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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.
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.
Today the University of Massachusetts Boston has made the fourth edition of “The Guide for Elders: Planning that Protects You and Your Assets” available for free online. The Guide which started in 1993 and has continued to be revised over time (most recently in 2010) hopes to be a resource for older adults so they know what steps to take to get and keep their affairs in order. There are “increasing numbers of reports of elderly people being abused, exploited, or victimized in ways that rob them of their life savings and their dignity. Those cases involving financial exploitation saw elders victimized by friends, neighbors, and even family members.”
Financial and health care matters are often confusing and the Guide provides their readers with clear descriptions and scenarios to illustrate problem areas. After reading the Guide you should be able to answer a number of questions: Why do I need a power of attorney, health care proxy, or will? When should I consider entering a nursing home? What can I do if I get “ripped off,” or if I am the victim of a crime or abuse?
Although not intended as a substitute for individual counsel and assistance, the Guide will allow you to prepare and determine if your situation needs additional professional advice. As clearly stated in the introduction, “Elders need to know what steps they can take to avoid being victimized and what they should do when and if it happens to them. This Guide’s…emphasis is on prevention and avoidance of problems, with the recognition of the old adage that an ounce of prevention is worth a pound of cure.”
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.
2010 saw the passing of the Elder Justice Act (EJA), the most comprehensive federal elder abuse law in U.S. history. We know from earlier studies that roughly 11 to15% of people ages 60 and older face some form of elder abuse each year. Experts agree this number is under-reporting and the scope of the problem is larger than we realize. According to a 2008 study by the Metlife Mature Market Institute et al., the perpetrators of elder financial abuse are typically not strangers. They are often businesses, service providers, family and friends who have gained the trust of the older adult. Here are some interesting findings:
- The victims of elder financial abuse are losing a combined total of $2.9 billion dollars annually.
- Women are twice as likely to be victims of financial abuse as men. Most of these women are age 80-89, living alone, and requiring some help in the home or with their health care.
- Nearly 60% of the perpetrator were men, mostly aged 30-59.
- The amount of money stolen by family or friends increased during the holidays.
Recently the researchers at MetLife updated these numbers, discovering that elder financial abuse cases have risen 12% since 2008. Though instances are increasing, data suggests that only one out of 43.9 financial exploitation cases are reported. Unfortunately the newly passed EJA can do nothing without the support of Congress and the President. Currently the Act only provides Congress with the authority to spend up to $777 million over the next four years on elder abuse. To actually see the money used, however, a separate bill must be passed by Congress and signed by the President.
Until this can get sorted out, and the EJA can strengthen existing adult protective services (APS), here are ways the report says you can watch out for yourself:
- Stay Alert – Don’t leave valuable items, cash, or checkbooks out in the open. Don’t be left out of decisions about your finances. Don’t sign anything without reading first and having someone you trust review it. If you are a concerned family member, be sure to ask periodically about the elder’s financial situation and keep an eye out for changes in their behavior (i.e. sudden worry about money) and any other sudden financial changes or unusual expenses.
- Stay Organized – Keep track of possessions, mail, and checking and savings account balances. Know who is calling and use an answering machine or caller ID to screen calls. Know who is asking for personal information and why (never provide this over the phone!)
- Stay Informed – Know where to go if you suspect abuse (your local APS, the police, or get help from bank employees). Talk to an attorney and keep track of your will, future caregiving arrangements and power of attorney.
- Report Abuse – Anyone (e.g. elder, family member, physician, bank teller, etc.) suspecting elder abuse should be reporting it to the local APS. Reports can be made confidentially and reporters are protected from civil and criminal liability. It is always better to err on the side of caution.
The Elder Justice Act comes almost 40 years after the passage of the Child Abuse and Neglect Prevention Act. Congress, and the general public, see the value in protecting vulnerable children from abuse and today we spend upward of $7 billion to help this effort. Surely vulnerable older adults deserve the same protection.
During a Qualitative Research Methods course, I conducted a focus group on young adults discussing how they view retirement and what, if anything, are they doing about it. Being interested in the topic but finding little besides opinions out there, I wanted to ask the source. My findings are not generalizable by any means, however my participants did bring up a reason for not saving no one has seemed to mention yet.
Financial planners and economists out there are screaming at young adults. Timing is everything, You need a Roth IRA, and Research urges you to start now. And people speculate as to why they are not listening. They have student loans, they are irresponsible, they only care about consumption in the present, they have other financial priorities such as a house, or they are anxious about Social Security and whether or not they can trust our government. Yes, all of these topics did come up in my conversation with the group, but so did something else. Intimidation.
75% of the individuals I spoke with are very intimidated by the thought of a retirement account or a 401(k). They know it is a good idea and feel foolish for “not speaking the the HR guy,” but frankly they are confused and scared. This is their money, what little they have, and they don’t know where to put it. They are listening to the professionals yelling at them to save and are whispering back, “But what does this even mean? What am I getting into?” Why this is interesting to me is because no one is talking about it. Not all young adults have the opportunity to put money in a 401(k), but many young adults who have this option feel uneducated. Think about how many of them were raised, taught to arm themselves with knowledge when making a decision, weigh all the options, shoot for the best and accept nothing less. It’s no wonder they feel they cannot make this significant decision about their future when they are missing information.
It is sad to me that financial education, something that impacts every American’s life, has been cut from the school systems. If not cut, it is an elective course or the “lower-level” math. We teach our children about history, geography, biology, literature, chemistry, and calculus. Proper knowledge of these will get you into college and allow you to acquire a better paying job, but none of these subjects will be a part of every American’s future. None of these subjects affect their life like having good financial knowledge. Too bad they don’t get it, and so we leave them uninformed and intimidated.