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Fewer Claiming Social Security Right at 62

New research shows that the share of Americans who sign up to receive their Social Security pensions at age 62 has declined sharply over the past decade.

This trend is expected to continue despite a temporary spike in applications by 62-year-olds during the Great Recession, said Richard Johnson, a senior fellow who conducted this research at the Urban Institute, a Washington think tank. This is a major shift in retirement behavior, and it reflects sweeping cultural changes that range from more flexible employment options for older workers to the baby boomer health and fitness craze.

“Over the past 10 years, we saw the share of people claiming at 62 fall about 10 percent for men and 8 percent for women,” he said. “That’s a pretty big decline in 10 years’ time.”

Sixty-two year olds still constitute the largest single group of new applicants every year, regardless of age. That’s why the significant decline in their application rate is notable. Those who sign up for their Social Security checks when they first become eligible – within days or weeks of their 62nd birthday – are known as “early claimers.” People with physically demanding jobs are more likely to do so, because of health problems or unpleasant and exhausting work. …Learn More

I’ll Save More – Just Not Today Please

We know that not enough Americans save for retirement. Behavioral finance professor Shlomo Benartzi devised a way to fix it – quite awhile ago, in fact.

To ease the pain of saving money, Benartzi and economist Richard Thaler designed a now-famous program in which employees can commit to increase their 401(k)s savings when they get a raise.

Saving is painful because it requires sacrifice, but committing to save money that one doesn’t yet have synchs with human psychology. In 1998, Benartzi and Thaler tested their theory on blue-collar workers in a Midwestern manufacturing plant, and it worked.

The key to saving, Benartzi said, is “embarrassingly simple but extremely powerful.”

The finding was nothing short of ginormous, though employer adoption has been modest. David Wray, president of the Plan Sponsor Council of America, estimated that about 10 percent of U.S. employees with 401(k) plans at work have automatic savings increases, typically at raise time. It’s much more common among mega-employers, he said.

If you’ve heard about behavioral economics but haven’t had time to learn what it’s really about, this 15-minute TED video in which Benartzi explains is an excellent start.

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Mortgage Refi Dilemma: 15 or 30 years?

My mortgage broker is a patient man.

I kept changing my mind, because this refinancing was about so much more than whether to go with a 15- or a 30-year fixed rate.  Now that the loan is about to close, I worry that I made the wrong decision.

As a baby boomer, all financial decisions suddenly spin around retirement.  Many boomers now own their homes free and clear.  I am not one of them, and it seems critical to get this refinancing right, since mortgage interest rates may not hit these historic lows again for a long time.  For this reason, and because house prices have plummeted, the 15-30 dilemma may prove important for cash-strapped, first-time homebuyers too.

“I don’t think [rates] are going to race up in the next 6 months, or even year and a half, but things are definitely headed upwards,” predicted Susan Honig, owner of Veritana Financial Planning Inc. in Burbank, Calif.  “And after that I think rates are going to fly.” …Learn More

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Bracketology Simulates Stock Picking

Odds, outliers, random – such terms are batted around like gnats among the economists and statisticians here at the Boston College research center that sponsors this blog. Recently, we tossed around some parallels between the art of NCAA Basketball Bracketology and picking stocks or actively managed mutual funds.

Here’s our Final Four:

  • A fresh printout of an unscrawled bracket is like a new pool of money to invest – it engenders the hope of winning big. The thrill can give way to defeat — very suddenly.
  • Admit it: Most people fill in their bracket winners without doing any research on the teams they’re selecting. (And who reads a prospectus?)
  • A team (or stock) on a winning streak is a prime candidate for losing – and it takes only one in the single-elimination championship.
  • Past performance is not a reliable predictor of playoff results. Remember the 2011 NCAA basketball champion? UConn lost last week. And I won’t even mention the Duke Blue Devils.

Send in your own ideas to Squared Away! To do so, click “Learn More.”Learn More

Buy, Hold and Be Happy?

When an investor selects a mutual fund that’s hot, it usually backfires.

Morningstar Inc. generated the evidence for Squared Away: it essentially analyzed returns for two types of investors in the nation’s 25 largest fund companies – from PIMCO, Fidelity Investments and Vanguard Group on down. Using fund flow and performance data, it compared returns to a theoretical investor who stayed put for an entire decade to the returns that investors in funds actually experienced, given that they move into and out of funds.

Investors earned 3.8 percent per year, on average, over the decade ending Dec. 31, 2011, the Chicago fund tracker said. If they had stayed put, they would’ve earned 5.3 percent. The results were not equal, because some of us make brilliant moves but more of us make dumb moves, such as buying high and selling low.

The gap – 1.5 percentage points – “is bigger than [fund] expense ratios,” said Don Phillips, Morningstar president of fund research. Investors “really hurt themselves that much.”

To be fair to 401(k) investors, their inertia is great. Those who select funds from employer-run plans typically buy and hold. But more money – about $1 trillion more – sits in Individual Retirement Accounts, where investors are more likely to trade on their own or to have brokers or advisers recommending new funds, whether motivated by their own commissions or their clients’ goals.

To try to improve returns, Phillips listed three types of funds investors should avoid: …Learn More

Taxing Behavior

Taxes, politicians and economists say, can either encourage or discourage human behavior. This chart landed on my desk, so I thought I would share it.

The capital gains tax rate has declined sharply over the past 14 years. The marginal tax rate for high-income individuals has plotted a very different course than the marginal rate for the middle class.

What does this chart say to you?

Please post a comment by clicking below, on “Learn More.” …Learn More

Young Adults Adrift in E-Spending Ocean

Collectibles purchased online range from Russel Wright dinnerware (shown here) to songs and video. Source: backhomeagainvintage.

Credit cards and malls are so yesterday.

Young adults move easily among an array of online payment and shopping options unimaginable a decade ago: PayPal, Groupon, telephone bill payment, smartphone apps that pay for store purchases, online retailers galore, automatic bank payments, and online gift cards.

Technology is moving fast: Amazon recently released an app called “Flow” that will recognize a product — from a book to a jar of Nutella — and then send the price, user reviews and a “Buy It Now” option to your smartphone.

It’s time to take stock of how easy it has become to overspend and how difficult saving is for young adults weaned on e-transactions.

“When it doesn’t feel like money, people don’t treat it like money,” said Priya Raghubir, a professor at the New York University Stern School of Business, neatly summing up her 2008 paper, “Monopoly Money: The Effect on Payment Coupling and Form on Spending Behavior.”

It’s extremely hard for young adults to change their behavior, “because they aren’t used to any other way of paying,” said Raghubir, 48, who remembers the old paper-transaction days when cash was king and checks were reserved for the big purchases…Learn More

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