January 2019

Percent signs on a chalkboard

How Long Will Retirement Savings Last?

It might be the most consequential issue baby boomers will deal with when they retire: did I save enough?

Vanguard’s free online calculator will estimate that for you, using the same sophisticated technique financial advisers charge hundreds of dollars to provide.

The user-friendly calculator uses 100,000 of what are called Monte Carlo simulations of potential future returns to the financial markets to arrive at the probability that a household’s invested savings will last through the end of retirement. To get to this number, older workers enter their information into the calculator – 401(k) account balance, asset allocation, estimated years in retirement, and annual withdrawals – by moving around a sliding scale for each input.

The financial industry recommends aiming for a probability in the 80 percent range – 95 percent is overdoing it. In the end, however, your comfort level is a personal decision.

An important purpose of the calculator is to demonstrate how changes in the inputs can hurt one’s long-term retirement prospects – or improve them. One obvious example is increasing the annual withdrawal amount, which lowers the probability the money will last. To increase your chances, try a later retirement date.

The calculator is a lot of fun, but it has some limitations.

First, it’s no substitute for a detailed pre-retirement financial review. The other issues are primarily mathematical, and they boil down to the difficulty of predicting the future.

The calculator assumes, for simplicity, that a retiree withdraws the same dollar amount from savings every year to supplement Social Security and any pension income. But Anthony Webb, an economist at the New School for Social Research in New York, said this ignores the most important thing retirees should do to preserve their money: adjust the withdrawals every year, depending on how their investments have performed.

“If you encounter icebergs (bear markets), you should cut your spending” and withdrawals, he said. …Learn More

Trust barometer

Are We Able to Judge Financial Advisers?

Let’s get this out of the way first: the vast majority of financial advisers would not take advantage of you.

But that doesn’t eliminate the problem of discerning whether an individual adviser can be trusted. About 7 percent of U.S. advisers have misconduct records in civil or regulatory proceedings.  If someone draws an unlucky card and picks a bad one, how would they know?

In certain situations, they might not. A new study finds that various things can trip people up and make them trust an adviser who is giving out bad advice. These influences included a good first impression of the adviser. And one way for an adviser to make a good first impression is by initially confirming the client’s own views on investing before introducing poor advice.

The subject of this study – judging the quality of financial advice – is important at a time workers are carrying a heavy load of responsibilities for managing their 401(k) accounts, and the accounts are becoming more critical to their retirement outlook.

The adviser study was conducted by an international group of researchers. Their online experiment was done in Australia, where employers are required to provide workers with a retirement savings and investment plan – Superannuation Accounts – similar to 401(k)s.

Trust is tricky to evaluate, and the researchers put a lot of thought into designing the experiment to minimize flaws in the results. They asked nearly 1,300 Australians to evaluate advice online about four investment topics. Under each topic, one adviser presented good advice, while the other presented bad. The researchers varied the order for presenting the good and bad advice to the participants.

They generally had a good sense of when they were getting good advice. But there were exceptions: …Learn More

Hispanic Retirement Outlook Gets Worse

One thing really stood out in a recent study: the deterioration in Hispanics’ retirement prospects since the 2008-2009 recession.

Retirement security by raceWorkers’ success at saving for retirement is becoming increasingly important to their financial security in old age. This puts Hispanic households at a clear disadvantage: they earn half as much as white households, which makes it that much more challenging to build retirement wealth by buying a house or saving more in their 401(k)s – two-thirds of Hispanic workers don’t even participate in an employer 401(k).

White Americans aren’t exactly in great shape either. Today,
48 percent of them are at risk of experiencing a drop in their standard of living after they retire – this is 6 percentage points higher than before the recession, according to a new study by the Center for Retirement Research. Black Americans are worse off than whites, though their situation hasn’t changed much over the past decade.

But 61 percent of Hispanic workers are at risk – a 10-point jump since the recession – the study found. A big reason is that Hispanic homeowners were hit especially hard by plunging house prices during the mortgage crisis in states like Florida, Nevada, Arizona, and California, where they are heavily concentrated. Their home equity values dropped 41 percent, a result of buying “houses in the wrong place at the wrong time,” the researchers said.

The loss of home equity has a big impact on retirees by reducing the amount they can extract from their properties by purchasing less expensive housing or taking out a reverse mortgage. (The researchers assume that when workers retire, they will use reverse mortgages.) …Learn More

A Taste of How the 1 Percent Lives

The dramatic increase in U.S. inequality is due almost entirely to the expanding fortunes of the
1 percent. They have tripled their share of the nation’s total wealth to 21 percent since the 1970s.

Such extreme concentrations of wealth are of growing concern to economists and even one Wall Street firm. They argue that it hurts the economy for everyone.

The public’s reaction couldn’t be more different. Their preferred solution to barely coping financially is to become rich themselves. Two out of three Americans told Gallup they aspire to being rich and say that the super-wealthy are good for the country. Democrats and Republicans are equally enamored of the rich.

Mansion in Naples, FLWhat it means to be in the top 1 percent is, for most of us, an abstraction since the wealthy largely keep to their own. But the crew of the Double Sunshine tour boat are happy to show tourists the lifestyles of Florida’s rich and famous during daily tours of the dolphins and multimillion-dollar mansions on Naples Bay.

During my Christmastime tour of the bay, the crew pointed out one property where the new owner had demolished a $49 million house to build a new one. “Tear-downs are on a tear,” says The Naples Daily News, which closely follows the real estate transactions of celebrities and chief executives.

In property after property, royal palms sway over lawns that tumble into the bay. Every house has a yacht or an empty boat slip with a full crew awaiting the owner’s return, said Greg Dyer, the tour boat company’s assistant operations director. One homeowner pays nearly $600,000 a year in property taxes. No wonder Naples has such great bike paths. …Learn More

exclamation point

Parent PLUS College Loans Can Spell Peril

QuoteA dramatic increase in 1993 in how much parents are permitted to borrow from the federal government for their children’s college is coming home to roost.

Since then, average debt through the parent PLUS loans has more than tripled, adjusted for inflation, according to a Brookings Institution report. About one in 10 parents owe more than $100,000. And as loan balances have ballooned, the rate of repayment has slowed.

Now that the college applications have been submitted, Allan Katz, a financial adviser in Staten Island, New York, has this advice for parents contemplating their next move:

PLUS loans should be avoided “at all cost,” he said. “A big part of my practice is avoiding PLUS loans.”

His dire warning stems from the 1993 change in the law, which made it easier for parents to get into trouble. The reform increased how much parents can borrow from $4,000 per year to whatever the teenager needs to cover his or her school expenses – regardless of the institution’s cost. Total borrowing per child used to be capped at $20,000 – there is no limit today. …Learn More

Young woman with piggy bank

Savings Tips Help Millennials Get Serious

This is young adults’ financial dilemma in a nutshell: you’re well aware you should be saving money, but you admit you’d rather spend it on the fun stuff.

Yes, paying the rent or student loans every month takes discipline. But it isn’t enough. Even more discipline must be summoned to save money, whether in an emergency fund or a retirement plan at work.

Tia Chambers' headshot

Tia Chambers

Tia Chambers, a financial coach in Indianapolis and certified financial education instructor (CFEI), has put some thought into how Millennials can overcome their high psychological hurdles to saving.

The 32-year-old lays out six doable steps on her website, Financially Fit & Fab, which she recently elaborated on during an interview.

Get in the right mindset. “It is the hardest part,” she said. “When I speak with clients, money is always personal, and it’s also emotional.” The best way to clear the emotional hurdles is to keep a specific, important goal in mind that continually motivates you, for example buying a house. Or create a detailed savings challenge, such as vowing to save $1 the first week, $2 the second week, $3 the third week, etc. This adds up to $1,378 at the end of the year, she said.

Cut expenses. Some cuts are no-brainers. Scrap cable for Hulu and Netflix subscriptions. Drop that gym membership you never use. The biggest challenge for young adults is saying no to friends who want to go out for dinner or drinks. Chambers suggests enlisting your friends to help – after all, they’re probably spending too much too. She and her friends have agreed to go out one weekend and save money the next weekend by hanging out at someone’s apartment. Another idea is happy hour once a week instead of twice. …Learn More

Mom and baby at a computer

A Social Security Reform for Mom

Created in the 1930s, Social Security’s spousal benefit – it’s half of a retired husband’s benefit – was the way to compensate housewives for the work of raising children.

The world has changed, but Social Security hasn’t been modified to reflect the rise of the full-time, working mother.

Today, married women frequently have earned enough to collect Social Security based on their own employment histories, rather than a spousal benefit. The problem comes when their earnings are reduced – and ultimately their Social Security benefits – because they disrupted their career paths and sacrificed pay raises to care for their children.

Single motherhood has also become very common, which means that a wide swath of women have no access to spousal and survivor benefits at all. Due to a higher divorce rate, one in four first marriages don’t last the full 10 years that Social Security requires to qualify for these benefits.

The erosion of spousal benefits points to a future in which “large numbers of women are going to move through retirement with more disadvantages” than previous generations, concludes a recent report by the Center for Retirement Research.

This problem could be addressed if Social Security gave credit to parents for caregiving. Caregiver credits are already pervasive in Europe, including Austria, Germany, Spain, Sweden, the Netherlands, and the United Kingdom, and they take various forms.

In this country, policy experts have proposed two different approaches to help parents with children under age six by increasing the earnings that dictate the size of their benefit checks. …Learn More