401(k)s Bleeding Cash

HelloWallet’s survey landed with a thud in the media this week: one in four U.S. households with a 401k or IRA raided it to cover necessities.

The vast majority of raids are cash withdrawals, not loans – $60 billion in cash in 2010. These grim statistics throw weight behind those who argue we are watching a retirement crisis unfold in slow motion. The pressures on saving are aggravated by stubbornly high long-term unemployment: layoffs explain why 8 percent pulled out cash. But the Great Recession isn’t the only culprit.

Wages, adjusted for inflation, have declined over the past decade, health costs have soared, and consumers remain heavily dependent on their credit cards. In this environment, no wonder saving is often viewed as a luxury.

The 2010 data reveal behavior at a time individuals were still smarting from Wall Street’s financial crisis. But back in 2004, the average 401k balance for all boomers age 55 to 64 was only $45,000 – it was only slightly lower by 2010.

To put that $60 billion in perspective, it is about half the amount U.S. employers put into 401(k) plans on their employees’ behalf that year.

Click “Learn More” to see more data on the cash withdrawals. Readers, what do you think is driving them higher?Learn More

chart: how much should I save?

Happy Retirement?

This article was originally posted on Squared Away on October 23.

A large majority of people in a survey released last week identified saving for retirement as their top financial priority. If that’s the case, then why aren’t Americans saving enough?

Stuart Ritter, senior financial planner for T. Rowe Price, the mutual fund company that conducted the survey, has some theories about that. Squared Away is also interested in what readers have to say and encourages comments in the space provided at the end of this article.

But first the survey: about 72 percent of Americans identified saving for retirement as “their top financial goal,” with 42 percent saying that a contribution of at least 15 percent of their pay is “ideal.”

Yet 68 percent said they are saving 10 percent or less, which Ritter called “not very much.” The average contribution is about 8 percent of pay, according to Fidelity Investments, which tracks client contributions to the 401(k)s it manages.

The Internal Revenue Service last week increased the limit on contributions to 401(k) and 403(b) retirement plans from $17,000 to $17,500. The so-called “catch-up” contribution available to people who are age 50 or over remains unchanged at $5,500.

The question is: why do Americans give short shrift to their 401(k)s, even as people become increasingly aware that their dependence on them for retirement income grows? Ritter offered a few theories in a telephone interview last week: …Learn More

Money Still Can’t Bring Happiness

The vast majority of us wouldn’t dream of trading time with our children for a 50 percent pay hike.

Then why, when asked to give up evenings off from work – presumably family time – for the big pay raise, would more than half of us go for it?

In short, how can the same people – more than 2,000 adults surveyed in August by New York Life – so flatly contradict themselves?

“We’re not even conscious of how our behavior conflicts with our values,” said Christine Carter, director of the parenting program at University of California’s Berkeley’s Greater Good Science Center, which studies happiness, compassion and social bonding.

This lack of awareness is especially true when money is involved. The human brain lights up like a Christmas tree when money is offered as the reward in neurological experiments, as the prospect of the reward releases dopamine that sets off a burst of pleasure.

But Carter, an expert in happiness, said the research also shows that, over the long-term, “our social connections” – not money – will bring us true happiness.

To stay on top of news about financial behavior, readers may want to sign up for e-alerts – just one a week – by clicking here. Or like us on Facebook!Learn More

xmas colored shirts

13% Haven’t Paid Off Christmas 2011

Consumer Reports says 13 percent of Americans are still paying off credit cards that they ran up to buy 2011’s holiday gifts.

That may be one reason more Americans plan to budget this holiday season – 52 percent – compared with last year’s 41 percent, according to Consumer Reports’ national survey. Among those who bought their 2011 gifts with credit cards, 58 percent paid them off by the end of January and another 13 percent in February – hats off to them. But the rest waited. Some are still waiting.

I can relate.

In the interest of encouraging Squared Away readers to reveal their financial failings in the comments area below, here’s one of mine: a credit card balance averaging $2,500 for more than 20 years. It’s embarrassing, and yes, this personal finance blogger knows why it’s important to pay off a credit card charging nearly 15 percent interest – what a waste of a few thousand dollars I could’ve put in my 401(k), for instance…Learn More

Psychology Matters

Rick Kahler believes that financial planners who do not factor in the psychological aspects of their clients’ money problems are “missing the elephant in the room.”

Kahler, a founding board member for the Financial Therapy Association, usually meets with each new client in the presence of a therapist. And for the minority of his clients who are “stuck” and can’t get past their money issues, which are often rooted in childhood, he asks that they submit to psychological coaching.

In his 2008 book, “Facilitating Financial Health,” Kahler identified several common money disorders. The South Dakota planner recently shared his ever-evolving list, which Squared Away used as the basis for the above slide show.

Click here to watch an interview in which Kahler talks about our “number one stressor.”Learn More

Image: womens pay gap

Women Don’t Ask

Why do men earn more than women? Attitude!

Last week on Squared Away, Francine Blau, a Cornell University labor economist, discussed the economic and other external reasons behind why women earn less than men. But there’s another way to look at it: women’s behavior differs from men’s – and that plays a role in how much they’re paid.

A woman earns 77 cents for every dollar that a man earns. This disparity undermines women’s well-being, reducing their standard of living and affecting everyone’s retirement – including their husband’s.

The following is an excerpt from a June 2003 article I wrote as a Boston Globe a reporter about an experiment by researcher Lisa Barron, a professor of organizational behavior at the Graduate School of Management at the University of California, Irvine. It involved 38 future MBAs – 21 men and 17 women – who participated in mock job interviews with a fictitious employer.

In the mock interviews, the students were offered $61,000 for a new position. Here’s what I wrote about the differences in men’s and women’s approaches to their pay negotiations:

Men, responding to the salary offer, asked for $68,556, on average, while women requested $67,000 for the same job.

More revealing were differences in fundamental beliefs men and women expressed about themselves when Barron questioned them: 70 percent of the men’s remarks indicated they felt entitled to earn more than others, while 71 percent of women’s remarks showed they felt they should earn the same as everyone else. Also, 85 percent of men’s remarks asserted they knew their worth, while 83 percent of women’s remarks indicated they were unsure.Learn More

chart: how much should I save?

401(k)s “Top” Financial Priority. Really.

A large majority of people in a survey released last week identified saving for retirement as their top financial priority. If that’s the case, then why aren’t Americans saving enough?

Stuart Ritter, senior financial planner for T. Rowe Price, the mutual fund company that conducted the survey, has some theories about that. Squared Away is also interested in what readers have to say and encourages comments in the space provided at the end of this article.

But first the survey: about 72 percent of Americans identified saving for retirement as “their top financial goal,” with 42 percent saying that a contribution of at least 15 percent of their pay is “ideal.”

Yet 68 percent said they are saving 10 percent or less, which Ritter called “not very much.” The average contribution is about 8 percent of pay, according to Fidelity Investments, which tracks client contributions to the 401(k)s it manages.

The Internal Revenue Service last week increased the limit on contributions to 401(k) and 403(b) retirement plans from $16,500, to $17,000. The so-called “catch-up” contribution available to people who are age 50 or over remains unchanged at $5,500.

The question is: why do Americans give short shrift to their 401(k)s, even as people become increasingly aware that their dependence on them for retirement income grows? Ritter offered a few theories in a telephone interview last week:

  • The financial industry is partially to blame. “We have done a really good job of conveying to people how important saving for retirement is,” he said, “but what we haven’t done as good a job of is telling them how much to save.”

Employers may also share blame. Further confusing the issue, the savings rate depends on when the employee starts saving – the percent of pay is lower for those who start in their 20s than for someone who waits until they’re 45. …

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