May 28, 2015
Annuities: Useful but Little Understood
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
May 14, 2015
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
May 7, 2015
The Real Minimum Wage – It’s Dropping
The federal minimum wage is $7.25 per hour, up from $1.60 in 1968. Yet it has eroded in terms of what it can buy.
Its value has fallen, because, despite more than a four-fold increase in the minimum wage over nearly a half century, it has not kept up with inflation.
The 1968 value, when translated into 2014 dollars, was $9.58 per hour, as shown in the chart (left) from the Center on Wage and Employment Dynamics at the University of California, Berkeley. In other words, today’s minimum wage, at $7.25, buys about 25 percent less than it did in 1968.
As the federal minimum wage has eroded, Sylvia Allegretto, the Center’s co-director, noted that numerous states and municipalities stepped in to raise their minimum wage last year. They include Arkansas, Delaware, Hawaii, Massachusetts, Rhode Island, and West Virginia, as well as Louisville, Kentucky, and San Jose, California. Others are kicking the idea around. …Learn More
April 30, 2015
TDFs Appeal to the Most Inexperienced
New research finds that the people most likely to benefit from target date funds are also the people inclined to invest their 401(k)s in them – unsophisticated investors.
Retirement and financial literacy researchers long ago established the pitfalls of our nation’s do-it-yourself system of retirement saving (i.e., people don’t save at all or don’t save enough, and investing is too complex for most people). Target date funds (TDFs) have become an increasingly popular solution to the investment piece of the problem in the wake of the Pension Protection Act of 2006, which allowed employers to use them as the default investment option in defined contribution savings plans.
TDFs place a 401(k) participant’s accumulated savings into a broadly diversified portfolio of stocks and bonds that shifts the asset mix as they age. When employees are young and retirement is a distant concept, TDFs invest heavily – as much as 90 percent – in stocks. As employees age, a growing share goes into more conservative bonds.
TDFs are now the primary default investment among employers that automatically enroll new employees into their savings plans. TDFs are a good option not only for inexperienced investors but also for more experienced investors who prefer to delegate the task of portfolio rebalancing to their fund manager. However, employees typically have the option of transferring out of the TDF and selecting other investments offered in their plan. …Learn More
April 14, 2015
Even in Nursing, Men Earn More
The nursing profession is predominantly women, but it’s the male nurses who earn more – $5,148 more per year on average.
“Male RNs out-earned female RNs across settings, specialties, and positions with no narrowing of the pay gap over time,” according to a salary comparison from 1998 through 2013 in the Journal of the American Medical Association. Other research has revealed pay gaps in teaching, another women-dominated profession.
Today is Equal Pay Day, and the media is replete with reminders that American women earn 77 cents for every dollar that men earn. Nursing is the single largest profession in the growing health care sector, and the pay gap affects some 2.5 million women employed in a profession established in 19th century London by Florence Nightingale, who wrote “Notes on Nursing: What It Is, and What It Is Not.”
The importance of a woman’s earnings level goes beyond the obvious implications for her current standard of living. Earnings are also key to how much she can accumulate over a lifetime.
The largest pay disparity is for nurse anesthetists: men earn $17,290 more than their female counterparts. The only category in which women out-earn – by $1,732 – is university professors in the nursing field. The researchers isolate the role a nurse’s sex plays by controlling for demographic characteristics such as education level, work experience and other factors that also influence how much someone earns. Only about half of the gap between men and women was explained by these identifiable factors, leaving half unexplained.
The chart below shows pay gaps, by type of nurse specialty.
April 2, 2015
Grads With Student Loans: Rent or Buy?
Some college graduates are so overburdened with student loan payments that they struggle just to stay afloat. But for those who can make their payments and even save some money, the logical next question might be: when can I buy a house?
This is a weighty question for 20-somethings new to the labor force and carrying unprecedented levels of student debt, which puts them at greater financial risk than previous generations of graduates. Squared Away asked two financial planners from the sensible Midwest – Danielle Schultz and Mark Zoril – to help young adults work through the difficult financial tradeoffs they’ll face as they juggle student loan and car payments, retirement saving, and homeownership.
Here’s their advice:
Danielle L. Schultz, a financial planner in suburban Chicago, believes buying a house should be a 20-something’s lowest priority.
The highest priorities are building up an emergency fund and contributing regularly to an employer’s retirement savings plan. The minimum emergency fund for a young, healthy adult who earns, say, $36,000, is around $6,000 – $10,000 would be better. [The standard emergency fund equals at least three months of necessary living expenses, excluding splurges like vacations or restaurant meals with friends.]
Schultz feels strongly about the emergency fund, especially if buying property is the goal. When something goes wrong – a car accident, a job loss, a house fire – renters “can always move in with mom and dad or a friend, but when you’ve got a mortgage, it’s not easy to get out of,” she said. Schultz also is not wild about real estate as an investment, since property values aren’t rising appreciably in many areas.
After the emergency fund is established, it’s wise to knock down the student debt first by paying off the loans with the highest interest rates, she said. Many graduates have multiple loans, so don’t sweat the loans with interest rates at, say, 2 percent – that’s effectively “free money” when inflation is running at 2 percent. …Learn More
March 31, 2015
Tapping 401(k)s, IRAs Early Is Costly
It’s fairly easy to withdraw money prematurely from 401(k)s and IRAs – a practice that depletes roughly one-fourth of account balances over a worker’s lifetime.
U.S. workers on average withdraw 1.5 percent annually from their retirement account assets. When they do, they forgo years of investment gains they could have earned had they left their money alone.
Early withdrawals can pose a problem for many Americans at a time financial security in retirement increasingly hinges on these defined contribution plans. The potential for leakages has also grown in recent years, in part due to the shift away from traditional employer pensions to 401(k)s that place control in employees’ hands. Further, the assets being held in IRAs, which have more liberal withdrawal policies, are increasing as workers changing jobs and retiring baby boomers roll their employer-sponsored 401(k)s into IRAs.
This chart shows the sources and relative amounts – as a percent of total plan assets – of different types of these premature and permanent withdrawals from defined contribution plans. These estimates, by the Center for Retirement Research, which supports this blog, are based on data from the mutual fund company, Vanguard. They total slightly less than 1.5 percent, because plan participants in Vanguard’s client base earn more than the general population and may have somewhat lower withdrawal rates.
To help preserve workers’ savings, the study proposed ways these premature withdrawals could be restricted: …Learn More