Statue of bear and bull

Impact of Stocks on Retirement System

U.S. stock market performance has implications for our entire retirement system – not just your 401(k).

Three studies addressing the big-picture relationships between the market and retirees’ financial security were produced in 2017 by the Center for Retirement Research, which sponsors this blog. Here are summaries of each one:

  • State and Local Pension Plan Funding Sputters in FY2016 – Public pension plan returns were very weak in fiscal year 2016. But even though stock market performance improved in 2017, it will be difficult to compensate for the plans’ funding shortfalls over the long-term: “To achieve more meaningful progress,” the researchers concluded, state and local governments “need to establish contribution levels that will actually reduce unfunded liabilities.”
  • How Will More Retirees Affect Investment Returns? – This interesting paper reviews the effect of the competing demographic forces driving investment returns. This is an extremely complex economic calculation, but the upshot is that our retirement accounts are receiving less interest and dividend income per dollar invested.
  • What are the Costs and Benefits of Social Security Investing in Equities? – Young adults are told to throw their 401(k) contributions into the stock market and forget about them for a few decades. That’s because stocks are riskier but generally outperform bonds. The Social Security Trust Fund, which currently invests only in bonds, is just another long-term investor, and projections show that its finances would also benefit from investing in stocks.

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Grandmother with baby

Slightly More Seniors Living With Family

In the 19th and early 20th centuries, it was not unusual for older Americans to live with their adult children and grandchildren. But more seniors could afford to live on their own after passage of Social Security and then Medicare.

By the 1990s, fewer than 10 percent of people over age 65 lived with relatives, usually offspring.  This number has crept back up to around 12 percent in recent years, according to an analysis by the Center for Retirement Research.

Economic disadvantage is the common thread among older people living in these multigenerational households, a new study finds. This held true whether the seniors moved in with their adult children and grandchildren or the offspring moved into their parents’ homes.

“Experiencing economic distress increased the odds of a senior forming a multigenerational household,” concluded researchers from Arizona State University and George Mason University.

Here are their main findings, based on an analysis of U.S. Census data for more than 49,000 people who were 65 or older between 1996 and 2008: …Learn More

Growing tree

Women Get a Bigger Social Security Bump

The magic number is 35.

That’s how many years of earnings the U.S. Social Security Administration (SSA) uses to calculate every worker’s pension benefit.  But 35 years can be a tall order for the many boomer women who took time off or cut back on their hours to raise their children.  Nearly half of 62-year-old working women today didn’t make any money for at least one year in their earnings history on record with SSA.

But this also means they have more to gain financially than men from working longer, because each additional year of work substitutes for a zero- or low-earning year during motherhood in the benefit calculation, according to research by Matt Rutledge and John Lindner at the Center for Retirement Research, which sponsors this blog.

Beefing up one’s earnings record is actually one of the two ways that working longer raises monthly benefits.  The other, more familiar way is a benefit increase from delaying collecting Social Security.

Delaying claiming compresses the time period over which workers will receive benefits.  The resulting increase when they finally do start is known as Social Security’s “actuarial adjustment.”  Take the most extreme example: both men and women who begin their Social Security at age 70 receive 76 percent more per month from this adjustment than they would’ve gotten had they started at 62.

But it is women who generally gain much more from additional years in the labor force.

By working to 70, rather than retiring at 62, the average woman can increase her monthly Social Security check by 12 percent, the researchers found.  Adding this to the standard actuarial adjustment produces an 88-percent increase, from roughly $1,112 per month at 62 to $2,090 at age 70.

The earnings bump that 62-year-old men get from working to 70 is half as big – about 6 percent – because men typically already have had more years of higher earnings during their working lives.

A woman doesn’t have to work all the way to 70 either to benefit. Any period of delay will increase monthly benefits – and that will help. …Learn More

Birds on a wire

Older Workers’ Job Changes a Step Down

When older workers change occupations, many of them move into a lower-status version of the work they’ve done for years, according to a new study by University of Michigan researchers who tracked the workers’ movements among some 200 different occupations.

Aging computer scientists were likely to become programmers or computer support staff.  And veteran high school teachers started tutoring, financial managers transitioned to bookkeepers, and office supervisors became secretaries.

Late-career transitions need to be put into some context: a majority of Americans who were still working in their 60s were in the same occupations they held at age 55, the study found.  And these occupations ran the gamut from clergy to life scientists to cooks.

Interestingly, while teachers, thanks to their defined benefit pensions, often retire relatively young, primary and high school teachers were also at the top of the list of older workers who have remained in one occupation into their 60s, along with radiology technicians and bus drivers.

But about 40 percent of Americans who were still working when they turned 62 had moved to a new occupation sometime after age 55, according to the researchers, who tracked individual workers’ employment changes using the federal government’s coding system. …Learn More

Sticky note

The Benefits of Late-career Job Changes

Finding a new job in one’s 50s is not that easy to pull off, and it’s risky if the new employer doesn’t work out.  But there’s a silver lining for people who can make the change to a job they feel is better: they work longer than those who don’t make a move.

A new study by the Center for Retirement Research, which supports this blog, finds the probability that older workers remain in the labor force until they’re 65 increases considerably – by 9 percentage points – if they voluntarily made a job change sometime during their 50s.

This lends credence to other research showing that when older workers voluntarily find a new employer, they often experience more job satisfaction and less on-the-job stress, which makes it easier to resist retiring.

The benefits from changing jobs are both psychic and practical. …Learn More

Woman at computer

Managing Money with Cognitive Decline

Despite the normal cognitive challenges that people in their 70s and 80s inevitably face, most are sharp enough to be in charge of their financial affairs or oversee them.

But the significant minority of seniors who do have trouble is explored in a new summary of the research by Anek Belbase and Geoffrey Sanzenbacher at the Center for Retirement Research, which supports this blog.

One such group is people learning for the first time how to carry out financial tasks. Widows, not surprisingly, are often required to negotiate this financial learning curve, which gets steeper as a senior’s ability to process new information erodes. With guidance from a family member or professional, however, the novices can usually figure things out.

Seniors with mild cognitive impairment might also develop problems. Mild impairment becomes fairly common by the time people reach their 70s, affecting their financial judgment and potentially their ability to manage their affairs in ways that promote their best interests.  Among those with mild impairment, 82 percent can independently handle the various financial tasks they face, such as paying bills, managing bank accounts, and maintaining good credit.  This compares with 95 percent of unimpaired seniors.

Another danger facing seniors with mild cognitive impairment is their vulnerability to fraud.  They are usually aware they’re slipping, yet they may remain confident about their ability to handle their financial affairs. …Learn More

The Late-1950s Boomers: Hit by Divorce

Middle Boomers chartIt’s old news that the many baby boomers who did not get married and stay married are worse off financially than those who did. Unfortunately, the financial damage to one segment of this generation has broken new ground.

Only 44 percent of “middle boomers” – those born in the late 1950s – have remained married to their original spouses, down from 52 percent of their parents’ generation. Middle boomers are also far more likely to have lived with partners without marrying, remained single all their lives, or even to have divorced twice.

The heart of a study is determining which of middle boomers’ choices were most likely to have led to financial distress when they reached their pre-retirement years.

About 11 percent of middle boomers had negative net worth by the time they were in their early 50s – more than double the share for the generation born during the Great Depression when they reached this age. Negative net worth means that middle boomers’ mortgages and other debts exceed the value of their assets; in this study, assets included everything from retirement plans and taxable bank accounts to primary and vacation homes.

To understand why, the researchers culled marital histories from a survey of older Americans. They found that four lifestyles are most strongly linked to middle boomers’ negative net worth: never marrying, going through one divorce and becoming single again, separating from a second marriage, and divorcing from a second marriage.

In all of these situations, the individuals were about three times more likely to have negative net worth than were the continually married middle boomers. The study controlled for age, gender, race, education, health, household income, and the number of offspring.

Middle boomers are the “least prepared for retirement” out of four groups studied, the researchers concluded, and their choices around marriage have been important contributing factors.Learn More

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