Percent signs on a chalkboard

How Long Will Retirement Savings Last?

It might be the most consequential issue baby boomers will deal with when they retire: did I save enough?

Vanguard’s free online calculator will estimate that for you, using the same sophisticated technique financial advisers charge hundreds of dollars to provide.

The user-friendly calculator uses 100,000 of what are called Monte Carlo simulations of potential future returns to the financial markets to arrive at the probability that a household’s invested savings will last through the end of retirement. To get to this number, older workers enter their information into the calculator – 401(k) account balance, asset allocation, estimated years in retirement, and annual withdrawals – by moving around a sliding scale for each input.

The financial industry recommends aiming for a probability in the 80 percent range – 95 percent is overdoing it. In the end, however, your comfort level is a personal decision.

An important purpose of the calculator is to demonstrate how changes in the inputs can hurt one’s long-term retirement prospects – or improve them. One obvious example is increasing the annual withdrawal amount, which lowers the probability the money will last. To increase your chances, try a later retirement date.

The calculator is a lot of fun, but it has some limitations.

First, it’s no substitute for a detailed pre-retirement financial review. The other issues are primarily mathematical, and they boil down to the difficulty of predicting the future.

The calculator assumes, for simplicity, that a retiree withdraws the same dollar amount from savings every year to supplement Social Security and any pension income. But Anthony Webb, an economist at the New School for Social Research in New York, said this ignores the most important thing retirees should do to preserve their money: adjust the withdrawals every year, depending on how their investments have performed.

“If you encounter icebergs (bear markets), you should cut your spending” and withdrawals, he said. …Learn More

Trust barometer

Are We Able to Judge Financial Advisers?

Let’s get this out of the way first: the vast majority of financial advisers would not take advantage of you.

But that doesn’t eliminate the problem of discerning whether an individual adviser can be trusted. About 7 percent of U.S. advisers have misconduct records in civil or regulatory proceedings.  If someone draws an unlucky card and picks a bad one, how would they know?

In certain situations, they might not. A new study finds that various things can trip people up and make them trust an adviser who is giving out bad advice. These influences included a good first impression of the adviser. And one way for an adviser to make a good first impression is by initially confirming the client’s own views on investing before introducing poor advice.

The subject of this study – judging the quality of financial advice – is important at a time workers are carrying a heavy load of responsibilities for managing their 401(k) accounts, and the accounts are becoming more critical to their retirement outlook.

The adviser study was conducted by an international group of researchers. Their online experiment was done in Australia, where employers are required to provide workers with a retirement savings and investment plan – Superannuation Accounts – similar to 401(k)s.

Trust is tricky to evaluate, and the researchers put a lot of thought into designing the experiment to minimize flaws in the results. They asked nearly 1,300 Australians to evaluate advice online about four investment topics. Under each topic, one adviser presented good advice, while the other presented bad. The researchers varied the order for presenting the good and bad advice to the participants.

They generally had a good sense of when they were getting good advice. But there were exceptions: …Learn More

Young woman with piggy bank

Savings Tips Help Millennials Get Serious

This is young adults’ financial dilemma in a nutshell: you’re well aware you should be saving money, but you admit you’d rather spend it on the fun stuff.

Yes, paying the rent or student loans every month takes discipline. But it isn’t enough. Even more discipline must be summoned to save money, whether in an emergency fund or a retirement plan at work.

Tia Chambers' headshot

Tia Chambers

Tia Chambers, a financial coach in Indianapolis and certified financial education instructor (CFEI), has put some thought into how Millennials can overcome their high psychological hurdles to saving.

The 32-year-old lays out six doable steps on her website, Financially Fit & Fab, which she recently elaborated on during an interview.

Get in the right mindset. “It is the hardest part,” she said. “When I speak with clients, money is always personal, and it’s also emotional.” The best way to clear the emotional hurdles is to keep a specific, important goal in mind that continually motivates you, for example buying a house. Or create a detailed savings challenge, such as vowing to save $1 the first week, $2 the second week, $3 the third week, etc. This adds up to $1,378 at the end of the year, she said.

Cut expenses. Some cuts are no-brainers. Scrap cable for Hulu and Netflix subscriptions. Drop that gym membership you never use. The biggest challenge for young adults is saying no to friends who want to go out for dinner or drinks. Chambers suggests enlisting your friends to help – after all, they’re probably spending too much too. She and her friends have agreed to go out one weekend and save money the next weekend by hanging out at someone’s apartment. Another idea is happy hour once a week instead of twice. …Learn More

Mom and baby at a computer

A Social Security Reform for Mom

Created in the 1930s, Social Security’s spousal benefit – it’s half of a retired husband’s benefit – was the way to compensate housewives for the work of raising children.

The world has changed, but Social Security hasn’t been modified to reflect the rise of the full-time, working mother.

Today, married women frequently have earned enough to collect Social Security based on their own employment histories, rather than a spousal benefit. The problem comes when their earnings are reduced – and ultimately their Social Security benefits – because they disrupted their career paths and sacrificed pay raises to care for their children.

Single motherhood has also become very common, which means that a wide swath of women have no access to spousal and survivor benefits at all. Due to a higher divorce rate, one in four first marriages don’t last the full 10 years that Social Security requires to qualify for these benefits.

The erosion of spousal benefits points to a future in which “large numbers of women are going to move through retirement with more disadvantages” than previous generations, concludes a recent report by the Center for Retirement Research.

This problem could be addressed if Social Security gave credit to parents for caregiving. Caregiver credits are already pervasive in Europe, including Austria, Germany, Spain, Sweden, the Netherlands, and the United Kingdom, and they take various forms.

In this country, policy experts have proposed two different approaches to help parents with children under age six by increasing the earnings that dictate the size of their benefit checks. …Learn More

counting change

Reducing Poverty for Our Oldest Retirees

With more Americans today living into their 80s and beyond, the elderly are becoming more vulnerable to slipping into poverty.

To reduce the poverty risk facing the oldest retirees, some policy experts have proposed increasing Social Security benefits for everyone at age 85. Under one common proposal analyzed by the Center for Retirement Research in a new report, the current benefit at this age would increase by
5 percent.

The poverty rate for people over 85 is 12 percent, compared with 8 percent for new retirees. But more elderly people may actually be living on the edge, because the income levels that define poverty for them are so low: less than $11,757 for a single person and less than $14,817 for couples.

age and poverty chartOne reason the oldest retirees are especially vulnerable is that their medical expenses are rising as their health is deteriorating, yet they’re too old to defray the expense by working. This is occurring at the same time that the value of their employer pensions – if they have one – has been severely eroded by inflation after many years of retirement.

Further, elderly women are more likely to be poor than men, because wives usually outlive their husbands, which triggers a big drop in income that is generally not fully offset by a drop in their expenses.

Limiting the 5 percent benefit increase to the oldest retirees would ease poverty while containing the cost. …Learn More

Group of young professionals

Workshops Teach Salary Negotiation

At a recent workshop in downtown Boston, the mostly female audience was asked whether their anxiety level goes up when they ask for a raise or negotiate a salary for a new job.

Hands shot up, and the room erupted in boisterous conversation. “I’m worried about being perceived as being greedy,” volunteered one woman. Another said that her employer told her she earns less than her coworkers because she’s only in her 20s – “even though I’m doing exactly the same things!”

Workshop facilitator Lauren Creamer explained that many women find it difficult to ask for a raise, because they face a double standard that treats them differently than men. “Women are expected to behave a certain way. They’re either nice or competitive and aggressive,” she said. Asking for a raise can be perceived as too aggressive.

Over a lifetime, lower pay for the same jobs their male coworkers are doing put millions of women behind the 8 ball when they’re trying to pay back student loans, buy a house, and save for retirement.

To help them overcome their fear of asking for a raise, the American Association of University Women (AAUW) is introducing salary negotiation workshops around the country. “Pay equity – and financial security – is one of our major goals right now,” said AAUW’s Alexandra Howley, who coordinates the Massachusetts program with the Boston mayor’s office and the state government.

In AAUW’s workshop in Boston last month, Creamer and Robbin Beauchamp gave advice in four areas to the women – and three men – attending.

Know Your Value

  • Before negotiating a raise, be clear on the unique benefits you bring to your workplace – effective facilitator, top salesperson, organizer, etc.
  • When applying for a new position, tailor your skills and experience to fit the job description in a way that highlights your value to a prospective employer.

Know Your Target SalaryLearn More

Woman looking at mountains

A Proposal to Reduce Widows’ Poverty

A dramatic decline in widow’s poverty over a quarter century has been a positive outcome of more women going to college and moving into the labor force.

Bar graph showing percentage of povertyYet 15 percent of widows are still poor – three times the poverty rate for married women.

A new study by the Center for Retirement Research takes a fresh look at Social Security’s widow benefits and finds that increasing them “could be a well-targeted way” to further reduce poverty.

Widows are vulnerable to being poor for several reasons. The main reason is that the income coming into a household declines when the husband dies.  The number of Social Security checks drops from two to one, and any employer pension the husband received is reduced, or even eliminated if the couple didn’t opt for the pension’s joint-and-survivor annuity.

While one person can live more cheaply than two, the drop in income for new widows often isn’t accompanied by a commensurate drop in expenses.

Another issue begins to develop as much as 10 years before a husband dies. Prior to his death, his declining health may increase the couple’s medical expenses and reduce his ability to work, depleting the couple’s – and ultimately the widow’s – resources.

The irony today for wives who worked is that their decades in the labor force generally improve their financial prospects when they become widowed. Yet, under Social Security’s longstanding design, they receive less generous benefits than housewives – relative to the household’s benefits prior to the husband’s death. …Learn More

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