Videos Critique Active Stock Investing

This is the sixth video featured in a series of seven that are worth watching.

The new series, “How to Win the Loser’s Game,” takes viewers on an in-depth tour of the financial industry landscape while managing not to be dull.  It includes a history of academic research in the finance field and examines the issue of paying high fees for active investment managers.

The big message in the above video has also been covered on this blog: it’s virtually impossible for active managers to consistently outperform the overall market’s return. The solution: buy passive mutual funds and diversify. The evidence presented in the videos, sometimes by academic giants in the field, is compelling.

Click here to watch the remaining videos, which are produced by sensibleinvesting.tv, a non-profit founded by a U.K. financial company.Learn More

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Primer: Home Equity → Retiree Income

Americans who are 62 or older had an estimated $3.6 trillion in total equity locked up in their homes in the first quarter of 2014, according to the National Reverse Mortgage Lenders Association. A new primer suggests they should start thinking seriously about using it to generate some extra retirement income.

The primer, published by the Center for Retirement Research at Boston College, which sponsors this blog, discusses two ways retirees can use home equity to generate income: by downsizing into a less expensive house or condominium or by taking out a reverse mortgage.

Click here to read the booklet online and learn how these strategies work and how much money each can provide.  Their pros and cons are detailed in the graphic below, excerpted from the booklet:

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Debit Card Beats Cash as Budgeting Tool

Plastic or paper?  Americans have spoken.

In 2013, they made $4.1 trillion in purchases on their credit and debit cards, according to the Nilson Report – and that figure keeps marching upward.

Some researchers view this as a dangerous trend.  Plastic cards, they contend, put distance between a man and his bank account. Without the tactile sensation of handing over one’s hard-earned cash, it’s easy – too easy – to spend money and harder to save.

New research out of The Netherlands has an entirely different take on the cash versus plastic debate. The study, based on a detailed Internet survey of nearly 1,500 Dutch people about their financial habits, shows that they view the debit card “as the better expense monitoring tool.” (The study compared cash and debit cards, excluding credit cards.) …Learn More

Seniors’ Housing Cost Burden on Rise

For a growing share of older Americans, housing expenses have become an increasingly large financial burden.

Chart: Housing burdenOne in three Americans over age 50 were carrying a severe or moderate housing cost burden in 2012, up from one in four in 2000, according to a new study by Harvard’s Joint Center for Housing Studies and AARP. The Center defined a severe burden as housing costs that consume more than half of household income; a moderate housing burden takes between 30 percent and 50 percent of income.

The Center’s report, Housing America’s Older Adults – Meeting the Needs of An Aging Population,” warns that the nation is unprepared for both the financial and non-financial housing challenges that will accompany the coming explosion in the elderly population. Aging baby boomers will require better access to public transit, handicap access, assisted living facilities and other special services and amenities, and many will need subsidized housing.

Housing is often an older person’s largest single expense. And because housing costs are largely fixed (think mortgage payment, taxes, insurance, upkeep and utilities), they can become a growing burden for people as they age and become more vulnerable to reductions in income. Incomes often decline toward the end of their working years and decline again when they enter retirement. Pensions and Social Security benefits fall again when one spouse dies.

The report finds that: …Learn More

Retirement: a Good State of Mind

Is retirement good for one’s mental health? The evidence is all over the place.

One study concludes that retiring sooner means a higher incidence of dementia.  Other studies show it benefits physical health, which can affect one’s state of mind.  Research from different countries reach different conclusions about their own retirees’ sense of well-being: the English and Finnish find that retiring improves it, while Korean and U.S. researchers don’t.

Chart: Life Satisfaction by CountrySeeking some universal truths about retirement in the Western world, a new study of the United States and 11 European countries finds that it improves subjective well-being, measured both in terms of satisfaction with one’s life and the incidence of depression.  The study is based on two comparable sets of surveys of age 50-plus Americans and Europeans taken in 2004, 2006, and 2010.

An analysis of retiree well-being faces some tricky analytical issues, which have plagued past studies and which the new study had to overcome. For one thing, people who are depressed may be the most likely to retire, creating the statistical equivalent of a chicken and egg problem.  The new study also had to account for the negative financial consequences of leaving or losing one’s job – which can reduce satisfaction and increase depression – in order to isolate the influence of retirement, independent of its effect of lowering income. …Learn More

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On Moms, Deadbeat Boomers, and Utopia

This blog has a single writer posting just two articles a week. So it’s impossible to keep up with all the news that crosses the transom.

But perhaps because the work world is gearing back up this fall, there have been a lot of interesting stories lately about financial behavior.  Here are three worth noting:

Fatherhood adds to paychecks – motherhood, not so much. A new study estimates that women actually face about a 7 percent “wage penalty” for each child. So, having two children reduces a woman’s hourly wages by 14 percent, according to a new study out of the University of Massachusetts at Amherst. In contrast, annual earnings for fathers are about 8 percent higher than similarly situated men who have no children. This research sheds more light on the wage gap.

Baby boomers are having to pay off college loans they took out decades ago.  Some 155,000 older Americans are now seeing deductions from their Social Security checks to pay their federal student loans – up from 31,000 a decade ago – according to the U.S. Government Accountability Office.  Parents often co-sign loans for a child’s education, but the GAO report says that about three out of four dollars of boomers’ loan balances are for their “own education.”  Baby boomers never borrowed the large amounts that today’s steep college tuitions demand. But what’s not discussed in the report is that the garnisheeing of Social Security benefits may be due to a cultural artifact of the 1960s and 1970s – when attitudes toward repaying student debt were, well, loose.  Laws requiring repayment have become more stringent. …Learn More

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Canadian Pension Reform: the Long View

Policymakers often worry that increasing government pension benefits won’t necessarily help retirees, if the reforms cause workers to change their behavior in ways that counteract them.  For example, some workers might save less if they know pension benefits are rising, offsetting the income boost they’ll get from a larger pension.

However, researchers examining Canada’s pension reform over five decades confirm that they have materially improved the financial well-being of retirees there.

To reach this conclusion, Kevin Milligan of the Vancouver School of Economics and David Wise of Harvard University tracked the financial status of older Canadians from 1960 through 2010.  They analyzed some 100,000 families between 55 and 80 years old using Canada’s Survey of Consumer Finances, the Survey of Labor and Income Dynamics, and the Family Expenditure Survey.

They conducted simulations to estimate what benefits would have been if no policy changes had been made since the 1960s.  This simulation showed that the poverty rate, based on the incomes of Canadians from ages 70 through 79, would have been 34 percent.  But today, in the aftermath of reforms, only 4 percent of older Canadian families are poor.  [The researchers did a second simulation based on an alternative poverty measure: how much older Canadians spend on shelter, food, clothing and other goods. This also showed a decline in the poverty rate, albeit smaller.] …Learn More

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