February 28, 2013
The IRA Tax Deduction Beckons
At tax time, many Americans think, often fleetingly, about spending less and socking away more for retirement.
Until April 15, the IRS permits people who do not have a pension plan at work to deduct up to $6,000 for money placed in an IRA; taxpayers who do have an employer pension can also receive the IRA deduction if their earnings fall under the IRS’ income limits.
The tough question that trips people up is: How much will I need?
The easy way to think about this is in terms of the income necessary to maintain your current standard of living after the paychecks stop coming in. Click here for a tool that estimates both how much you’ll need and how much you’ll have if you continue on your current path.
The calculator, created by the Center for Retirement Research, which supports this blog, was designed for people over 50 and on the retirement runway. Younger people can also get a ballpark idea of how they’re doing using the calculator. Or click here for the percent of your wages to put into a tax-deferred retirement fund.
This is a beta website with a few kinks, and it works smoothly only on the Safari and Google Chrome browsers. But the results are sound and backed by academic research. Here’s how to read the results. …Learn More
February 21, 2013
Corporate Match Falls in Auto Enrollment
Enrollment in 401(k)s is higher in companies that use auto-enrollment than in companies that don’t. But the innovation falls short of an ideal solution to the nation’s low retirement savings.
That’s because corporations using it contribute less of their workers’ earnings to the plan than do companies without it, according to a revised paper by Urban Institute researchers Barbara Butrica and Nadia Karamcheva.
“Firms are profit-maximizers, so we’d expect that, if there is some cost to providing these benefits, they may reduce their match rates to control their costs,” Butrica said.
The researchers found that employers that automatically enroll employees in their plans match their employee contributions up to 3.2 percent of earnings, which is lower than the 3.5 percent average match by employers in their study without auto enrollment. Their statistical analysis shows that it has a significant effect.
Americans are saving very little for their retirement, and news and reports often focus on what individual employees are or are not doing right. Why don’t they save enough? Do they properly invest their 401(k) savings?
This research adds a different perspective: the conflict corporations face between providing better benefits to employees – so they can recruit and retain talent – and maximizing profits to satisfy Wall Street or investors seeking higher profits.
Corporate motivations and decisions can “substantially affect future retirement security,” the authors wrote in an executive summary of their paper funded by the Retirement Research Consortium, which supports this blog. …Learn More
January 22, 2013
Olen Explains ‘Pound Foolish’
New York journalist Helaine Olen lit up Twitter last week with her new book, “Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.” She has attracted high praise – from The Economist, The New York Times, and others – and a few critics, in the online community and at Business Week: “Financial professionals,” Business Week wrote, “are not responsible for knitting the safety net, though Olen makes it sound as though they are.”
Squared Away asked Olen to explain her thinking behind the book.
Squared Away: Let’s get this out of the way. What do you have against financial planners?
Olen: I don’t have anything against all financial advisers, but a lot of people are selling themselves as experts in things they are not expert in. I believe that their commissions are almost inherently conflicted. I also believe that the minute you start selling things as, “I can protect you. I can do better than…,” you’re getting into dangerous territory, because it’s simply not true.”
Are there situations in which financial planning services are useful?
I would never want anyone to think I don’t believe a good, non-conflicted financial planner or coach isn’t useful. They are, very much so. I think very few of us actually see ourselves honestly, and we could all use an objective eye looking over things like our money and investing strategies at least occasionally. But consumers need to know how their chosen advisers are compensated and if that method of compensation can influence their recommendations and strategies.
You say, “No amount of savvy or money management can fully protect” people from a punishing economy that pummels wages and erodes high-quality employment. Are average individuals blamed for troubles that are larger than they are?
Olen: I absolutely think this sort of sentiment – the idea that we will all be okay if only we learn proper money management – is an excuse to blame people for their troubles. Since the late 1970s, a massive inequality issue has opened up. We have very little class mobility in our country. We know that our net worth plunged by 40 percent in 2007-2010. To turn around and tell people that their issues are all their fault is naïve at best and it’s an outright lie at worst. …Learn More
January 17, 2013
401(k)s Bleeding Cash
HelloWallet’s survey landed with a thud in the media this week: one in four U.S. households with a 401k or IRA raided it to cover necessities.
The vast majority of raids are cash withdrawals, not loans – $60 billion in cash in 2010. These grim statistics throw weight behind those who argue we are watching a retirement crisis unfold in slow motion. The pressures on saving are aggravated by stubbornly high long-term unemployment: layoffs explain why 8 percent pulled out cash. But the Great Recession isn’t the only culprit.
Wages, adjusted for inflation, have declined over the past decade, health costs have soared, and consumers remain heavily dependent on their credit cards. In this environment, no wonder saving is often viewed as a luxury.
The 2010 data reveal behavior at a time individuals were still smarting from Wall Street’s financial crisis. But back in 2004, the average 401k balance for all boomers age 55 to 64 was only $45,000 – it was only slightly lower by 2010.
To put that $60 billion in perspective, it is about half the amount U.S. employers put into 401(k) plans on their employees’ behalf that year.
Click “Learn More” to see more data on the cash withdrawals. Readers, what do you think is driving them higher?Learn More
November 8, 2012
Women’s Pay Gap Explained
Lower pay for women came up – where else! – in the foreign policy debate between President Obama and Governor Romney. It affects women’s living standards, single mothers’ ability to care for their children, and everyone’s retirement – husbands and wives.
To understand why women earn 77 cents for every dollar earned by men, Squared Away interviewed Francine Blau of Cornell University, one of the nation’s top authorities on the matter. A new collection of her academic work, “Gender, Inequality, and Wages,” was published in September.
Q: How has the pay gap changed over the years?
Blau: For a very long time, the gender-pay ratio, which is women’s pay divided by men’s pay, was around 60 percent – in the 1950s, 1960s and 1970s. Around the 1980s, female wages started to rise relative to male wages. In 1990, the ratio was 72 percent – that was quite a change, from 60 to 72 in 10 years. We continued to progress but it is less dramatic. In 2000, it was 73 percent. Now it’s 77 percent – that’s the figure that came up in the debate.
Q: Why do women earn less?
Blau: There are two broad sets of factors: the first is human capital and the factors that contribute to productivity and the second is discrimination in the labor market. Women have traditionally been less well qualified than men. The biggest reason here is the experience gap between men and women. Traditionally, women moved in and out of the labor force, and that lowered their wages relative to men.
But when we do elaborate studies – my recent study with Lawrence Kahn in 2006, for example – we find that when we take all those productivity factors into account we can’t fully explain the pay gap. The unexplained portion is fairly substantial and is possibly due to discrimination, though it could be various types of unmeasured factors. So in the 1998 data used in our 2006 article, women were making 20 percent less than men per hour. When we take human capital into account, that figure falls to 19 percent. When we add controls for occupation and industry – men and women tend to be in different occupations and industries – we can get a pay gap of 9 percent. This unexplained gap of 9 percent is potentially due to discrimination in the workplace. …Learn More
October 23, 2012
401(k)s “Top” Financial Priority. Really.
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 $16,500, to $17,000. 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:
- The financial industry is partially to blame. “We have done a really good job of conveying to people how important saving for retirement is,” he said, “but what we haven’t done as good a job of is telling them how much to save.”
Employers may also share blame. Further confusing the issue, the savings rate depends on when the employee starts saving – the percent of pay is lower for those who start in their 20s than for someone who waits until they’re 45. …
September 27, 2012
Paying Mortgage Faster Not Best Option
Americans have been paying down their high-interest credit cards like crazy. Once you do, financial advisers say, think hard about the best use of that spare cash.
With mortgage interest rates at historic lows – they’re scraping 3.5 percent on 30-year fixed loans and 2.8 percent for 15 years – paying extra on the mortgage should no longer be a priority. This simplifies what is a difficult decision for many of us: what’s next?
Saving for retirement and paying off student loans are now the top priorities, in that order, according to two financial advisers interviewed by Squared Away. But paying off the mortgage is a mistake that many people continue to make: mortgage debt outstanding has also declined in recent years, from $11.1 trillion in 2008 to $10 trillion currently, according to the Federal Reserve.
“Paying off a mortgage – I’m not a big fan of that,” said John Scherer of Trinity Financial planning near Madison, Wisconsin. He proposes that his clients funnel the extra money that had been used to pay credit cards into other personal finance “buckets.” …