Behavior

March 22, 2022

While living in New York City, Clifton Seale and Charles Gilmore piled up an enormous amount of credit card debt for basic expenses and frequent dinners out.

After retiring – Seale was a librarian and Gilmore a clergyman – the couple were notified of a $200 rent increase on their Queens apartment. With so much debt on the books, they realized they could no longer afford New York City, and after a few visits to see friends near the Delaware seashore, they moved there.

“I like to say I flunked retirement because I found out neither of us could afford to live on the pension and Social Security,” Gilmore said.

Although Delaware was a less expensive place to live, they didn’t turn their finances around until they found the non-profit Stand by Me 50+, which offers free financial coaches to Delaware residents over age 50.

The couple, who have been together 35 years and married for 8 years, have a decent income by rural Delaware’s standards, if not New York’s. Their combined income is about $70,000 per year. They were able to buy a $185,000 three-bedroom house in Lincoln, Delaware, after a friend helped with the down payment. Their $1,150 mortgage isn’t much more than the rent on their one-bedroom apartment in Queens.

Credit cards were Seale and Gilmore’s big issue. They owed about $40,000, including moving expenses and some new furniture purchased in Delaware. Both of them had retired at a fairly young age – 62 – but felt they had no choice but to go back to work. Gilmore found a job at a local operation for a national hospice organization and, last September, landed a part-time position as a Presbyterian pastor. Seale has worked at a non-profit that helps seniors who want to age in their homes.

The extra income helped, but the debt was still going up. “We weren’t paying off as much [debt] as we were spending,” Seale said. “No matter what I did, everything was still falling down around my shoulders.”

They just needed to get rid of the debt. …Learn More

Behavior

January 4, 2022

For the baby boomers who are looking down the road to retirement, generalities will no longer suffice. They are diving into the nitty gritty.

Their keen interest in retirement issues, based on reader traffic last year, range from why the adjustments to Social Security’s monthly benefits are outdated to how it’s still possible for boomers, even at this late hour, to rescue their retirement.

First, and most important, there is hope for the unprepared. In “No-benefit Jobs Better than Retiring Early,” readers who want to retire but can’t afford it learned that they can dramatically improve their finances by finding a new job – ideally a less stressful or physically demanding one. Even if the job doesn’t have employee benefits, working longer will increase their Social Security benefits and allow them to save a little more.

The most popular article tackled a complex issue: “Social Security: Time for an Update?” The article explained the program’s actuarial adjustments, which are based on the age someone signs up for their benefits and factors into how much they’ll get. The adjustments, set decades ago, are no longer accurate, due to both increasing life spans that affect how much retirees receive from the program over their lifetimes and persistently low interest rates.

If these factors were taken into account, the researchers estimate that the average person who starts Social Security at age 62 would get more in their monthly checks, and the average person who holds out until 70 would get less.

However, not everyone is average. High-income workers tend to live longer and retire – and claim Social Security – later, while low-income workers have shorter lifespans and disproportionately start Social Security at 62.  The researchers conclude that the inequities “are not a problem that can be solved by tinkering with the actuarial adjustment.” A true fix would “would require a reassessment of the benefit structure.”

A major issue facing boomers in their late 50s and early 60s is that households with 401(k)s typically have saved only about $144,000 for retirement in their 401(k)s and IRAs. The reasons for insufficient savings – explained in “Here’s Why People Don’t Save Enough” – boil down to things that are largely beyond their control, including disruptions in their employment, a lack of access to employer retirement plans, lower earnings than they’d hoped for, bad investments, unanticipated premature retirements, and health problems.

However, workers can do something to gauge how they’re doing: make sure they know how much they’ll get from Social Security. …Learn More

July 20, 2021

About half of the nation’s private-sector employees do not have a retirement savings plan at work, and that hasn’t changed in at least 40 years.

Some states are trying to fix this coverage gap in the absence of substantial progress by the federal government in solving the problem.  And the state reforms are gaining momentum.

In the past year alone, Maine, Virginia, and Colorado have passed bills requiring private employers without a retirement plan to automatically enroll their workers in IRAs, with workers allowed to opt out. New York City, which is more populous than most states, approved its program in May. And other states are either starting to implement programs or looking at their options.

Auto-IRAs are already up and running in California, Illinois, and Oregon, where a total of nearly 360,000 workers have saved more than $270 million so far. The programs are run by a private sector administrator and investment manager.

These mandatory programs are the only practical way to close the coverage gap, because voluntary retirement saving initiatives have never done the trick. Numerous voluntary plans created by the federal government – such as the Simplified Employee Pension (SEP) – have failed to measurably increase coverage.

Large corporations usually offer a 401(k) plan and match some of their workers’ savings. But millions of restaurants, shops, and other small businesses either can’t afford to set up their own 401(k)s or don’t see it as a priority. Without additional saving, half of U.S. workers are at risk of a drop in their standard of living when they retire.

State auto-IRA programs eliminate the administrative burden and expense to employers of a private plan and provide an easy way for workers to save. The money is taken out of their paychecks before they can spend it and is deposited in an account that grows over time. The state programs also permit workers  to withdraw their contributions without a tax penalty for emergencies, like a medical problem or broken-down car, if they need the money they’ve saved. …Learn More

July 13, 2021

Life’s unpleasant surprises – a new set of tires or a big vet bill – can get in the way of saving money for retirement. This is especially true for low-income workers.

But if they are able to save a little here and there, the federal government provides a very big assist through its Saver’s Credit. Unfortunately, low-income workers are also the least likely to be aware the tax credit exists.

Here’s how the Saver’s Credit works. The IRS returns half of the amount saved over the year – up to certain limits – by a head of household earning less than $29,626 or a couple earning less than $39,501.

So, the head of household with earnings under the income limit who saves $2,000 in a tax-exempt retirement plan like an IRA or an employer 401(k) would get back the IRS’ maximum credit of $1,000. And the couple that saves $4,000 would get back the $2,000 maximum.

Granted, these are very large sums for low-income workers. But if they can manage to save a little bit every week, the Saver’s Credit is effectively free money from the federal government.

Smaller tax credits are available to people with slightly higher incomes. Individuals and couples do not qualify if they earn more than $49,500 and $66,000, respectively.

Unfortunately, only about a third of households earning under $50,000 are aware of the credit, according to a Transamerica Institute survey.

Now that you know, start saving. You’ll get a big chunk of it back. …Learn More

December 19, 2019

Joejuan Williams
Photo courtesy of the New England Patriots.

Joejuan Williams, a rookie defensive back for the New England Patriots, has received a lot of attention for his practice of saving 90 percent of his game-day paychecks. He credits his frugality to a personal finance class at his Nashville, Tenn., high school.

“It completely changed my life,” Williams told The Boston Globe recently. “I’m going to sacrifice now for me to be happy later.”

Williams, having signed a $6.6 million contract this season, isn’t exactly living on the edge. But keep in mind that these sky-high earnings are often temporary for football players. When one considers that the average NFL career lasts about three years, Williams is just playing it smart.

But read on in the Globe article, and a more complex and touching explanation for Williams’ frugality seems to emerge – one that revolves around a childhood watching his single mother live paycheck to paycheck.

“I’ve been stingy with money ever since I was young just because I saw what my mom had to go through,” he told the Globe. He said that he has paid off his mother’s student loans and purchased a car for her.

Although he credits the influence of his personal finance class, psychologists say that adult financial behavior has deep roots in childhood experiences like Williams’. In fact, endless research papers have debunked the effectiveness of financial education. There are numerous reasons for this, including a widespread aversion to math. Human nature is another obstacle: people regularly sacrifice their long-term goals to whim – credit card spending is the classic example.

Williams is different. He has his eye on the future. He is focused on one long-term goal for himself – investing his savings for the future – and one goal for his mother.

“I’m going to give my mom a home,’’ he said. “That’s the only big purchase I have my eyes on.’’

Williams’ high school finance class clearly influenced him. But maybe the lessons stuck because he took them to heart.

Squared Away’s regular posts will return Dec. 31. …
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Field Work

May 14, 2019

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 9, 2019

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