November 1, 2016
Housing Bust Still Plagues Pre-Retirees
In 2013, almost 40 percent of all households ages 55 and over had not paid off their mortgages, up from 32 percent in 2001. These borrowers were also carrying a lot more housing debt by 2013.
During that time span, the housing boom first encouraged homeowners to borrow against their newfound home equity. Then the 2008 bust hammered house prices from Miami to Seattle, reducing home equity and leaving many people holding relatively large mortgages.
By 2013, these two factors had combined to exacerbate Americans’ poor preparation for retirement, according to a study by the Center for Retirement Research, which supports this blog.
The researchers analyzed the impact of the bursting of the housing bubble on the National Retirement Risk Index (NRRI) through its effect on home equity, the largest store of non-pension wealth for most retirees. The baseline NRRI estimate, using 2013 data from the Federal Reserve’s Survey of Consumer Finances, was that 51.6 percent of working-age households were at risk of having a lower standard of living in retirement. Housing is part of the index, because retirees are assumed to convert their home equity into income by taking out a reverse mortgage.
The 2013 NRRI baseline was adjusted to see what would’ve happened if households had not run up their housing debt during the bubble and if house prices, rather than jump up and then plunge in 2008, had kept up their historic pace of increases since the 1980s. In that case, the researchers found, the share of households at risk would have been 44.2 percent – not 51.6 percent.
In other words, had the housing bubble and subsequent crash not occurred, fewer households would be at risk of having insufficient retirement income.
The middle-class was hardest hit by the crisis, probably because they’re more likely to own homes than people with low incomes and because housing wealth is more important to them than it is to wealthy people. …Learn More
October 4, 2016
Day Care Costs Factor into Mom’s Work
In 26 states, the average cost of full-time care for just one infant at a day care center approaches or exceeds $10,000 a year, according to ChildCare Aware of America.
No wonder many new mothers (and sometimes fathers) ask themselves: Is it even worth it to work in the first place?
Proposals by both presidential candidates to subsidize care for the nation’s 11 million pre-schoolers amount to non-partisan recognition that parents need some help.
The IRS does provide a child care tax credit of up to $3,000 for one child and to $6,000 for two. But despite this, the United States lags well behind Europe in the financial assistance extended to parents of young children.
The result is that the child care costs shouldered by two-earner American families – the percent of their after-tax incomes that go toward care – are two times what parents pay in countries that subsidize care, such as Germany, Australia, Sweden, Denmark, France and Greece, according to the OECD.
A series of academic studies over more than two decades document a deep and enduring link between steep child care costs and mothers’ decisions to drop out of the labor force.
One study in 2005 found a “striking” impact on mothers when Quebec made child care for pre-schoolers affordable by putting in place subsidies for private day care in the late 1990s, which capped parents’ daily costs at $5. The program spurred big increases in child care use in the province. The study found that universal day care also significantly increased married women’s labor force participation, by 14 percent. …Learn More
September 27, 2016
Annuities Have Real Value
The value that annuities can provide to retirees may not be obvious, but it is real.
Annuities are also becoming increasingly valuable as fewer people have that traditional source of reliable retirement income: an employer pension.
Insurance company annuities, like pensions, pay out a monthly income no matter how long you live. These payments come from three sources: 1) the initial amount invested to purchase the policy; 2) the interest earned on the amount that’s invested before it is paid out; and 3) “mortality credits.”
These mortality credits are the essential element that protects retirees from outliving their savings. As a retiree moves through her 80s, a growing share of the other people in the annuity pool die. The funds they leave behind in the pool are used to continue making monthly payments to those who are still living.
This is the starting point for a new summary of academic research on annuities by the Center for Retirement Research at Boston College, which supports this blog. To fully understand the individual studies, it’s necessary to read the report. But here are some takeaways: …Learn More
September 15, 2016
When a Diamond Isn’t Forever
While student loans are a painful, long-term expense, they are also an investment in one’s career and earnings prospects. But what does lavish spending on a wedding provide?
It can lead to divorce, according to a study by Emory University researchers Andrew Francis and Hugo Mialon. More interesting, they suggest that the stress that comes with wedding debt might be the underlying cause for the unhappy outcomes.
Weddings, which peak in early summer and surge again in the fall, have become more elaborate over the years. Engagement rings usually have diamonds – that wasn’t always the case. The average expense for a wedding and reception in this country is now $30,000.
But the researchers found that women who spend more than $20,000 on a wedding were nearly four times more likely to become divorced than women who spend under $10,000. In the case of men, buying a more expensive engagement ring was linked to a higher divorce rate.
They based these findings on data from their own random survey asking 3,151 adults about their wedding costs and current marital status.They controlled for education, household income, whether the person was employed and other things that play a role in whether a couple stays married.
Stress may be the undercurrent that explains their findings: couples who spend more money are also more likely to report being “stressed about wedding-related debt,” the researchers found.
The links between marriage and money are a perennial topic in academic literature. Other studies have shown that divorce creates financial problems, particularly for people closing in on retirement. It just might be that excessive spending on a wedding – usually a couple’s first major expenditure – gets a marriage off to a bad start.Learn More
September 13, 2016
Parents’ Dilemma: Kids Who Don’t Launch
Karen James and John Kingrey remember very clearly breaking the news to their Millennial son that they would no longer support him.
After struggling through his first year in college, Michael was sitting on his parents’ bed tossing around whether or not he should join the U.S. Navy. “I said, ‘You don’t have to join the Navy, but you’re not living here. And winter’s coming,’ ” Karen James recalled.
And then she thought, but did not say, what many parents before her have thought about the offspring they love: “You’re not living here doing nothing.”
Easing their son out the door in the run-up to the couple’s 2014 retirement “was one of the toughest things we ever did,” John Kingrey said. Their son’s story had a happy ending.
But more parents than ever are being torn between supporting adult children who haven’t yet launched and getting ready for their own fast-approaching retirement. Record numbers of 18- to 34-year-olds are living with their parents, a result of later marriages and a tough job market for that age group.
I am not a parent and am unqualified to write this blog from their perspective. But as a cold financial calculation, supporting a 20-something is problematic for older parents at a time that nearly half of U.S. baby boomers are at risk that their standard of living will decline after they retire.
With little time left to prepare, the most effective thing people in their 50s or early 60s can do is plan on delaying retirement, which sharply increases the size of a monthly Social Security check. But paying down a mortgage faster or putting more money into a 401(k) retirement plan is also a good idea.
“You shouldn’t be helping them if you want to put more money into your retirement,” says Minnesota financial planner Mark Zoril. But he’s quick to add that getting tough on offspring isn’t easy for parents – or their advisers. “It’s a pretty difficult [conversation] to have with your client.” …
September 8, 2016
Women Often Quit Work to Help Parents
Here’s just some of the evidence of the enormity of the challenge of caring for our elderly parents:
- One in three baby boomer women cares for an elderly parent.
- Even if they work, these caregivers devote anywhere from eight to 30 hours per week to that parent.
- The estimated value of informal senior care provided by family members approaches $500 billion in this country – or double the amount spent on formal, paid care.
Caring for an elderly parent is usually done with love or out of a feeling of familial obligation. But there are real costs to taking on this responsibility, which most often lands squarely on a daughter’s shoulders. These costs could come in the form of lost wages and employer health insurance or in sacrifices of future pay raises or promotions. It’s also more difficult for older women to find a new job if they drop out of the labor force to help an ailing parent.
According to preliminary findings in a new study that used 20 years of data, taking care of a parent does significantly reduce the chances that women in their early 50s to early 60s are working. Interestingly, the number of hours devoted to caring for a family member do not seem to affect women’s decisions about whether or not to work (though the researchers plan to revisit this finding).
But Sean Fahle of the State University of New York in Buffalo and Kathleen McGarry of UCLA said caregivers “may simply leave a job in order to provide care.” Their paper was part of a series presented at the National Bureau of Economic Research this summer. …
September 6, 2016
Wives Pay Price to Retire with Husbands
Wives like to retire around the same time as their older husbands – so they can play. But what a difference the baby boom generation has made.
For boomer wives, as members of the first generation of women to enter the U.S. labor force en masse, there can be a steep cost to leaving the labor force at a relatively young age to retire with an older husband. New research by Nicole Maestas of the Harvard Medical School bears out this logic.
It’s obvious that working wives can increase their earnings from work by resisting the urge to retire at a relatively young age. And married women generally earn much more, relative to their husbands, than in the past.
But, more often than their mothers and grandmothers, boomer wives can increase their own Social Security benefits by continuing to work.
To understand how this works, compare boomers with their grandmothers. Their grandmothers were probably housewives for most of their lives and worked sporadically or part-time. As a result, their husbands’ earnings determined the size of the spousal retirement benefits they received from Social Security.
The situation is very different for boomer wives, who often have worked enough to earn their own benefits and wouldn’t qualify for a spousal benefit. Social Security calculates their benefits, as they do for all workers, using the average of her highest 35 years of earnings. But here’s the rub: many boomer mothers still haven’t accumulated 35 years of substantial earnings, because they took some time off or worked part-time to raise children. …