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A recent post by the CRR shows that non-working Baby Boomers age 55 to 61 (ages ineligible for Social Security benefits) are wealthier now than non-working 55 to 61 year olds of the past. The post explores how they’ve accumulated the wealth and why they chose to leave the labor force. An important point of the article is that, though they find themselves wealthier than non-workers of the past, they still only have a median wealth figure of $98,000. This “isn’t a lot of money for a boomer with a long spell of retirement ahead of them. Boomers who leave the labor force often put themselves at risk of depleting their 401(k) assets too soon.”
Full post from the Center for Retirement Research.
Post Introduction: “Baby boomers who’ve left the labor force in their pre-retirement years are in better financial shape than they once were.
The wealth of non-working Americans between ages 55 and 61 increased from $83,000 in 1992 to $98,000 in 2008, according to new research from the Urban Institute in Washington. (Comparisons are in constant dollars.)
Potential explanations for this trend range from greater U.S. inequality that launched more boomers into the top wealth tier to a rise in the numbers of married men who don’t work – but have wives who do. Barbara Butrica, a senior research associate at the Urban Institute, said her study did not look into the “why” for the emerging group of voluntary non-workers who are approaching traditional retirement ages, married and single men in particular. One possibility, she said, is that “they are leaving the labor force because they can afford to.”
…Read the full story.
During my study of retirement income security something has always bugged me. Countless articles and reports suggest smart asset allocations are the tried and true way to have a successful retirement (and still say this even after the economic recession). They talk about the value of investing and give financial advice that is clearly geared toward those with ample resources. Advice for the little guys is rarely provided, though arguably they need it more. Most people try to save for retirement but end up with little financial wealth. They’ll probably spend at least some of their retirement struggling financially.
A recent article by the Center for Retirement Research explores ways individuals can leverage their savings and assets so they are more likely to have a secure retirement. They suggest financial planning should not only include building retirement portfolios but:
- Delaying retirement and taking more time to contribute to retirement accounts
- Controlling spending and using the money saved to increase your savings
- Investing assets in ‘riskless equities’ after retirement
- Taking out a reverse mortgage
In other words, when all your financial adviser tells you is which stocks and bonds to put your money into, they are missing the big picture. There is an array of tools that people should explore and, based on their situation, employ to help them build a secure retirement. In fact, asset allocation was found to have the smallest effect on retirement security. The paper found working six months longer produces the same outcome as moving all investments into ‘riskless equities.’
However, I’d like to bring it back to my original point: do we provide advice to those who need it most? Recently, I gave a talk on women’s retirement security to a local Council on Aging community event. Community members had wonderful questions after the talk. One question struck me most: “I didn’t know about saving when I was young, my husband did that. But we spent most of it on his illness and now he’s gone. I have nothing but my Social Security check, do you have any financial advice for me?” Later we had a chat and I asked her some questions about her situation. I found that she had been a homemaker, she did not own her home, and she was physically incapable of working. Her monthly check was also ‘too much’ for her to qualify for government services and benefits. What advice do we have for people like her?
Researchers and financial experts are starting to explore ways low- and middle-income workers can make the most out of their savings and assets. But still, there are people currently in retirement who live on little income, own next to nothing, and would love some advice. This is particularly true of older women. Many never needed to care about their finances until their husband passed away. If anyone knows an organization or service that advises these people (for free!) please educate me…because I don’t know of one.
The Older Women’s League has come out with their 2012 Mother’s Day report. Their reports are always thorough, up-to-date, and readable. This year the topic is on women in the U.S. workforce and highlights what women are faced with as they grow older. As OWL’s president mentions in her message to readers, this is a timely report since mid-life and older women are the fastest growing segment of our workforce and the economic downturn presents new challenges in their ability to find work, keep their jobs, and build their retirement wealth.
From the OWL National Website: “This year’s report looks at how factors such as unemployment and underemployment, pay inequality, caregiving, age and gender discrimination, and education, training, and technology are impacting women age 40 and older. The report highlights existing programs that produce real results and offer innovative solutions and policy-driven recommendations to expand economic diversity and accelerate our nation’s productivity.”
Last week I was asked to present high school students with information on women in the workforce and saving for retirement. One of my major goals was to instill the value of starting early. But I had the sense, maybe because I’m not too far from high school age myself, that my slides about compound interest and Roth IRAs would be particularly boring.
Rather than watch their eyes glaze over I added a new slide: A personal story about my mother, her life course, marital history and saving behavior. I wasn’t saying anything novel but by explaining compound interest this way I kept everyone’s attention. So, I encourage you to share this with the young people in your life and reflect on what it really means to save early and save often.
(For simplicity, the interest rate at all time points is 5%. In actuality, she gained more during her earlier life and has lost a lot during the recent recession).
This figure tells us two stories. Let’s begin with the story in blue, which is what really happened. At age 21, my mom got married and started working a new job. She was so excited to finally have her own money and be able to buy all the clothes she wanted and decorate their new house. My dad, however, didn’t think this was a good plan and told her, “Save your money! We both should be saving now for our future.” Reluctantly she saved, putting $2,000 away each year for her retirement. By the time her first child was born (me!) she had saved up $20,000.
In her 30’s she had another baby and raised my sister and me. She was not working or saving at this time but her $20,000 continued to grow. By 42 her marriage was on the rocks and she became divorced. Now, all that planning for her future had to be done alone. She spent a couple years searching for a new job and struggling with the change. Even so, the savings from her 20’s continued to grow. By 45 she found a new job and started her career over. She was getting nervous about her retirement savings and started putting away $5,000 a year. The savings from her new job were added the nice nest egg she had accumulated while she wasn’t working. The final blue bar shows an optimistic future where she continues to save each year, the economy improves and hopefully she reaches over $300,000 by retirement.
What is the reality of saving? Well, you can’t always save when you want to or need to and it’s hard to predict the future. For example, my mom couldn’t predict that we’d be in an economic recession right at the time most people her age start saving for retirement. The green bars show us what this path would look like for her. Nothing in her life has changed except that she didn’t save in her 20’s. Instead she chose to ignore my dad’s suggestion and spend her money on clothes, new furniture and all the other things she wanted. The message is clear: Saving early, even if it’s just a little, makes a huge difference for your future.
I can tell you honestly that most of my mom’s friends are extremely worried about their futures. They are in their 50’s, starting to save now and having a difficult time. She knows, though she hates to admit it, my dad was right.
This post by Robert Powell from MarketWatch (The Wall Street Journal) discusses a bleak outlook for America’s state of retirement security. In my opinion, the most important thing mentioned in this article is how the lack of financial education among workers can directly affect their retirement wealth. Many people hold misguided expectations about their retirement portfolios and believe they have more in Social Security benefits, employer pension plans, or health and long-term care coverage than they really do (Helman, VanDerhei, & Copeland, 2007). What’s worse, this misinformation can actually drive planning behavior so much that ill-informed workers, rather than doing nothing, are losing significant portions of their pension wealth because they take inappropriate and detrimental action (Chan & Stevens, 2003). Not everyone has expendable income to play with, yet the financially-informed worker is 5 times more likely to respond to pension incentives accordingly and increase their pension wealth (Ekerdt & Hackney, 2002).
The article highlights many other topics that are important to educate yourself about. We need to fix Social Security, we need to contribute more to our own 401(k)s and retirement savings, we need to make sure more workers are covered by pension plans, and so forth. Yet, many of the suggestions for fixing these issues are based on what’s feasible for the typical, middle class worker.
Should you really force people to put part of their wages into an IRA when they need every penny of every paycheck to cover the costs of food, shelter, and clothing? If yes, can you tell them what percentage of their income they must contribute? Are you then required to financially educated them or give them free access to financial experts? Will they even live long enough to reap the benefits of their automatic IRA account?
Longevity may be increasing in this country but we should always be cautious of statistics. Longevity varies widely by gender, race, income level, health status, region of the country…I don’t know, pick something. In fact, life expectancy has actually declined for women between 1997 and 2007 which is extremely rare in developed countries. “The nation has experienced a widening gap between the most and least healthy places to live. In some regions of the country, men and women are dying younger on average than their counterparts in nations such as Syria, Panama and Vietnam.”
As with any policy change or “universal” action, all parties who will be affected by the changes must be considered. I encourage you to read Powell’s article and to approach his solutions cautiously. Though it cannot be the only answer, there is one that seems to me most helpful and realistic: Financial education for all.
Many older workers would like to retire slowly, decreasing their hours at work before completely retiring. With the current economic downturn, people are expressing interest in working longer. People have a lot of their identity wrapped up in their careers, so reducing your hours can be a smoother transition both psychologically and financially. But is this option available to everyone? The Boston College Center for Retirement Research answered this question in a report titled Phased Retirement: Problems and Prospect.
Phased retirement is a white-collar phenomenon and high income individuals who are White, wealthy and educated are more likely to be able to reduce their hours with their employer. Interestingly, 73% of employers interviewed said they would ‘work out’ a phased retirement plan for certain managerial or higher level employees. These informal policies dominate over formal procedures with older workers being kept on to train colleagues or new staff. Unfortunately, not all workers are given the same options.
Employers point to a variety of constraints that make it difficult for them to provide phased retirement options. Pension plans or paying health insurance for older part-time workers is a frequently named drawback. Employers also express interest in only keeping certain employees. In fact, phased options are often offered to the best or favored employees allowing the employer to weed out undesirable workers. Still, one of the main reasons a company did not have phased retirement was simply because their business did not want or need part-time work.
The good news is that phased retirement options continue to increase among companies. If you are interested in phased retirement talk to your employer. Many different arrangements can be made to accommodate both the worker and the company. Here are some tips:
- Double check – does your employer already have a phased retirement program in place?
- Determine your needs – what do you want and what options are realistically available to you?
- Pension impacts – does your plan provide for phased retirement? how could it impact your benefits?
- Health insurance – what will happen to your health benefits if you reduce your hours?
- When can I start – does your employer have policies that could affect your decision? (for example: 6 months after you retire you can come back and work part-time)
- Employer expectations – what will be expected of you and how will your role and responsibilities change?
- Find more information from the Wall Street Journal and AARP’s Public Policy Institute
Employment over one’s life time is rarely with a single company. Individuals often change jobs or employers over their working years. People leave to have children, to go back to school, or to try their hand at running a business. All these changes in employment could confuse retirees trying to determine what pensions they are entitled to. And let’s be honest, who couldn’t use an extra $100 a month.
For New England residents there is a free resource that I’d love to share with you. The Pension Action Center was launched in 1999 and is based out of the University of Massachusetts Boston. Its primary program, the New England Pension Assistance Project, brings together pension experts, pension lawyers and a group of dedicated, knowledgeable volunteers to help you understand or obtain your pension benefits.
As their website states, the goals of the Center are to:
• offer individual counseling and assistance
• help you negotiate layers of bureaucracy
• help locate pension funds
• explain the benefits and rights under your pension plan
• supply referrals to attorneys if needed
• supply a listing of financial advisers if needed
The Pension Action Center complied this informative booklet in 2009 to help retirees answer a few burning pension questions. Am I entitled to a pension from my former employer or my spouse’s former employer? Where do I start looking? What documents will I need to understand my situation? What resources are available in my state? I think I have a lost pension, now what?
Employers are not required to provide a pension, so everyone’s results will be different. But now more than ever it is important to make sure you are getting all the benefits you are entitled to from your years of hard work. Check out the booklet to read more or contact the Center if you’d like to talk to someone directly. No one should be missing out on their much needed and well deserved retirement income.
The New England Pension Assistance Project
Phone: (617) 287-7307 or toll free (888) 425-6067
Fax: (617) 287-7080
Recently I’ve been working on this crazy data analysis for my professor. I say crazy because it involves 9 waves of data (different interview time points), a sample of over 22,000 Americans nearing retirement, and over 400 calculated Dow Jones scores representing changes in the stock market from 1992-2008 (That took me a better part of a week!) Our data comes largely from the Health and Retirement Study (HRS), a nationally representative, longitudinal data set that looks at people over 50 and follows them through the end of their working lives and into retirement.
This all started with an idea about the lasting effects of the 2008 stock market crash. All else being equal, whether you were interviewed by the HRS in March or December should have no bearing on your retirement plans. Unless, of course, historical time and place played a role in your decisions. By December you may have been listening to the news, watching your stocks drop, and talking to your spouse about an unanticipated future. Did the changes in 2008 influence people’s plans for retirement? Preliminary results indicate, Yes. Many people who were planning on working till 62 or 65 are now planning to work longer or are no longer sure when they can expect to retire.
So we’ve taken it a step further (enter my hundreds of stock calculations) to examine stock market fluctuations from 1992 to 2008 and see whether or not economic conditions at the time people are interviewed have any effect on individuals’ plans for retirement. I mean sure, people may be thinking and worrying about it but have they really changed their plans? The answers are yet to come!