The value that annuities can provide to retirees may not be obvious, but it is real.
Annuities are also becoming increasingly valuable as fewer people have that traditional source of reliable retirement income: an employer pension.
Insurance company annuities, like pensions, pay out a monthly income no matter how long you live. These payments come from three sources: 1) the initial amount invested to purchase the policy; 2) the interest earned on the amount that’s invested before it is paid out; and 3) “mortality credits.”
These mortality credits are the essential element that protects retirees from outliving their savings. As a retiree moves through her 80s, a growing share of the other people in the annuity pool die. The funds they leave behind in the pool are used to continue making monthly payments to those who are still living.
This is the starting point for a new summary of academic research on annuities by the Center for Retirement Research at Boston College, which supports this blog. To fully understand the individual studies, it’s necessary to read the report. But here are some takeaways: …Learn More
An interesting psychology powers this video in which the youngest daughter of a low-income, single mother explains how she migrated into the financial services industry – and then became the company president.
Mellody Hobson’s fascination with finance took hold as she watched her mother struggle with evictions, repossessed cars, and empty gas tanks. She once spent all her money on her daughters’ Easter dresses but then couldn’t pay the phone bill, Hobson recalls in the video above.
“I do not think it’s an accident I work in the financial industry,” she explains, “because as a child I was desperate to understand money – desperate. I hated the fact that I felt this insecurity around money.”
Hobson is a celebrity in her industry. In other videos, she talks about being black, being a successful career woman, being financially savvy, and the trouble with credit cards. Perhaps she’s all over YouTube, because she’s worth listening to.Learn More
Some suggestions for late-summer fun include an independent movie about a woman earning a very good living on a not-so-friendly Wall Street. But first, here are two practical financial guides, one for grown-ups and one for kids.
Harris (Hershey) Rosen, who is 83, put serious thought into how to leave household financial information in good order for his wife should he die – and put his thoughts together in his homegrown “My Family Record Book.” This book “is not a money-making proposition,” he said. Rosen suggests husbands and wives make this important task a joint project.
As the former owner of a candy company that made those lollipops packaged in strips of cellophane, Rosen learned to sweat details. His “Family Record Book” records the nuts and bolts of things like mapping where files are located in the house, planning the logistics of downsizing to a smaller home, and making lists for everything that’s important to you – doctors, the home-maintenance schedule, birth dates of friends and loved ones.
“The purpose of the book is to motivate people to commit all the information in his or her head to writing,” he said.
Susan and Michael Beacham are pros when giving financial information and advice to children and young people. I just came across their award-winning “O.M.G. Official Money Guide for Teenagers,” published in 2014, which merges personal finance and colorful graphics, while finding ways to get inside teens’ heads.
For example, it points out that “when you deposit a check, it may take several days” to clear and advises on how to handle “awkward money moments” with friends. A credit card is like a snowball, which “starts out fairly small” but “can get out of control.” If only they’d listen!
Movies about money – “The Big Short,” “The Wolf on Wall Street,” “The Smartest Guys in the Room,” “Glengarry Glen Ross,” “American Psycho,” “Bonfire of the Vanities,” “Trading Places,” and, of course, “Wall Street” – are about men. Until now. …Learn More
Like the United States, many European countries are concerned about shoring up their pension systems for their aging populations. In 2000, Austria took action by introducing a series of small increases in the earliest age at which workers can begin receiving their federal pensions.
This reform is gradually phasing out early eligibility entirely. Raising the earliest claiming ages, from 60 to 65 for men and from 55 to 60 for women, will cause them to converge, next year, with the pension program’s standard – or “normal” – retirement ages.
Prior to the reform, workers who had signed up for benefits before their normal retirement age received only mild reductions in their monthly benefits. The reform, in addition to gradually raising the early retirement age, exacted a larger penalty on the early claimers, increasing the incentive to continue working.
Austria’s pension changes have provided researchers with a unique natural experiment to see how workers reacted to a delay in their eligibility. A study by economists at the University of Texas at Austin and the Vienna University of Economics and Business, which they will present tomorrow at the NBER Summer Institute, have concluded that the reforms have had a “pronounced” effect. …Learn More
The economy keeps chugging along, unemployment has been bobbing at or below 5 percent all year, and wages have been creeping up.
Yet anxiety is rising, according to a newly released survey by Northwestern Mutual. In February,
85 percent of Americans said they had “financial anxiety,” particularly about how they would pay for an unexpected emergency or medical bill.
And here’s how financial anxiety affects them:
70 percent say it reduces their “happiness,” their mood, or their ability to pursue their dreams, passions, and interests.
67 percent say it impairs their health.
61 percent say it has a negative effect on their home life.
51 percent say it has a negative effect on their social life.
For more than half, the most popular answer to how financial security would change their lives was: “Peace of mind that I never have to worry about day-to-day expenses.”
Northwestern Mutual summed things up by saying “the levels to which financial anxiety is impacting all corners of people’s lives is extraordinary.”
Pretty strong words for a typically cautious insurance company. Learn More
Yes, income inequality has risen dramatically over the past 35 years. But something else has happened that might surprise you.
The size of the upper middle class is expanding, as Americans migrate up from the ranks of the middle class and poor, according to a new analysis from the Urban Institute.
Economist Stephen J. Rose uncovered this finding by defining how much income families needed in 1979, just before inequality really took off, to be counted as rich, upper middle class, middle class, lower middle class, or poor. He anchored his class divisions largely around incomes relative to the federal poverty level. For example, he set the income floor for the upper middle class at five times the poverty level. He then used U.S. Census Bureau survey data to estimate the share of American families falling into each income tier in 1979 and in 2014, with incomes adjusted for inflation. …Learn More
There’s plenty of evidence of the unfortunate consequences for employees overwhelmed by too many investment options in their 401(k) plans. Studies find that confused employees might not join the plan at all, select investment funds that are not well diversified, or throw up their hands and put an equal amount in each fund offered by their employer. And as employers add more options, the new funds often carry higher fees and produce lower returns.
A new study took the opposite tack, examining how employees reacted when one large U.S. employer reduced the number of investment options. The results were lower fees and less turnover, saving employees an average of $9,400 over a 20-year period. Further, their new portfolios were less risky.
The employer, a non-profit organization, cut the number of investment options roughly in half, from the 90 different funds initially in the plan. The employer also simplified the plan by sorting employees’ choices into four groups:
13 Target Date Funds (TDFs) with low fees and investments determined by an employee’s age;
4 index funds invested in a money market, diversified U.S. stocks, diversified U.S. bonds, and diversified international stocks;
32 mutual funds organized by risk level, from small-cap growth funds and REITs to balanced funds and Treasury bond funds;
A brokerage account with wide latitude to invest.
The researchers – Donald Keim and Olivia Mitchell at The Wharton School – analyzed the responses among those affected by the change, which was anyone who held at least one mutual fund eliminated during the plan streamlining. Those affected who did not choose replacement funds were defaulted into a TDF appropriate for their age. …Learn More