May 23, 2017
Paying Medical Bills is a Herculean Task
Hercules sculpture, Florence, Italy.
Medical bills are leaving “a lasting imprint on families’ balance sheets,” JP Morgan Chase concludes from its recent analysis of the anonymous checking and credit card account activity of some 250,000 bank customers.
With little available cash on hand, 53 percent of these families prepare to pay large, one-time medical expenses by waiting for an uptick in their income. Nevertheless, a year after the bill is paid, they are still struggling to patch the hole blown in their household budgets, according to the report, “Coping with Costs: Big Data on Expense Volatility and Medical Payments.”
The 2013-2015 account data show that family incomes tend to be 4 percent higher, on average, in the month a medical bill is paid. This doesn’t mean that people suddenly become Uber drivers or work more overtime hours. What is probably going on, the bank said, is that people “have delayed either receipt of medical treatment or payment of their medical bill until they were able to pay” – when the extra income arrives.
Tax refunds are one clear source of this income for paying large one-time medical bills. These payments were the most frequent around tax time, JP Morgan’s customer data show. But the $163 average increase in monthly income, mostly from tax returns, was small relative to the average $2,000 medical bill.
The damage done to family finances was apparent even a year after such bills were paid. Credit card balances, which had been reduced prior to paying the medical bill, rose for at least a year following a payment. Meanwhile, spending on non-medical purchases, as well as the amount of cash on hand, decline in the aftermath as the families struggle to repair their household finances.
This dry but compelling report is a window into the Herculean feat of paying medical bills for some families. It helps to explain why two out of three Republicans and Democrats in a Kaiser Family Foundation poll said that lowering their health care costs should be a top priority for any reform.
To read the full J.P. Morgan report, click here.Learn More
May 9, 2017
Retirement Ball’s in Employers’ Court
If employers want to improve the poor retirement prognosis for a large chunk of American workers, there are some obvious things they could do.
That’s the big takeaway in Morningstar Inc.’s new report on employers that offer 401(k) plans to their employees but don’t do what’s required to encourage them to save enough.
During the early 2000s, automatic enrollment to increase participation in employer 401(k)s became all the rage, and the strategy has proved itself. Today, nearly 90 percent of automatically enrolled employees stay where they are put, while only about half of workers sign up to save when 401(k) enrollment is strictly voluntary.
But the auto enrollment trend has stalled, and the crazy-quilt private-sector retirement system still has a lot of holes in it. Even when companies automatically enroll their workers, the plans are often designed in ways that discourage them from saving enough, Morningstar’s David Blanchett, head of retirement research, concludes in his report.
“Too often the focus among plan sponsors is improving [401(k)] participation,” he writes. The plans themselves have left us “with low and inadequate savings rates that threaten the retirement security of many Americans.”
At least there’s something to be improved upon: many private-sector employers don’t even offer retirement plans, particularly in industries when people earn low-incomes or work for small companies.
Blanchett’s critique of plans already in place rightly leans on groundbreaking academic research a decade ago that tested 401(k) plan design to determine what drives employee participation in the plans and drives how much they’ll agree to save.
Take plans with auto-enrollment. His analysis of T. Rowe Price and Vanguard client data found that 3 percent of salary remains the most popular savings rate that employers default their workers into during automatic enrollment in the plan – but 3 percent is widely viewed as inadequate if a worker wants to have enough money to retire on.
Why so low, Blanchett asks, when people might accept more? …Learn More
May 4, 2017
Our Stubborn State of Financial Illiteracy
The U.S. retirement system is built on people having a working knowledge of finance. Yet financial literacy among a big chunk of Americans ranges from unimpressive to abysmal.
This revelation was again confirmed in a survey that recently debuted by financial literacy guru Annamaria Lusardi, head of the Global Financial Literacy Excellence Center at George Washington University. In a 2011 survey, Lusardi had found that too many Americans were unable to answer three very simple financial questions.
This new survey is more ambitious, though the results are no more promising. It asks 28 questions in eight areas: earning money, budgeting, saving, investing, borrowing, insuring, understanding risk, and information sources. In the nationally representative survey, about one in four people got no more than seven answers (25%) correct.
One telling finding is that the highest scores were for knowledge about borrowing, with nearly two out of three answering these questions correctly. I suspect this knowledge has been gained from experience – experience with high-interest credit card bills and onerous student loan payments, as well as mortgages.
In every other financial topic surveyed, about half or less answered the questions correctly. Questions about risk, which is at the heart of many financial decisions, fared worst – only 39 percent answered these correctly.
An important connection is made in the report regarding 18- to 44-year olds, who answered only 41 percent of the questions correctly (versus 55 percent for people over 45). Younger adults also answered “I do not know” most often.
When it comes to retirement, those who would gain more from financial knowledge are the least knowledgeable. Saving that starts in early adulthood can go a long way toward achieving retirement security, thanks to compound investment returns over the many years remaining prior to leaving the work force. It’s unfortunate that those who could benefit from compounding often don’t comprehend its effect. …Learn More
April 25, 2017
Long-term Care Insurance Goes Uptown
Is long-term care insurance a luxury product?
Today, most policies covering home care and assisted living and nursing care facilities for the elderly are purchased by people with relatively high earnings, according to a new survey.
Long-term care used to be insurance that the middle class would buy – either individually or through an employer, union, or affinity group – when it was more affordable. But the market, which has contracted dramatically, also seems to be shifting, according to retirement experts and new data from LifePlans, a long-term care research firm.
In LifePlans’ survey, 82 percent of the people who purchased long-term care policies in 2015 earned more than $50,000 per year. In comparison, only half of the general older population surveyed separately by LifePlans falls into this income bracket. An Urban Institute study supports this too, finding that the market is dominated by households with more than $500,000 in net wealth.
Eileen J. Tell, who consults on aging and long-term care issues, said the slant toward the higher end reflects the fact that the coverage being sold is more comprehensive – and more costly. Most policies purchased now cover all levels of care, from home care to assisted living and long-term care facilities. This reflects a desire for people to age in their homes, Tell said. Back in 1995, just two out of three policies had this comprehensive coverage. Another feature that’s more common – and costs more – is inflation protection. …Learn More
April 20, 2017
A Californian’s ‘Retirement’ is Part-Time
Rob Peters during a trip East last summer.
Rob Peters’ approach to retiring wasn’t much different from hitting the road in 1975 to help drive a college friend from New York to California. He didn’t really know where he was going.
When he first laid eyes on California, he was captivated by its beauty, as well as the left-leaning politics absent in the conservative Long Island community he grew up in. But Peters, equipped only with an English degree from the State University of New York at Buffalo, bounced around for years among the various part-time and full-time counseling jobs available to him in his new paradise.
Not until age 38, after earning a master’s degree in counseling and 13 job interviews, did he land his dream job at Diablo Valley College, a community college serving mostly low-income and minority students. He stayed more than 26 years, as a student adviser, program facilitator, and instructor.
He took a blind leap into retirement, too. Again, finding his place was a process. Within four months of retiring, at the end of 2014, he contacted Diablo Valley College. Yes, they would welcome him back as a counselor for four hours in the morning, two days per week in the spring and three days in the fall.
He returned in June 2015 and again enjoys “the acknowledgment that your work is valuable,” said Peters, 65, who lives with his wife, Suzanne James-Peters, in their home in Benicia with a view of the Carquinez Strait that lies east of San Francisco.
A new body of research indicates that continuing to work but gearing down to a lower-intensity job is often good for older Americans, because it reduces their stress, increases their job satisfaction, and is an encouragement to continue working and preparing financially for retirement.
It’s not all that surprising that Peters “un-retired,” considering how much and how long (10 years) he’d wrestled with the retirement decision.
Yes, the technological demands of working full time became harder to keep up with, the demands of being an older parent with teenage twins (a girl and a boy) consumed him, and coworkers his age were peeling off. However, he was constantly torn about letting go of a job just when he felt that, as an older counselor, he had even more to give students. As a decision loomed, he attended yet another retirement seminar. “I began to anticipate that leaving [academia] would take some adjustment.”
He retired reluctantly and weeded out his file cabinet full of work materials even more reluctantly. …Learn More
April 13, 2017
Hispanic Retirees: Low Saving, Long Life
Just one in three native-born and immigrant Hispanics working in this country has a retirement plan through their employers. If they do have one, three out of four save money in their plans, which is somewhat less than their coworkers.
One reason for the first abysmal statistic is that many Hispanics and Latinos, recent immigrants in particular, hold down part-time restaurant or hotel jobs at very low wages. But even among Hispanics working full-time, access to an employer savings plan is still much lower (44 percent) than it is for their white and black counterparts (more than 60 percent).
Low rates of saving are compounded by the fact that elderly Hispanics and Latinos will need more money over their longer-than-average retirements. A 65-year-old Hispanic man can expect to live 16 months longer than a white, non-Hispanic man in this country, and Hispanic women live 11 months longer. [One theory is that less healthy immigrants are more likely to return to their home countries, so the U.S. immigrant population that remains is healthier.]
“Longevity is a big issue, but there is little awareness of this” in the Hispanic population, said retirement consultant Manuel Carvallo, a Chilean immigrant to the United States. …Learn More
April 6, 2017
Retirees Don’t Touch Home Equity
Remarkably, middle-class Americans have at least as much money tied up in their homes as they have in all their retirement plans, bank accounts, and other financial assets combined.
A hefty share of older U.S. homeowners are even better off: 41 percent between ages 65-74, and 63 percent over 74, have paid off their mortgages and own their homes free and clear.
But only one in five retirees would be willing to use their home equity to generate income in a new survey by the National Council on Aging (NCOA). This reluctance seems to be on a collision course with financial reality for working baby boomers, when so many are at risk that they won’t be able to maintain their living standards when they retire.
Retirees can get at their home equity to improve their finances a couple of ways. One is to sell, say, the three-bedroom family home on Long Island for a pretty penny and buy a condo on Long Island or a cheaper house in Florida. Yet only a tiny sliver of older Americans actually downsize to reduce their living expenses, according to a new report by the Center for Retirement Research at Boston College, “Is Home Equity an Underutilized Retirement Asset?”
Another avenue is available to people over 62 who don’t want to move: a reverse mortgage. While these loans against home equity are not for everybody, they’re one option if retirees want to pay off the original mortgage or withdraw funds when they’re needed. But only about 58,000 homeowners took out federally insured Home Equity Conversation Mortgage (HECMs) in 2015, according to the U.S. Department of Housing and Urban Development.
The NCOA’s survey, which was funded by Reverse Mortgage Funding, a lender, uncovered one reason for the lack of interest: retirees are not clear about how reverse mortgages work and how they differ from a standard home equity line of credit. …Learn More