Field Work

New Books of Note

Several new books are pertinent to topics frequently covered by this blog. Three worth noting are about low-income savers, older workers, and small employers with retirement plans that are overdue for an upgrade.

Here are brief descriptions:

  • A Fragile Balance: Emergency Savings and Liquid Resources for Low-Income Consumers:”:

a fragile balanceFor low-wage workers in fast food, retail, and similar jobs, just finding enough money for living expenses is like squeezing blood from a turnip. Research shows that many want to save, and the absence of this backstop only increases their financial fragility. The default is often to resort to high-cost debt, which further confounds their ability to pay the bills, much less weather the next emergency such as a car repair.

Finding effective savings interventions to help low-wage workers may be the toughest personal finance challenge there is. It’s also the mission of the Center for Financial Security at the University of Wisconsin in Madison and its director, Michael Collins. In this volume, edited by Collins, leading researchers review various interventions and policies – from mortgage reserve accounts and impulse saving to programs that encourage low-income workers to save their tax refunds. [Watch for future blogs about specific findings in this volume.] …

Money Culture

Around 50, U.S. Workers’ Earnings Fall

Here’s a sobering thought: by the time most workers get into their 50s, their earnings are declining.

Although older workers don’t necessarily see smaller paychecks, their earnings are effectively shrinking, because they no longer keep up with inflation, according to a study charting the inflation-adjusted, or “real,” earnings of some 5 million U.S. workers over their lifetimes.

The first decade in the labor force, between ages 25 to 35, is crucial – that’s where the wage gains are concentrated, the researchers find. Real earnings plateau sometime between 35 and 45, and this plateau occurs earlier than previous research had indicated. By the time most people move into the oldest age group in the sample – 45 to 55 – their earnings are falling.

The chart below shows the percentage changes during three discrete decades in the labor force for people whose earnings are in the middle of all U.S. workers’ earnings. For the 45-55 age group, other data in the study pinpoint the earnings decline as actually beginning around 50.

Economists have been refining their analyses of lifetime earnings patterns for decades. The researchers’ methodology improves on past techniques and then applies it to an extremely robust data set: the Social Security Administration’s earnings records for U.S. workers from the 1970s through 2011.

When they looked at all workers, they found that earnings, adjusted for inflation, rise by 38 percent over a typical person’s lifetime. But these lifetime patterns vary dramatically by a worker’s income bracket. …Learn More

Geometric pattern

Research

Strange Influences on Financial Decisions

It would be nice to think that careful financial planning is behind the critical decision of when to start collecting Social Security benefits.

But psychological traits – perhaps impatience or one’s fear of losing money – can also affect whether an individual claims his benefits right at age 62 or waits a few years to increase his monthly income from Social Security.  A new study reveals another powerful influence that can jeopardize financial security: how a person’s dollar benefits might appear on the printed Social Security statement.

Business professors Suzanne Shu at UCLA and John Payne and Namika Sagara at Duke University tested this on people over age 40, controlling for psychological influences on the research subjects, such as their impatience, loss aversion, and expectations of how long they’ll live.

In the first experiment, some people were shown tables presenting their monthly Social Security benefits for each claiming age from 62 to 70 – this layout highlights the significant benefit increases that come with each year of delay.

A second set of subjects saw more complex tables displaying their total potential benefits accumulated over their entire time in retirement, which depends on both the age they first claimed and on how long they’ll live. This presentation emphasized a different aspect of the decision: the later someone claims and the longer he lives, the more money he’ll receive over many years. Die young, however, and the accumulated benefits are higher for those claiming at 62.

The experiment’s outcome was significant. The cumulative tables “make people want to claim earlier” – six months earlier than people shown the tables with monthly benefits – Shu said during a recent presentation. …Learn More

Field Work

How Much For the 401(k)? Depends.

How much must 30-somethings save in their 401(k)s to prevent a decline in their living standard after they retire?

No two people are alike, but the Center for Retirement Research estimates the typical 35 year old who hopes to retire at 65 should sock away 15 percent of his earnings, starting now.  Prefer to retire at 62?  Hike that to 24 percent.  To get the percent deducted from one’s paycheck down into the single digits, young adults should start saving in their mid-20s and think about retiring at 67.

These retirement savings rates are taken from the table below showing the Center’s recent estimates of how much workers of various ages should save to achieve a comfortable retirement; they represent the worker’s contribution plus the employer’s contribution on their worker’s behalf. Expressed as a percent of their earnings, they also vary depending when a worker retires.

How Much to Save: Table

To derive these savings rates, the Center’s economists assumed that a retired household with mid-level earnings needs 70 percent of its past earnings.  They then subtracted out the household’s anticipated Social Security benefits. The rest has to come from employer retirement savings plans, which determine the percent of pay required to reach the 70 percent “replacement rate.” …Learn More

Photo: Postit- Pay Mortage, Rebalance Portfolio

Behavior

The Aging Mind and Money

As we age, the things we forget are at first laughed off as “senior moments.” But when forgetting to send a birthday card becomes forgetting to pay the mortgage, the natural cognitive decline that accompanies aging becomes a serious financial issue.

With Americans living longer and an estimated 10,000 baby boomers turning 65 every day, a spate of fresh research has examined how and whether older brains can handle the challenges of modern financial life. But what the researchers have found out so far about the aging mind and money is somewhat of a mixed bag.

First, the bad news. Diminished cognition is an increasingly important concern in the financial arena, because the choices faced by retirees are getting ever more complex. One recent survey of people either experiencing cognitive decline themselves or observing it in a family member pinpointed the kinds of financial decisions that older people find difficult.

Among those surveyed, 41 percent said they or their family member forgot to pay their bills and 14 percent paid the same bill twice, according to the National Endowment for Financial Education and Harris Interactive. More than one-third had trouble with simple math or made rash purchases.

Retirees today face bigger financial challenges than that if they have to juggle their 401(k) investments and withdrawals. This is a change from the days when an employer simply issued a check every month from the defined-benefit pension plan, said Laura Bos, AARP’s acting vice president of financial education and outreach. …Learn More

Money Culture

Amid Recovery, Part-Time Jobs Still High

One segment of the U.S. labor force sheds light on the continuing struggle to find work: part-time employees who want a full-time job but can’t find one.

The U.S. unemployment rate has drifted down during the economic recovery. But the number of people the Department of Labor calls “involuntary part-time” roughly doubled during the recession to 8 million and still remains stuck at this much higher level.

Millions of Americans work part-time because they want to, but this involuntary part-time workforce is one more gauge of the slack labor market and lingering pain three years after the Great Recession officially ended. The Labor Department counts part-timers as involuntary if they can’t find a full-time job or if they work part-time for economic reasons, say a construction worker who doesn’t have enough projects to keep busy. …Learn More

Photo of lone rafter

Research

Aging U.S. Workers: The Fittest Thrive

By the time people reach their mid-60s, two out of three have retired, either voluntarily or because they’re unable to keep or find a job. By age 75, nine out of ten are out of the labor force.

But the minority who do continue working aren’t just survivors – they’re thrivers. Think novelist Toni Morrison, rocker Neil Young, or the older person who still comes into your office every day.

The earnings of U.S. workers in their 60s and 70s are rising faster than earnings for people in their prime working years, according to a new study. Defying the stereotype that they’re marking time, today’s older workers are also just as productive as people in their prime working years.

Driving these trends is education: far more older Americans now have a college degree than they once did.

There’s a “perception that the aged are less healthy, less educated, less up-to-date in their knowledge and more fragile than the young,” but this does “not necessarily describe the people who choose or who are permitted to remain in paid employment at older ages,” Gary Burtless, a senior fellow at the Brookings Institution, concluded in his study.

The experience of age 60-plus workers is becoming increasingly important, because there are more of them in this country than there ever have been – a rising trend that will continue. …Learn More

On the Web

Readers Call Gen-X to Action

A recent blog article, “Retirement Tougher for Boomer Children,” did not elicit much sympathy for Generation X.

Many readers who commented expressed a sentiment something like this: Yes, things are tougher for young adults. So deal with it.

Members of Generation X, as well as Millennials, are largely on their own with their 401(k)s, in contrast to their parents and grandparents who may’ve had a guaranteed pension at work. But the evidence indicates young adults are not preparing for retirement: well over half of 30- and 40-somethings are on financial path to a lower standard of living once they retire, according to an analysis cited in the article.

They need to find “the discipline to save for retirement through all the means available,” said a Squared Away reader named Paul. …Learn More

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