Photo of generation: Grandmother, mother, daughter

Retirement Tougher for Boomer Children

The financial media (including this blog) inundate baby boomers with articles cajoling, coddling, and counseling them about their every retirement concern.

But members of the Me Generation might want to focus on their children: retirement is likely to be an even greater financial challenge for Generation X, now in their 30s and 40s.

Economists at the Center for Retirement Research, which supports this blog, recently produced this striking prediction: three out of five Americans in their 30s and well over half of those in their 40s are at risk of experiencing a decline in their standard of living after they retire.

This compares with 44 percent of baby boomers.

The reasons for Generation X’s poorer prospects are due to long-term trends like the rise of 401(k)s and less generous Social Security benefits for future generations. …Learn More

Photo of underwater fishes

Too Many Homeowners Still Underwater

With house prices rising smartly, homeowners should be celebrating. Right?

Wrong. To be sure, a 10 percent jump in house prices in the first quarter, compared with a year earlier, pushed more people out of the red and into the black. But one in four U.S. homeowners with a mortgage still has “negative equity:” the mortgage exceeds the value of the home, according to new data from Zillow.

These 13 million U.S. homeowners will need more price appreciation before they can feel that the housing-market downturn of the previous decade is truly over.

Negative equity is prevalent not just in obvious places like Las Vegas, once the poster child for the go-go real estate market that went bust. The painful aftermath lingers in Chicago and Minneapolis, where about one in three owners has negative equity.

Seattle, Cleveland, and Baltimore also each have a larger share of owners in negative territory than the national average.

Zillow computes a second, broader measure of underwater homeowners. It adds together people with negative equity and those who have some equity, though not enough to pay a real estate agent and related costs to sell their house and move. When this second group is included, the share of home borrowers in a financial bind increases to 44 percent, from 25 percent, Zillow said. …Learn More

Nobel Winners Are Unsure Investors

Medal for the Sveriges Riksbank Prize in Economic Sciences. © ® the Nobel Foundation

A Los Angeles Times reporter once called up several Nobel laureates in economics to ask how they invest their retirement savings.

One of the economists was Daniel Kahneman, a 2002 Nobel Prize winner who would become more famous after writing “Thinking, Fast and Slow” about the difference between fast, intuitive decision-making and slow, deliberative thinking. Kahneman admitted to the reporter that he does not think fast or slow about his retirement savings – he just doesn’t think about it.

Kahneman’s confession in the 2005 article seems even more relevant in today’s 401(k) world. Americans are realizing the investment decisions imposed on them by their employers may be too complex for mere mortals. For example, three out of four U.S. workers in a 2011 Prudential survey said they find 401(k) investing confusing.

Readers might take comfort in learning that even some of the world’s great mathematical minds have admitted to wrestling with the same issues they do: How do I invest my 401(k)? Should I take some risk? How about international stocks?

Here are the Nobel laureates remarks, excerpted from the article, “Experts Are at a Loss on Investing,” by Peter Gosselin, formerly of The Los Angeles Times:

Harry M. Markowitz, 1990 Nobel Prize:

Harry M. Markowitz won the Nobel Prize in economics as the father of “modern portfolio theory,” the idea that people shouldn’t put all of their eggs in one basket, but should diversify their investments.

However, when it came to his own retirement investments, Markowitz practiced only a rudimentary version of what he preached. He split most of his money down the middle, put half in a stock fund and the other half in a conservative, low-interest investment.Learn More

Earnings Growth: Better at the Top

U.S. inequality can be measured two ways – by wealth or by earnings. Either way, most working Americans are losing out.

It’s the 1920s again for the richest 1 percent of Americans, and a recent analysis of the wealth gap illustrates why they’re able to live like the fictional Jay Gatsby, portrayed by Leonardo DiCaprio in the new movie, “The Great Gatsby.”

The value of their wealth rises and falls with the stock market. But since the 1960s, they have consistently held 33 percent to 39 percent of the wealth owned by all Americans, including their stock, mansions, commercial real estate, and businesses, according to economist Edward Wolff at New York University. In 2010, the last year examined by Wolff, the richest 1 percent’s share was 35 percent – that was before the Dow flew past 15,000.

The U.S. wealth gap is enormous, partly because most Americans have little wealth to speak of. Most people instead gauge their financial well-being by the size of their paychecks, and income inequality is rising sharply.

Between 1993 and 2011, the earnings of the top 1 percent of U.S. earners grew by nearly 58 percent, after adjusting for inflation. Earnings include salaries, bonuses, stock options, dividends, and capital gains on stock portfolios. That far outpaced the 6 percent rise for the rest of U.S. workers during the same 18-year period, according to a new analysis by economist Emmanuel Saez at the University of California, Berkeley. …Learn More

Layoffs After 50 Cause Severe Losses

For the average older worker who loses his job, his income a decade later is 15 percent lower than if he had escaped the layoff.

It gets worse: His pension wealth is worth 20 percent less, and his financial assets are 30 percent smaller.

The enormous financial hit delivered to older workers who experienced a layoff sometime during the 1990s was reported recently by researchers at the Center for Retirement Research, which supports this blog. First, the researchers pinpointed all workers in the data set who were over age 50 and lost a job between 1992 and 2000. They then examined their financial outcomes – earnings and assets – a decade later and compared them with outcomes for those who avoided layoffs during that time.

Unemployment rate for workers ages 55+If the financial fallout during the 1990s was that dramatic for unemployed older workers, it will be even worse for many of the 3.2 million jobless baby boomers at the peak of the Great Recession, the longest downturn in post-war U.S. history.

The Great Recession hit just as members of the biggest demographic bulge ever were either hitting retirement age or lining up on the runway. Record numbers of them sustained severe hits to their financial security, because the jobless rate for older workers reached record highs.

The research suggests that the recession’s effects may last into old age for many boomers. One key reason for their grim prospects is that older workers have more difficulty snaring new jobs than do young adults. Many boomers never found employment and are being forced to retire grudgingly, simply because they lack options. …Learn More

Infographic: Pension coverage U.S. & Australia

Aussie Employer Mandate Fuels Saving

Consider this: 92 percent of Australian workers have 401(k)-style plans, while less than half of Americans have any kind of pension coverage on their current job.

This yawning disparity exists, because the Australian government requires employers to contribute 9 percent of each worker’s earnings to a personal account, which participants invest much like a 401(k). Under reforms to Australia’s system, employer contributions will rise gradually until 2020 – to 12 percent.

Even though Aussie employers are mandated to make the contributions, economists argue, the money ultimately comes from workers – through lower wages. But U.S. workers, left on their own, have proved to be poor savers, and the fact remains that putting the onus on employers to ensure that retirees have something in savings is working better than our catch-as-catch-can system.

“Australia has been extremely effective in achieving key goals of any retirement income system,” concluded a new report by the Center for Retirement Research, which supports this blog. …Learn More

Student Loans = No House, No New Car

Here’s what Will Flannigan, 26, would rather do with the $401.58 he pays on his student loans every month.

• Save.
• Buy a house: the mortgage payment on a house he looked at was the same as his rent, but renovating or fixing anything would be unaffordable.
• Replace his 2006 Ford Focus – it’s red but he calls it a “lemon.”
• Buy new clothes – thrift shops are standard.
• Eat dinner out at someplace other than a fast food restaurant.

Flannigan is getting married in August – to a woman who pays about $250 per month for her college loans.

Three out of four people now paying off student debt – whether graduates or their parents – are just like Flannigan: they’re delaying important life goals in order to make their payments, according to a new survey by Harris Interactive sponsored by the American Institute of CPAs (AICPA). About 40 percent also said they have delayed saving for retirement or buying a car, to name just two deferred goals.

This survey, which was random and based on telephone interviews, illustrates the reason behind the growing concern among financial advisers, 20- and 30-somethings, and their parents that paying for a college education has become a burden with financial implications for years, even decades.

“It’s indentured servitude – that’s what it is,” said Flannigan, a Kent State graduate (2010), whose loan payments equal one-quarter of his salary as the online editor of Farm and Dairy, in Salem, Ohio, near Youngstown. Payoff horizon for his $62,000 loans: more than 25 years, according to his loan documents, he said….Learn More

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