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A 2018 Merrill Lynch survey found 79 percent of parents financially support an adult child between the ages of 18 and 34, and 25 percent said they would be willing to draw from retirement savings to do it. I joined CBS This Morning to look at how this can affect everyone in the family.
Pensions are certainly not as common as they once were, but they're still out there, and we still field a lot of questions on them. Usually the most common one is whether or not a lump sum payment is the best option. That's the case with Phil from Tennessee on the latest BONUS call.
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After dropping to record lows between 2009 and 2013, the percentage of workers confident about having enough money for a comfortable retirement, continues to increase, according to the 2015 Employee Benefit Research Institute Retirement Confidence Survey. 22 percent of Americans are now very confident (up from 13 percent in 2013 and 18 percent in 2014), while 36 percent are somewhat confident. That’s the good news. Unfortunately, 24 percent are not at all confident (statistically unchanged from 2013 and 2014). EBRI notes that confidence is strongly related to whether or not people have retirement plans. Among those with a plan, the percentage of very confident doubled from 14 percent in 2013 to 28 percent in 2015.
The fact that 67 percent of all workers (or their spouses) – and 78 percent of full time workers – have saved for retirement is misleading, because total savings remain low. A staggering 57 percent say total value of savings and investments is less than $25,000, including 28 percent who have less than $1,000. As you would expect, retirement savings increase with household income and education.
Lack of education has become a big problem for Americans. According to research from the Hamilton Project, the median, inflation-adjusted earnings of men without a high school degree fell by 20 percent between 1990 and 2013 and for women, earnings fell by 12 percent. In contrast, both men and women with a bachelor’s degree saw their earnings rise between 1990 and 2013, by 7 and 16 percent respectively.
With median income dropping, it’s no wonder that half of the respondents to the EBRI survey said that cost of living and day-to-day expenses were the two main reasons that they are not saving (or saving more) for retirement. Even so, it is still amazing to learn that even those who are under pressure say that they could save $25 a week more than they are currently saving.
Instead of saving more, respondents are relying on a later retirement date. In 1991, just 11 percent of workers expected to retire about age 65. This year, the number has more than tripled to 36 percent. Working longer always sounds like a great solution, but what happens if your boss hasn’t bought into your plan, or you have a job that is too physically demanding to continue late in life? In fact, while 67 percent of workers say they plan to work for pay after they retire, just 23 percent of retirees report they have actually worked during retirement.
It should also be noted that while 63 percent of today’s retirees say that Social Security is a major source of income in their retirement, about half that number (31 percent) of current workers expect Social Security to be a major source of income in retirement. That result probably speaks to a misunderstanding of the current state of the Social Security system.
According to The 2014 Annual Report of the SS Board of Trustees, the trust funds' assets are now $2.76 trillion and should keep growing through 2019. After 2033, the annual revenue from taxes will still be enough to cover 75 percent of future costs, so while many say flippantly, “Social Security won’t be there for me,” the numbers say otherwise.
Finally, the EBRI survey found that most people do not like to step on the scale to see just how much work they need to do. Just 48 percent have tried to calculate how much money they will need in retirement. For the other 52 percent, EBRI’s Choose to Save Ballpark E$timate is a great resource to crunch numbers. You can even play with some of the variables to see the impact of working longer, saving more and living longer. Retirement confidence may be influenced by a variety of external factors, but it is clear that those who take action will likely feel a lot better.
If only fixing a leaky retirement account were as easy as repairing a leaky faucet. A new report from the Center for Retirement Research at Boston College found that money is seeping out of retirement accounts at alarming rates, causing permanent damage to future retirement account balances. The cause of these leaks is “any type of pre-retirement withdrawal that permanently removes money from retirement savings accounts.” In other words, the ability for American workers to tap retirement accounts through a variety of ways, which include: In-service withdrawals (either hardship withdrawals or for those that occur for workers over the age 59 1/2); cash outs or lump sum distributions, which occur after an employee leaves a job; and loans against 401(k) assets. While all of these events are perfectly legitimate, they can “erode assets at retirement.”
The Center worked with Vanguard Investments to determine just how much each of the methods for accessing retirement assets can reduce future retirement nest eggs. While cash outs are the most damaging, all three show a total leakage rate of 1.2 percent of retirement assets. The analysis then used that rate to project the impact on 401(k) balances at age 60 and the bottom line is startling: “Leakages reduce 401(k) wealth by 25 percent. These estimates represent the overall impact for the whole population, averaged across both those who tap their savings and those who do not.”
So how do we repair leaky retirement accounts? The research makes a series of policy recommendations to plug the holes and keep monies in the plan for retirement, including:
Altering the definition of “Hardship”: Hardship withdrawals allow plan participants to withdraw funds if they face an “immediate and heavy financial need.” Government rules allow for hardship withdrawals under six circumstances: (1) To cover medical care expenses (2) To pay for funeral expenses (3) To prevent the eviction from or foreclosure on the mortgage on the principal residence (4) To cover certain expenses to repair damage to the principal residence (5) To cover costs directly related to the purchase of a principal residence or (6) To pay for post-secondary education.
While the paper acknowledges that it probably makes sense to keep hardship withdrawals as a safety valve for families in financial trouble, it suggests that “hardship” could be limited to serious, unpredictable hardships. Those might include: total and permanent disability; Health expenses in excess of 7.5 percent of AGI (as opposed to 10 percent under current law); and job loss, as documented by the receipt of unemployment benefits.
Separately, the report argues that the age for non-penalized withdrawals from both 401(k) and IRAs be raised to at least Social Security’s Earliest Eligibility Age, which is currently 62.
Cash-Outs: When you leave a job, there are usually three choices as to what to do with your retirement assets: you can leave the funds in the plan (if the employer permits), you can roll over the balance into an IRA, or into a new employer’s 401(k), or you can take a lump-sum distribution. It’s the third option that causes leakage.
The report suggests closing down the ability to cash out of a plan altogether and instead change the allowable options to leaving the money in the prior employer’s plan (even balances under $5,000); to transfer the money to the new employer’s 401(k); or, for those leaving the labor force, to roll over the plan balance into an IRA.
Loans are the least worrisome of the three leakage events. The reason is that most borrowers continue to contribute to the plan while they have a loan; and most of the money is repaid.
Most observers believe that these fixes are unlikely to be implemented any time soon, so the best bet for plan participants is to think twice before they tap the money in retirement accounts – doing so could prevent a small leak from turning into a deluge of cash that flows out of their grasps.
Americans are worried about retirement…very worried. According to a recent survey from Wells Fargo and Gallup, despite recent gains in the economy and the financial markets, 46 percent of investors continue to be nervous that they will outlive their savings in retirement. That’s probably a pretty valid concern, considering that a sizable percentage of workers report they have virtually no savings and investments. The reason for the dearth of retirement funds is clear: the cost of living and day-to-day expenses leaves little room in the savings category of a family’s budget. A new study by the Center for American Progress shows just how heavy the burden has grown: For a typical married couple with two children, the combined cost of child care, housing, health care and savings for college and retirement jumped 32 percent from 2000 to 2012 - and that's after adjusting for inflation. Meanwhile, median household income is down 5.7 percent from 2000. The Great Recession only exacerbated the trend. More than 20 percent of those who were laid off over the past five years are still unemployed and one in four, who found work, is in a temporary job. Of those who were lucky enough to land new jobs, 46 percent say they had to take a pay cut and 44 percent reported a drop in status.
The increase in expenses, combined with stagnant incomes is creating a retirement squeeze, where middle-income families are finding it hard to build savings. For those who are struggling, the advice remains the same: do the best that you can to address what I like to call “The Big Three Financial Goals”. Those include: (1) Paying down consumer debt (credit card, auto loans) (2) Establishing an emergency reserve fund (6-12 months worth of living expenses for those who are still working and 12-24 months worth of living expenses for retirees) (3) Contributing to retirement accounts.
For many, conquering the Big Three requires that you figure out where your money is going. The easiest way to do that is to track your expenses for three months. You can use a software program, like Quicken, an app, like Mint, a spreadsheet or an old-fashioned legal pad. Without determining how much money is coming in and going out today, it’s tough to do any planning.
A word of encouragement here: When I was a financial planner, some of the clients who started with big debts, turned out to be fantastic savers. After they whittled down the loan balances, they simply shifted the outgoing payment into savings, and voila, they were able to build their nest eggs.
When it comes to older Americans, the lack of savings is more critical. According to the nonprofit National Council on Aging (NCOA), one in three Americans age 60 or older is economically insecure and 49 percent of Americans 60 and older are very concerned about whether their savings and income will be sufficient to last for the rest of their lives.
These statistics encouraged NCOA to launch a free, confidential site for older, financially insecure Americans called EconomicCheckUp (https://www.benefitscheckup.org/esi-home). The site prompts you to answer a few simple questions and will then generate a personalized report with tips on how you can better manage your budget, save money, and set financial goals. The site can translate into real, bottom line results. According to Ramsey Alwin of NCOA, “We’ve found that individuals using EconomicCheckup, on average, receive $3,000 worth of recommendations to free up their annual budget.” Three grand…now that’s worth some of your time!
Another part of the site is devoted to helping older Americans find work later in life. Given that some may have retired a little bit earlier than expected, or lost their jobs in the recession, this too is a valuable service.
Just in case you thought that there were not enough retirement accounts out there, along comes President Obama’s latest entry in the crowded category. “MyRA” (rhymes with IRA and looks like a misspelled woman’s name) is supposed to be a “starter” retirement account, for those workers who do not currently have an employer-based plan available (about half of all workers and 75 percent of part-time workers lack access to employer-sponsored retirement plans, according to the White House) and whose small contributions to a traditional or Roth IRA would be eaten up by investment fees. A MyRA account will be similar to a Roth IRA, in that contributions are made with after-tax dollars and grow tax-deferred and their availability will be limited by income (married couples with modified adjusted gross incomes up to $191,000 and individuals earning up to $129,000). The money you put into a MyRA account can be withdrawn tax-free at any time without penalty, subject to the same restrictions as the Roth. Additionally, contributions that you make to a myRA will count against your Roth contributions and the same annual limits will apply: $5,500 per year if you are under age 50, and $6,500 if you are over age 50.
If it’s just like a Roth, you may be wondering why the MyRA needs to exist at all? The MyRA has three differentiating features from the Roth: it requires a low minimum investment, participants will be able to contribute through payroll deductions and the cost of investing is ZERO.
One complaint that I have often heard from readers and listeners is that even no-load fund families like Vanguard, Fidelity and T. Rowe Price require anywhere between $1,000 and $3,000 for the initial purchase of a fund inside of a Roth IRA. (As a note, TD Ameritrade has NO minimum to establish either a Roth or an IRA.) The MyRA attempts to address the quandary of high minimums by setting the bar low: initial investments can be made with as little as $25, and continuing contributions can be as little as $5.
The money will go into MyRA accounts through payroll deductions - initially through a pilot program to workers whose employers sign on by the end of this year. Once the program reaches full implementation, anyone who has direct deposit for his or her paycheck will be eligible to enroll, according to Treasury. This is a helpful feature, since it’s always harder to make a retirement contribution once that money hits the general checking and savings account.
There is nothing that will eat away at investments faster than fees. Even if you purchase an inexpensive index fund within a retirement account, there is always some expense. With the MyRA, retirement savers will have no cost at all, but there’s a hitch: you only get one investment option. (Think of this as the Henry Ford approach: you can have any car color you want, as long as it’s black!)
President Obama will instruct the Treasury Department to create a safe, fixed investment fund modeled after the federal employees’ Thrift Savings Plan (TSP) Government Securities Investment Fund (“G-Fund”), which pays a variable rate. That fund earned around 1.75 in 2012, and had an average annual return of nearly 2.7 percent for the five years that ended in December 2012 and 3.6 percent between 2003 and 2012.
Finally, unlike the Roth, savers will be able to fund the MyRA to a total of $15,000. After reaching that threshold, or after 30 years, the balance can be rolled over to a private retirement account.
Obviously, saving $15,000 is not going to be enough for anyone’s retirement, but I like the idea because it helps to model the behavior of retirement saving. For those who have not had the opportunity to do so, I am all for a plan that helps to get them on the right track.
Listeners have amassed sizable cash reserves-now what to do with all of that moo-lah? Is it time to pay down the mortgage, invest or do maintain the position?
Walt, Lynn Steve and Ang are all sitting on a pile of cash. In each case, the advice is slightly different, proving once again that every situation is unique.
Mark has had a variable annuity for five years and has been offered the opportunity to purchase a rider that would protect his downside risk-is it worth it? Meanwhile, Nell's advisor is suggesting a change in how he will charge her for his services. She wonders if the new fee is worth it?
Katie asked about combining retirement accounts and Elmar and his wife want to know what steps they should take to go from two incomes to one.
Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:
Congress finally got its act together and agreed on a deal to reopen the government and raise the debt ceiling. Sure, we may have to go through this all over again in January and February, but in the mean time, it's back to our regularly scheduled programming!
Our young listeners are so great, because in answering their questions, I can review some of the basic premises we should all be applying throughout our lives. Leah got us started with questions about rolling over an old retirement plan and whether or not to combine assets with her soon-to-be husband. Aaron's wife wants to buy a house, but is that the best idea at this point in their lives? Steve needed advice about where to invest $5K and Tim and his wife have whole life insurance and want to know whether to exchange it for term -- YES! 29 year old Jaydan wrote such a nice e-mail, that I wanted to give him a shout-out on the show and in the show notes as well.
On the retirement front, Cheryl asked about the nasty provision of Social Security that reduces benefits for federal employees (Windfall EliminationProvision (WEP) and Government Pension Offset (GPO). While there is legislation pending to undo these punitive rules, given the state of affairs in DC, I wouldn't hold my breath for action.
Ena has a wonderful problem: she has saved $1.35 million and needs a strategy to create income from the portfolio in retirement. Now is a good time to interview fee-only advisors. Howard asked about index vs. managed funds (INDEX RULES!), Andy is weighing a lump sum versus an annuity for his wife's retirement account, and Robert asked about the file and suspend strategy for Social Security.
Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:
With all of the drama out of Washington DC, you probably didn't realize that it was just Financial Planning Week. To celebrate, our guest, fee-only financial planner Gary Schatsky of ObjectiveAdvice.com provides everything you need to know about how to choose a financial advisor.
For those who are in the process of interviewing financial professionals, here are the 10 Questions you should ask!
We started the show with a great call from Louiseann from MD brought up a vexing question: where can a small investor go? Then we helped Chris from OR, who is managing her own $1 million portfolio and needs to understand how to evaluate her performance. Linda from TX wants to know what type of retirement plan would be best for her husband, who is a doctor earning big bucks!
Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:
With the government shutdown in full swing and the debt ceiling looming, should you be making any changes to your portfolio? The easy answer is: NO! Stick to your diversified, balanced approach and you will be more likely to survive this latest crisis with less anxiety.
David and Matt had government shutdown-related questions, but Jane was focused on what to do with a lump sum to help fund retirement.
Shelley's debt consolidation questions allowed me to talk about financial scams, while Milton and Matt sought advice on selecting financial advisors.
TIB and Andy wrote about investing retirement assets, which Daphna and Tim are just starting their retirement funding journey.
Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:
