Posts Tagged "saving"

Motivation to Save: A Simple Solution?

Quiz: by socking away $400 per month, earning 10 percent on your money, you can save $302,412 in 20 years. So, how much would you have in that same account in 40 years?

Yes, it’s more than double. But how much more?

Most Americans can’t do the math, explains Craig McKenzie of the University of California, San Diego’s Rady School of Management, in this video. And if they can’t do the math, then they are unable to comprehend how much easier their lives would be if they took advantage of the enormous benefits of starting to save early for their retirement.

That’s hardly surprising. What is surprising, however, is that McKenzie, a cognitive psychologist by training, experimented with a “simple, straightforward intervention” to get the point across to research subjects of the large boost to saving of earning compound interest over many years. Even better, it succeeded in motivating them to save, he said.


The solution is, as promised, simple – so easy that employers who offer 401ks, as well as mutual fund companies, banks and credit unions, could easily implement it…
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Flatline: U.S. Retirement Savings

Baby boomers’ balances in 401k and IRA accounts have barely budged for most of the past decade.

In 2004, the typical U.S. household between ages 55 and 64 held just over $45,000 in their tax-exempt retirement plans. Plan balances for people who fell in that age group in 2007 rose but settled back down after the biggest financial crisis in U.S. history. In 2010, they were $42,000, a few bucks lower than 2004 balances.

These are among the reams of sobering data contained in the Federal Reserve’s 2010 Survey of Consumer Finances released in June. The $42,000 average balance is for all Americans – it includes the more than half of U.S. workers who do not participate in an employer-sponsored savings program.

There’s more bad news buried in the SCF: the value of other financial assets such as bank savings accounts dropped in half, to $18,000. And hardship withdrawals from 401(k)s have increased, to more than 2 percent of plan participants, from 1.5 percent in 2004.

So, where did all that wealth created by the longest economic boom in U.S. history go? The 2008 financial collapse didn’t help. But we can also blame the baby boom culture. Click here to read a year-ago article that examines the cultural reasons for the troubling condition of our retirement system.

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Image: cartoon of letters 401k

401(k) Tax Break May Be Weak Incentive

The typical American household approaching retirement age had just $42,000 saved in its 401(k) in 2010. This raises the question: Does the federal tax incentive designed to spur savings even work?

In what one retirement expert called “landmark” research, a new study has found that employers’ automatic enrollment and other employee mandates are far more effective ways to increase retirement savings than the federal tax exemption granted for retirement-fund contributions.

Harvard University Professors Raj Chetty and John Friedman, together with Soren Leth-Petersen and Torben Nielsen at the University of Copenhagen, tested the impact of both types of incentives on an enormous sample of 4.3 million people in Denmark. Chetty said the findings also hold implications for the United States.

They found that every $1 increase mandated for retirement savings – in this case, by a temporary Danish policy that required workers to contribute 1 percent of their earnings to government pension savings accounts – spurred 86 cents in additional savings by individuals. In contrast, the Danish government’s tax subsidy, which is very much like our own 401(k) tax break, spurred only 20 cents more in savings.

“This is a landmark study,” Dartmouth College professor Jonathan Skinner said about the paper, presented during the Retirement Research Consortium’s conference in Washington in early August. “I can’t emphasize enough how important this study is in terms of how retirement policies work.” …Learn More

Less Smoking Trumps More Obesity

Smoking cigarette

Since the 1950s and 1960s, the number of cigarettes smoked in the United States has plummeted by one-half but the number of obese Americans has tripled.

So which megatrend has a greater impact on U.S. health and life expectancy? Remarkably, the winner is the positive effect of the decline in smoking. And the additional longevity, as fewer Americans light up, will continue to play out at least through 2040, according to new research.

“The advantages of smoking reductions are expected to outweigh the disadvantages of increases in obesity for both sexes,” according to findings by University of Pennsylvania sociologist Samuel Preston and his colleagues at UPenn’s Population Studies Center and at Emory University’s Department of Global Health.

The declining popularity of smoking has driven down deaths due to lung cancer to 18 percent of all U.S. deaths. But currently obesity is nearly running neck and neck, causing 16 percent of all deaths.

“We have a horse race going on,” said Christopher Ruhm of the University of Virginia’s Batten School of Leadership and Public Policy, who commented on Preston’s paper at the Retirement Research Consortium’s conference in Washington earlier this month. “The winner of the horse race is that the smoking effect is going to dominate.” (The Center for Retirement Research, which sponsors this blog, is a consortium member.)

Estimates of longevity, in this particular case, should be viewed with caution. The mortality impact isn’t easy to calculate, Ruhm and Preston said, because many conflicting things are going on at the same time. For example, although obesity is rising, cholesterol-lowering statins and blood pressure medications are reducing the risk that any individual will die from obesity. …Learn More

money in a tin

Public Perplexed About Annuities

Sales of annuities are slow, because most retirees simply don’t know how to assess their value, new research concludes.

Many of the nation’s top retirement experts agree that annuities are the best solution for retirees struggling with the best way to invest and spend a lifetime of savings.

Annuities have a singular benefit: they guarantee monthly income, no matter how long the retiree lives – something a savings account can’t always do. This constant, pre-determined stream of income has the added advantage of preventing financial mistakes as the elderly lose cognitive capacity, according to Harvard economist David Laibson. Smart Money magazine has dubbed annuities “dementia insurance.”

Yet sales of fixed and variable annuities have been largely flat over the past decade. This “annuity puzzle” has befuddled the academy for years.

Research by the Financial Literacy Center, a joint effort by George Washington University, the Wharton School, and the Rand Corporation, concluded that most people avoid annuities – they “stick to the status quo” – because they don’t understand how they work.

“How can they make these decisions if they don’t understand what a good decision is?” said a Rand senior economist and one of the paper’s co-authors, Arie Kapteyn. “We have to do something about the fact that people have to make these decisions” about managing their retirement wealth. … Learn More

Fourth of July Quiz

Just over two-thirds of Americans were able to answer the questions below correctly. Given their “simplicity,” Annamaria Lusardi and Olivia Mitchell called the results “discouragingly low” in their 2011 research published by the National Bureau of Economic research.

Women did worse than men: 59 percent of women got it right, compared with 71 percent of men.

Take the test to see how you do.

1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow?
a. More than $102
b. Exactly $102
c. Less than $102
d. Do not know
e. Refuse to answer

2. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After one year, how much would you be able to buy with the money in this account?
a. More than today
b. Exactly the same
c. Less than today
d. Do not know
e. Refuse to answer

To see the answers, click “Learn more” below. And happy Fourth of July!Learn More

Employers Try New 401(k) Strategy

Employees apathetic about their 401(k)s are not saving enough. Some employers are bringing in reinforcements to push, cajole, or entice them.

Employers and employees share the blame for the low rate of retirement savings nationwide, consultants say, but the common practice of employers handing their new workers a 401(k) sign-up form and investment materials from the mutual fund manager clearly isn’t working. A few employers are trying a different tack.

One such initiative, by the Foundation for Financial Wellness in Colorado, trains and certifies CPAs, estate planning attorneys and financial advisers to educate its clients’ employees. NASA was the foundation’s first client, and they now include hospitals, city governments, oil companies, unions and churches, said Brent Hines, founder.

The foundation’s educators “are unbiased and don’t have a dog in the fight,” Hines said. “We’re not the 401(k) provider, and we don’t have the bias of wanting to put more money into your 401(k) or invest in a product.”

Separately, a program to educate credit union employees is expanding from four pilot states to an additional six and Washington, DC. And the American Nurses Association recently teamed up with a non-profit to train 10 nurses in five initial states to run workshops; to date, more than 700 nurses have gone through the financial workshops.Learn More

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