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

Abstract financial concept illustration

Work v. Save Options Quantified

One of Americans’ biggest financial challenges is proper planning to ensure that their standard of living doesn’t drop after they retire and the regular paychecks stop.

A new study has practical implications for baby boomers in urgent need of improving their retirement finances: working a few additional years carries a lot more financial punch than a last-ditch effort to save some extra money in a 401(k).

This point is made dramatically in a simple example in the study: if a head of household who is 10 years away from retiring increases his 401(k) contributions from 6 percent to 7 percent of pay (with a 3 percent employer match) for the next decade, he would get no more benefit than if he instead had decided to work just one additional month before retiring.

Table showing how long to delay retirement in order to match a 1% increase in savings rate by age

Of course, this estimate should be taken only as illustrative.  To get their retirement finances into shape, many people should plan to work several more years than is typical today. Baby boomers tend to leave the labor force in their early- to mid-60s, even though more than four out of 10 boomers are on a path to a lower retirement standard of living. …Learn More

uphill battle

Why Less-educated Men Retire Younger

retirement age by educationMen with high school diplomas are retiring around age 63 – three years before college-educated men.  The gap in their retirement ages used to be smaller.

The reasons behind the current disparity are explained in a review of research studies on the topic by Matt Rutledge, an economist with the Center for Retirement Research.  The trend for women is similar, though their story is complicated by a sharp rise in their participation in the labor force in recent decades.

Rutledge provides four reasons that less-educated men are still the lion’s share of early retirees:

Health. Older Americans are generally getting healthier and living longer – so why not wait to retire? Well, the health of less-educated people is poorer and has improved less over time than their more-educated coworkers. And health problems trump unemployment and other types of job losses as the single biggest reason for their early retirements – more so than for better-educated workers.

Labor Market.  Two aspects of the labor market are relevant to less-educated workers.  In the past, a large share of the retiree population could count on a guaranteed monthly income from a pension. Today, the workers who have a retirement savings plan have an incentive to delay retirement, because they will have to rely on the often inadequate and uncertain income that can be withdrawn from their 401(k)s. But less-educated workers haven’t been affected very much by the change, because they’ve never been big beneficiaries of employer retirement plans. In the 1990s, they could claim just 11 percent of the value in pensions, and today they hold 11 percent of the wealth in 401(k) plans.

A second change in the labor market is plummeting U.S. manufacturing employment since the 1980s, which reduced the physical demands of work.  But myriad working conditions remain relatively poor for less-educated workers and are still a powerful reason for them to retire. …Learn More

stick family

Kids Figure into Retirement Plans

The grocery shopping for five is over, the family cell phone plan has been canceled, and the college tuition has been paid one last time.

So what’s next?

Newly minted empty nesters, having poured a couple hundred thousand dollars into raising each child, respond to their financial liberation in one of two ways. Some start saving more for their golden years. The others keep spending at that elevated level – but this time on themselves.

This personal decision, made at the critical juncture in the pre-retirement years, will have consequences for retirement – save more and things could turn out pretty well, or keep spending and jeopardize financial security in old age.

In the aggregate, at least some older households are taking the second approach. An analysis by the Center for Retirement Research at Boston College, finds that having children translates to “a moderate increase” in the risk that their standard of living will fall after they retire.

The researchers looked at the financial implications of kids from two angles. First, they used household data to estimate the sacrifices parents make – in the form of lower income – while they are raising children. Then they looked ahead to their retirement finances.

Compared with childless couples, parents in their 30s and 40s have about 3 percent less income for each additional child – some of this loss occurs when mothers work part-time temporarily or take time out for childbearing and childrearing. The income gap between parents and childless couples closes when parents reach their 50s and the kids start leaving the roost.

Less income over a lifetime translates to less wealth: parenthood reduces wealth by about 4 percent per child for workers ages 30-59.

The effects of children persist even after the transition from work to retirement. …Learn More

paddleboarder

1 in 4 Can’t Afford a Summer Vacation

What a drag. One in four Americans said they can’t afford to take a vacation this summer.

The 3.8 percent unemployment rate is at its lowest since 2000, when the high-technology industry was going gangbusters. Despite the economy’s current strength, the cost of a vacation puts it out of reach for millions of people.

The average family of four spends about $4,000 on vacation, Bankrate said. Air fares don’t seem to be the issue – they are lower now than they were five years ago. But families living on a limited budget are more likely to drive, and the price of gasoline has shot up 25 percent over the past year, to around $2.90 per gallon.

Many people are shortchanging themselves on vacations, because they are “living paycheck to paycheck,” analyst Greg McBride said in a recent Bankrate blog.

Indeed, workers paid on an hourly basis can’t seem to get ahead. Their wage increases, adjusted for inflation, have been flat over the past year. Further, one in four U.S. households couldn’t come up with $2,000 even in an emergency, according to one widely cited study a few years ago. A summer vacation is probably out of the question for them.

Everyone needs a little time off to decompress and relax. Yes, it would be great to go on a deluxe fishing trip to Canada or cycle around Tuscany for two weeks, but there are more affordable ways to enjoy a few days off. A “staycation” is better than nothing. And the cost of a trip can be kept under $500 – one in four people do it, Bankrate said.

But cost isn’t the only reason people skip their vacation – family and work obligations also get in the way. A majority of workers, according to Bankrate, aren’t even using all of their paid vacation days.Learn More

Luck – or a Deliberate Path to Wealth

wealth by education chartIt’s usually not talent or street smarts or brains that make people wealthy and comfortable. It’s the luck of having rich parents.

But there is another way to get there, one that is within reach: becoming the first generation in the family to earn a college degree.

A new study by the Federal Reserve Bank of St. Louis, using the latest federal data on household finances, measures the impact of having that degree – or not having one – on wealth and income.

Although the ranks of college-educated Americans have grown over the past quarter century, people lacking a degree still make up a substantial majority – two out of three Americans. …Learn More

optimism

Be Optimistic. You Might Live Longer!

People who have a college education are known to live longer. But could a sunny disposition also help?

Yes, say two researchers, who found that the most optimistic people – levels 4 and 5 on a 5-point optimism scale – live longer than the pessimists.

But this effect works both ways. The biggest declines in optimism have occurred among older generations of Americans who didn’t complete high school at a time when this was far more common. It’s no coincidence, their study concluded, that the white Americans in this less-educated group in particular are also “driving premature mortality trends today.”

The finding adds new perspective to a 2015 study that rocked the economics profession. Two Princeton professors found that, despite improving life expectancy for the nation as a whole, death rates increased for a roughly similar group: white, middle-aged Americans – ages 45-54 – with no more than a high school degree. They suggest that addiction and suicide play some role, both of which have something to do with the deterioration in the manufacturing industry that once provided a good living, especially for white men.

To make the link between mortality and optimism, Kelsey O’Connor at STATEC Research in Luxembourg and Carol Graham at the Brookings Institution examined whether heads of households surveyed back in 1968 through 1975 were still alive four to five decades later. They controlled for demographic characteristics and socioeconomic factors, such as education, which also affect longevity. …Learn More

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