May 12, 2015
Rewriting the American Dream
Americans once defined success mainly by whether they owned a house or were better off than their parents. Today, it’s a debt-free college education and a comfortable retirement.
U.S. adults feel that their top indicator of financial success is having enough money in the bank to retire (28 percent of adults), followed by sending their kids to college without having to borrow to pay for it (23 percent), according to a telephone survey sponsored by the American Institute of CPAs. Homeownership and upward mobility each came in at a distant 11 percent of the adults, age 18 and up, randomly surveyed by Harris Poll.
“No longer are homeownership and upward financial mobility the hallmarks of financial achievement,” said Ernie Almonte, chairman of the CPA Institute’s Financial Literacy Commission. “Americans have changed the benchmarks for their financial success.” …Learn More
April 30, 2015
TDFs Appeal to the Most Inexperienced
New research finds that the people most likely to benefit from target date funds are also the people inclined to invest their 401(k)s in them – unsophisticated investors.
Retirement and financial literacy researchers long ago established the pitfalls of our nation’s do-it-yourself system of retirement saving (i.e., people don’t save at all or don’t save enough, and investing is too complex for most people). Target date funds (TDFs) have become an increasingly popular solution to the investment piece of the problem in the wake of the Pension Protection Act of 2006, which allowed employers to use them as the default investment option in defined contribution savings plans.
TDFs place a 401(k) participant’s accumulated savings into a broadly diversified portfolio of stocks and bonds that shifts the asset mix as they age. When employees are young and retirement is a distant concept, TDFs invest heavily – as much as 90 percent – in stocks. As employees age, a growing share goes into more conservative bonds.
TDFs are now the primary default investment among employers that automatically enroll new employees into their savings plans. TDFs are a good option not only for inexperienced investors but also for more experienced investors who prefer to delegate the task of portfolio rebalancing to their fund manager. However, employees typically have the option of transferring out of the TDF and selecting other investments offered in their plan. …Learn More
April 2, 2015
Grads With Student Loans: Rent or Buy?
Some college graduates are so overburdened with student loan payments that they struggle just to stay afloat. But for those who can make their payments and even save some money, the logical next question might be: when can I buy a house?
This is a weighty question for 20-somethings new to the labor force and carrying unprecedented levels of student debt, which puts them at greater financial risk than previous generations of graduates. Squared Away asked two financial planners from the sensible Midwest – Danielle Schultz and Mark Zoril – to help young adults work through the difficult financial tradeoffs they’ll face as they juggle student loan and car payments, retirement saving, and homeownership.
Here’s their advice:
Danielle L. Schultz, a financial planner in suburban Chicago, believes buying a house should be a 20-something’s lowest priority.
The highest priorities are building up an emergency fund and contributing regularly to an employer’s retirement savings plan. The minimum emergency fund for a young, healthy adult who earns, say, $36,000, is around $6,000 – $10,000 would be better. [The standard emergency fund equals at least three months of necessary living expenses, excluding splurges like vacations or restaurant meals with friends.]
Schultz feels strongly about the emergency fund, especially if buying property is the goal. When something goes wrong – a car accident, a job loss, a house fire – renters “can always move in with mom and dad or a friend, but when you’ve got a mortgage, it’s not easy to get out of,” she said. Schultz also is not wild about real estate as an investment, since property values aren’t rising appreciably in many areas.
After the emergency fund is established, it’s wise to knock down the student debt first by paying off the loans with the highest interest rates, she said. Many graduates have multiple loans, so don’t sweat the loans with interest rates at, say, 2 percent – that’s effectively “free money” when inflation is running at 2 percent. …Learn More
February 24, 2015
The Pain of Paying Student Loans
Anger, frustration, confusion, and regret – high emotion permeates the nearly 8,500 complaints about student loans posted last year on the Consumer Financial Protection Bureau (CFPB) website.
A college education can pay dividends in the form of higher lifetime earnings and more opportunities, and millions of graduates repay their loans without incident. But many of the one in three borrowers facing extreme difficulty with repayment have legitimate reasons. The job market, while improving, is not robust for recent graduates. And interest rates on student loans are higher than mortgage rates, so the amount of debt accumulated – and the monthly payments – can be substantial.
Borrowers report that lenders and the firms hired by lenders to service customers are often unwilling to renegotiate monthly payments or devise ways to work down the principal. “I wish that with what I know now I never would have gotten these loans for college,” said one borrower’s online complaint.
The CFPB last month requested detailed information from lenders and servicing firms about customers’ options for modifying loans or negotiating more affordable loan payments. Customers receive “very little information or help when they get in trouble,” CFPB said.
Future borrowers beware. Here’s a sampling of the complaints about lenders:
• No flexibility.
• Refinancing may one day be possible – but not now.
• “Bureaucratic nightmare.”
Unfortunately, private lenders are not under the same obligations as the federal government to show flexibility in renegotiating federally funded loans; for example, the government forgives loans for some public workers or offers payment plans that take into account graduates’ incomes for those who don’t earn enough to meet their loan payments.
So before taking out student loans, consult the CFPB consumer guide, which recommends exhausting all federal loans before resorting to private loans.
The issues raised in the complaints detailed below sound similar to subprime borrowers’ experiences with loan servicing firms. …Learn More
January 29, 2015
Retirement Saving: Excuses and Regrets
U.S. workers have a long list of reasons, many of them legitimate, for why they can’t come up with the money for a retirement savings plan.
But here’s the rub: we live in a 401(k) world. Workers who aren’t convinced of the urgency of saving should listen to people who have already retired. Even though many current retirees have defined-benefit pensions, they have become largely unavailable to most people still working today. And these retirees say they’ve learned the hard way that saving is key.
Excuses now and regrets later – these two takeaways came out of a nationally representative survey of workers and retirees by HSBC, a global financial institution.
Saving for retirement is not a major priority for 81 percent of the workers surveyed. The chart shows that saving takes a back seat to myriad other financial concerns, topped by the impact of the global economic downturn and the U.S. job market.
Things are much clearer to retirees. Nearly half of them, when asked for the latest age at which people should start preparing to retire, said before 30. Many retirees – about two out of five – said “they did not realize that their preparation had fallen short until it was far too late.”
Whatever obstacles they face, the question facing workers is: what can they do to save or save more? …Learn More
January 27, 2015
Inequality Fuels Drop-Out Rate
Education is the holy grail of success. But too many young men in this country don’t graduate high school, much less aspire to a college degree.
It’s clear that completing high school improves one’s chances of moving up the economic ladder. So why doesn’t this incentive always work?
At a time of greater attention to the nation’s widening inequality, new research supports the argument that income inequality may actually discourage disadvantaged low-income teenagers from finishing high school.
The study examined whether there is a relationship between inequality and the drop-out rate, measuring inequality as the ratio of the lowest incomes in each state – the bottom 10 percent – to incomes in the middle. The study found that drop-out rates for teenage boys in states with the greatest inequality were 4.1 percentage points higher than drop-out rates in the states with the least inequality – this is a big difference, amounting to more than one-third of the 11.1 percent average drop-out rate. …Learn More
January 8, 2015
Many in Dark About Their College Debt
A recent Brookings Institution report confirms for the first time how severely uninformed many college freshman are about the impact of the debts they’re taking on to fund their education.
This isn’t entirely surprising. But with tuitions continually rising and students now often forced to borrow the equivalent of a house down payment by the time they graduate, the Brookings findings should serve as a wake-up call:
- Half of the full-time freshmen surveyed “seriously underestimated” how much they were borrowing.
- Among students known to have federal college loans, four out of 10 either said they didn’t have any federal loans or didn’t have any debt at all.
According to the report, “Students who do not have a good idea of their level of borrowing may make expensive mistakes that they will later come to regret.” …Learn More