October 16, 2012
20-Somethings Buck Pressure to Spend
Newlyweds Erin and Michael Gallagher
Michael and Erin Gallagher are just 26 years old but have made a strong start financially, socking away $50,000 by maxing out their 401(k)s while honoring a $20,000 budget for their October 5 wedding in downstate Illinois.
Jennifer and John Lucido, both 32 years old, now have $250,000 in the bank and have built a 2,500-square-foot home near Detroit.
By comparison, the typical U.S. household had saved $42,000 for retirement in 2010, according to the Center for Retirement Research, which funds this blog.
Both couples are members of that rare species of 20-something super savers, spurning intense peer pressure to spend money on consumer items, go out for dinner a lot, and run up their credit cards. Neither couple got where they did the easy way either. They worked hard, but they were also quick to catch on to important lessons about being frugal and saving – from their parents or from each other.
“I have clients in their 30s and 40s who don’t even have $200,000 in their 401k,” said Naomi Myhaver, a financial planner at Baystate Financial Services in Worcester, Massachusetts.
An August article in The Journal of Consumer Affairs suggests one reason people like them are so hard to find. Young adults are extremely vulnerable to peer pressure to run up credit card debt so they can support a high lifestyle and social life.
In the study, 225 college students were asked questions such as whether they have “very strong” connections to their friends or “feel the need to spend as much as [friends] do on activities we do together.” College students have an average of 4.6 credit cards and $4,100 in debt…
October 11, 2012
Boomer Moms, Here’s A Radical Idea
Research shows that when children leave the nest, married couples spend 50 percent more on discretionary spending like eating out and vacations. But whether you’re ready or not, retirement is bearing down hardest on women.
Here’s a radical concept for moms whose children have suddenly grown up: focus on your own financial needs. Women usually out-live their husbands and need to be on top of the situation. So getting a handle on your financial priorities should be at the top of your list.
Squared Away interviewed financial experts to come up with five priorities for baby boomer women whose kids have flown the coop.
Get Smart. If you haven’t had time to pay attention to the household finances, start simple. Financial expert Wendy Weiss, on her blog, Hot Flash Financial, said the first thing to do is track down and inventory the types of accounts and the financial institutions that hold your money: savings, retirement plans, insurance documents, your and your husband’s latest Social Security statements – add them up and determine what you’ve got. Then get a handle on the size of the credit card debts and mortgage.
“Just find out what you have,” Weiss says. “There are questions you can ask later.”
Talk to Your Kids. You’ve poured your heart into nurturing your offspring. So turn the tables and ask them to have a conversation about your needs once you retire.
Financial advisers swear by these wide-ranging discussions, the content of which reflects the diversity in families. The children will be reassured if you’ve saved enough or will share your concern if you haven’t. Perhaps they’ll have opinions about whether you should purchase long-term care insurance. They should also know the beneficiaries on your financial and pension accounts and insurance…Learn More
October 9, 2012
401(k) Education Missing A Target
Dennis Ackley says he doesn’t get a lot of holiday cards from the mutual fund industry.
The Kansas City, Missouri, consultant has become a well-known critic of the 401(k) materials that funds provide to employers, which usually leave the complex job of retirement planning to the workers to figure out. When speaking to a room full of 401(k) plan sponsors, he has a unique way of getting his point across. Ackley hands out sheets of paper similar to what’s shown here and asks them to wad them up and throw them at the target.
The problem – for the plan sponsors in the audience – is that Ackley doesn’t give them a target.
“Most of them are just kind of befuddled by the whole thing.” Befuddlement, he tells is audience, “is what young employees experience sitting in a 401(k) meeting.” …Learn More
October 4, 2012
The Long-Term Care Insurance Gamble
A good friend in Houston recently emailed me to ask whether she should buy long-term care insurance. Let me be very clear about my answer: I have no idea.
This writer is like baby boomers everywhere trying to get a grip on this long-term care stuff. Where to start?
First, let’s look at the prices for long-term care. Squared Away used data from Genworth, one of the nation’s largest insurers in this market, to generate a U.S. map with the median cost in each state of a semi-private room in a nursing care facility.
Genworth’s goal is obviously to sell insurance. But I ran its data by a few people, and it held up well, with a few observations and caveats discussed later…Learn More
September 25, 2012
401(k) Fund Choices: Less is More
New research suggests that the more mutual funds your 401(k) offers, the more likely you are to take the easy way out to escape the mental gridlock.
The typical 401(k) has seven mutual fund investment options, but some have as many as 21 funds. We may think we like choices, but behavioral research has shown that people simply can’t handle so many options – that’s why some employers have turned to auto enrollment in their 401(k)s or picking investments for workers who can’t or won’t make the decision.
A new study building on prior research finds that the more investment options an employee has the more likely he or she is to simply divide the money evenly among those options. This can potentially reduce the diversification in employees’ retirement portfolios, with long-term consequences.
“We find that considering a larger number of funds to invest in may be overwhelming for many investors,” said the research, by Gergana Nenkov and colleagues at Boston College, as well as Rutgers University, the University of Pittsburgh, and the University of Texas, Austin. Splitting the money evenly is how we cope.
“We just don’t have enough capacity to sift through the options that are out there,” Nenkov explained in an interview. Employees aren’t financial experts, and asking them to make these decisions is often “too much,” she said, and may even be “making us unhappy.”
The focus is on 401(k) choices in this study, recently published in the Journal of Marketing Research, But the argument may apply to the proliferation of all kinds of complex financial products, including credit cards charging different rates for balance transfers, purchases and cash advances, as well as debit cards with hidden fees and mortgages with complicated terms.
Multiple products act to prevent consumers from comparison shopping. But the demise of the defined benefit plan and the sudden responsibility thrown on employees to manage tens or hundreds of thousands of dollars in their personal investment portfolios is clearly more than many of us can handle. Don’t feel bad either – Nenkov, who has a PhD in marketing, admits to feeling overwhelmed by the choices. (As does this blog writer.) …Learn More
September 20, 2012
Social Security: There is a Better Way
Married couples have up to 567 options for deciding when and how to file for their Social Security benefits. Yes, 567!
“They are faced with a bewildering array” of choices, said David Freitag, vice president of Impact Technologies Group Inc. in Charlotte, North Carolina, which just released a spiffy, user-friendly Social Security calculator to help.
No wonder people just throw up their hands and claim their benefits at 62, when they first become eligible. But in the midst of the baby boomer retirement tsunami, oodles of calculators are coming online to simplify the decision for couples. Impact is offering a 14-day free trial to anyone who wants to test its calculator.
Couples’ strategies have become more complex, because today’s boomer wives have spent a lifetime working and because they may earn wages rivaling or exceeding their husband’s, said Jim Blankenship, a financial planner in New Berlin in central Illinois. There is also more money at stake in making the right decision, he said.
“Before, it was much easier to have a rule of thumb to go by,” he said. “The decisions are different than what they used to be.” …Learn More
September 13, 2012
It Pays More Than Ever To Delay
Single people can receive tens of thousands more from Social Security over many years of retirement and couples can receive nearly $125,000 more by waiting until their late 60s to sign up.
The most common age for starting up Social Security is 62, when individuals first become eligible, even though monthly benefit checks would rise sharply if they’d wait. But it’s becoming increasingly worthwhile financially to hold out, according to economist Sita Nataraj Slavov of the American Enterprise Institute, who presented her research findings at the Retirement Research Conference in Washington last month.
This contradicts the conventional wisdom that no matter when people file, they’re going to essentially receive the same total amount over their entire retirement. The trade-off has always been between filing early and receiving a smaller check for a longer period of time, or filing later and receiving a bigger check for fewer years. Financially, it’s a wash.
But an economic fluke has changed all that: historically low interest rates. Slavov and co-author John Shoven, a Stanford University economist, have determined that, increasingly, there’s a payoff to holding out in this unusual rate environment. (More later on how that works.)
“There’s real money at stake here. This is not a trivial amount for most people,” Slavov said in a telephone interview. “What we’re trying to communicate is, it’d be good to think more about what you’re giving up when you claim early.”
At Squared Away’s request, Slavov calculated the present values for retirees who file for Social Security at the age at which they would maximize their benefits – she did so for the average single man, single woman, and two-earner couple. The payoff is largest for married couples who delay filing for benefits: …Learn More