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
March 24, 2015
Why I Dropped My Financial Adviser
My financial adviser is smart. She’s ethical. And her special IRS tax certification has come in handy at tax time.
So why did I drop her? Fees.
Every year, her firm extracted 1 percent of my modest retirement account balance. This is less than some advisers charge, but on top of that I pay between 0.8 percent and 1.2 percent in fees to various mutual fund firms for the mostly stock funds she selected for my investments. These aren’t exorbitant fees, either, for actively managed funds. But when you add this up, I was shelling out at least 2 percent of my account every year.
Thanks to fees and my penchant for some international stocks, which were sluggish or declined last year, my retirement portfolio did not grow at all in 2014, despite a booming U.S. stock market that gained nearly 14 percent, based on the Standard & Poor’s 500 index.
I used a simple fee calculator to estimate my savings in fees, and the resulting increase in my investment returns, from letting my adviser go. If I don’t tap my IRA funds until age 70, I would save nearly $40,000. This sum won’t radically improve my retirement. But it’s not chump change either. It would pay for a few really big trips my husband and I hope to take – or a large chunk of a year in a nursing home. …Learn More
March 17, 2015
Savings Products Deter Senior Fraud
Ken Osborne with his mother.
Ken Osborne became vigilant about safeguarding his 81-year-old mother’s savings as her memory loss set in. She often failed to recall what she’d said during frequent, unsolicited phone calls from people prying into her personal life and financial affairs.
“She’s vulnerable,” Osborne, a resident of Jacksonville, Florida, says about his mother who lives 140 miles away.
Osborne took preventive action. He signed his mother up for a debit card funded by, but segregated from, her primary bank account. Osborne maintains a $500 balance in the card account, giving his mother the freedom to spend her own money – whether for groceries or a church excursion to North Carolina – while giving him control of the nest egg to protect her from herself and others.
Sold by True Link, the debit card is among a handful of new financial products capitalizing on what the Senate Committee on Aging called an “invisible epidemic.” The incidence of fraud is rising, especially online, and experts warn that aging baby boomers will increasingly be the targets. True Link chief executive Kai Stinchcombe was moved to form his San Francisco start-up after his grandmother started writing small checks adding up to more than $1,000 a month to a multitude of soliciting charities.
Banks, which often become aware of fraud against seniors, are also in a position to help. California now holds bank employees liable for failing to immediately report suspicious transactions and elder financial abuse to local law enforcement or adult protective agencies.
The Bank of American Fork in Utah went further, introducing anti-fraud accounts for seniors in 2011 after seeing problems ranging from an older woman who repeatedly wired money to a lottery in Spain to a man with a drug problem looting his elderly mother’s account. …Learn More
March 12, 2015
Navigating Taxes in Retirement
The tax landscape shifts suddenly when most Americans leave the labor force to retire. The single most important thing to remember is that income taxes can fall dramatically, because retirement incomes are typically lower and because all or a portion of your Social Security benefits will be tax-exempt.
This was among the tax insights supplied by Vorris J. Blankenship, a retirement tax planner near Sacramento, California, who has just finished the 2015 edition of his 5-inch thick “Tax Planning for Retirees.” The following is an edited version of tax information he supplied to Squared Away:
Lower taxes in retirement. Brian and Janet are a hypothetical couple renting an apartment in Nevada, a state with no income tax. In 2013, Brian earned $40,000 at his job, and Janet’s wages were $20,000, for a total income of $60,000. They took the standard deduction on their federal tax return and paid income tax of $5,111.
Brian retired on December 31, 2013. In 2014, he received Social Security payments of $15,000 – $2,750 of which was taxable – and a fully taxable pension from his former employer of $10,000. About one-third of retirees pay some income taxes on their Social Security benefits, because their retirement income exceeds certain thresholds in the tax code.
In 2014, Janet again earned $20,000, but the couple’s total household income declined to $45,000 from $60,000. They took the standard deduction on their federal tax return and paid income tax of only $1,248.
The 75 percent reduction in their taxes is much larger than the 25 percent decline in their income after Brian retired. …Learn More