Man riding a bull with an upward arrow

Just Half of Americans Enjoy Bull Market

The stock market’s 19 percent climb in 2017 was nothing short of impressive. This year, it has gained another 6 percent.

This means that many boomers with 401(k)s are feeling a little more secure about retirement – at least for now. That more people feel they will be able to afford a vacation this summer with their children. And that Warren Buffett is getting richer even faster.

But one in two Americans isn’t at the party. According to the Survey of Consumer Finances in 2016, the Federal Reserve Board’s latest triennial survey and the most comprehensive look at Americans’ personal finances, 48 percent of U.S. families do not own equities.

Less surprising is how stock holdings break out at various income levels. About 30 percent of families with earnings in the bottom half of all incomes own equities, whether in the form of 401(k) investments, brokerage accounts, mutual funds, or individual stocks. For these lower-paid workers, the 2.5 percent average increase in hourly wages in 2017 is usually more meaningful. But inflation increased 2.1 percent last year, leaving them with just 0.4 percent more spending money, according to U.S. Bureau of Labor Statistics wage and inflation data. This is half of 2016’s inflation-adjusted wage gain.

In the next highest income group – from the middle-income level up to the 90th percentile – about 70 percent of families own equities in various forms. In the top 10 percent, the vast majority do (94 percent).

The chasm between the well-heeled and ordinary workers has been widening. Stock ownership is one prism through which to view that inequality. …

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Millennial Retirement ‘Discouraging’

Baby boomers have limited time and only a few options to improve their financial prospects when they retire and give up a regular paycheck. Millennials have more time to do something about it.

They should start thinking about it, indicates a study by the Urban Institute’s Richard Johnson, Karen Smith, Damir Cosic, and Claire Xiaozhi Wang.

millennial chartTheir test of a comfortable retirement was set at a 75 percent replacement rate, meaning retirees need 75 cents in monthly income for every dollar earned in their final decade of working. For this analysis, the researchers estimated retirement income at age 70 – an age when most people have already retired – for every individual in the federal data sources used in their analysis.

They found that about a third of boomers and boomers’ parents don’t have enough retirement income to make that 75 percent cutoff. Millennnial households will be significantly worse off at age 70: nearly half are at risk.

The prospects for Millennials are “discouraging,” the researchers said. …Learn More

half of boomers

Half of Boomers Social Security Eligible

This milestone must be noted: about half of baby boomers are now over 62 and can claim their Social Security benefits.

The year 1955 was the midpoint for the post-World War II population explosion – and those boomers born in 1955 will turn 63 sometime this year.

This marks the time to take stock of differences between the old boomers (born 1946-1955) and young boomers (1956-1964).  Of course, Social Security eligibility doesn’t automatically mean retirement, and boomers of all ages are retiring later than their parents.  Today, only around a third of 62-year-olds file immediately for Social Security benefits – it was closer to half for the oldest boomers. The downward trend should continue.

But a yawning difference between the two boomer groups is their vastly different stages of life.  Those born in the late 1950s and early 1960s are still working full-time. Entrenched in work, they have several years to go to retirement – their big challenge is having enough time to prepare financially.

The oldest boomers, now in their late 60s and early 70s, are already retired. They can take great joy in their grandchildren, which most have. That’s a comforting antidote to sobering thoughts like whether my financial affairs are in order (just in case), who will take care of me when I no longer can, and how do I want to spend my final years or days?

The good news is that baby boomers are healthier than any previous generation and will live longer. Old and young boomers still have lots to enjoy.Learn More

dollar art

Know About the Roth 401(k) Surprise?

Financial experts and writers often tout the Roth 401(k)’s main selling point: when the money is withdrawn in retirement, it won’t be taxed.

Well, that’s not entirely true.

An employee’s own money saved in his Roth account over the years is, indeed, shielded from income taxes when he retires and starts pulling out the money. That’s because the worker had paid the taxes before he put the money into the Roth.

But employer contributions to Roths are different. Employer contributions and any resulting investment earnings are taxed as income in the year that the money is withdrawn.

“Most everyone I talk to is shocked by this and surprised,” said CPA Sean Stein Smith, a business and finance professor at Lehman College in New York. Understanding the difference between the two types of savings plans offered to employees – Roth versus regular 401(k) – is already complicated enough, he said, and the tax distinction only adds to the confusion.

The reason withdrawals of employer contributions to Roths are not exempt from income taxes is because they are no different than employer contributions to regular 401(k)s. They are another form of income, just like your hourly wages. However, no taxes are deducted from a worker’s paycheck for Roth and regular 401(k) contributions when the employer puts them into the account. So the worker eventually has to pay the taxes – they are simply being delayed.

The next logical question is, how do you know how much you owe in taxes? What if you withdraw retirement income from both a Roth and a traditional 401(k) over the course of a year?

Figuring out the tax bite “is not your problem,” said Jaleigh White, CPA for a Louisville, Kentucky, investment firm and member of the National CPA Financial Literacy Commission for the American Institute of CPAs. …Learn More

baby on mom's shoulder

Earnings Gap Hits Mom’s Social Security

Mothers often work less because, well, they’re also moms.

Still, they generally work consistently enough to qualify for Social Security pensions based on their own earnings records – rather than on their husbands’, as was common when more women were full-time housewives or worked just a few hours a week while the kids were at school.

Yet today’s working mothers do take a hit to their earnings when they temporarily reduce their hours or take a hiatus from work for childcare. The upshot of lower earnings is less Social Security income later for mothers, according to a new study by researchers for the Center for Retirement Research (CRR supports this blog).

The researchers, Matt Rutledge, Alice Zulkarnain, and Sara Ellen King, used data on all older women – married or single, mother or not.  First, they confirmed past studies showing that the typical mom earns about $2,760 per month – or 28 percent less than a childless woman earns. Having two children translates to nearly 32 percent less income, and three children, to 35 percent less. (The analysis adjusts for some things – education is one – but not all the factors that distinguish mothers from non-mothers.)

Mothers’ lower Social Security benefits reflect this earnings penalty, though by a smaller percentage.  Mothers’ benefit checks are 16 percent less than women who had no children to care for.  Benefits are also lower if they had more children – by 18 percent for two children and nearly 21 percent for three. …Learn More

boston skyline

Burdensome Rents are “the New Normal”

apartment rents chartDuring Boston’s mayoral election in November, Mayor Marty Walsh boasted that his administration has overseen $100 million in housing investment. Walsh’s challenger, City Councilor Tito Jackson, responded that this new investment has been dominated by the luxury apartments and condominiums sprouting downtown and around GE’s new headquarters in the booming Seaport neighborhood.

Walsh retained his seat, but Boston’s housing debate is playing out from Orlando to Austin to San Francisco.

“The lack of affordable rental housing is a consequence of not only increases in the number of lower-income households but also steeply rising development costs,” Harvard University’s Joint Center for Housing Studies concluded in its annual report on the nation’s housing stock.

An unprecedented 1 million new renters have come into the market annually since 2010, the center said, fueled by well-heeled older couples and young professional couples with children pouring into luxury apartments and the single-family homes that are on the rental market.

Building has slowed more recently, but not before strong demand had driven up the typical U.S. apartment rent by 27 percent, to $1,480, between 2011 and 2016. And $1,100-plus apartments leaped from one-third of the rental market to two-thirds; all rents were adjusted for inflation.

A decline in available apartments renting for under $850 are depriving working-class families of options. “[O]nce-affordable units have become out of reach for lower-income households,” the report said. …Learn More

New Yorker Cartoon Considers 401(k)s

New Yorker cartoonThis New Yorker cartoon by Trevor Spaulding is cute, but – spoiler alert – it’s not quite right.

A company offering a 401(k) retirement savings plan to its workers is a good thing, but it’s no “favor,” noted my long-time editor Steve Sass, an economist with a hawk eye for inaccurate retirement information. Setting up and funding a 401(k) is a big expense for employers. But many think it is worthwhile, because 401(k)s – and, more so, employers’ matching contributions – help them attract and retain the sharpest, most productive, or most-skilled workers.

Another employer calculation is that the income tax deduction employees get for saving, which costs the employer nothing, is especially valuable for those on the payroll who earn the most money and, by definition, pay more taxes.  It’s a neat outcome that the tax deduction most helps those presumably doing the most for the bottom line, though the government does limit how much highly compensated employees can contribute based on how much the rank-and-file workers are contributing.

But, it’s no fun to criticize a cartoon!Learn More

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