June 6, 2019
Class of 2019: Low Rent Key to Survival
The first and arguably most important decision a new graduate will make is how much to pay for rent.
If it’s too high, the rent – on top of those annoying student loans – will push out other priorities necessary to prevent financial trouble down the road.
Rick Epple, a certified financial planner in Minnesota’s Twin Cities area, counsels his daughter’s friends and clients’ children entering the labor force to keep their rent at around 20 percent of their income.
“Nobody ever talks about what they should spend,” he said. He worries about young adults who pay a third of their income – the standard recommendation – for an apartment. If the rent blows a hole in the budget, paying student loans every month and on time becomes a much bigger challenge.
A paycheck, Epple said, “just goes quick.”
A manageable rental payment also leaves room to prepare for the inevitable unexpected expense – and, yes, retirement. …Learn More
May 23, 2019
Student Loan Payments Linked to 401ks
Abbott employee Harvir Humpal
Student loans or the 401(k)?
Young adults have a tough time finding the money for both. Unless they work for Abbott Laboratories.
Employees who put at least 2 percent of their income toward student loan payments will qualify for Abbott’s
5 percent contribution to their 401(k) account – without the worker having to put his own money into the 401(k).
From the company’s point of view, it’s an innovative recruitment tool – and it worked for Harvir Humpal, a 2018 biomedical engineering graduate of the California Polytechnic State University in San Luis Obispo. He joined Abbott’s northern California office in February.
Humpal said his student loans weighed on him after graduation. “It’s very empowering that Abbott is willing to tackle an issue that’s near to my heart,” said the 24-year-old, who works on medical devices used in heart transplants.
He estimates he will pay off his $60,000 student loans about four years early and save $7,000 in interest – without completely sacrificing his retirement savings.
As the cost of college continues to rise and U.S. student loan balances hit $1.5 trillion, an increase in the number of private and even government employers offering student loan assistance is a response to the growing financial burden. An Abbott survey found that 87 percent of college students and 2019 graduates want to find an employer offering student loan relief.
The magnitude of the problem “forces us to focus on our employees’ greatest needs and how we, as an employer, can help them,” said Mary Moreland, an Abbott vice president of compensation and benefits. …Learn More
May 14, 2019
20,000 Savers So Far in New Oregon IRA
About a third of retired households end up relying almost exclusively on Social Security, because they didn’t save for retirement. Social Security is not likely to be enough.
To get Oregon workers better prepared, the state took the initiative in 2017 and started rolling out a program of individual IRA accounts for workers without a 401(k) on the job. The program, OregonSaves, was designed to ensure that employees, mainly at small businesses, can save and invest safely.
Employers are required to enroll all their employees and deduct 5 percent from their paychecks to send to their state-sponsored IRAs –1 million people are potentially eligible for OregonSaves. But the onus to save ultimately falls on the individual who, once enrolled, is allowed to opt out of the program.
More than 60 percent of the workers so far are sticking with the program. As of last November, about 20,000 of them had accumulated more than $10 million in their IRAs. And the vast majority also stayed with the 5 percent initial contribution, even though they could reduce the rate. This year, the early participants’ contributions will start to increase automatically by 1 percent annually.
The employees who have decided against saving cited three reasons: they can’t afford it; they prefer not to save with their current employer; or they or their spouses already have a personal IRA or a 401(k) from a previous employer. Indeed, baby boomers are the most likely to have other retirement plans, and they participate in Oregon’s auto-IRA at a lower rate than younger workers.
Despite workers’ progress, the road to retirement security will be rocky. Two-thirds of the roughly 1,800 employers that have registered for OregonSaves are still getting their systems in place and haven’t taken the next step: sending payroll deductions to the IRA accounts.
The next question for the program will be: What impact will saving in the IRA have on workers’ long-term finances? …Learn More
April 25, 2019
Do Couples Save Enough for Two?
Since only about half of all private sector workers currently have access to an employer 401(k) plan, it’s not at all unusual for spouses who are both working to have only one saver in the family.
When that’s the case, is the person who is contributing to the employer retirement plan saving for two? The answer is definitely not, concludes a new study by the Center for Retirement Research.
The challenge for couples living on two paychecks is that they have to save more money to maintain their current lifestyle after they retire. But households with two earners and only one saver end up saving less than others – only about 5 percent of the couple’s combined incomes, compared with more than 9 percent when both spouses are working and saving, the study found.
Couples who rely on a lone saver need that person to pick up the slack. Employers could help them if they considered the employee’s family situation when setting a 401(k) contribution rate in plans that automatically enroll workers. …Learn More
April 9, 2019
Retirement Saving – Latinos Get an App
Amid a growing awareness that many Americans aren’t properly prepared for retirement, various efforts have ramped up to push the non-savers to save.
A notable initiative is occurring in state government. California, Illinois, and Oregon have started IRA savings programs that require private employers to offer the state-sponsored IRAs to workers if the company doesn’t already have a 401(k).
Cell phone apps are also popping up to make saving easier. One such app – Finhabits – is being marketed directly to Latinos, who financial experts say are particularly unprepared for retirement. Two out of three Latino workers aren’t saving in a retirement plan, often because they work in low-wage restaurant and hotel jobs that don’t offer one.
The Finhabits app offers both traditional and Roth IRAs, which can also be set up online. The IRA regularly deducts an amount, designated by the customer, from his bank account and invests the money in low-cost exchange-traded index funds managed by Vanguard or BlackRock.
Carlos A. Garcia created the app – in English and Spanish – to confront a barrier to saving that he experienced in his own family as a child growing up in the border towns of El Paso, Texas, and Juarez, Mexico. Saving “is not part of [Latino] culture,” he said. “Everybody’s working so hard. But you never talk about retirement.”
He carried this sentiment into his first job at Merrill Lynch after college graduation. He turned down the 401(k) option, because “I had no clue what a 401(k) was.”
This blog doesn’t recommend financial products, and Finhabits has advantages and disadvantages over competing apps. The app’s management fee is slightly higher than some, according to expert reviews. Nevertheless, Finhabits follows sound principles, such as investing in low-cost index funds. The Washington state government chose Finhabits as one of its vendors to provide a retirement plan through the state’s Retirement Marketplace for small businesses. …Learn More
February 5, 2019
Oregon’s IRA Gets Workers to Save
Luke Huffstutter felt a great sense of relief when the employees of his Portland hair salon started putting money into a state retirement program designed to make saving easy.
This is much better than the “guilt” he felt over many years of desperate attempts – and not much luck – to convince his stylists and other employees to save on their own. He even brought in a financial adviser once to nudge them.
“I have a responsibility to provide them a path to retirement,” Huffstutter said.
Today, 39 of the Annastasia Salon’s 45 employees have joined some 22,000 others across the state of Oregon who’ve accumulated a total of $10 million for retirement through OregonSaves, a state government program being rolled out over time for residents who don’t have savings plans at work.
Oregon was the first state to introduce this type of program, and California, Connecticut, Illinois, and Maryland are following. New York may be next. Mayor Bill de Blasio is proposing a similar program, because more than half of working New Yorkers lack a retirement savings plan at work.
The absence of a retirement plan is a particular problem at small firms, which often lack the money or staff to set up the 401(k) plans common at major employers. OregonSaves, which is mandatory for employers, provides a very low-cost way to automatically enroll workers and send their payroll deductions to personal IRA accounts.
The main stumbling block appears to be that not everyone is as enthusiastic as Huffstutter. Some employers are taking a very long time – more than six months – to set up the payroll deductions, and others that enrolled are showing lower participation rates than the salon. …Learn More
January 31, 2019
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