The Marshmallow Test for Retirement

Walter Mischel, who used marshmallows to test children’s ability to delay gratification, died recently, but his lesson never grows old.

For those who aren’t familiar with his famous test, a young girl or boy sits at a table with a single marshmallow on a plate. The tester tells the child that he or she can eat the marshmallow right away, but waiting to eat it until the tester comes back into the room will bring a big payoff: a second sweet, puffy morsel.

Watching the children in this video squirm as they wrestle with their decisions brings to mind the adult equivalent. A desire for immediate self-gratification can come at the detriment of any number of personal financial decisions.

Like the marshmallow test, consuming now means having less money in the bank later.  The test also applies to deciding when to retire. Retiring becomes extremely tempting for baby boomers who want to escape from work after decades in the labor force.  But those who wait patiently for a few more years will have a sweeter retirement: a much larger Social Security check and more 401(k) savings distributed over fewer total years in retirement.

Children, when faced with the marshmallow test, struggle mightily to exercise self-control. They pick up the marshmallow to examine it, play with it, nibble it, and move it out of reach – but impulse gets the better of them, and they pop it into their mouths.

The lesson here is the same for children and adults: resist temptation and be rewarded. …Learn More

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Switching Medigap Plans is Tricky

Thomas Uttormark

When Thomas Uttormark turned 65 in 2010, he researched his Medigap options on the Medicare.gov website and chose a plan with a premium of around $100 a month.

As his premium inched up over the next two years, he decided to apply to another insurance company to see if he could reduce the cost of his policy. Since the federal government dictates the coverage amounts under each of the 10 Medigap plans, he reasoned, his existing insurer’s Plan N provided exactly the same coverage as any other insurer’s Plan N – and the new plan might be cheaper.

“I thought it was no big deal to switch,” said the 73-year-old Uttormark.

However, switching did prove to be a big deal. His application was denied. He suspects it was due to his pre-existing conditions, which included a routine gallbladder surgery before he retired, and his cholesterol, blood pressure and acid reflux conditions, which are fully controlled with medications. The insurer didn’t give him a reason for the denial.

Uttormark ran headlong into a maze of federal regulations that determine whether, when, and how a retiree can transfer from one insurer’s Medigap plan to another insurer’s Medigap. One in four people enrolled in traditional Medicare have Medigap supplemental insurance – about 10 million retirees – and are affected by these restrictive regulations.

They are “particularly confusing,” said Casey Schwarz, the senior counsel for education and federal policy for the Medicare Rights Center in New York and Washington.

She said that people who’ve just signed up for Medicare Parts A and B routinely call her organization because they are having trouble sorting out their options and what they will be permitted to do in the future if they choose either Medigap, which is supplemental coverage for traditional Medicare, or Medicare Advantage private insurance after initially signing up for Medicare Parts A and B.

A handful of states have looser regulations than the federal rules – California, Connecticut, Maine, Massachusetts, Missouri, New York, and Oregon – and allow retirees to move more freely among various Medigap plans, though the states also have their own restrictions.

Schwarz explained that the insurance company denied coverage to Uttormark because he did not qualify for what the federal government calls “guaranteed issue.”

Under guaranteed issue, there is only one time when every Medicare beneficiaries is assured access to a Medigap policy: when they first sign up for Medicare Part B. At this time, insurers can neither deny coverage based on a pre-existing condition nor charge a higher premium if an applicant has a specific health condition.

Another guaranteed issue period applies to limited numbers of retirees. It gives retirees the right to buy a Medigap policy – even people with pre-existing conditions – if they lose their previous coverage through no fault of their own. Perhaps their current Medigap or Medicare Advantage insurer went bankrupt or left the state, or their employer ended its Medicare supplement for retirees. When this occurs, however, the retiree must select a new policy within 63 days of losing their old coverage.

Uttormark didn’t qualify for guaranteed issue because he was choosing to drop his Medigap policy for a less expensive one. Insurers can rightly “refuse to sell him a policy, can charge him more for pre-existing conditions, or refuse to cover his pre-existing conditions,” Schwarz said.

The federal rules also provide an opportunity to switch plans if retirees selected Medicare Advantage as their first form of insurance when they enrolled in Medicare. In this case, they are permitted to move into any Medigap policy sold in their area but they, too, have a restriction: they must do so within the first year of their initial Medicare enrollment.

“Medicare beneficiaries who miss these windows of opportunity may unwittingly forgo the chance to purchase a Medigap policy later in life,” the Kaiser Family Foundation said in a recent policy brief detailing the federal and state regulations.

The Medicare.gov website describes the circumstances in which beneficiaries qualify for federal guaranteed issue. …Learn More

babies

US Fertility Falls in Midst of Recovery

fertilityWhen the economy is expanding and more people are working and earning more, they can afford to have more babies.

But that time-tested connection between the economy and fertility seems to be broken. During the recovery that followed the 2008-2009 recession and continues today, the U.S. fertility rate has dropped quite a bit.

Lower fertility is of interest to retirement experts because it has serious implications for our aging population.  AARP’s Public Policy Institute predicts a decline in the number of family members and friends available in the future to care for the elderly. Fewer babies also mean fewer workers will be paying into Social Security, in the absence of an increase in immigration.

Of course, fertility rates in developed countries like the United States, Germany, and Japan are far below the post-World War II baby boom. But the very recent decline in this country is striking. The total fertility rate, the best measure of current fertility, is 1.76 births per woman. This is well below the rate of 2 births per woman a decade ago.

A study by researchers at the Center for Retirement Research at Boston College identified four structural changes that are pulling the birth rate down. …Learn More

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Personality Influences Path to Retirement

Only about a third of the older people who are working full-time will go straight into retirement. Most take zigzag paths.

These paths include gradually reducing their hours, occasional consulting, or finding a new job or an Uber stint that is only part-time. Other people “unretire,” meaning that they retire temporarily from a full-time job only to decide to return to work for a while.

A new study finds that the paths older workers choose are influenced by their personality and by how well they’re able to hold the line against the natural cognitive decline that accompanies aging.

Researchers at RAND in the United States and a think tank in The Netherlands uncovered interesting connections between retirement and cognitive acuity and, separately, and a variety of personality traits. To do this, they followed older Americans’ work and retirement decisions over 14 years through a survey, which also administered a personality and a cognition test.

Here’s what they found:

  • Cognitive ability.  The people in the study who had higher levels of what’s known as fluid cognitive function – the ability to recall things, learn fast, and think on one’s feet – are much more likely to follow the paths of either working full-time or part-time past age 70.

    The probable reason is simply that more job options are available to people with higher cognitive ability – whether fluidity or sheer intelligence – so they have an easier time remaining in the labor force even though they’re getting older. …

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2 in 5 Millennials Have Used Payday Loans

Millennials at a food truckMillennials are big users of payday loans, which have steep interest rates that can really mess up their finances.

Remarkably, two out of five people in their mid-20s to mid-30s have used a payday loan, which is more than double the frequency for people in their late 30s, says Melody Harvey at the Pardee RAND public policy school. Generation-Xers and baby boomers use them even less, other surveys have shown.

Harvey’s new research has produced some evidence that something can be done to protect vulnerable young adults in the future: require them to take money management classes while they’re still in high school.

The use of payday loans is part of a broader trend among Millennials, she said. They also turn to desperation financing such as pawn shops to raise quick cash or rent-to-own schemes that, in the end, require them to pay much more for consumer products like furniture and computers.

Many young adults probably gravitate to high-cost forms of financing, because they’re strapped for cash after paying their rent and student loans every month. They also start their careers at relatively low wages and haven’t established the strong credit histories required to qualify for traditional, lower-cost debt.

But while poor people are often forced to use payday loans to solve an impossible financial problem, young adults could be using them partly to fund profligate spending. …Learn More

US

US Increasingly Polarized – by Geography

Rich or poor, old or young, white or black, red or blue – our differences cut many ways.

But a new divide has opened up, one based on geography. Stark new evidence shows that well-paid, highly educated people have moved to high-cost coastal cities over the past decade, while lower-income, less educated people have moved out.

American cities are “grow[ing] increasingly dissimilar along socioeconomic dimensions,” said Issi Romem, a fellow at the Terner Center for Housing Innovation at the University of California and economist for BuildZoom, a California website focused on development.

Gentrification is nothing new. But Romem’s analysis of U.S. intercity migration shows that gentrification occurs not just within city neighborhoods but also between cities. San Francisco is the most extreme example of what he calls “income sorting.” He estimates that the population moving into the Bay Area earns $13,000 more, on average, than the population that is moving out. People relocating to Seattle and Washington earn about $3,800 more than the people who leave.

A similar phenomenon is occurring in New York, Los Angeles, San Diego, and Boston, where restrictions on development, coupled with the strong demand for the limited housing stock, are pushing up house prices and driving people out, including renters who can no longer afford the steep increases in rents.

These movements exacerbate society’s already high level of inequality. As cities or regions of the country become less integrated in terms of their residents’ incomes, fewer low- and middle-income groups will enjoy the particular benefits to them of living in the midst of those who are better off.

Upward mobility is one such benefit. A famous study found that lower-income people are more likely to move up the income ladder, relative to their parents, if they live in coastal cities with higher education levels, better primary schools, and more family stability. Other research shows they will also live longer if they reside in cities with more socioeconomic diversity. …Learn More

race to the finish

Americans With Small 401ks Worry

This blog has spilled plenty of ink over the problem of so many workers having inadequate retirement savings.

One theory is that they don’t understand the urgency. But a new survey makes clear that they not only are fully aware of the problem but are very worried about it.

The vast majority of the 1,000-plus baby boomers and Generation-Xers who conceded to being behind on their saving wish they could save more – Allianz, which conducted the survey, calls them “chasers.”

These chasers recognize that if they don’t make adjustments, it’ll be too late to repair their finances. Two out of three fear the worst: they’ll run out of money at some point in old age and will be forced to eke out a living on their Social Security checks alone.

Their fears are warranted. The typical boomer household approaching retirement who has a 401(k) has saved just $135,000 in its 401(k) and any IRAs combined. At retirement, this amount equates to only about $600 in monthly income

Half of the workers put the blame on a single culprit: “too many other expenses right now.”

This sentiment dovetails with mounting evidence that many workers are overwhelmed by the increasing costs of health insurance, college, and housing, which are far outpacing their pay raises. Low-paid workers are especially hard hit, according to 2017 research. If they save at all, they set aside only 3 percent of their paychecks – half of what top-paid people are able to save. …Learn More

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