401k Saving Harder at Lower Incomes

Sales assistant working in a supermarketOur 401(k) retirement system doesn’t work as well for lower- and middle-income workers as it does for those at the top.

That’s because they face more severe headwinds in pursuit of their retirement goals, concludes a new study.

Consider what happens when a worker’s earnings drop 10 percent or he experiences a bout of unemployment. These episodes are more common among lower-paid workers, and when they hit, they hit their 401(k)s harder than the 401(k)s of people who earn more, according to the study, “Defined Contribution Wealth Inequality.”

In theory, 401(k)s could work for everyone – if everyone had access to an employer savings plan (which they don’t).  And while people who earn more money obviously have more to sock away in their retirement plans at work, smaller paychecks aren’t necessarily a problem either.

The key to retirement for any worker is whether he or she has saved enough, along with Social Security, to cover about 75 percent of what they earned at work during the years leading up to their retirement. It’s true that lower-paid workers can’t save as much, but less could still be enough to reach their more modest retirement goals.

But earnings declines, unemployment, smaller employer contributions, and unwise investment choices – these “barely affect earners in the top 10 percent of the earnings distribution but are associated with less DC [defined contribution] wealth accumulation for those at the bottom,” concluded the researchers, Joelle Saad-Lessler at the Stevens Institute of Technology and Teresa Ghilarducci and Gayle Reznik at the New School for Social Research.

This disparity, they argue, has increased the retirement wealth gap in this country.  In the post-recession period 2009-2011, for example, more high-income workers saw their DC account balances increase than did workers in the bottom half.

The researchers tracked the same people over time in two groups – the bottom 55 percent of the earnings ladder and the top 10 percent. They were able to more precisely compare each group’s ability to save for retirement by using the actual earnings and employer contributions to individual workers’ retirement plans. Here are their other findings: …Learn More

Houses

Reverse Mortgage: Yes or No?

The older people who either consider a reverse mortgage or actually get one don’t have much else to fall back on.  Their primary assets – outside of their homes – are a car worth no more than $7,000 and about $2,000 in a checking account.

This was one salient fact unearthed about reverse mortgage users – or people who’ve looked into them – in a 2014-2015 survey led by Stephanie Moulton at Ohio State University. This supports a later study by Moulton that found that people who take out the loans tend to be in worse shape financially than other homeowners. The survey provides a more complete picture of who is turning to reverse mortgages – and why other people find alternatives to solve their financial issues.

Federally insured reverse mortgages, known as Home Equity Conversion Mortgages, or HECMs, allow homeowners over age 62 to borrow against their often-substantial home equity. These loans do not have to be paid back until the older homeowners sell the house or die.

Despite these attractive financial features, reverse mortgages are not popular: fewer than 60,000 were sold in 2015.  Many elderly homeowners are appropriately wary of a complex financial product. The fees and interest rates are also higher than on a standard mortgage.  But the idea behind HECMs is to allow cash-strapped seniors either to pay off their existing mortgages, eliminating house payments, or to create a readily accessible pool of cash or a new source of monthly income. Either way, they free up money that retirees can use to meet their expenses, emergencies, or medical bills.

The researchers interviewed some 1,800 older households after they had received the counseling required under federal law to apply for a HECM reverse mortgage.  About two-thirds of those counseled proceeded with the loans, and one-third decided against it. Here’s what these two groups look like: …Learn More

singing

A Day at the Golden Age Senior Center

Chung-Au Loi Tai

Boston – Four mornings a week, a van scoops up Chung-Au Loi Tai and delivers her to the senior center for a full schedule of activities. The 1:30 bingo game is her favorite.

She giggles when she explains why: she likes the Chinese Rice Biscuits that are handed out as prizes.

She is one of 350 mostly low-income clients of the Greater Boston Golden Age Center’s three locations around Boston. Most came to this country from China decades ago and raised families while working in Chinatown or the suburbs. Chung-Au, for example, worked in a shoe factory for nine years, and her late husband cooked in restaurants all over the city.

Now in old age, the Golden Age Center’s community of like-minded people spend their days learning English, new songs, and calligraphy, eating $2 lunches – a “suggested” donation – and getting help with their medical and other needs from the nurse and social workers on staff.

Finding things to do all day might seem trivial to working people – there are barely enough hours in a day. But the center’s carefully planned activities are critical to seniors’ physical and mental health and to their families, who are still out working. One big reason for these daily visits is to prevent the frail or cognitively impaired from becoming too isolated.

The Golden Age Center and similar centers around the country make up a patchwork of often poorly funded non-profit and local-government agencies that quietly fill a big need in the safety net for seniors. These agencies provide an array of services, including transportation, meals, exercise, medical supervision, and cognitive stimulation.  The federal Medicaid program pays the Golden Age Center a per-day fee for its low-income clients.

Ruth Moy, the executive director who founded the center in 1972, raises additional money from donations and other federal and local government programs.  “There is never enough money,” Moy said. “You just keep plugging away.” …Learn More

Binary code

How Your Data Get into the Wrong Hands

Chris Vickery, director of cyber-risk research for UpGuard in California, warned NPR listeners recently about a situation in which another high-technology company allowed 198 million voters’ personal information to become publicly accessible online.

When our non-financial information gets loose on the Internet, it can cause financial damage: “If a bad guy has your phone number and can get your PIN, they can, at 3 in the morning, get a code sent to your phone, listen to your voicemails, log in to your bank account and drain all your money,” Vickery said. “Phone numbers are more important than people realize.”  

Callout quoteSquared Away asked him to expand on what occurs when we freely hand over our personal data to retailers, financial institutions, and credit rating agencies, which then sell it to other companies or “data brokers” that buy and resell data.

Q. Is the dangerous situation you mentioned involving voters’ personal information still present, and has any financial fraud resulted from its release?

Vickery. I don’t know of any specific frauds that came out of that situation, but voter data in general – the more we make it available, the more fraud that is bound to come of it. It’s not a good idea.

Q. It has become routine to share our email address, as we’re required to do when we conduct business or buy things online. Is this a bad idea?

Vickery. Knowing that you use a particular email can be very useful to a bad guy. But the fact of the matter is there are a lot of people being careless with their emails. Getting mad at your best friend who gives your email address to an airline to share your arrival time might be a little unreasonable, but I don’t think it’s unreasonable to expect the companies to treat them more carefully than they have been. Companies that buy and sell your data create risks for you.  For example, have you heard of the concept of a “data base of ruin”? That is the concept whereby a dataset is created – maybe not all in one place – a healthcare breach here, a supermarket breach there – and this is all being brought together in one form where a malicious actor can search anybody and, based on one email address that you have authenticated, can get everything on everybody. This data base of ruin is starting to emerge. There are people seeking to do this, and there are already data sets commercially available that are scary in the level of detail they go into.  The more we can protect data and make those things unlikely to be used, the better off we will be.

Q. A 2013 Senate report found that data brokers buying and selling personal information sort people into various categories based on their financial circumstance – in essence there is a profile of every one of us, and it can be used for fraudulent purposes. How do these profiles get compiled?

Vickery. The roots of this stuff probably existed before I was born in 1984.  I can’t tell you exactly where it all came from, but things like voter data bases get rolled into these commercial purposes. Everything you buy at the grocery store with your special discount card gets rolled into these data bases. Anybody you provide data to is turning around and selling it to somebody. …Learn More

Washington DC

Retirement Researchers Meet Next Week

On August 3 and 4, the Retirement Research Consortium will hold its annual meeting in which retirement researchers from around the country will converge on Washington to present their latest findings.

The papers being presented next week will explore the impact on retirement from our health, work-life balance, and family ties, as well the millennial generation’s prospects for retirement. These are just some of the research topics. Click here for the full agenda.

For those who can’t attend, the CRR will provide live streaming of the presentations as they occur. In late August, they will be archived on the CRR’s website.

The Retirement Research Consortium includes the Center for Retirement Research (CRR) at Boston College, which sponsors this blog, as well as the Michigan Retirement Research Center, and the National Bureau of Economic Research. The research being presented at the conference is funded by the U.S. Social Security Administration.  Throughout the year, the findings will be covered in this blog.Learn More

Retrofitting Your Home for Old Age

Brickhouse Design Group Ltd.

Big advances in the construction industry are helping the elderly better maneuver around their homes, and they’re doing it in style.

Ramps no longer look like ramps; they are pleasantly lit walkways with stone paving. Compact pneumatic elevators squeeze into tight spaces.  The lip at the entrance to the shower – the one an elderly person can trip over or that blocks a wheelchair – has cleverly been eliminated. Watch this recent webinar to find out how.

And here’s an interesting idea: a reverse mortgage is one way to pay for the upgrades required for seniors who want to remain in their homes as they age.

That is the punch line in the webinar, which is sponsored (not surprisingly) by the National Reverse Mortgage Lenders Association (NRMLA).  NRMLA confirms that some loan originators report that the proceeds from federally insured reverse mortgages are being used for the purpose, though this is not widespread – yet.

Many are, however, considering it: one in four older households in a 2014-2015 academic survey reported, after they had received reverse mortgage counseling, that they planned to use their funds to pay for home improvements.

This webinar isn’t exactly exciting. But it will interest baby boomers who are either caring for elderly parents or thinking about their own old age.  One poll found that 87 percent of older Americans would not want to move into a nursing home. But if they want to age in their homes, there’s apparently a lot of work to be done.

“The bulk of long-term care will occur in single-family, owner-occupied homes,” predicted one webinar presenter, citing a study. “But the homes aren’t prepared.” …Learn More

Mid-sized Employer Meets Big 401(k) Goal

Thomas Automotive Family’s service department in Bedford, Pennsylvania.

When Peggy Zembower became the human resources director for Thomas Automotive Family about four years ago, she was dismayed that some long-time employees had never increased their retirement saving above the measly 1 percent of pay they’d started at.

One big issue was that the lowest-paid workers at the auto dealership – like low-wage workers everywhere – felt they couldn’t afford to save in the 401(k). A lack of knowledge about investing and a reluctance to give up control of their money seemed to frighten others out of saving, which meant forfeiting their employer’s matching contribution.

“It bothered me when I saw employees who’d been here five years and up and saw what small amounts they were investing,” she said. “Many lower-paid employees saved little or nothing.”

With her boss’ blessing, Zembower got to work.

Thomas Automotive is a mid-sized company with 280 full-time and part-time workers. Their earnings run the gamut, from employees in the service department earning $11 per hour (or about $23,000 per year) to car salespeople earning as much as $100,000, and Thomas Automotive’s owner, who has four dealerships in Pennsylvania and one in Maryland.

By doing the things retirement experts recommend, Zembower increased participation to 87 percent of employees, up from 53 percent. She did this by instituting automatic enrollment in the 401(k) at 4 percent of workers’ pay and auto-escalation, over time, of the amount saved. (Employees have the right to pull out or to maintain past contribution levels.) These techniques are far more common at large companies.

She goes further, re-enrolling all non-participating employees each April 1st, which requires them to revisit their decision before opting out of the retirement savings plan again.  “We have a few employees who feel we don’t have the right to do this,” she said, “but we do.”

One gets the impression when interviewing Zembower that it is not what she’s done to make the 401(k) plan work better.  It’s how she’s done it, with her gentle insistence that saving for retirement is best for the workers.  Sometimes this means she’ll ask a worker to wipe off his greasy hands and look with her at the retirement calculator placed front and center on the employee page of the company website. …Learn More

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