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Big Picture Helps with Retirement Finances

The prospect of retiring opens a Pandora’s box of questions. But one big question dominates all the others: How will I manage my finances when I retire?

This is a vexing problem, and baby boomers could use some help thinking it through. To ease the process, a team at UCLA and Cornell University led by David Zimmerman, a UCLA doctoral student, created an online decision tool. In an experiment, they found that the tool might help future retirees understand how to smooth out their income over many years and make their savings last.

The results are preliminary, and the researchers are refining their analysis. But for the initial experiment, they recruited 400 people, ages 40 through 63. The participants were instructed to use the tool to make three big retirement decisions: starting Social Security, choosing a 401(k)-withdrawal strategy, and deciding whether to purchase an annuity. Their decisions would be on behalf of a 60-year-old who is single and plans to retire in two years. He earns $55,000 and has $250,000 in savings to work with.

The participants were split into two comparison groups. One group received immediate feedback on the impact of each separate decision. For example, when the participants picked a Social Security starting age for the hypothetical person, a chart showed a horizontal line tracking the fixed annual benefit locked in by that decision.

When they moved on to another page and selected a plan for 401(k) withdrawals, a chart showed the age when the savings would probably run out. The final decision was whether to buy a deferred annuity with some portion, or all, of the 401(k) assets. The chart on this page displayed the fixed income the annuity would generate every year for as long as the person lives.

The participants were encouraged to change their decisions as much as they liked to see how a change affected that particular source of income. But the researchers suspected that seeing each decision in isolation doesn’t help to clarify how various decisions work together to determine total retirement income over time.

So, the second group got to see the big picture. The chart in this case displayed the impact of any single decision on the annual income from all sources.Learn More

Mortgage Paid Off

Readers See Pros, Cons to Paid-off Mortgage

Baby boomers love to discuss this age-old question: Should I pay off the mortgage before retiring?

Our blog readers fell into two camps in their comments on a recent article.

Some made an emotional argument – that a mortgage-free retirement makes them feel secure. The other camp argued that paying off the mortgage does not make financial sense.

The article, “Boomers Repairing their Mortgage Finances,” described research showing that boomers have sharply cut what they owe on their mortgages by paying extra in the years since the housing market bust. People naturally pay more of this debt as they age. But the boomers’ rapid payoffs partly explain why 40 percent to 50 percent of Americans in their 60s no longer have a mortgage, wiping out what is often a retiree’s largest single expense.

Despite the recent payoffs, boomers still trail their parents. Roughly 80 percent of the homeowners born in the 1930s had paid off their home loans by the same age, according to Jason Fichtner’s analysis for the Center for Financial Security at the University of Wisconsin.

As for whether to pay off the mortgage, many boomers don’t have that luxury. After the wave of foreclosures a decade ago, Fichtner found, the homeownership rate for 60-something boomers quickly slid more than 10 percentage points, to around 65 percent. The U.S. homeownership rate has increased in recent years but is still below the pre-recession peak.

The financial argument against paying off the mortgage was made in a blog comment by Tony Webb, a research economist at The New School. “At current interest rates and anticipated inflation rates, mortgage borrowing is almost free,” he wrote.

“All but the most risk-averse should load up on money while it’s on sale,” he said. [Full disclosure: Webb used to work at the Center for Retirement Research, which sponsors this blog.]

Another reader, Beth, said paying off the mortgage “is one cornerstone of a worry-free retirement.” However, she knows “several financially savvy people who for various valid reasons have not paid off their homes.” …Learn More

Teacher teaching a class

Smaller Pensions Don’t Spur More Saving

Most state and local governments provide their employees with traditional pensions, which are nice to have. But not all pensions are equally generous.

The monthly benefits vary from one place to the next, and some governments have cut costs by reducing pensions for their newest hires. Further, one in four public-sector workers aren’t currently covered by Social Security, because their employers never joined the system.

A logical back-up plan for these workers would be to contribute money to the supplemental savings plans that most public-sector employers provide. When the workers retire, they can add the money saved in their accounts – a 401(k), 401(a), 457 or 403(b) – to their pension benefits.

But researchers at the Center for Retirement Research (CRR) find that workers are only slightly more likely to participate in a savings plan if they work for government employers with less generous pensions – a criterion based on how much of the worker’s current income will be replaced by the pension after they retire.

This lackluster response may not be surprising. Workers can see what’s deducted from their paychecks every week but don’t necessarily understand how these deductions – combined with their employer’s contributions – will translate to a pension.

Public-sector workers are probably more aware of whether their employers are part of the Social Security system. But apparently workers don’t consider that either. …Learn More

House roof illustrations

Boomers Repairing their Mortgage Finances

The housing market collapse more than a decade ago inflicted a lot of financial damage on baby boomers nearing retirement. But a new study finds that some have been trying to make up for lost time by rapidly reducing their mortgage debt.

Since the Great Recession, the boomers who were born in the 1950s – they are now in their 60s – have paid down more than 40 percent of their remaining mortgages and home equity loans, on average – a much faster pace than their parents did at that age.

Not all the damage from the Great Recession can be repaired, however, because many people lost their homes in the wave of foreclosures. For example, the homeownership rate for the boomers born in the early 1950s quickly dropped slightly more than 10 percentage points after the housing crisis, to 67 percent, where it remained until 2016, the last year of data in the study.

Since then, the U.S. homeownership rate has increased but is still below the pre-recession peak.

The impact of the housing crisis was far less dramatic for Americans born in the early 1930s. Their homeownership rate dipped 2 percentage points right after the crisis, to a relatively high 76 percent, according to Jason Fichtner of Johns Hopkins University.

The decline in boomers’ homeownership leaves fewer of them with housing wealth to fall back on when they retire.

They have also fallen behind in fully paying off their mortgages, which would eliminate their monthly payments and make the house a low-cost place to live. Just half of the boomers born in the early 1950s who held onto their homes during the Great Recession own them outright – two-thirds of the people born in the early 1930s had paid off their mortgages by that age. …Learn More

Alzheimer’s: from Denial to Empowerment

First came the denial.

Jay Reinstein

Jay Reinstein co-hosts a radio call in program every Tuesday.

Jay Reinstein’s unwillingness to accept that he had early onset Alzheimer’s disease was equal in magnitude to the responsibilities he would have to give up as the assistant city manager of Fayetteville, North Carolina. He was afraid the people working for him would judge him.

But disclosing his condition to coworkers was unavoidable. After Reinstein, who is 59, was diagnosed in March 2018, his doctor made this very clear: “You’re in a visible position and making decisions. You’ve got to tell them.” With encouragement from a therapist, Reinstein informed his boss, and together they mapped out a plan for telling the city’s elected officials and employees.

His disclosure wouldn’t be all smooth sailing. As news of his situation spread through City Hall, he felt hurt by the rumblings of some employees who felt he should leave immediately. What surprised Reinstein, however, was a feeling of relief after initially disclosing his condition to his direct reports during lunch at a local restaurant. “I felt the love, and people really cared. That made me confident that I knew I could tell others,” he said.

Seven months after his diagnosis, he retired – and he hasn’t looked back. Today, his daily schedule rivals that of, well, a city official.

Reinstein, who is now living in Raleigh, North Carolina, hosts a call-in radio program on Tuesday mornings to discuss issues involving race with his African-American co-host, Kevin Brooks, on WIDU 99.7 FM and 1600 AM. He relishes the challenge of doing research to prepare and even finds it therapeutic.

He is also one of two people with Alzheimer’s disease on the national board of directors for the Alzheimer’s Association, a role that includes occasional interviews with major newspapers. As a board member, he gets involved in strategic planning – just as he did in local government. Prior to joining the board, he spoke around the country on the organization’s behalf to put a public face on the disease and reduce its stigma.

Being around positive people “gives me a feeling there’s hope,” he said. “My philosophy is, I like to keep my brain busy.”

Bobbi Matchar, director of the Duke Dementia Family Support Program, says Reinstein is defying the stereotypes associated with Alzheimer’s. “Jay shows the world that it’s possible to have a joyful and meaningful life after being diagnosed with dementia,” she said – “and he does so with warmth, dignity, and enthusiasm.” …Learn More

Affordable Care Act Indirectly Affects SSI

Disabled man in physical therapy

The Affordable Care Act (ACA) requires that insurance companies offer coverage to young adults with disabilities – like all young people – through their parents’ employer coverage until age 26.

So, up to this point, many adults with disabilities now have a viable way to get health services, independent of any government assistance. But at 26, that changes.

A Mathematica study finds that’s when some start applying to the federal Supplemental Security Income Program (SSI) – probably partly to gain access to Medicaid health coverage. Health insurance is critically important to people with disabilities, who often need expensive, specialized medical services. SSI’s purpose is to provide monthly cash assistance for living expenses if they lack financial resources and don’t have the work history required for federal disability insurance. SSI recipients also qualify automatically for Medicaid in a majority of states.

The researchers examined the trends in applications to SSI by people in their 20s before and after the Affordable Care Act’s 2010 passage. They found that the annual application rates among people right around their 26th birthdays have recently been 3.4 percent higher than what would be expected based on the steady pattern of overall age trends. This jump in applications at age 26 was not evident before the ACA – when people tended to lose parental insurance earlier in their 20s.

The number of SSI applications that were approved was also somewhat higher, according to the study, which was funded by the U.S. Social Security Administration.

The risk to young adults who go on SSI, the researchers said, is that they might develop a long-term dependence on the program’s cash assistance and Medicaid. And this, in turn, could discourage people with less severe disabilities from trying to work at a critical point in their lives, because SSI strictly limits how much money its recipients can earn. …Learn More

Woman with Dementia Gets Lots of Support

Robert and Brenda Lugar

In the 3 1/2 years since Brenda Lugar was diagnosed with dementia due to Lewy body disease, she has found great comfort in the people who want to make her life a little easier.

This support takes many forms. At church on Sunday mornings, Shirley always reminds Lugar of her name. When Lugar is writing an email, she knows it’s okay to text her friend, Michele, or her sister-in-law, Janet, for help finding the right word. Lugar’s husband of 43 years, Robert Lugar, recently bought her a special board for Christmas so she has a place to work on her jigsaw puzzles – and he insisted she open it early and start enjoying it now.

“Just that little thing – it meant a lot,” she said in a recent interview.

It’s common for people who are grappling with the painful reality of a dementia diagnosis to deny their condition or hide it from others. But not Brenda. Asking for the support she needs – and getting it – is “soul cleansing,” she said.

Lugar, who is 62, didn’t arrive at this place immediately. When a neurologist at Duke University Medical Center diagnosed her, her initial reaction was denial. “I said, ‘Oh you can cure me.’ He said, ‘I can’t cure you but I can slow it,’ ” she said. “When he said that, I knew that wasn’t good. I kind of shut down.”

Lewy body disease is a condition in which abnormal protein deposits in the brain can cause dementia. For Lugar, disclosing her disease gives her an odd sense of relief – it’s an explanation to others for her memory loss, her intermittent hallucinations about animals, and her uneven performance at work. “I had to tell people, because I wasn’t the same person,” she said.

She even shared her condition with a store clerk to explain her fumbling with the credit card reader. “If I tell them [and] if they have any decency in them, they’ll treat me better,” she said.

Barbara Matchar, director of the Duke Dementia Family Support Program, which Lugar participates in, said that people like Lugar “who are open about their diagnosis often feel relieved.”

Lugar was diagnosed in 2017 after she noticed frightening things happening to her at work. …Learn More