Posts Tagged "401k"

Oldest Women, Often Poor, Need a Hand

In this video, Elena Chavez Quezada introduces two working women in her family who didn’t get a fair shot at a comfortable retirement.

Her mother-in-law, a single mother and immigrant from the Dominican Republic, pieced together a living for herself, her parents, and her children. She never had a 401(k) or owned a house. Each time she built up a little savings, an emergency depleted it. Now in her 70s, she is supported by her son and Quezada.

Quezada’s aunt possessed the personality of a chief executive but worked as a housekeeper and sold snow cones and hot dogs at her husband’s stand in Albuquerque. After his death, she worked well into her 90s as a receptionist for a hair salon.

The goal for retired women like them should be “to age comfortably and with dignity,” said Quezada, a senior director for the San Francisco Foundation, which supports communities in the Bay area.

That’s very difficult for many older women to do. They have less wealth, and although their poverty rate has declined, women – many of them widows – still make up the vast majority of poor people over 80. This is rooted in part in their years as working women, when they earned less. Women are also the majority of single parents raising their families on a single paycheck.

A lack of a retirement plan is a common problem. More than half of the women employed full-time or part-time in the private sector are not saving in a retirement plan at any given time. …Learn More

401k Balances are Far Below Potential

If a 60-year-old baby boomer started saving consistently at the beginning of his career back in the 1980s, he would have some $364,000 in his 401(k)s and IRAs today.

Bar graph showing a 60-year-old worker's 401(k): potential vs. reality

How much does he actually have? One-fourth of that, according to a new study from the Center for Retirement Research at Boston College (CRR).

One obvious explanation for the enormous gap is that the 401(k) system was in its infancy in the 1980s, and it took time for employers to widely adopt the plans and for young adults to get into the habit of saving for retirement.

Another likely reason is the large share of workers who do not have any type of employer-sponsored retirement plan.  This coverage gap, which predates the introduction of 401(k)s, persists today and leaves about half of private-sector workers without a plan at any given point in time.

And this gap isn’t just a problem for baby boomers. A majority of young workers are not saving in a retirement plan, despite their advantage of having entered the labor force after the 401(k) system was more mature. …Learn More

Abstract line chart

People Tap IRAs After the Penalty Ends

Workers are apparently very eager to get their hands on the money in their retirement savings plans.

The evidence is the spike in withdrawals from IRA accounts that occurs soon after people turn 59½, the age at which the IRS’ 10 percent penalty on early withdrawals vanishes and is no longer a deterrent, according to a research study.

Average annual withdrawals from IRA accounts surge by about $1,965 to $3,540 – an 80 percent increase – after people cross the age 59½ threshold, according to the study, which was conducted for NBER’s Retirement Research Center by researchers at Stanford University, the University of Chicago, and the Federal Reserve Bank of Chicago.

Early withdrawals from tax-deferred retirement accounts – IRAs and 401(k)s – usually are not for frivolous reasons. This money tends to be tapped to ease financial hardships, such as unemployment, a disability, or a large, unexpected medical expense. But when older workers withdraw retirement funds – even for important matters – they may be chipping away at their financial security in old age. Withdrawals by high-income workers, on the other hand, will likely have little impact on their security.

The researchers analyzed taxpayer data from the IRS, which requires withdrawals to be reported at tax time. They compared withdrawals by people in the dataset for the two years before they turned 59½ with their withdrawals between 59½ and 60½.

While the penalty was in place, daily withdrawals were largely flat. But soon after people crossed the age 59½ threshold, withdrawals spiked before declining “to a new higher level than that of prior ages,” the researchers found. …Learn More

Red piggy bank on a yellow background

Does Increased Debt Offset 401k Savings?

Roughly half of U.S. employers with a 401(k) plan enroll their workers automatically, deducting money from their paychecks for retirement unless they explicitly opt out of this arrangement. This strategy is widely viewed as a good way to get people to save.

But auto-enrollment might not be as effective as it seems, if individuals are compensating for a smaller paycheck by borrowing more.

A new study of civilian employees of the U.S. Army used credit and payroll data to gauge whether debt increased for employees who were automatically enrolled in the federal government’s retirement savings plan. The researchers compared changes in debt levels for people hired after the government’s 2010 adoption of auto-enrollment with hires prior to 2010.

The good news is that since the broadest debt category, which includes high-rate credit cards, did not increase, it did not offset the employees’ accumulated contributions. Their credit reports showed no increase in financial distress either, the study concluded.

However, the findings for car and home loans were ambiguous, so auto-enrollment “may raise these latter types of debt,” said the researchers, who are affiliated with NBER’s Retirement and Disability Research Center.

If workers are, in fact, borrowing more, the question, again, is whether the new debt is offsetting the additional savings under auto-enrollment. Auto and home loans – in contrast to credit cards – are used to finance an asset that has long-term value. Whether these forms of debt improve or erode net worth depends on the asset’s value and whether the value rises (say, a house in a growing city) or falls (a car after it’s driven off the lot).

The researchers did not have access to data on federal workers’ assets, which they would need to see what’s happening to their net worth. This remains an important question for future research. …Learn More

Half of Retirees Afraid to Use Savings

For most retirees, figuring out how much money to withdraw from savings every year is a difficult-to-impossible math problem. But the issue goes much deeper: fears about what the future might bring make this decision overwhelming.

Extreme caution is a popular solution. A 2009 study estimated that by the time middle-income retirees are in their 80s, they still had not touched about three-fourths of their savings, and 2016 research found that retirees with substantial assets are the most reluctant spenders. Vanguard recently reported that retirees with very modest savings turn around and reinvest a third of the money they’re required to withdraw under IRS rules after age 70½.

People saved all of their lives to make sure they will enjoy retirement. So why are they so reluctant to spend the money for the purpose it was intended?

A 2018 study in the Journal of Personal Finance surveyed retirees to get a sense of the psychology behind their caution.

Half of the survey respondents agreed with this statement:  “The thought of my retirement portfolio balance going down over time brings me discomfort, even if the decline in value is a result of me spending money on my retirement goals.”

And the people who agreed with this statement said they feel like they are not well prepared financially to retire – and this had nothing to do with how prepared they actually are. …Learn More

What Personality Says about Your Wealth

A person’s finances are not determined simply by obvious factors like how much they earn – personality can also make a difference.

A new study has identified three personality traits that play a role in how individuals handle their nest eggs. For example, conscientious people – self-disciplined planners – are more careful and have more wealth at the end of their lives.

The University of Illinois researchers looked at two types of wealth: within employer retirement plans and outside of these plans. They did not find a connection between the wealth levels in employer plans and various personality traits, a result they anticipated because retirement wealth has more to do with a retiree’s work history and earnings.

But they did find a connection between personality and the wealth individuals hold outside of their retirement plans. Even though the majority of retirees have very little of this wealth, it’s still interesting to see the connections.

For example, retirees who are open to new experiences – they are imaginative, proactive, and broad-minded – behave like conscientious people and preserve their wealth, especially after their mid-60s, according to the study, which was conducted for NBER’s Retirement and Disability Research Center.

Agreeableness works in the opposite direction. Agreeable people are known for being soft-hearted, friendly and helpful – they also tend to care less about money or about managing it. Not surprisingly, they have less wealth. …Learn More

Aerial photo of a row of houses

Many Demands on Middle Class Paychecks

Ask middle-class Americans how they’re doing, and you’ll often get the same answer: there are still too many demands on my paycheck.

Several recent surveys reach this conclusion, even though wages have been rising consistently at a time of low inflation.

Student loans trump 401(k)s. Two top financial priorities are in conflict: student loan payments, which people described as a “burden,” and saving for retirement, which they viewed as “important” in a TIAA-MIT AgeLab survey.

The debt seems to be winning: three out of four adults paying off student loans say they would like to increase how much they save for retirement but can’t do it until their loans are paid off – and that can take years. One woman described her loans as “draining” her finances.

A promising sign on the horizon is that some employers are finding creative ways to help employees pay down college debt, giving them more leeway to save money in their 401(k)s. But these efforts impact a small number of workers, and the amount of debt continues to rise year after year for every age group, from new graduates to baby boomers who helped send their children and grandchildren to college, a Prudential study found.  

Buying a house isn’t an option. The good news is that about half of Millennials already own a home. Most of the others want to buy a house but can’t afford it, 20- and 30-somethings told LendEdu in a survey. Their top reasons were student loan and credit card payments and a lack of savings, which is the flip side of having too much debt.

Millennials are also putting off other goals until they get a house – marriage, children, even pets. “It’s quite obvious that this uphill battle” and debt “is having secondary effects,” said LendEdu’s Michael Brown.

Medical debt looms large. Americans borrowed $88 billion last year to pay their hospital, doctor, and lab bills. That debt fell hardest on the 3 million people who owe more than $10,000, according to an estimate by the Gallup polling company and a group of healthcare non-profits. …Learn More