People Lack Emergency Funds, Tap 401ks

Emergency Uses of retirement savings chartWhen between 45 percent and 60 percent of Americans don’t have enough money for retirement, encouraging saving is a national priority.

A related issue is preserving the funds once they’re set aside.

A survey released last month by Transamerica indicates that workers frequently resort to hardship withdrawals and loans from their 401(k)s, because they lack the cash required in emergencies. The survey bolsters the argument made by some retirement experts and employers that until workers’ cash-flow problems are addressed, many will continue to view retirement funds as their best option in an emergency.

More than one in four U.S. workers in the survey said they have taken premature withdrawals from their 401(k) or IRA retirement funds.  Catherine Collinson, president of the Transamerica Center for Retirement Studies, connected this “alarmingly high share” to a shortage of cash: 21 percent of workers reported having less than $1,000 saved for emergencies and another 14 percent have saved just $1,000 to $5,000. …Learn More

piggy bank

2.8 Million Seniors Have College Debt

The number of Americans over age 60 who are paying back federal or private student loans has reached a critical mass, quadrupling to 2.8 million over the past decade, a new report finds.

These older borrowers owe $23,500, on average, and two-thirds of them also have mortgages and credit card bills at a time their medical expenses are typically increasing, according to the report issued this month by the Consumer Financial Protection Bureau (CFPB). Separately, nearly 40 percent of those with federal loans have defaulted on their payments.

The response of many older student loan borrowers, the CFPB said, is to “skip necessary health care needs such as prescription medicines, doctor’s visits, and dental care because they could not afford it.”

Suzanne Martindale, a staff attorney at Consumer Reports, said CFPB’s report illuminates the link between the country’s college debt crisis and the retirement crisis. …Learn More

Rewriting Retirement Header Illustration

Caring for Her Elderly Parents 24/7

Vivian Gibson

Taking care of her elderly parents is Vivian Gibson’s full-time job.

The last two weeks in October weren’t so unusual.  She tended to her 86-year-old father for several days in the hospital – another episode in his unending battle with ankle sores stemming from service in the Korean War. Gibson also helped her mother, age 81, get through a medical procedure and chauffeured both parents to more than a dozen doctor’s appointments and to their dentist. Her mother has been dealing with a pulled tooth, along with abnormal cells in her bladder and an abnormal EKG.

In addition to their medical needs, Gibson helps them with everything else, from cleaning and dressing her father’s wound daily to buying their groceries and cleaning up the yard.  Her parents live in Bartow in central Florida, about 20 minutes from Gibson’s home in the country, and she’s always on call in case her father falls again.

Yet she remains surprisingly upbeat, unfazed by a non-existent social life and a caregiving burden made heavier by the fact she is an only child. “There is never any respite,” she said. “I have to work my doctor’s appointments in around theirs. My mother keeps telling me, ‘Don’t get sick. You can’t get sick!’ ”

To help her parents, Gibson retired from a local hospital just shy of her 59th birthday.  She’s now 61 and premature retirement has strained, though not broken her financially.  She drained most of her $17,000 emergency fund to meet regular expenses and reluctantly dipped into her IRAs and past employers’ retirement savings plans. Her combined balance is down to $300,000 – or about $12,000 lighter than when she retired, despite a rising stock market. Her lifeline has been a $24,000 pension from her work in state government.

“I wanted to travel,” she said – Australia, New Zealand, Canada – “but I don’t have the money – or the time – for that.” …Learn More

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

Kids sleeping at daycare

Day Care Costs Factor into Mom’s Work

Table about daycareIn 26 states, the average cost of full-time care for just one infant at a day care center approaches or exceeds $10,000 a year, according to ChildCare Aware of America.

No wonder many new mothers (and sometimes fathers) ask themselves: Is it even worth it to work in the first place?

Proposals by both presidential candidates to subsidize care for the nation’s 11 million pre-schoolers amount to non-partisan recognition that parents need some help.

The IRS does provide a child care tax credit of up to $3,000 for one child and to $6,000 for two. But despite this, the United States lags well behind Europe in the financial assistance extended to parents of young children.

The result is that the child care costs shouldered by two-earner American families – the percent of their after-tax incomes that go toward care – are two times what parents pay in countries that subsidize care, such as Germany, Australia, Sweden, Denmark, France and Greece, according to the OECD.

A series of academic studies over more than two decades document a deep and enduring link between steep child care costs and mothers’ decisions to drop out of the labor force.

One study in 2005 found a “striking” impact on mothers when Quebec made child care for pre-schoolers affordable by putting in place subsidies for private day care in the late 1990s, which capped parents’ daily costs at $5. The program spurred big increases in child care use in the province. The study found that universal day care also significantly increased married women’s labor force participation, by 14 percent. …Learn More

Annuities Have Real Value

Woman falling on money parachute

The value that annuities can provide to retirees may not be obvious, but it is real.

Annuities are also becoming increasingly valuable as fewer people have that traditional source of reliable retirement income: an employer pension.

Insurance company annuities, like pensions, pay out a monthly income no matter how long you live. These payments come from three sources: 1) the initial amount invested to purchase the policy; 2) the interest earned on the amount that’s invested before it is paid out; and 3) “mortality credits.”

These mortality credits are the essential element that protects retirees from outliving their savings.  As a retiree moves through her 80s, a growing share of the other people in the annuity pool die.  The funds they leave behind in the pool are used to continue making monthly payments to those who are still living.

This is the starting point for a new summary of academic research on annuities by the Center for Retirement Research at Boston College, which supports this blog. To fully understand the individual studies, it’s necessary to read the report.   But here are some takeaways: …Learn More

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