September 12, 2013
Swedish Retirees Spend More Freely
Americans are known for being reluctant to spend their life savings after they retire. The burning question has always been why.
New research comparing tight-fisted Americans with more free-spending Swedes found that U.S. retirees tend to hold on to their savings, because they face more risk of having to pay high out-of-pocket costs in the future for their medical and long-term care.
U.S. households, by the time they’re in their late 80s, have tapped only about one-third of the net worth they held in their late 60s, according to the study. Swedish households in their late 80s have spent more than three-fourths.
In preliminary findings presented at an August meeting of the Retirement Research Consortium in Washington, researcher Irina Telyukova said her study with Makoto Nakajima found that nearly 70 percent of the difference in the way Swedish and U.S. retirees spend down their financial assets can be explained by differences in their potential future medical costs.
Sweden’s healthcare system reduces the uncertainties for retirees in two ways. Sweden has national health care for everyone. Swedish municipalities are responsible for providing long-term care to the elderly in their communities, limiting a cost that can be enormous for U.S. retirees who need these services. …Learn More
September 10, 2013
Making the Case for Working Longer
Remaining on the job for a few more years may not appeal to many older Americans who long to retire.
But in the above video, a compelling case for working longer is made by Steven Sass, an economist with the Center for Retirement, who also edits this blog.
Sass explains that delaying retirement improves a retiree’s financial security in three critical ways:
- The worker can continue to save money for a few more years and will have more time to earn investment income on his savings.
September 3, 2013
Money Concerns Sap Mental Capacity
Poor and working people’s continual worries about money cloud their thinking and make it more difficult to perform simple tasks, concludes new research in Science magazine.
This finding came out of two very different experiments – one at a New Jersey shopping mall, the other in India’s sugar cane fields – by an international team of economists and psychologists.
In the first experiment, wealthy and low-income shoppers – $70,000 in household income was the cutoff between high and low – were seated in front of computers and quizzed about a variety of financial scenarios designed to trigger thoughts of their own money concerns.
For example, they might have been asked whether to pay for a car repair with a loan or cash or to forgo the work altogether. Some of these scenarios were relatively easy to resolve – say, the car repair cost only $150. In a difficult scenario, it might cost $1,500.
After answering a series of easy and hard financial questions, the shoppers performed simple tasks often administered by psychologists, such as picking the shape that best fits into a group of other shapes. Rich and poor performed similarly on the tasks after they were presented with the low-cost scenarios. But the high-cost scenarios caused the poor to perform significantly worse.
A brain distracted by financial problems is “like a computer slowing down when you run too many things at once,” said Eldar Shafir, a Princeton University professor of psychology and public affairs. …Learn More
August 29, 2013
Financially Mismatched Couples at Risk
Financial planners say it happens all the time: couples who don’t see eye to eye on money matters often break up or divorce.
One reason they run into trouble is that a financial mismatch makes it more difficult for them to achieve important goals, said financial adviser Bonnie Sewell of Leesburg, Virginia.
“They’re working against the tide. People who pick like-minded partners get there faster,” said Sewell, who’s written a book about money and divorce.
Her contention is backed up by the preliminary results of a study of more than 30,000 married and cohabiting couples between 1999 and 2012 by Federal Reserve Board researchers Jane Dokko and Geng Li. Their study compared the partners’ individual credit scores to gauge their financial compatibility and found that the larger the disparity between the two of them, the higher the incidence of break-ups.
The authors said credit scores are a proxy for financial behavior and also can measure trustworthiness. The link between poor financial matches and household dissolution, they wrote in their paper, was “quite strong.”
To prevent unhappy endings, Sewell, the financial planner, has three suggestions for new couples: …Learn More
August 27, 2013
Reverse Mortgage Article Hits Nerve
Readers reacting to a recent blog post about reverse mortgages fiercely debated the financial product’s pros and cons, which they felt were missing from the article.
The July 25 article noted that fewer than 55,000 older Americans in 2012 used the federally insured loans. The advantage of a reverse mortgage is that Americans age 62 or older can borrow against some of the equity in their homes to generate much-needed income or create a financial cushion. The principal and interest are repaid when the retiree or his children sell the house.
Even though reverse mortgages are rare, the topic hit a nerve with readers, including lawyers, brokers, and people with elderly parents.
A mortgage broker named D. Gardner, for example, said that he’s often seen people use reverse mortgages to maintain a lifestyle they can’t afford, eliminating a financial option they may need later in life.
For some borrowers, he said, a reverse mortgage “was a means to paper over problems.” …Learn More
August 20, 2013
What’s Your ‘Money Script’?
Our subconscious often stands in the way of our conscious efforts to save for college, prepare for the future, or spend what we’ve saved once we retire.
Some psychologists and financial planners believe these roadblocks are rooted in an individual’s “money script” – the story about money that we’ve told ourselves repeatedly since childhood. They’re typically passed down from our parents, extended family, or culture, and they are extremely difficult to change.
Writing in the Journal of Financial Planning, two experts in financial psychology, Bradley Klontz and Sonya Britt, presented their research associating three specific money scripts to poor financial behavior. Their study was based on a survey of 422 individuals who were largely middle-aged, white, and highly educated.
Click on a money script in one of the boxes below to read their descriptions of each one, excerpted from the November JFP article, to see if any apply and to learn how they affect the way we relate to money.
The researchers found that one person can hold multiple scripts, and these scripts can even contradict each other. …Learn More
August 13, 2013
End-of-Life Medical Costs Vary Widely
Medical expenses increase unpredictably with age, so the crystal ball gets very hazy when trying to foretell how much you’ll need in retirement.
A new study helps clear things up: a single older American spends about $39,000 on average for medical care in the final five years of life, or about $7,800 a year. For couples in which one spouse has died, $51,000 was spent during that spouse’s final years, or about $10,000 annually.
These out-of-pocket expenses, which were reported by surviving spouses and family members, are for health care not covered by Medicare: insurance premiums, hospital and physician copayments and deductibles, and expenses for medications, nursing homes, and in-home care.
The data also show that the financial burden on older people varies greatly, not just depending on marital status but also income. High earners spend more than $100,000 in their last five years, reflecting the large amounts paid out by those who need – and can afford – long-term care.
The authors conclude that end-of-life medical expenses subject a significant minority of older Americans to “considerable financial risk.” Their evidence: for 43 percent of the people they studied, the medical bills accumulated during their last years exceeded the value of their financial assets, excluding home equity. …Learn More