April 24, 2014
Should a Will Even the Score?
Consider this difficult situation: An elderly woman lends her oldest son $20,000 to help pay for some expensive medical care for his teenage son – her grandson – who’s stricken with cancer.
When the woman writes her will, a different son who is also her executor – and happens to be an accountant – advises her to deduct the $20,000 loan, never repaid, from the oldest son’s modest inheritance.
This happened in my family, and I was of two minds at the time. Technically, the money was a loan – not a gift – so not paying it back was unfair to the other siblings who didn’t receive $20,000. But it seemed uncompassionate to take the money out of a bequest, given the graveness of the teenager’s illness.
Financial planner Rick Kahler discusses a similar situation in this video and proposes something that may seem radical: evenly dividing up your estate isn’t necessarily fair.
The way Kahler explains his argument in the video, it makes sense – at least in the particular instance he’s discussing. But does it depend on the situation? …Learn More
April 8, 2014
1 in 4 Seniors Have Little Home Equity
Retirees can use the equity sitting in their homes to pay for their daily expenses, out-of-pocket medical bills or nursing care, especially toward the end of their lives.
Cash-strapped older retirees can access that equity by taking out reverse mortgages or home equity loans or by downsizing to less expensive homes or condominiums.
But one in four Medicare recipients has less than $12,250 in home equity, according to a new report by the Kaiser Family Foundation, a healthcare non-profit.
Kaiser’s calculations also show that the distribution of home equity among older Americans is – like the distribution of income and financial assets – top heavy. While 5 percent of Medicare beneficiaries in 2013 had more than $398,500 in home equity, half have less than $66,700.
According to Kaiser’s projections, that gap will widen in the future. By 2030, those whose home equity places them in the top 5 percent will see that equity grow more than 40 percent, but it will rise less than 10 percent for those with mid-level – or median – amounts of equity.
The analysis was part of a study to examine the ability of older Americans to absorb rising out-of-pocket retiree medical costs and increasing Medicare premiums. This blog also reported the study’s similarly grim findings about the meager financial savings held by many retirees to cover their health care costs.Learn More
April 1, 2014
Many with Dementia Manage Finances
When dementia enters an elderly couple’s home, it can bring financial mismanagement with it.
But since both spouses don’t usually become cognitively impaired at precisely the same time, couples have the option of turning over the household financial responsibilities to the person who’s not yet impaired. The question is whether this transfer of control happens quickly enough.
Most couples are waiting until after cognition is very low to make this change, according to a new study.
Economists Joanne Hsu with the Federal Reserve Board and Robert Willis with the University of Michigan found that 80 percent of married older Americans who had been in charge of their household finances continued to manage them after a test revealed they were approaching or already experiencing dementia. …Learn More
March 4, 2014
New Book Spotlights Behavioral Finance
Did you know that an investor may be more likely to hold on to a money-loser if he bought it himself than if he inherited it? That people born with the “warrior gene” will take more risks? Or that trust is essential to whether individuals prepare for retirement?
A new edited volume, “Investor Behavior: the Psychology of Financial Planning and Investing,” is a thorough tour of the research on these and other aspects of behavioral finance. The book was compiled for financial planners, investment professionals, academics, and finance students and edited by two finance professors, H. Kent Baker of American University’s Kogod School of Business and Victor Ricciardi of Goucher College.
The field of behavioral finance is gaining traction as financial experts increasingly recognize that psychology, sociology, neurology and other fields may have something to say about why people behave the way they do around money.
Traditional theories explaining investor behavior, such as modern portfolio and utility theory, assume that people make “rational” choices. In contrast, the research covered in this new book tries to explain why financial decisions are not always rational, are often infused with emotion, and can be very predictable. Or, as 1978 Nobel laureate Herbert Simon once explained, orthodox finance’s “traditional paradigm did not describe the behavior of real people,” the book says. …Learn More
February 20, 2014
Minimum Wage Workers: Who are They?
Whether or not you agree that the minimum wage should be raised, there are very real financial strains on the 5 percent of U.S. hourly workers who earn no more than $7.25 per hour, the current federal minimum wage.
This video, produced by Bloomberg TV, puts a human face on a few of these 3.5 million workers. Data from the U.S. Bureau of Labor Statistics provides more information about who they are:
- Nearly half are over age 25.
- Two-thirds are women, and one-third are men.
- About three-fifths of minimum-wage workers are in service occupations, such as food preparation and food service.
February 6, 2014
Lottery-like Prizes Spur Saving
Jessica Smith, mother of four, was never much of a saver. But a credit union that dispenses prizes has changed all that.
She now saves $150 every month out of her pay and bonus as a restaurant buffet manager. Each $25 deposited into her account gives her one more entry in a monthly drawing for cash prizes at the Communicating Arts Credit Union in Detroit.
Jessica Smith and her winnings.
By coincidence, she won three times last fall – a total of $100 in prizes. But in contrast to throwing money away on a lottery ticket with bad odds, she earns a little interest on her credit union account.
These so-called prize-linked accounts aren’t a new concept: one of the first appeared in 1694 in the United Kingdom to help people pay off war debts. Today in this country, nearly 18,000 individuals like Jessica participate in Save to Win programs. Launched in 2009, they’re offered at more than 60 credit unions in four states.
Michigan handed out $100,000 in prizes last year, including six $10,000 grand prizes; Nebraska, North Carolina, and Washington each gave out between $25,000 and $50,000 in a year. …Learn More
February 4, 2014
Retirement Tax Credit for Low Earners
The IRS effectively gives money away to low-income Americans who save for retirement.
Workers meeting the agency’s income requirements can receive a Saver’s Tax Credit equal to as much as half of their total deposits into a 401(k) or IRA. The lower one’s income, the bigger the credit.
The program, which was made permanent in 2006, gives a nice boost to the nation’s lowest-paid workers, who are also most vulnerable in retirement. And not taking advantage of the credit, said Jim Blankenship, a financial planner in New Berlin, Illinois, “is a lot like giving up an employer match for a 401(k).”
Low-income workers do just that, a previous study found: 40 percent decline to participate when their employer offers a 401(k). But the Savers Tax Credit may provide another avenue to this under-covered population.
The annual income requirements for the credits, shown in the following table, apply to calendar year 2013 tax filings due April 15. …
*Note: Credits are equal to 10 percent, 20 percent, or 50 percent of total contribution.