Millennials: Managing a Steady Paycheck


As a 20-something working in downtown Chicago in the 1980s, I spent every dime of my disposable income – and then some – on beer and Thai food, vacations, clothes, and parking tickets.

Fast forward 30 years, and my niece and nephew in Chicagoland are now graduating college. It’s liberating to leave school for a full-time job and a substantial increase in one’s income after years of penury. It’s also so tempting to squander this money.

But young adults no longer have that luxury.

The financial demands Millennials will face over their lifetimes are shaping up as far more complex than they were for their baby boomer parents, whose primary worry was buying a house. …Learn More

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TDFs Appeal to the Most Inexperienced

New research finds that the people most likely to benefit from target date funds are also the people inclined to invest their 401(k)s in them – unsophisticated investors.

Retirement and financial literacy researchers long ago established the pitfalls of our nation’s do-it-yourself system of retirement saving (i.e., people don’t save at all or don’t save enough, and investing is too complex for most people). Target date funds (TDFs) have become an increasingly popular solution to the investment piece of the problem in the wake of the Pension Protection Act of 2006, which allowed employers to use them as the default investment option in defined contribution savings plans.

TDFs place a 401(k) participant’s accumulated savings into a broadly diversified portfolio of stocks and bonds that shifts the asset mix as they age. When employees are young and retirement is a distant concept, TDFs invest heavily – as much as 90 percent – in stocks. As employees age, a growing share goes into more conservative bonds.

TDFs are now the primary default investment among employers that automatically enroll new employees into their savings plans. TDFs are a good option not only for inexperienced investors but also for more experienced investors who prefer to delegate the task of portfolio rebalancing to their fund manager. However, employees typically have the option of transferring out of the TDF and selecting other investments offered in their plan. …Learn More

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Late-Career Job Changes Reduce Stress

Great news for older workers considering a career change – those who’ve done it are happier and less stressed.

People who attempted a career change sometime after turning 45 were surveyed last year by the American Institute for Economic Research (AIER) in Massachusetts.  Whatever the reason for making a change – voluntary or forced – the majority of those who did so felt their results were successful.

These late-career changers need to be put in a larger perspective.  Older workers are much more likely to stay put in a job than are younger people moving up the ladder, and older people also have a tougher time recovering and finding a new full-time job after becoming unemployed.

But when older workers can change their employment, the outcomes are positive.

“I feel like a new person” – 72 percent of job changers agreed with this statement, while 65 percent said their stress levels fell, according to the AIER.  There are also downsides to late-career transitions: a hefty minority of those surveyed advised others taking this path to be open-minded about their working hours and lower compensation, though half of those surveyed said their pay eventually increased in their new jobs.

“If you feel you need a change, then do it,” one survey respondent commented.

This survey provides a fresh take on a comprehensive 2009 AARP-Urban Institute study that reached similar conclusions.  The AARP-Urban study found that many older workers tend to move into less prestigious jobs when they make a change.  For example, managers often take non-management positions, which could partly explain why the share of people who said they felt stressed about their work dropped by almost half after a late-career change, from 65 percent to 36 percent. …Learn More

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Kids’ College Trumps Parents’ Retirement

Parents have spoken: paying for college is affecting their retirement planning.

Two new surveys indicate that the surge in college costs is impinging on Americans’ retirement finances.  One survey, by the research firm Hearts & Wallets, found that boomer parents who support their adult children are more likely to delay retirement than parents of financially independent offspring.  The second survey, by the mutual fund manager T. Rowe Price, found that half of parents are willing to delay retirement or dip into their retirement savings to fund college.

college grads chartThe surveys included young, idealistic parents as well as parents staring down the barrel of the retirement gun, and parents whose children achieved financial independence years ago. Nevertheless, these responses consistently show a willingness to trade retirement security to pay for their children’s college education.

The findings aren’t shocking, since parenthood is defined by sacrifice. But financial planners offer some tough advice about parental financial obligations, especially for clients zeroing in on retirement. Parents – as opposed to their offspring – have relatively few years left in the labor force to save for retirement.

“There’s going to be a day when you can’t work anymore,” said Kelley Long, a financial planner with Financial Finesse, which provides independent financial education programs and a financial helpline for U.S. workplaces. …Learn More

leaky pipe

Tapping 401(k)s, IRAs Early Is Costly

It’s fairly easy to withdraw money prematurely from 401(k)s and IRAs – a practice that depletes roughly one-fourth of account balances over a worker’s lifetime.

U.S. workers on average withdraw 1.5 percent annually from their retirement account assets.  When they do, they forgo years of investment gains they could have earned had they left their money alone.

Early withdrawals can pose a problem for many Americans at a time financial security in retirement increasingly hinges on these defined contribution plans.  The potential for leakages has also grown in recent years, in part due to the shift away from traditional employer pensions to 401(k)s that place control in employees’ hands.  Further, the assets being held in IRAs, which have more liberal withdrawal policies, are increasing as workers changing jobs and retiring baby boomers roll their employer-sponsored 401(k)s into IRAs.

Figure: Sources of Premature Withdrawal This chart shows the sources and relative amounts – as a percent of total plan assets – of different types of these premature and permanent withdrawals from defined contribution plans.  These estimates, by the Center for Retirement Research, which supports this blog, are based on data from the mutual fund company, Vanguard. They total slightly less than 1.5 percent, because plan participants in Vanguard’s client base earn more than the general population and may have somewhat lower withdrawal rates.

To help preserve workers’ savings, the study proposed ways these premature withdrawals could be restricted: …Learn More

couple on beach

Some Spouses Shun Retirement Planning

Retirement is a joint project for married couples, but remarkably only 43 percent of couples plan for it together.

Are wives to blame?

Some husbands expressed frustration that their wives don’t engage in planning during a focus group conducted by Hearts & Wallets. One man reported that his wife “is not interested in investing,” and another said “all my wife cares about is if we’re going to have the money.”

A San Francisco man volunteered this worst-case scenario: “If I were to get hit by BART on the way home, she would be clueless about what to do with whatsoever there is or how to handle anything.”

Hearts & Wallets cofounder Laura Varas calls it the issue of the “uninvolved spouse.” In a new analysis of its 2013 survey data on 5,400 US households, the financial research firm found that 80 percent of these uninvolved spouses are wives among couples approaching retirement age. The good news is that younger wives are more engaged, Varas said. In early- and mid-career couples, fewer than 60 percent of uninvolved spouses were women.

Yet it’s hard to imagine how anyone can avoid this conversation, given the myriad issues to resolve: Will you stagger your retirement dates, especially if your ages are far apart? If saving and paying off the mortgage are twin retirement goals, are you both still contributing enough to your 401(k)s to ensure you get the full employer match? Have you coordinated your strategies for claiming Social Security? Will you be financially secure if your spouse dies first? …Learn More

Wanna Retire? Find a Purpose

In this video by KUTT-TV in Anchorage, Alaska, Fred Keller and Judy Foster show off their retirement project: they transformed a 1976 pickup truck into an oversized replica of a Radio Flyer wagon they can drive around town.

While a new red wagon isn’t for everyone, it illustrates an important point: retirees need to find ways to remain active. Older people warn that retirement shouldn’t be viewed exclusively as a time to “relax,” a well-deserved break.  People who enter retirement expecting nirvana often find they’re bored stiff, or even depressed, due to an abrupt drop in productivity after decades of working. Retirees also spend a lot of time alone or watching television.

This blog often promotes the benefits of financial health and mental health that come with working longer.  When making financial preparations for retirement, preparation should also include thinking about pursuits such as working on a long-neglected project or hobby, writing a family history, or finding a social group, part-time job, avocation, or volunteer work to add structure and purpose to one’s life.

It took Keller and Foster nearly a year to build their vehicle, KTUU reports. When they took it on the road, they discovered another benefit: talking to the people who invariably ask them about their Radio Flyer is a constant source of fun.Learn More

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