January 15, 2013
401(k) Mutual Funds Mediocre
A spate of research in recent months shows that the mutual funds offered in employer 401(k)s have fairly unremarkable – though not disastrous – investment performance.
As with any academic study worth its salt, the various authors’ findings are complex and loaded with critical twists, turns, and footnotes. Descriptions of three research papers on 401(k) plan returns can be found by clicking “Learn More” below. But here’s the gist:
- So-called Target Date Funds – investments are based on each employee’s planned retirement age – perform better than investments guided by financial advisers hired by one Oregon employer to advise its workers. TDFs also outdo employees who go it alone.
- When the 401(k) plan’s trustee is also a mutual fund management company, it’s more reluctant to remove its own, poorly performing funds from the plans’ smorgasbord of funds.
- Employers select mutual funds that outperform a portfolio of randomly selected funds but underperform passive indexes.
There’s a common thread in many of these studies: the extra fees that investors pay for advice or the stock pickers who manage their mutual fund often don’t translate to better returns… Learn More
January 8, 2013
Healthy, Wealthy and Not Retiring
Rich and poor retire at vastly different ages – nine years in the most extreme case.
A rich man in excellent health works three years longer than a poor man in excellent health – that’s a fairly long time when one is talking about the decision to retire. But if both men are unhealthy, the difference is much larger. The rich man works nine years longer than his low-earning counterpart.
This complex interplay between one’s financial and physical conditions can be seen in the above chart, which shows retirement ages for American households in five income groups, rich to poor. Among financial planners and prospective retirees, as well as academics, any discussion about the retirement decision is typically dominated by how much a person earns and saves during his or her lifetime. Health and medical expenses are usually a given.
That is “too simplistic,” said Ananth Seshadri, an economist at the University of Wisconsin in Madison.
The chart, taken from a paper by Seshadri and his Wisconsin colleague, John Karl Scholz, for the Retirement Research Consortium, also dramatizes the complex impacts on various groups that would occur if Congress were to raise the eligibility age for Medicare, which it is considering among dozens of other deficit-reduction proposals.
Think about the working man in heavy industry. Research has shown that men in physically demanding jobs, such as aluminum workers, often are forced to retire earlier out of poor health or sheer exhaustion.
But as a wealthy man ages, he is able to pay for good medical care for his heart or hip problem, which enables him to delay retiring. Some people, not entirely consciously, also may choose higher-paying employment – or they may save more – in anticipation that they will have big medical bills when they’re older, Seshadri said.
“People get earnings shocks, but more importantly people get health shocks,” he said. “Medical expenses are a big deal later in life.”
And a primary consideration when one is thinking ahead about when to retire.
Click here for another research paper by the Retirement Research Consortium showing that access to Medicare is a primary consideration when one is thinking ahead about when to retire.
Full disclosure: The research cited in this post was funded by a grant from the U.S. Social Security Administration (SSA) through the Retirement Research Consortium, which also funds this blog. The opinions and conclusions expressed are solely those of the blog’s author and do not represent the opinions or policy of SSA or any agency of the federal government. Learn More
January 3, 2013
This article was originally posted on Squared Away on October 23.
A large majority of people in a survey released last week identified saving for retirement as their top financial priority. If that’s the case, then why aren’t Americans saving enough?
Stuart Ritter, senior financial planner for T. Rowe Price, the mutual fund company that conducted the survey, has some theories about that. Squared Away is also interested in what readers have to say and encourages comments in the space provided at the end of this article.
But first the survey: about 72 percent of Americans identified saving for retirement as “their top financial goal,” with 42 percent saying that a contribution of at least 15 percent of their pay is “ideal.”
Yet 68 percent said they are saving 10 percent or less, which Ritter called “not very much.” The average contribution is about 8 percent of pay, according to Fidelity Investments, which tracks client contributions to the 401(k)s it manages.
The Internal Revenue Service last week increased the limit on contributions to 401(k) and 403(b) retirement plans from $17,000 to $17,500. The so-called “catch-up” contribution available to people who are age 50 or over remains unchanged at $5,500.
The question is: why do Americans give short shrift to their 401(k)s, even as people become increasingly aware that their dependence on them for retirement income grows? Ritter offered a few theories in a telephone interview last week: …Learn More
December 13, 2012
Financial Planners Diversify: Four Types
Brokers, registered investment advisers, fee-only, commission-based, dual license – the labels for financial planners can be intimidating.
In a consumer-friendly article, the Retirement Income Journal (RIA) in November identified four adviser types, based on what they do for their clients.
Most advisers still fall into the traditional Technician category. But the rise of other types – Strategist, Behaviorist, and Life Coach – partly reflects a profession rocked by the 2008 financial crisis. The number of advisers nationwide fell 3 percent last year, according to Cerulli Associates in Boston.
“[T]he combined impact of the financial crisis, boomer retirement, the advent of behavioral economics and fee compression is forcing more advisers to evolve,” RIA explained.
The following is an adaptation of RIA’s article, which was based on a presentation to the University of Pennsylvania’s Wharton School of business by fee-only advisers Paula Hogan in Milwaukee and Rick Miller in Boston.
The new year is around the corner, and perhaps you’ll want to hire a planner. But which of the following four types suits you? …Learn More
December 11, 2012
Black Families Struggle to Build Wealth
It is extremely difficult for black Americans to accumulate wealth they can pass on to their children.
Getting to the heart of this concern is new research by the Urban Institute. The Washington think tank found that while blacks excel at converting the gifts and inheritances they receive into even more wealth, the size and frequency of these bequests are much smaller than for whites, perpetuating a wealth gap that has existed since emancipation.
“In the news, you hear about the racial income gap, but the racial wealth gap is so much larger, and it’s not improving,” said Signe-Mary McKernan, a senior fellow at the Urban Institute and co-author of the new study. Smaller inheritances and gifts in African-American families “are hindering their opportunity and wealth accumulation,” she said, about her findings.
Median wealth for black families is $18,181 – white family wealth is $122,927, and Hispanic wealth is $33,619.
But the real question is, why is white wealth seven times larger than black wealth? The researchers found that blacks are five times less likely to receive family bequests than are whites, and their inheritances are $5,013 smaller.
McKernan’s research employed standard statistical methods by holding factors such as income and education constant in order to highlight the racial aspect of differences in wealth.
But Lester Spence, a political science professor at Johns Hopkins University who sometimes conducts statistical analysis in his research, said such analysis fails to fully capture the significant impact of factors such as the social and cultural barriers facing black Americans. …Learn More
December 6, 2012
Readers’ Picks for 2012
Squared Away readers’ favorite articles during the year reflect America’s biggest financial challenges: paying for college and retirement.
The following are the Top 10, according to an online analysis of blog articles with the most unique visits by readers. A link to each article is embedded in the last word of each headline:
It Pays More Than Ever to Delay
The Long-Term Care Insurance Gamble
Boomer Moms, Here’s a Radical Idea
For Many Elderly, Little Left at Life’s End
Why Baby Boomers Can’t Retire …Learn More
December 4, 2012
Long-Term Care Policies Unpacked
The typical, elderly couple spends about $260,000 on health care and long-term care services during retirement – for the unlucky ones, the amount can be double. No wonder sales of long-term care policies this year will increase nearly 10 percent, according to the American Association for Long Term Care Insurance. At the same time, major insurers are pulling out of the market in droves, and premiums are surging due to higher demand by aging baby boomers, record-low interest rates, and rising medical costs.
To help navigate this increasingly treacherous market, Squared Away interviewed Larry Minnix Jr., chief executive of LeadingAge, a non-profit consumer organization in Washington.
Q: Is there anyone for whom long-term care insurance does not make sense?
A: Not many. I’ve seen too much of the consequences for too many age groups and too many families – long-term care just needs to be insured for. A majority of the American public is going to face the need for some kind of long-term care in their family. The only people it doesn’t make sense for are poor people – they have Medicaid coverage, mostly for nursing homes. And for people who are independently wealthy, if they face a problem of disabling conditions they can pay for it themselves. You find out at age 75 you have Parkinson’s or Alzheimer’s, but it’s too late to insure for it. Think about it like fire insurance. I don’t want my house to burn down, and very few houses do. But if mine burns down, I do have insurance.
Q: The Wall Street Journal reported that GenWorth Financial next year will charge 40 percent more to women who buy individual policies. Why?
A: Among the major carriers, private long-term care insurers have either limited what they’re doing or backed out of the market entirely. You’d have to get GenWorth’s actuarial people [to explain], but let me venture a guess. I’ve had private long-term care insurance for 12 to 15 years, but my wife couldn’t get it. She’s got some kind of flaw in the gene pool, and she was denied coverage. She may be the bigger risk, because I’m more likely to stroke out and die, but she’s more likely to live with two to three conditions for a long period of time.
Q: Your wife wasn’t healthy enough to get coverage? …