Posts Tagged "savings"
August 10, 2021
Onus of Retirement Planning is on Us
Many workers are poorly prepared for retirement. Inadequate savings is a primary culprit.
But the question of why workers don’t save enough was debated by our readers in comments posted to a recent article. The article pertained to a new study showing that life gets in the way of saving, which is derailed by major disruptions such as unemployment or a large, unexpected medical bill.
“This confirms my thinking that the major reason for not saving is spotty employment and a lack of money,” Chuck Miller wrote in his comment posted to “Here’s Why People Don’t Save.” Debi Street agreed: “It is also the quotidian reality of too many people in low-wage, precarious jobs with no surplus to save.”
The research study also tested an alternative explanation for insufficient savings: procrastination. The procrastination theory was not supported by the analysis.
Readers, however, would not let people off the hook so easily. “What’s that old saying? ‘Failing to plan is planning to fail,’ ” said Brian Jarvis. “That planning is certainly impacted by procrastination, which then leads to being … unprepared for life’s disruptions.”
A reader who calls herself Retirement Coffee Shop knows “more than a few people who just disregard the notion of saving for the future. They have lived their lives like there is no tomorrow and spend money on any and everything they want.”
On another matter central to retirement planning – Social Security – readers didn’t criticize. They just offered practical advice.
The article, “Workers Overestimate their Social Security,” described research showing that workers of all ages have a poor grasp of how much they’ll receive in their monthly Social Security checks when they retire.
Specifically, the workers’ estimates were higher than the more precise benefit projections made by the researchers, based on each individual’s earnings history. Not surprisingly, young adults, who have more pressing matters on their minds than retirement, were farthest off the mark.
Several readers made the same suggestion: get the facts. “Go online and look at your SSA statement,” said Lynn. “It lists your FRA [monthly benefit] amount” – at the full retirement age – “as well as estimated amounts at 62 and 70.” …Learn More
December 17, 2020
How Much Will Your Retirement Taxes Be?
Four out of five retired households will pay little or no income taxes. But the tax rates at the highest income levels are meaningful, averaging 11 percent of household income and as much as 23 percent at the very top.
These estimates come from a new analysis by the Center for Retirement Research that sheds light on a potentially important consideration that is often overlooked by people approaching retirement age.
The highest tax rates are paid by the highest-income households because they often withdraw money from 401(k)s and IRAs to supplement their Social Security benefits. They must also pay capital gains taxes when they sell stocks and bonds for a profit from their regular financial accounts.
Households with income in the top 20 percent have nearly $770,000, on average, in retirement savings and other financial assets – their taxes equal 11 percent of their total retirement income. However, limiting the households to the top 5 percent of the income distribution, the tax rate increases to 16 percent – and the top 1 percent pays 23 percent.
These estimates assume retirees start pulling money out of their taxable 401(k) and IRA accounts when the IRS’ required minimum distributions (RMDs) kick in at age 70 1/2 – this age will increase to 72 next year. The tax rates were very similar under alternate scenarios that assume retirees either start withdrawing savings prior to the RMD or buy an immediate annuity with a survivor’s benefit.
The tax estimates are based on data for older U.S. households with at least one recent retiree. The researchers first calculated their expected future lifetime income from Social Security, 401(k)s and other sources in each year. The future yearly tax payments were then estimated using a program that applies IRS rules and each state’s tax rules to the various types of retirement income.
The tax rates are their total tax bills as a percentage of their total income. …Learn More
September 8, 2020
A Laid-off Boomer’s Retirement Plan 2.0
Jennifer Lee wanted to work until 70 to max out her monthly Social Security checks – at least that was the plan before she was laid off three years ago from a Washington D.C. church.
The church’s newly hired pastor “decided he wanted a whole new staff,” she said. “I felt to a degree he was entitled to do that,” she said – except that “he was only eliminating people on the staff who were over 60.”
She wasn’t having any luck finding a new job and felt that her only choice was to sign up for Social Security at 63½ to pay her bills. Eventually, Lee, a one-time nurse and medical administrator, landed a nice part-time job as a Jack-of-all-trades in an oral surgeon’s office. Post-pandemic, her duties have expanded to include overseeing the COVID-19 safety protocols.
The recession is putting many baby boomers in a predicament similar to Lee’s: a layoff has derailed their plans to work full-time to build up their retirement savings. Since March, the unemployment rate for Americans who are at least 55 years old has more than tripled, to 9.7 percent in June.
“Most older people, when they’re laid off, will take Social Security right away,” but “that’s not their best short-term solution,” said Wendy Weiss, a Cambridge, Mass., financial adviser. She urges them to find other ways to generate income or reduce expenses, because delaying Social Security increases the monthly check by 7 percent to 8 percent for each additional year the benefits are postponed.
But, Weiss acknowledges, the recession is putting growing numbers of unemployed boomers in situations that aren’t easily solved. “It’s not going to be pretty,” she said about the next few years.
Lee, who is 65, was fully aware she should have postponed her Social Security. But it took her more than six months to find her current job, and she didn’t have any unemployment benefits to tide her over, because church employers don’t usually pay into state unemployment insurance funds. She wasn’t old enough for Medicare at the time of her 2017 layoff either.
“I waited five months to apply for Social Security. I waited as long as I could,” she said.
She sees a problem not in the difficult decisions she’s had to make but in a shortage of policies for older workers like herself, who may be more vulnerable to layoffs and also can have a tougher time finding a new job even in an expanding economy. …Learn More
August 13, 2020
Workers Lacking 401ks Need a Solution
Although COVID-19 has exposed alarming gaps in a health insurance system that revolves around the employer, the Affordable Care Act is one potential solution for workers who lack the employer coverage.
There is nothing equivalent on the retirement side, however.
Many workers between ages 50 and 64 are in jobs that provide neither health insurance nor a retirement savings plan. But, in contrast to the health insurance options available to them, “no retirement saving vehicle appears effective in helping older workers in nontraditional jobs set aside money for retirement,” concluded a new analysis of workers in these nontraditional jobs.
Nontraditional workers who want to save for retirement are left with two options: their spouse’s 401(k) savings plan or an IRA operated by a bank, broker or financial firm.
A spouse’s 401(k) hasn’t been an effective fallback for a couple of reasons. First, a substantial number of the workers who lack their own 401(k)s are not married. And second, if they are married to someone with a 401(k), they’re not any better off. The researcher found that married people currently contributing to 401(k)s do not save more to compensate for the spouse without a 401(k), reinforcing other research showing these couples don’t save enough for two.
The other option – an IRA – is open to everyone. But only a small fraction of Americans currently are saving money in IRAs, and most of them already have a 401(k). So IRAs, in practice, aren’t doing much for the people who need the help: workers who lack employer benefits. … Learn More
July 21, 2020
Pandemic Puts More Retirements at Risk
Americans’ retirement outlook has gone from bleak to bleaker.
The unemployment caused by COVID-19 has pushed up the share of working-age households not able to afford their current standard of living in retirement from 50 percent to 55 percent, according to a new analysis by the Center for Retirement Research, which sponsors this blog.
The analysis updates a previous estimate, based on 2016 data, to include the harmful effects of surging unemployment. The researchers estimate that perhaps 30 percent of workers – far more than is reflected in the monthly jobless rate – could be affected by layoffs now and in the future. They did not factor in the recession’s impact on the housing and financial markets, which could make things worse.
Unemployment hurts retirement in a variety of ways. Laid-off workers’ paychecks vanish immediately, but they may also earn less in the next job. The depressed earnings, over months or years, reduce the money flowing into their 401(k)s, and the amount they’ll receive in pensions and future Social Security benefits. It may also force some to spend down savings that, had they not lost their jobs, would’ve been preserved for retirement.
Interestingly, the impact on low-income workers is mixed. In one way, they’re protected by Social Security’s progressive benefit formula, which will replace a higher percentage of their earnings as their lifetime earnings decline. But low-income workers have had more layoffs, which widens the gap in their retirement savings – between what they can save and what they should be saving – more than for higher-income people.
The 2020 recession will impact retirement “in a very different way” than the Great Recession, the researchers said. This time, “the destruction is occurring more through widespread unemployment and less through a collapse in the value of financial assets and housing.” However, the lessons of the previous recession can’t be dismissed either. …Learn More
May 19, 2020
The Profound Financial Pain of COVID-19
It was hard to miss the news last year that four out of 10 people couldn’t come up with $400 if they had an emergency. The coronavirus is that emergency – on steroids.
A wave of new surveys asking Americans about their personal finances reveal the depth of a crisis that has suddenly befallen untold numbers of people. And the worst, economists say, is probably still ahead of us.
As of last week, 36.5 million people had filed for unemployment benefits, and that doesn’t include some workers who were furloughed or have not yet been able to file their applications for benefits. The Federal Reserve said nearly 40 percent of people living in households earning less than $40,000 have lost their jobs.
As the virus tore through the country in April, most adults cited a lack of savings as the reason for their financial stress in a survey by the National Endowment for Financial Education.
What many people have, instead, is debt. In recent years, consumers loaded up on credit card and other debt – for bigger houses, new cars, vacations. This is what people do when the job market is strong and confidence is riding high. …Learn More
January 14, 2020
Oddly, the Educated Pay Higher Fees
It’s smart to invest retirement savings in mutual funds that charge very low fees for one simple reason: the worker keeps more of his money and hands over less to Wall Street.
But in a study of people in their 50s and 60s who have retired or otherwise left federal employment, the people with the most education and the best scores on a standardized test were more likely to make what seems to be the wrong decision. Rather than keep their retirement funds in the government’s Thrift Savings Plan (TSP), which has extremely low fees, they transferred the money to much higher-fee IRAs operated by financial companies.
The $500 billion TSP – the world’s largest defined contribution retirement plan – is inexpensive in large part because it invests only in index mutual funds, which automatically track a variety of stock and bond market indexes and avoid the need to pay money managers to pick the investments. The annual fees for TSP’s index funds – known as expense ratios – are under 0.04 percent of the investor’s assets.
But over a 10-year period, about one fourth of the former federal employees rolled over the money saved during their careers into IRAs that typically had much higher expense ratios: 0.57 percent. On top of that, IRAs often charge additional fees for investment advice, pushing the potential total annual fees to well in excess of 1.5 percent. It’s possible that investing in an IRA could generate enough returns to make the extra fees worthwhile, but research has shown this is not the norm.
What explains the rollover decision? More educated people tend to have larger retirement account balances, raising the possibility that they were either seeking out financial advice or were targeted by advisors’ sales pitches. However, even among people with similar balances, those with more education were still more likely to roll over to IRAs.
It’s possible that they “perceive that they know what they’re doing” and want to take control of their investments “even when higher fees result,” the researchers said. …Learn More