August 4, 2020
Financial Survival of Low-Income Retirees
Watch these six videos and walk in the shoes of low-income older Americans. It’s an arduous journey.
Social Security is the primary or only source of income for the retirees who agreed to be interviewed for the videos. Since their income doesn’t cover their expenses, they live with family, frequent the Salvation Army, and continually stress about money.
“You’re lucky if you come out even or a little behind” at the end of the month, said Howard Sockel. The 81-year-old resident of Skokie, Illinois, supports two sons – one with autism and one unemployed – on his Social Security, a small Post Office pension, and credit cards.
The older workers who were interviewed are on the same road to a difficult retirement. Cathy Wydra, who was 64 when the videos were made, shares the expense of a two-bedroom apartment in a Chicago suburb with her daughter and grandson and sleeps on an inflatable mattress.
“It’s a little scary. I think, am I going to be able to retire in two years?” she says.
One out of three older people can’t cover their costs comfortably, often because they lack savings, said Sarah Parker with the Financial Health Network, which produced the videos in conjunction with AARP Foundation and Chase. “You often have to rely on debt, and that’s a very precarious financial situation to be in,” she said.
The video topics are: “When Fixed Incomes Fall Short,” “All in the Family,” “The Caregiver Conundrum,” “A Shock to the System,” “When Retirement Won’t Work,” and “Good Advice Never Gets Old.”
Some of the retirees admitted to making strategic mistakes around their retirement finances. Many other people have made these same mistakes, but they are catastrophic for people who were already on shaky ground. Verner Reid, a former Chicago teacher, was forced to retire when she became ill. Rather than a teacher’s pension, she took a lump sum and is now short on funds – “the mistake of my life.” …
June 18, 2020
Recession Slams Millennials – Again
Several young adults in my life have been derailed by the COVID-19 recession.
A few examples. My daughter-in-law just finished her graduate degree in occupational therapy and sailed through her certification only to be met by a stalled job market. A friend’s daughter, fresh out of nursing school, has already been turned down for one job. My nephew, a late bloomer who had finally snared a job making jewelry for a major retailer, was laid off and is floundering again.
Student loans, the Great Recession, and now a pandemic – Millennials can’t seem to catch a break.
Going into this pandemic, people in their 20s and 30s already had lower wages, more student debt, and less wealth than previous generations at the same age. This recession arrives at a critical time when Millennials were trying to catch up, build careers and strive for financial goals.
For the youngest ones, this is their first recession. But the downturn is the second blow for older Millennials, many of whom had the bad luck of entering the job market in the midst of the Great Recession a decade ago.
Does this double jeopardy put them in danger of becoming “a lost generation”? Millennials’ predicament prompted the Federal Reserve Bank of St. Louis to ask this question in a new report on their finances.
The COVID-19 recession, the report said, “could upend many of their lives.”
The situation is far from hopeless, of course – they have several decades to make up for this rough patch! There’s no reason they can’t overcome the setbacks with some pluck and determination.
But this will require much more effort to pull off amid the highest unemployment rate since the Great Depression. The Federal Reserve estimates more than 5.5 million Millennials have become unemployed this year – African-Americans bore a disproportionate share of the layoffs.
Young adults were over-represented in the food service, hospitality, and leisure industries slammed by state shutdowns to control the pandemic. And as the recession plays out, Millennials, with their shorter tenures in the labor market, will continue to be vulnerable to layoffs.
Don’t forget about Generation Z either. The recession will be a tough period for its oldest members, who are just graduating from college and haven’t built up their resumés. They may be less appealing job candidates when so many experienced people are eager to work and willing to compromise on pay at a time of sky-high unemployment. …Learn More
April 14, 2020
More Cuts to 401k Matches are Coming
To conserve cash, some employers are suspending contributions to their workers’ 401(k)s. And if this downturn plays out like previous recessions, more will follow.
The handful of employers announcing suspensions in recent weeks include travel companies and retailers hit first and hardest by shrinking consumer demand, including Amtrak, Marriott Vacations Worldwide, the travel company Sabre, Macy’s, Bassett Furniture Industries, Haverty Furniture Companies, and La-Z-Boy.
Tenet Healthcare and a physician practice in Boston on the front lines of providing expensive coronavirus care have also suspended their matches. Employees, not surprisingly, are unhappy with these moves. An emergency room doctor told The Boston Globe that his organization’s decision comes as he is “working huge extra hours trying to scrape together [personal protective equipment] and otherwise brace for COVID-19.”
Employers are required to give their workers a 30-day notice and cannot stop the match prior to the 30-day period.
Suspending matching contributions has become somewhat of a recession tradition. In the months following the September 2008 market crash, more than 200 major companies rushed to do so, according to the Center for Retirement Research. The firms’ primary financial motivation was easing an immediate cash-flow constraint – not a concern about profits – the researchers found.
But cutting 401(k) contributions may be a small price to pay for mitigating layoffs, said Megan Gorman, a managing partner with Chequers Financial Management in San Francisco. “It might be a stop gap to help save the business in the long run,” she said. A typical employer matches 50 percent of employee contributions up to 6 percent of their salaries.
Amy Reynolds, a partner at Mercer Consulting, said the bigger danger for workers’ future retirement security is tapping their 401(k)s to pay their routine expenses in a tough economy. As part of the rescue package Congress passed in March, workers can withdraw up to $100,000 without paying the 10 percent penalty usually imposed on 401(k) withdrawals by people under 59½. “We want them to be thoughtful and consider other sources before they get to that,” Reynolds said. …Learn More
December 24, 2019
Next Tuesday – New Year’s Eve – we’ll return with a list of some of our readers’ favorite blogs of 2019. Our regular featured articles will resume Thursday, Jan. 2.
Thank you for reading and posting comments on our retirement and personal finance blog. We hope you’ll continue to be involved in the new year. …
November 5, 2019
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.
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
September 24, 2019
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
August 20, 2019
Modifying a Retirement Plan is Tricky
Employers beware: changing your retirement plan’s design can have unfortunate, unintended consequences for your employees.
That’s what happened to the Thrift Savings Plan (TSP) for federal workers, says a new study by a team of researchers for the NBER Retirement and Disability Research Center.
Like many private-sector savings plans, the $500 billion TSP – one of the nation’s largest retirement plans – has automatic enrollment. Federal employees can make their own decision about how much they want to save and, in a separate decision, how to invest their money. But if they don’t do anything, their employer will automatically do it for them.
In 2015, the TSP changed its automatic, or default, investment from a government securities fund to a lifecycle fund invested in a mix of stocks and bonds with the potential for higher returns than the government fund. However, the employer did not change the plan’s default savings rate for workers – 3 percent of their gross pay. (The government matches this contribution with a 3 percent contribution to employees’ accounts.)
After the TSP switched to the lifecycle fund, the new employees at one federal agency – the Office of Personnel Management – started saving less, the researchers said.
This probably occurred because, in passively accepting the TSP’s new lifecycle fund – a more appealing option than the old government securities fund – they were also passively accepting the relatively low default 3 percent contribution.
Employees seem to “make asset and contribution decisions jointly, rather than separately,” the researchers concluded. …Learn More