July 6, 2017
IRAs Fall Short of Original Goal
Nearly 8 trillion dollars sits in Individual Retirement Accounts, or IRAs. This is nearly half of all the value held in the U.S. retirement system, which also includes employer pension funds and 401(k)s.
A big reason IRAs were created in 1974 under the Employer Retirement Income Security Act (ERISA) was to give individuals not covered by retirement plans at work an opportunity to save in their own tax-deferred accounts.
So, are IRAs helping these workers?
IRAs “have drifted very far from their original intent” of helping those who need them most, researchers for the Center for Retirement Research conclude in a new study.
Who is eligible to receive tax benefits for saving in an IRA has morphed over the years since ERISA’s passage, but the original description is still relevant to millions of Americans: about half of U.S. private-sector workers today do not have a tax-exempt retirement plan at work. Low-income workers are even less likely to have one.
To determine who benefits from IRAs today, the researchers first tracked down the source of the trillions of dollars held in IRAs. Only 13 percent of the money that flowed into IRAs in 2014 was from people putting new savings into these accounts. The rest was from rollovers of funds accumulated in employer 401(k)s, which usually occur when a worker retires or changes job. (ERISA did delineate rollovers as a second purpose of IRAs.) …Learn More
June 20, 2017
Autopay Ends Credit Card Late Fees
Credit card companies usually set small-dollar minimum payments, so there’s really no excuse for incurring fees for late card payments.
Yet many consumers fail to pay on time. In a new study, British researchers found a no-brainer solution that is highly effective: setting up automatic payments of our credit cards.
The researchers started out with a different premise: that customers might learn, over time, to prevent maddening late fees after having to pay them numerous times. The researchers roundly rejected this after following nearly 250,000 U.K. credit card holders over two years. When it comes to late fees, we do not learn from our mistakes.
What they noticed, however, was a clear distinction between card holders who incur late fees regularly and those who don’t or who stopped incurring the fees. Setting up autopay “all but eliminates the likelihood of future [late] fees,” while the probability remains “persistently high” (about one in five) among people who did not, they said.
Further, a seemingly obvious explanation for chronic late fees didn’t hold water: that people don’t have the cash to make their minimum payments. Payers of late fees “do not appear to be liquidity constrained,” the study found. Apparently, most people simply forget to pay those pesky credit card bills. …Learn More
May 25, 2017
Fewer Older Americans Work Part-time
It’s now a given that more people in their 60s and 70s are choosing to keep working.
But a related trend rumbling beneath the surface isn’t so well-known: the share of working older people with full-time jobs has increased sharply – to almost 61 percent in 2016 from 40 percent in 1995 – as part-time work has become less popular.
The majority of older Americans are retired. But among those who do work, the move from part-time to full-time is “a major shift” in work schedules, concluded the Brookings Institution’s Barry Bosworth and Gary Burtless and George Washington University’s Ken Zhang in a report last year. This is one aspect of the broader trend of rising labor force participation for the nation’s older workers.
Burtless said in an email that the likely reason for the shift toward full-time employment is that more of the growing number of people who are working in their 60s and 70s are simply staying put in full-time career jobs.
Not surprisingly, much more income for the entire U.S. population over 65 comes from work. In 1990, employment earnings made up just 18 percent of their income from all sources. By 2012, that had almost doubled to 33 percent, according to the Brookings report.
Fueling the increase in full-time work are changes to the U.S. retirement system, as well as an increasingly healthy older population: …Learn More
May 23, 2017
Paying Medical Bills is a Herculean Task
Hercules sculpture, Florence, Italy.
Medical bills are leaving “a lasting imprint on families’ balance sheets,” JP Morgan Chase concludes from its recent analysis of the anonymous checking and credit card account activity of some 250,000 bank customers.
With little available cash on hand, 53 percent of these families prepare to pay large, one-time medical expenses by waiting for an uptick in their income. Nevertheless, a year after the bill is paid, they are still struggling to patch the hole blown in their household budgets, according to the report, “Coping with Costs: Big Data on Expense Volatility and Medical Payments.”
The 2013-2015 account data show that family incomes tend to be 4 percent higher, on average, in the month a medical bill is paid. This doesn’t mean that people suddenly become Uber drivers or work more overtime hours. What is probably going on, the bank said, is that people “have delayed either receipt of medical treatment or payment of their medical bill until they were able to pay” – when the extra income arrives.
Tax refunds are one clear source of this income for paying large one-time medical bills. These payments were the most frequent around tax time, JP Morgan’s customer data show. But the $163 average increase in monthly income, mostly from tax returns, was small relative to the average $2,000 medical bill.
The damage done to family finances was apparent even a year after such bills were paid. Credit card balances, which had been reduced prior to paying the medical bill, rose for at least a year following a payment. Meanwhile, spending on non-medical purchases, as well as the amount of cash on hand, decline in the aftermath as the families struggle to repair their household finances.
This dry but compelling report is a window into the Herculean feat of paying medical bills for some families. It helps to explain why two out of three Republicans and Democrats in a Kaiser Family Foundation poll said that lowering their health care costs should be a top priority for any reform.
To read the full J.P. Morgan report, click here.Learn More
May 9, 2017
Retirement Ball’s in Employers’ Court
If employers want to improve the poor retirement prognosis for a large chunk of American workers, there are some obvious things they could do.
That’s the big takeaway in Morningstar Inc.’s new report on employers that offer 401(k) plans to their employees but don’t do what’s required to encourage them to save enough.
During the early 2000s, automatic enrollment to increase participation in employer 401(k)s became all the rage, and the strategy has proved itself. Today, nearly 90 percent of automatically enrolled employees stay where they are put, while only about half of workers sign up to save when 401(k) enrollment is strictly voluntary.
But the auto enrollment trend has stalled, and the crazy-quilt private-sector retirement system still has a lot of holes in it. Even when companies automatically enroll their workers, the plans are often designed in ways that discourage them from saving enough, Morningstar’s David Blanchett, head of retirement research, concludes in his report.
“Too often the focus among plan sponsors is improving [401(k)] participation,” he writes. The plans themselves have left us “with low and inadequate savings rates that threaten the retirement security of many Americans.”
At least there’s something to be improved upon: many private-sector employers don’t even offer retirement plans, particularly in industries when people earn low-incomes or work for small companies.
Blanchett’s critique of plans already in place rightly leans on groundbreaking academic research a decade ago that tested 401(k) plan design to determine what drives employee participation in the plans and drives how much they’ll agree to save.
Take plans with auto-enrollment. His analysis of T. Rowe Price and Vanguard client data found that 3 percent of salary remains the most popular savings rate that employers default their workers into during automatic enrollment in the plan – but 3 percent is widely viewed as inadequate if a worker wants to have enough money to retire on.
Why so low, Blanchett asks, when people might accept more? …Learn More
May 4, 2017
Our Stubborn State of Financial Illiteracy
The U.S. retirement system is built on people having a working knowledge of finance. Yet financial literacy among a big chunk of Americans ranges from unimpressive to abysmal.
This revelation was again confirmed in a survey that recently debuted by financial literacy guru Annamaria Lusardi, head of the Global Financial Literacy Excellence Center at George Washington University. In a 2011 survey, Lusardi had found that too many Americans were unable to answer three very simple financial questions.
This new survey is more ambitious, though the results are no more promising. It asks 28 questions in eight areas: earning money, budgeting, saving, investing, borrowing, insuring, understanding risk, and information sources. In the nationally representative survey, about one in four people got no more than seven answers (25%) correct.
One telling finding is that the highest scores were for knowledge about borrowing, with nearly two out of three answering these questions correctly. I suspect this knowledge has been gained from experience – experience with high-interest credit card bills and onerous student loan payments, as well as mortgages.
In every other financial topic surveyed, about half or less answered the questions correctly. Questions about risk, which is at the heart of many financial decisions, fared worst – only 39 percent answered these correctly.
An important connection is made in the report regarding 18- to 44-year olds, who answered only 41 percent of the questions correctly (versus 55 percent for people over 45). Younger adults also answered “I do not know” most often.
When it comes to retirement, those who would gain more from financial knowledge are the least knowledgeable. Saving that starts in early adulthood can go a long way toward achieving retirement security, thanks to compound investment returns over the many years remaining prior to leaving the work force. It’s unfortunate that those who could benefit from compounding often don’t comprehend its effect. …Learn More
April 25, 2017
Long-term Care Insurance Goes Uptown
Is long-term care insurance a luxury product?
Today, most policies covering home care and assisted living and nursing care facilities for the elderly are purchased by people with relatively high earnings, according to a new survey.
Long-term care used to be insurance that the middle class would buy – either individually or through an employer, union, or affinity group – when it was more affordable. But the market, which has contracted dramatically, also seems to be shifting, according to retirement experts and new data from LifePlans, a long-term care research firm.
In LifePlans’ survey, 82 percent of the people who purchased long-term care policies in 2015 earned more than $50,000 per year. In comparison, only half of the general older population surveyed separately by LifePlans falls into this income bracket. An Urban Institute study supports this too, finding that the market is dominated by households with more than $500,000 in net wealth.
Eileen J. Tell, who consults on aging and long-term care issues, said the slant toward the higher end reflects the fact that the coverage being sold is more comprehensive – and more costly. Most policies purchased now cover all levels of care, from home care to assisted living and long-term care facilities. This reflects a desire for people to age in their homes, Tell said. Back in 1995, just two out of three policies had this comprehensive coverage. Another feature that’s more common – and costs more – is inflation protection. …Learn More