Too Much Health Plan Choice is Costly

Technology, coffee, investments, beer – most consumers value choice in some aspect of their lives.  But what if having too many choices leads to bad decisions and costly mistakes?

Pie of optionsCarnegie Mellon University economists Saurabh Bhargava and George Loewenstein, and Justin Sydnor from the University of Wisconsin School of Business, found this to be the case at one company that required employees to select from a menu of options and build their personal health plans from the ground up. The researchers found that the employees typically designed health plans that would cost them more than other plans with similar coverage.

The cost of these choices was large for the average employee – about one-quarter of their annual premium payments in the coming year. An extreme example is the group that chose a plan with a $350 deductible. They paid about $1,100 more in premiums to save, at most, $650 in out-of-pocket spending throughout the next year.

There might be reasons that someone would choose a low-deductible plan – not having enough cash on hand in case of a medical emergency, for example. But in this particular setting, Bhargava explained in an email, “none of these explanations could reasonably account for people paying $2 to $4 in extra premiums to reduce $1 in expected out-of-pocket expenses.”

Further, lower-paid employees earning under $40,000 per year were much more likely to make these mistakes.

Bhargava said that the paradox of too many choices confronts the millions of Americans who sign up online for health insurance under the Affordable Care Act (ACA) – including his mother. In a recent presentation, he said she is “like a lot of consumers” and has “a strong aversion to a high deductible.” …
Learn More

Job satisfaction illustration

More Retirees Get Less Satisfaction

Figure: More Retirees Get Less SatisfactionIn the late 1990s, six out of ten retirees found retirement “very satisfying.” Today, not even half do, according to a recent analysis of a long-term survey of older Americans.

The news isn’t all bad, since the “moderately satisfied” share rose – and moderately satisfied is probably a more realistic goal for most people anyway.

But the question of why so few people are very satisfied with their retirement state of mind is difficult to pin down. The survey analysis by the Employee Benefit Research Institute (EBRI) and past academic research provide some clues.

Health.  It’s well-established that health and satisfaction are inextricably linked: healthier retirees are happier retirees, according to a 2005 study by the Center for Retirement Research, which supports this blog.  One reason health is important is that retirees who are healthy can remain active – bridge, golf, travel, volunteering, whatever – which brings satisfaction. …Learn More

Friends at dinner

5 Ways Millennials Mess Up With Money

The harsh reality is that you aren’t earning as much money as you think you are, and you don’t have as much to spend as you think you do – so it’s easy to let spending get out of control.

Gallup chartAndrea Woroch, only 34 years old herself, delivers some tough love to those who’ve already developed poor spending habits. A personal finance expert for the Millennial generation, Woroch said a perilous time is between the cash-strapped period right after college and the time when the steady, but modest, paychecks start flowing.

Early on, she explained, the attitude was “Okay, let me go to happy hour on this day because I can get $1 tacos and a beer. Now it’s okay to spend $20 for dinner. But that adds up, and they end up spending even more.”

Millennials polled by Gallup said they prefer saving to spending.  But Woroch, in an interview, provided five harsh observations about the obstacles to saving that she’s observed among young adults – including her husband, when they started dating:

  • You eat out all the time. Rightly, socializing is a big part of life. Eating out is also part of a larger trend: in March, consumer spending on dining out surpassed grocery store sales for the first time. Woroch advises that “spending money at the grocery store will help you spend less on food and leave room in your budget to put towards your savings goals.” …

Learn More

Housing, Health Are 1/2 of Elderly’s Costs

How will your spending change once you retire? Will you be able to afford your needs? Will healthcare drain your budget?

The U.S. Bureau of Labor Statistics (BLS) provides some clues in its data on the spending patterns of older Americans. The pie charts below show the percentage of total household budgets in 2014 that went to everything from housing to entertainment for two older age groups.

The two age groups selected highlight how spending changes between one’s final years in the labor force (ages 55-64) and retirement (the over-75 group). (Note: a household’s age is determined by the age of the individual who responded to the survey.)

pies

The pie charts tell part of the story. Here’s what the BLS report adds to our understanding of spending among older Americans:

  • Housing. Nearly 70 percent of elderly homeowners over age 75 have paid off their mortgages, while only a third in the 55-64 group have. But there are other costs associated with homeownership, such as maintenance. And a large minority of older people are renters. The upshot: housing gobbles up about one-third of older households’ yearly budgets, regardless of their age.
  • Healthcare. The share of the 75-plus elderly population’s total spending that goes toward health care (15.6 percent) is nearly double that of the younger group (8.8 percent). … 

Learn More

Delaying Motherhood Boosts Earnings

Mother and child

Economists have landed on two primary reasons for why women working full-time earn less than their male co-workers. First, their research detects an element of discrimination.

The second reason stems from motherhood, which can make it extremely difficult to simultaneously complete an education or get a firm footing in a career.

But America is changing. Over the past half-century, the typical age at which women have their first baby has risen markedly, from 20 to 25.

This societal shift toward later motherhood has, in turn, dramatically improved women’s financial prospects, concluded a study featured in a book about the financial impact of changing employment, family and health trends.

University of Virginia economist Amalia Miller found that each one-year delay in when women start a family has increased their lifetime earnings by 3 percent. Since first motherhood now comes five years later, she estimates that translates to a 14 percent increase since the 1960s in the typical woman’s lifetime earnings.

Women who wait to become mothers also accumulate more wealth: each one-year delay increases their wealth at age 50 by between $12,000 and $20,000 – or potentially $100,000 more for waiting five years.

Although women who earn more money spend more, “their consumption does not increase proportionately, leaving them with greater accumulated wealth at older ages,” Miller said. “The effects of motherhood timing especially are substantial and significant for decades after the age at first birth and well into retirement years.”

Education plays a large role in the improvement in women’s ability to build up their financial resources. For example, there was a much smaller increase in women’s incomes due to delay when Miller controlled for education.

There is another way to think about her findings: it’s becoming clear to many young women that there are fairly large financial rewards from delaying their first child. …Learn More

Image of a chewed pencil

Work Absenteeism Tied to Money Stress

Most of us know how distracting and stressful it is when our credit card balance creeps up or there’s a gap between a bill’s due date and when our paycheck gets deposited.

But financial stress can also create serious problems at work like absenteeism, problems that can turn around and compound the financial problems.

More than one in four employees who said they deal with “financial stress” admit that it interferes with how well they do their jobs, says a new survey of 5,000-plus workers by the consulting firm Willis Towers Watson.

It also increases absenteeism. The study found that workers stressed about their finances are absent from work 3.5 days per year, on average – nearly double the absenteeism of people who are not stressed. And when the worriers are at work, they are “highly distracted” – this distraction can gobble up 12 additional days per year, interfering with how well they do their jobs, the survey found.

The workers expressed broader concerns than their unpaid bills, too, said Steve Nyce, a senior Willis Towers Watson economist. Many are very concerned about their long-term financial future and retirement. …Learn More

Illustration: Debt

Americans Are on a Credit Card Binge

Rising levels of credit card debt are a good thing and a bad thing.

And they are definitely rising: during the final three months of 2015, Americans added $52.4 billion to what they owe on their credit cards, according to a new CardHub report based on Federal Reserve Board data.

For context, that is nearly as much as was added to cards in all of 2014.

Spending rises when consumers have jobs or get better jobs and when the economy is growing, as it is now, said Lowell Ricketts, an analyst with the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. With incomes increasing, he said, “they’re in a stronger position to make those investments like purchasing a new home or renovating their existing homes.” The surge in credit card debt indicates that people are using plastic to pay for things like the furniture for the new house.

The bad part is what happens to over-leveraged spenders when the economy suddenly turns down, which is what WalletHub analyst Jill Gonzalez is concerned about. “We are starting to get into scary territory here,” she said. The fourth-quarter binge “was much larger than usual.”

During all of 2015, credit card balances, net of payments, increased by nearly $71 billion, substantially higher than the $57.4 billion increase in 2014. Last year’s fourth-quarter binge was only part of the story, Gonzalez said. …Learn More

12345...10...