seniors either to pay off their existing mortgages, eliminating house payments, or to create a readily accessible pool of cash or a new source of monthly income. Either way, they free up money that retirees can use to meet their expenses, emergencies, or medical bills.

The researchers interviewed some 1,800 older households after they had received the counseling required under federal law to apply for a HECM reverse mortgage.  About two-thirds of those counseled proceeded with the loans, and one-third decided against it. Here’s what these two groups look like: …Learn More

singing

A Day at the Golden Age Senior Center

Chung-Au Loi Tai

Boston – Four mornings a week, a van scoops up Chung-Au Loi Tai and delivers her to the senior center for a full schedule of activities. The 1:30 bingo game is her favorite.

She giggles when she explains why: she likes the Chinese Rice Biscuits that are handed out as prizes.

She is one of 350 mostly low-income clients of the Greater Boston Golden Age Center’s three locations around Boston. Most came to this country from China decades ago and raised families while working in Chinatown or the suburbs. Chung-Au, for example, worked in a shoe factory for nine years, and her late husband cooked in restaurants all over the city.

Now in old age, the Golden Age Center’s community of like-minded people spend their days learning English, new songs, and calligraphy, eating $2 lunches – a “suggested” donation – and getting help with their medical and other needs from the nurse and social workers on staff.

Finding things to do all day might seem trivial to working people – there are barely enough hours in a day. But the center’s carefully planned activities are critical to seniors’ physical and mental health and to their families, who are still out working. One big reason for these daily visits is to prevent the frail or cognitively impaired from becoming too isolated.

The Golden Age Center and similar centers around the country make up a patchwork of often poorly funded non-profit and local-government agencies that quietly fill a big need in the safety net for seniors. These agencies provide an array of services, including transportation, meals, exercise, medical supervision, and cognitive stimulation.  The federal Medicaid program pays the Golden Age Center a per-day fee for its low-income clients.

Ruth Moy, the executive director who founded the center in 1972, raises additional money from donations and other federal and local government programs.  “There is never enough money,” Moy said. “You just keep plugging away.” …Learn More

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