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Workers See Regular, Roth 401ks as Same

Due to differing tax treatments, each $1,000 placed into a traditional, tax-deductible 401(k) costs less today than $1,000 placed into a Roth 401(k), but that Roth will provide more money in retirement.

New research indicates that workers don’t recognize this difference between the two types of employer-sponsored retirement accounts when deciding how much to save.

A $1,000 contribution to a traditional 401(k) costs the worker less than $1,000 in take-home pay, because the income tax hit on the $1,000 will be delayed until the money is withdrawn from the account. But a $1,000 contribution to a Roth 401(k) costs exactly $1,000 in take-home pay, because the worker has to pay income taxes on it up front. The Roth funds, including the investment returns, will not be taxed when they’re withdrawn.

A Roth 401(k) might be thought of as shifting additional money into the future, allowing people to spend and consume more in retirement. (This assumes the same tax rate over a worker’s lifetime.)

The upshot: to get a set amount of after-tax money for retirement, workers could contribute less to a Roth than to a traditional 401(k). But that’s not what they do. …Learn More

Lazy teenager

Teenagers Today Work Less

Chart: A Decade of Erosion in Teens' Labor Force ParticipationTeen unemployment has shot up in recent years, and their participation in the U.S. labor force has dropped to historic lows.

These data were highlighted in a series of recent reports by the Federal Reserve Bank of Boston expressing concern that this trend may have long-term consequences for today’s teens, including lower lifetime wages resulting from their early absence from the labor market.

“This is a long-term trend that was going on prior to the Great Recession,” the author of the reports, Alicia Sasser Modestino, a former Federal Reserve researcher now at Northeastern University, said in a recent interview.

Last year, nearly 54 percent of teens in the 16-19 age range who were trying to get their first job – their official entry into the U.S. labor market – were unemployed, according to the U.S. Bureau of Labor Statistics. …Learn More

Annuities: Useful but Little Understood

What makes a man tick

The general public is very cool on annuities. But many economists like the idea of retirees using some portion of their savings to buy them.

Annuities, with their fixed monthly payments, may be the best way to ensure retirees’ savings last just as long as they do. Otherwise, they may either spend it too fast and deplete their savings prematurely or spend too conservatively, depriving themselves of necessities in their old age.

New research suggests that one reason retirees don’t buy annuities is because they have great difficulty figuring out what they’re worth. When they try to figure this out, they bump up against their own cognitive limitations – limitations that only worsen with age.

In the study, 2,210 adults over age 18 were asked to estimate the value of a monthly annuity familiar to most workers: Social Security benefits. First, the research subjects were asked if they would pay $20,000 to “buy” a $100 increase in their monthly Social Security benefits. If the person said no, the survey repeated the question with a lower amount, eventually zeroing in on what this additional $100 benefit was worth to them. Next, the research subjects were asked to reduce – or “sell” – their monthly benefits by $100 in return for a specific dollar amount paid to them upfront.

In theory, the buy and sell prices they finally arrived at should be equal. But there was an enormous gap between the two. The median price research subjects were willing to pay was $3,000, and the median price at which they would sell was $13,750. There was also a wide range of sales prices among the individual participants: some would accept $1,500 or less, while others wanted $200,000 or more. …Learn More

Video: College Borrower’s Remorse

Parents should watch this video with their college-bound children.

The young adults featured in “Voices of Debt” have one thing in common: a lack of understanding of the financial implications of debt at the time they were taking out their student loans.  So it’s critical that parents start this conversation early with their children.

The compelling video, produced by Manhattan ad agency The Field, speaks for itself.  Similar videos can be found here.Learn More

Students Borrowed Less in 2013-14

student loansHere’s actually some good news about student debt: borrowing by undergraduates is now declining.

Annual borrowing by all full-time undergraduates peaked at $6,122 per student in the 2009-10 academic year and fell to $5,490 by 2013-14, according to the Urban Institute’s new report, “Student Debt: Who Borrows Most? What Lies Ahead?”

For its shock value, the media toss around the $1.2 trillion figure – the total of all U.S. student loans outstanding. The institute provides a more refined look at student debt by diving into U.S. Department of Education data to learn who tends to borrow the most and why.

The findings are summarized here: …Learn More

Millennials: Managing a Steady Paycheck


As a 20-something working in downtown Chicago in the 1980s, I spent every dime of my disposable income – and then some – on beer and Thai food, vacations, clothes, and parking tickets.

Fast forward 30 years, and my niece and nephew in Chicagoland are now graduating college. It’s liberating to leave school for a full-time job and a substantial increase in one’s income after years of penury. It’s also so tempting to squander this money.

But young adults no longer have that luxury.

The financial demands Millennials will face over their lifetimes are shaping up as far more complex than they were for their baby boomer parents, whose primary worry was buying a house. …Learn More

states

Financial Ed in Schools Sometimes Works

There’s little agreement on whether personal finance education in the schools is effective, but success with financial education mandates in Georgia, Idaho, and Texas indicates that it is.

A new study compared thousands of young adults in these states, which have fairly rigorous mandates, with states lacking personal finance education. This focus on states with very strong mandates departs from prior studies that lumped together numerous states with varying levels of mandates. The researchers also looked at whether behavior actually improved – credit scores and loan delinquencies – rather than simply testing students’ knowledge before and after they took the classes.

The three states studied have extensive financial education programs. Curricula in Georgia cover economics, financial institutions, saving, insurance, credit, and investing. Idaho requires a full semester of economics, with intensive personal financial instruction. In Texas, all high school students are required to delve into topics ranging from the rent-vs-buy decision and planning for retirement to personal bankruptcy.

The study assessed the impact of this education on credit scores once the students graduated high school and on whether they successfully avoided poor financial behaviors, such as falling into delinquency on their car loans. Young adults in Georgia, Idaho, and Texas were compared with young adults in the same state before the mandates, as well as people in other states with similar demographics but no mandates. …Learn More

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