Posts Tagged "psychology"

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Few Boomers Catch Up on 401(k) Saving

Only 13 percent of older workers take advantage of the “catch-up” contributions to their retirement accounts permitted by the IRS for anyone over 50, according to new data provided by Fidelity Investments.

This is hardly surprising, since prior research has estimated that only about 10 percent of all workers are contributing the maximum $17,500 per year that everyone, regardless of age, is allowed to contribute under IRS guidelines for 2013. Since the vast majority never reach that cap, the “catch-up” 401(k) contribution enacted to encourage people to save more when they hit their 50th birthday – an additional $5,500 per year – is largely irrelevant to them.

But the catch-up contribution data, which Fidelity culled from its 401(k) client database representing some 12 million workers, are yet another reminder of a fundamental problem with the U.S. retirement system: Americans simply are not saving enough to ensure their financial security in old age.

In short, members of the Me Generation don’t seem to be doing a great job of taking care of Me. …Learn More

Retirement Countdown: Sheila Downsizes

Sheila Taymore could not afford the $2,200 mortgage and home equity loan payments, the enormous heating bills, and the repairs – so many repairs – on the home she’d owned for decades.

Sheila Taymore, 60, of Salem, Mass.

But selling it was emotional: she and her first husband had raised two sons in that house in the seaside town of Swampscott, north of Boston. Her decision to move was triggered by a recent divorce and came about two years after the death of her mother.

“I walked around and cried and said, ‘Who cares about this house?’ I make all this money, and all my money was going towards my house,” said Taymore, a Comcast Cable salesperson – last year was her best year ever.

She is like millions of U.S. baby boomers struggling, often imperfectly, to prepare financially for their imminent retirement. Wall Street may tout investment savvy as critical to ensuring a comfortable old age, but less lofty decisions can be more helpful to those with too little savings and too few working years left to make it up.

Taymore is also planning to delay her retirement to age 70. That will give her a larger monthly check from Social Security and fewer years of retirement to pay for. That was an easy call, she said, because “I just love my job.”Learn More

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Health Reform May Impact Your Finances

Getting or keeping health insurance is central to many of the major decisions that working Americans make.

Canadian and European governments provide universal health care to their citizens, but this country has relied heavily on employers for health insurance, and only about two-thirds of them provide it. It’ll be fascinating to see how health care reform changes our decisions about work, starting a business, college, and individual finances when more Americans have access to coverage in 2014.

Research years ago established the influence of employer health insurance on the workplace. When employees are covered at work, job turnover is lower – workers know health care is a big thing to give up. There’s also newer evidence that people on the disability rolls, who receive health care as part of that federal benefit, are more likely to go back to work if they live in a state with better access to health insurance in the private market.

Retirement is another big decision driven by one’s health insurance options. Medicare eligibility at age 65 can trigger the decision, new research shows: people working for employers without any health benefits for their retirees are more likely to retire at 65, according to a paper by economists Norma Coe of the University of Washington’s School of Public Health and Matt Rutledge of the Center for Retirement Research at Boston College, which supports this blog.

“We interpret this finding as evidence that Medicare eligibility persuades people to retire, because they can begin receiving federal health coverage,” Coe and Rutledge write. …Learn More

Translating Savings to Retirement Income

Determining how much money one will need in retirement is a mathematically and psychologically daunting task for many Americans. But new research has landed on a deceptively simple strategy for prodding workers to save.

Employees in an experiment at the University of Minnesota saved more for retirement after researchers provided them with a personalized chart with information similar to that shown below. Each employee’s chart translated a $100, $200, or $500 contribution, made every other week, into the amount of income each of these contributions would generate annually once they retired. If they saved more, they could see that it translated to more retirement income.

“We think people may have a hard time making that translation from an accumulation of wealth to an income flow,” said researcher Colleen Flaherty Manchester. “They’re used to the flow because that’s what they get every month or week in their paycheck.”

The income projections, she said, are “completing the circle for them to make it clear.” …Learn More

Video: Why Stock Investors Defy Logic

The Standard & Poor’s 500 stock index has climbed steadily and surpassed its 2007 peak last week, and even sluggish European markets are showing signs of life as investors rush back in.

This interregnum between the collapse of global financial markets in 2008-09 and the next bubble – whenever and wherever that may occur – is a good time to reconsider investor behavior.

In this video, Ben Jacobsen, a finance professor at Massey University in New Zealand, discusses behavioral economics, market panics, and “strange” and inexplicable behavior.

“Most people,” Jacobsen concludes, “have a great difficulty assessing risk and what risk is.”

Check out another blog post about research confirming that people tend to rush in when the market is rising and pay dearly for stocks and then sell in a panic after experiencing large losses. Morningstar data also indicate that long-term investors have better returns if they buy and stay put.Learn More

Panic button

2008-09: Investors Really Did Sell Low

Repeated loud warnings by financial advisers fail to reverse the human tendency to panic when the market plunges and to rush in after it’s gone up.

Withdrawals from 401(k)s and IRAs surged between 2001 and 2003 after high-tech stocks declined, but the money went back in in 2005 through 2007 after the S&P500 index had soared nearly 27 percent in 2003 and 9 percent in 2004, according to new research by Thomas Bridges, a graduate student in economics, and Professor Frank Stafford, for the University of Michigan Retirement Research Center.

“They think I have $500,000, and if I don’t take it out now it’s going to be $50,000. It’s a panic mentality,” said Stafford, who was surprised by what they found.

Withdrawals increased again after the 2008-2009 market collapse pummeled investors stock portfolios. The Michigan researchers found they withdrew their retirement savings for a variety of reasons, but primarily to pay mortgages and medical bills and also to make major home repairs.

His take on these grim findings: “These are the guys from Main Street trying to figure out Wall Street, and they can’t do it.”Learn More

Tarantula crawling out of a box of chocolates

Women in Debt Less Likely to Marry

Women with large student loan balances are less likely to marry than their girlfriends who’ve graduated debt-free, new research shows.

Men, in contrast, are immune to this impact.  Their marriage prospects are the same regardless of how much they owe for their education, according to Fenaba Addo, who studied the effect of college and credit card debt in the “marriage market.”

As U.S. college debt outstanding has surpassed the $1 trillion mark, the fallout is widening.  Recent graduates complain that paying off their student loans affects their ability to take critical steps to improve their future finances, such as buying a house or saving for retirement.  But there are psychological effects too: young adults who carry a lot of debt, for example, are more stressed, even depressed.

It was only a matter of time before student loans started messing with their love lives.

Addo, now a post-doctoral fellow at the University of Wisconsin’s Department of Population Health Sciences, became interested in the topic as she watched her girlfriends taking on “crazy amounts of debt” to finish college or complete graduate degrees… Learn More

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