Tennis ball

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

Prudential billboard

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.

Understanding risk questionIn 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

Goblin

Online Goblins Want Your Money

No longer simply a convenience for shoppers, the internet has come into its own: it is now an ingenious tool for squeezing money out of our wallets.

This realization first struck me last year while helping my brother and his wife in Chicago with a flight to visit our mom in Orlando. The reason I was on the case is that he’s a bit of a technophobe. But it turned out that his technical skills weren’t the issue – the airline’s website was the issue.

To flyers’ chagrin, most airlines are now a la carte operations, charging separate fees for everything from baggage to potato chips. This makes it difficult to compare fares online – one way we might wind up paying more. But things went wildly astray for my brother when he clicked on one airline’s website icon to pay his and his wife’s baggage fees a few days before flying.

He was hurled off to a webpage beseeching him to join some type of $200 promotional program that included “free” baggage.  The same thing happened when I tried the next day.  It took all of my online ingenuity to figure out how to avoid the promotion and pay only their $30 per bag fees. I wondered whether other flyers had been sucked into paying for this promotion.

These website diversions are different from what has become routine: advertisements popping up that try to get you to take the plunge and buy the consumer product you were researching online yesterday. It’s difficult to ascertain which diversions are cynical marketing ploys and which ones are innocent technical glitches. But all of them have the potential to be costly to unwary consumers.

During a brunch on Easter Sunday, two friends confirmed my concerns that this isn’t just an issue for older people – one of my friends who complained about online trickery is 95 years old but the other is a tech-savvy college freshman.

All web crawlers are familiar with offers of free subscription trials. These are also dangerous. …Learn More

Lesbian wedding

Gay Marriage: Income Gains Quantified

The U.S. Social Security Administration states on its website that it “is no longer prohibited from recognizing same-sex marriages for the purpose of determining entitlement to or eligibility for benefits.”

Numerous disadvantages faced historically by the nation’s 800,000 same-sex partners are falling away in the wake of the 2015 Supreme Court decision legalizing marriage – access to Social Security’s benefits for a worker’s same-sex spouse or widow is just one. The financial gains from legalized marriage should also increase substantially over time, as more gays and lesbians are drawn out of cohabitation and into married relationships.

new study, by Urban Institute researchers Karen E. Smith, Stephen Rose, and Damir Cosic, estimates that by 2065 same-sex couples 62 and older with low or mid-range earnings will have about $4,000 in additional net cash income every year. This includes earnings, Social Security and pension benefits, and investment income minus taxes, Medicare premiums and other government levies.

The $4,000 estimate per couple is based on the institute’s population model that simulates multiple financial impacts on U.S. households to arrive at the overall effect. It also takes into account that same-sex married couples will be better able to pool their resources in the future, share employer health benefits, buy a house, and withstand a spouse’s layoff.

A key benefit for older same-sex married couples is access to Social Security spousal and survivor benefits, which were unavailable before the law change. Social Security is especially significant if the spouses have sharply different earnings levels – just as they are to married heterosexual couples in which one spouse, usually the wife, has lower earnings and is eligible for a higher benefit based on her husband’s work history instead of her own. …Learn More

Nurse with patient

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.

Bar chart showing people envisioning needing a nursing home in the futureLong-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

Rewriting Retirement Header Illustration

A Californian’s ‘Retirement’ is Part-Time

Rob Peters during a trip East last summer.

Rob Peters during a trip East last summer.

Rob Peters’ approach to retiring wasn’t much different from hitting the road in 1975 to help drive a college friend from New York to California. He didn’t really know where he was going.

When he first laid eyes on California, he was captivated by its beauty, as well as the left-leaning politics absent in the conservative Long Island community he grew up in. But Peters, equipped only with an English degree from the State University of New York at Buffalo, bounced around for years among the various part-time and full-time counseling jobs available to him in his new paradise.

Not until age 38, after earning a master’s degree in counseling and 13 job interviews, did he land his dream job at Diablo Valley College, a community college serving mostly low-income and minority students. He stayed more than 26 years, as a student adviser, program facilitator, and instructor.

He took a blind leap into retirement, too. Again, finding his place was a process. Within four months of retiring, at the end of 2014, he contacted Diablo Valley College.  Yes, they would welcome him back as a counselor for four hours in the morning, two days per week in the spring and three days in the fall.

He returned in June 2015 and again enjoys “the acknowledgment that your work is valuable,” said Peters, 65, who lives with his wife, Suzanne James-Peters, in their home in Benicia with a view of the Carquinez Strait that lies east of San Francisco.

A new body of research indicates that continuing to work but gearing down to a lower-intensity job is often good for older Americans, because it reduces their stress, increases their job satisfaction, and is an encouragement to continue working and preparing financially for retirement.

It’s not all that surprising that Peters “un-retired,” considering how much and how long (10 years) he’d wrestled with the retirement decision.

Yes, the technological demands of working full time became harder to keep up with, the demands of being an older parent with teenage twins (a girl and a boy) consumed him, and coworkers his age were peeling off.  However, he was constantly torn about letting go of a job just when he felt that, as an older counselor, he had even more to give students. As a decision loomed, he attended yet another retirement seminar.  “I began to anticipate that leaving [academia] would take some adjustment.”

He retired reluctantly and weeded out his file cabinet full of work materials even more reluctantly. …Learn More

The Picture of Investment Diversity

Most people see multicolored chaos in the chart below, which is a visual representation of the returns each year to various types of investments.

Morningstar Inc.’s director of quantitative research, Timothy Strauts, sees something else: the need for a diverse portfolio.
Callan table excerpt

Strauts, like most investment professionals, knows the Callan Periodic Table of Investment Returns. It has been around for 20 years and was just updated with 2016’s returns. Here’s how to read it. A colored square is assigned to each type of stock- and bond-market index. For example, the Bloomberg Barclay’s Aggregate (Agg) bond index is bright green, and the Standard & Poor’s 500 stock index is khaki green – the boxes also give each index’s return for each year. …Learn More

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