April 7, 2016
Our Blind Spots Cut Retirement Savings
Our personal biases can play havoc with how we handle our finances.
Two such biases have long been suspected as obstacles to saving for retirement. The first is a tendency to procrastinate on decisions that may benefit an individual in the long run, but also involve short-term costs, like saving for retirement – economists call this “present bias.”
The second bias is a failure to perceive the power of compounding investment returns and how this can build wealth over decades of saving.
But the impact of these biases on how much people actually save wasn’t really understood – until now. A new study by a team of economists from Stanford University, the University of Minnesota, the London School of Economics, and Claremont Graduate University finds that people who are not blinded by these two biases in particular have saved significantly more for retirement, largely because they start putting money away earlier in life.
The researchers based their findings on a big sample of nearly 2,500 people in online surveys in 2014 and 2015; the average age was about 49. To determine the consistency with which they value the present over the future, the survey asked the participants a series of questions about whether they would, for example, rather have $100 now or a larger amount on some future date – people who want their money now are a bit like Wimpy from the Popeye cartoons, who became famous for wanting a hamburger now but offering to pay for it later. The survey questions about compounding revolved around estimating an account’s future value, using a variety of different interest rates and time periods. … Learn More
April 5, 2016
Black Americans Give More to Relatives
Giving money to relatives.
Oprah has done it – in the form of a $490,000 house for her newly discovered sister. Former NFL cornerback Phillip Buchanon just wrote a book complaining about it. And Charles Barkley is characteristically blunt about it.
“When you continually come to me for money, that’s what ruins relationships,” Barkley explained on NBA TV. “I probably got $4-5 million I lent to friends and family I’ll never see again.”
No one is immune to a relative’s appeals for financial help. But this is a perennial and far more prevalent issue among black Americans – and not just the ultra-rich like Oprah and Barkley – according to Rourke O’Brien at the University of Wisconsin.
What O’Brien calls “informal assistance” exists, in part, because giving bestows non-monetary benefits on the givers as they foster emotional support and solidarity among their kin. But as a personal financial issue, the expectations and feelings of obligation are very challenging – and a topic of conversation in the black community.
One woman commenting online said she was looking for some useful advice about how “to be more comfortable with saying ‘no’ ” to her loved ones. …Learn More
March 31, 2016
401ks: an Employer-Employee Disconnect
A survey throws a new spotlight on the employer-employee disconnect over 401(k)s that has also been well-documented in research studies.
The survey of 1,000 employees reveals that workers lack confidence in their ability to navigate basic aspects of their retirement plans, while the 200 employers also surveyed have a more optimistic view of how workers are doing.
Consider the most basic question of how much to put away for retirement. Two-thirds of employers believe their workers know how much to save, while only one-third of employees feel they know, according to BlackRock. And while nearly two-thirds of employers believe the majority of workers save enough, a minority of workers does.
Most employers also believe their workers understand their investment options. Yet less than half of the workers say they do – and only 30 percent feel like they’ve made the right investment choices, according to the BlackRock survey. (Full disclosure: BlackRock is a corporate partner of the Center for Retirement Research at Boston College, which supports this blog).
Squared Away has written numerous blogs over the years about what academic research and other data reveal about the employer-employee relationship. Summaries of past articles continue on the next page, with links to the specific blogs mentioned: …Learn More
March 29, 2016
Work Absenteeism Tied to Money Stress
Most of us know how distracting and stressful it is when our credit card balance creeps up or there’s a gap between a bill’s due date and when our paycheck gets deposited.
But financial stress can also create serious problems at work like absenteeism, problems that can turn around and compound the financial problems.
More than one in four employees who said they deal with “financial stress” admit that it interferes with how well they do their jobs, says a new survey of 5,000-plus workers by the consulting firm Willis Towers Watson.
It also increases absenteeism. The study found that workers stressed about their finances are absent from work 3.5 days per year, on average – nearly double the absenteeism of people who are not stressed. And when the worriers are at work, they are “highly distracted” – this distraction can gobble up 12 additional days per year, interfering with how well they do their jobs, the survey found.
The workers expressed broader concerns than their unpaid bills, too, said Steve Nyce, a senior Willis Towers Watson economist. Many are very concerned about their long-term financial future and retirement. …Learn More
March 24, 2016
Americans Are on a Credit Card Binge
Rising levels of credit card debt are a good thing and a bad thing.
And they are definitely rising: during the final three months of 2015, Americans added $52.4 billion to what they owe on their credit cards, according to a new CardHub report based on Federal Reserve Board data.
For context, that is nearly as much as was added to cards in all of 2014.
Spending rises when consumers have jobs or get better jobs and when the economy is growing, as it is now, said Lowell Ricketts, an analyst with the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. With incomes increasing, he said, “they’re in a stronger position to make those investments like purchasing a new home or renovating their existing homes.” The surge in credit card debt indicates that people are using plastic to pay for things like the furniture for the new house.
The bad part is what happens to over-leveraged spenders when the economy suddenly turns down, which is what WalletHub analyst Jill Gonzalez is concerned about. “We are starting to get into scary territory here,” she said. The fourth-quarter binge “was much larger than usual.”
During all of 2015, credit card balances, net of payments, increased by nearly $71 billion, substantially higher than the $57.4 billion increase in 2014. Last year’s fourth-quarter binge was only part of the story, Gonzalez said. …Learn More
March 22, 2016
Rise in Fraud Reports is Unrelenting
A nearly three-fold increase over the past decade in the number of fraud and related complaints filed with the Federal Trade Commission has pushed the total to 1.7 million filings in 2015, according to the government’s consumer 2015 data book released this month.
As Squared Away reported recently, older Americans are often the most vulnerable, as their cognitive abilities decline or they become more socially isolated. Not surprisingly, the FTC said Florida had the highest rate of reported fraud per resident last year (followed by Georgia, Michigan, Texas, and Nevada).
One reason for the increase in complaints is that people are increasingly aware of fraud and more likely to report it. Another is that fraud-reporting agencies such as law enforcement and consumer groups are increasingly aware they can file complaints with the FTC. But 1.7 million allegations of fraud, identity thefts, and other scams is, by any yardstick, a lot of complaints.
The typical loss was $400 for an individual fraud complaint. There is evidence that more people are getting savvy: a smaller share of the people who filed 2015 complaints said they turned over any money to their scammers than in previous years. … Learn More
March 17, 2016
How Federal Taxation Drops for Retirees
Taxes are not as inevitable as most people assume. As the chart shows, the share of Americans paying federal income taxes falls precipitously after age 60.
Young adults often have little or no tax liability, because they’re either in school or aren’t yet earning very much. Older people revert to a similar picture, after having paid taxes all their lives.
The peak occurs around age 50, when nearly 80 percent of households pay federal income taxes. That share plummets to half at age 65 and to just over a third at 70, according to The Hamilton Project at The Brookings Institution, which produced the chart. [The chart is based on 2007 data; there may be some changes in current data, though not in the age patterns.]
This is important information for most baby boomers, because their tax picture will change dramatically in retirement. Taxes paid, as well as the share of people paying taxes, decline because retirees’ incomes generally fall below what they earned while they were working.
Further, U.S. tax policy provides additional deductions and credits for people over age 65. While some people pay taxes on their Social Security benefits, this usually happens, according to the Social Security Administration, “only if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits.”
As the chart makes crystal clear, tax considerations are a crucial part of retirement planning. Learn More