lottery

Lottery-like Prizes Spur Saving

Jessica Smith, mother of four, was never much of a saver.  But a credit union that dispenses prizes has changed all that.

She now saves $150 every month out of her pay and bonus as a restaurant buffet manager.  Each $25 deposited into her account gives her one more entry in a monthly drawing for cash prizes at the Communicating Arts Credit Union in Detroit.

Jessica Smith and her winnings.

By coincidence, she won three times last fall – a total of $100 in prizes. But in contrast to throwing money away on a lottery ticket with bad odds, she earns a little interest on her credit union account.

These so-called prize-linked accounts aren’t a new concept: one of the first appeared in 1694 in the United Kingdom to help people pay off war debts.  Today in this country, nearly 18,000 individuals like Jessica participate in Save to Win programs.  Launched in 2009, they’re offered at more than 60 credit unions in four states.

Michigan handed out $100,000 in prizes last year, including six $10,000 grand prizes; Nebraska, North Carolina, and Washington each gave out between $25,000 and $50,000 in a year. …Learn More

confidence

Confidence Key to Retirement Planning

Confidence can be dangerous. It has led investors into fraudulent deals and businessmen into over-borrowing.

But new research finds one circumstance in which confidence may be beneficial: retirement planning.

Saving and investing can be so overwhelming that workers, judging by the low balances in most 401(k)s, often avoid it. So Andrew Parker, a behavioral scientist in Pittsburgh for the non-profit RAND Corporation, wanted to get at the psychological factors motivating those who do dive in and plan for their future.

Parker and fellow researchers concluded that individuals’ tendency to engage in retirement planning and their self-confidence – how much they think they know – are “significantly and positively correlated with each other.” This was true even after their study accounted for how much people really did know.

“If I feel confident in my knowledge and abilities, I may be more likely to move forward” with retirement planning, Parker explained in an interview. “If I don’t, I may be more hesitant to engage in that process.” …Learn More

Photo: Group of people

Will Millennials Be Ready to Retire?

As he logged on to his online 401(k) retirement account, Jordan Tirone, a 25-year-old insurance underwriter, explained the mental accounting behind his 5 percent contribution.

He pays $300 a month to live with his mother so he can pay off student loans. Nevertheless, a regular paycheck from his Hartford, Conn., employer is finally giving him some financial stability. “I’m feeling like I’m gaining some traction,” he said.

Spontaneously, he clicks his mouse and increases his contribution to 6 percent of his salary.

Although it can be difficult to focus on a retirement that is still 40 years away, many young adults like Tirone try very hard to save. But are they doing enough? A lot of evidence suggests they’re not, either because they can’t afford to, refuse to, or don’t know what to do.

Adults in their 20s and early 30s, in a recent survey of 401(k) participants by Brightwork Partners LLC, predicted they would have to rely on their personal savings for half of their income in retirement.

Their 401(k) contributions don’t square with their expectations. Data on retirement plans administered by Fidelity Investments show that adults in their late 20s contribute 5.9 percent to their 401(k)s; by their early 30s, that increases to 6.5 percent.

But a typical 25-year-old who wants to retire at age 67 should contribute anywhere from 10 percent to 12 percent of his pay, according to various estimates. … Learn More

Graphic: Happy Halloween!

Fraud Scares Off Stock Investors

The evidence is clear: fraud causes investors to shed their shares of stock.

When the stock market is booming, fraud swirls unnoticed beneath the frothy surface. Only when the market busts, as it did in the fall of 2008, are allegations of fraud and financial shenanigans exposed to the public.

When they are, and rattled investors realize what has taken place, they decrease their stock holdings – whether they own shares in any of the fraudulent companies or not – according to researchers in Stockholm and at the University of Minnesota.

Their study analyzed changes in equity holdings among U.S. households in response to more than 700 Securities and Exchange Commission charges and other reports of fraud from 1984 through 2009. The researchers focused on investors state by state, based on the assumption that allegations of fraud at local companies were more visible and would be more likely to affect an investor’s decisions. They also controlled for economic effects, which can influence investors’ decisions.

Their findings are:

  • Reports of fraud in a given state made investors in that state less likely to hold stocks. …
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Photo: Peas in rows and columns

Compulsive Spender? Blame Your Parents

There’s a bright line between an impulse purchase and compulsive spending.

When something new catches her eye, the impulsive buyer snaps it up and enjoys the splurge. There is no such enjoyment for the compulsive buyer. The act of buying temporarily alleviates her anxiety but she inevitably feels guilt or regret.

A new study explores the childhood experiences that lie at the root of why some people – women more than men – develop these damaging spending problems, which can lead to enormous debts and derail plans to save for the future.

The specific goal of the study, based on surveying 327 college students, was to shed light on the emotional pathways that can lead to compulsive buying, explained researcher Anil Mathur, a marketing professor at Hofstra University. The experiences the researchers associated with this behavior include disruptive family lives, more controlling parents, and teens who seek out peers to support their spending. …Learn More

Photo: Man standing in front of maze

Dementia Prevention

There are now two reasons to postpone retirement.

The financial reason has been covered repeatedly in this blog: working longer increases a retiree’s savings and monthly Social Security income, while shortening the number of retirement years that their savings will have to fund.

If that doesn’t convince you, here’s the other reason: working longer may prevent dementia.

That’s the conclusion of a study on nearly 430,000 French retirees. After analyzing their health and insurance records, the researcher determined that each additional year an older worker remained in the labor forced further reduced the risk of being diagnosed with various forms of dementia, including Alzheimer’s disease. …Learn More

Workers Struggle Day to Day

There’s a growing concern that working people aren’t saving for the future, but the reality is that many of them can barely get by in the here and now.

A sizable minority of Americans say they are spending more than they earn, have overdue medical bills, or pay only the minimum on their credit cards. These were among the findings in the 2012 National Financial Capability Study (NFCS) conducted by the FINRA Investor Education Foundation, its second survey to illuminate the day-to-day financial issues facing average working people.

Pulling together $2,000 may seem like only a modest challenge for someone with good pay and benefits. But 40 percent of the people surveyed also indicated they would be hard-pressed to find that much money if they needed it, according to a September report on the NFCS survey.

FINRA identified indicators of what it called the “financial fragility” of the average American:

• More than half of those surveyed were in a poor position to save: 19 percent spend more than they earn, and 36 percent just break even.

• More than half have no rainy day fund and live paycheck-to-paycheck. …Learn More

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