Jonathan Clements's Blog, page 274
August 16, 2021
Runs in the Family
MY 28-YEAR-OLD wanted to know how much to contribute to her retirement plan at work. As a father, this was a text that I loved to get.
In May 2020, we toasted Genevieve over Zoom when she graduated with a master���s degree in social work. Within a week, she���d landed a job helping children in foster care and their families. Now, nearly a year later, she was invited to join the retirement savings plan at work, a 403(b) at her nonprofit agency.
���How much is the match?��� I asked her over the telephone.
She texted someone in human resources. ���There���s a 100% match on the first 3% and a 50% match on the next 2%,��� she said.
���Well,��� I said, ���if you save 5%, you can give yourself a nice, big raise.���
She decided to go one better, signing up to save 6% of pay, or 10% when you include her employer���s matching contributions. She also contributes annually to a Roth IRA, so her total retirement savings is approaching 20%. She���s also putting away money for a house purchase.
Where does Genevieve come by this saving discipline? We give credit to Charlotte, my late mother. Her well-to-do father���my grandfather���lost everything in the Great Depression. My mother could never shake the fear that the bottom could drop out unexpectedly. She watched her pennies and saved religiously���even during the Blitz in London, when she was with the Red Cross and managed to put some pounds aside.
My mother opened a savings account for me when I was two months old. I still have the passbook with every deposit recorded. Similarly, when Genevieve was young, we made an event of opening her savings account. We chose a bank with a grand marble lobby where a kindly banker welcomed their littlest customer. My mother���s example of savings was passed down in the family.
Most workers Genevieve���s age don���t rush to sign up for a 401(k) plan voluntarily. If you ask them why (as I have) they say retirement is far away and they���ll save for it later. They seem to possess a defective telescope, in the memorable phrase of English economist Arthur Pigou.
���Our telescopic ability is defective and we��� see future pleasures, as it were, on a diminished scale,��� Pigou wrote in 1920. ���This reveals a far-reaching economic disharmony. For it implies that people distribute their resources between the present, the near future, and the remote future on the basis of wholly irrational preference.���
Our preference for the present helps explain the world around us. Kitchens are redone while 529 accounts languish. A professional friend who makes a top income says he���ll work forever, shrugging to signify he is powerless to change his life���s trajectory.
Lots of people could benefit from an intervention when it comes to retirement savings. Happily, behavioral economists invented the automatic enrollment plan for just such a purpose. Rather than waiting for workers to sign up, an employer automatically enrolls new employees in the 401(k) or 403(b) plan. Contributions are invested in a mutual fund that mixes stocks and bonds in amounts judged prudent for the employee���s age. Most employers automatically increase their employees��� savings rate once a year, usually by one percentage point.
Workers can stop contributing whenever they want. Yet relatively few do. Ninety-two percent of employees remain in plans with automatic enrollment, according to 2020 data from Vanguard Group. Only 62% participate in plans if employees need to sign up voluntarily. That big lift, which translates into millions of more savers nationally, was achieved through a couple of insights into human behavior.
First, that ���I���ll get to it later��� inertia now works in employees��� favor when they���re automatically enrolled. Opting out of the plan would take an effort, however slight. Second, people who aren���t sure how to handle their finances tend to accept their employer���s decisions. It���s a phenomenon known as the endorsement effect.
One problem remains, however. Historically, workers automatically enrolled tend to save less than those who enroll themselves. Why this is so is another example of the endorsement effect, only this time it���s unfortunate.
When the federal government wrote the regulations for the first automatic plans in 1988, it included a hypothetical example. In that example, an imaginary employer set workers��� initial savings rate at 3%. Many employers���anxious to avoid regulatory missteps���took that rate as gospel. Plans with a 3% savings rate predominated for years. It was like filling a swimming pool with just three feet of water���it���s too little for a good swim.
Fund companies such as Fidelity Investments and T. Rowe Price suggest saving at least 15% of pretax pay for retirement, including any employer contributions. Actual savings rates remain stubbornly below that goal. Among retirement plans administered by Vanguard, which suggests saving between 12% and 15%, workers saved 11.1% on average last year, including matching contributions. Close, as they say, but no cigar.
Which is why I loved getting my daughter���s text: ���How much should I contribute to the plan?��� The answer: More than most people do.
Greg Spears worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger���s Personal Finance magazine. After leaving journalism, he spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. Greg currently teaches behavioral economics at St. Joseph���s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. He is also a Certified Financial Planner certificate holder. Check out Greg's earlier articles.
In May 2020, we toasted Genevieve over Zoom when she graduated with a master���s degree in social work. Within a week, she���d landed a job helping children in foster care and their families. Now, nearly a year later, she was invited to join the retirement savings plan at work, a 403(b) at her nonprofit agency.
���How much is the match?��� I asked her over the telephone.
She texted someone in human resources. ���There���s a 100% match on the first 3% and a 50% match on the next 2%,��� she said.
���Well,��� I said, ���if you save 5%, you can give yourself a nice, big raise.���
She decided to go one better, signing up to save 6% of pay, or 10% when you include her employer���s matching contributions. She also contributes annually to a Roth IRA, so her total retirement savings is approaching 20%. She���s also putting away money for a house purchase.
Where does Genevieve come by this saving discipline? We give credit to Charlotte, my late mother. Her well-to-do father���my grandfather���lost everything in the Great Depression. My mother could never shake the fear that the bottom could drop out unexpectedly. She watched her pennies and saved religiously���even during the Blitz in London, when she was with the Red Cross and managed to put some pounds aside.
My mother opened a savings account for me when I was two months old. I still have the passbook with every deposit recorded. Similarly, when Genevieve was young, we made an event of opening her savings account. We chose a bank with a grand marble lobby where a kindly banker welcomed their littlest customer. My mother���s example of savings was passed down in the family.
Most workers Genevieve���s age don���t rush to sign up for a 401(k) plan voluntarily. If you ask them why (as I have) they say retirement is far away and they���ll save for it later. They seem to possess a defective telescope, in the memorable phrase of English economist Arthur Pigou.
���Our telescopic ability is defective and we��� see future pleasures, as it were, on a diminished scale,��� Pigou wrote in 1920. ���This reveals a far-reaching economic disharmony. For it implies that people distribute their resources between the present, the near future, and the remote future on the basis of wholly irrational preference.���
Our preference for the present helps explain the world around us. Kitchens are redone while 529 accounts languish. A professional friend who makes a top income says he���ll work forever, shrugging to signify he is powerless to change his life���s trajectory.
Lots of people could benefit from an intervention when it comes to retirement savings. Happily, behavioral economists invented the automatic enrollment plan for just such a purpose. Rather than waiting for workers to sign up, an employer automatically enrolls new employees in the 401(k) or 403(b) plan. Contributions are invested in a mutual fund that mixes stocks and bonds in amounts judged prudent for the employee���s age. Most employers automatically increase their employees��� savings rate once a year, usually by one percentage point.
Workers can stop contributing whenever they want. Yet relatively few do. Ninety-two percent of employees remain in plans with automatic enrollment, according to 2020 data from Vanguard Group. Only 62% participate in plans if employees need to sign up voluntarily. That big lift, which translates into millions of more savers nationally, was achieved through a couple of insights into human behavior.
First, that ���I���ll get to it later��� inertia now works in employees��� favor when they���re automatically enrolled. Opting out of the plan would take an effort, however slight. Second, people who aren���t sure how to handle their finances tend to accept their employer���s decisions. It���s a phenomenon known as the endorsement effect.
One problem remains, however. Historically, workers automatically enrolled tend to save less than those who enroll themselves. Why this is so is another example of the endorsement effect, only this time it���s unfortunate.
When the federal government wrote the regulations for the first automatic plans in 1988, it included a hypothetical example. In that example, an imaginary employer set workers��� initial savings rate at 3%. Many employers���anxious to avoid regulatory missteps���took that rate as gospel. Plans with a 3% savings rate predominated for years. It was like filling a swimming pool with just three feet of water���it���s too little for a good swim.
Fund companies such as Fidelity Investments and T. Rowe Price suggest saving at least 15% of pretax pay for retirement, including any employer contributions. Actual savings rates remain stubbornly below that goal. Among retirement plans administered by Vanguard, which suggests saving between 12% and 15%, workers saved 11.1% on average last year, including matching contributions. Close, as they say, but no cigar.
Which is why I loved getting my daughter���s text: ���How much should I contribute to the plan?��� The answer: More than most people do.
Greg Spears worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger���s Personal Finance magazine. After leaving journalism, he spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. Greg currently teaches behavioral economics at St. Joseph���s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. He is also a Certified Financial Planner certificate holder. Check out Greg's earlier articles.The post Runs in the Family appeared first on HumbleDollar.
August 15, 2021
Summer Lull
REMEMBER 2020���S BIG market swings? Financial markets have been more boring of late. But are things too quiet?
The VIX is the most ��commonly cited indicator of market volatility. Turn on CNBC or flip through The Wall Street Journal and you���ll likely learn the latest reading for the ���fear gauge.��� Last Friday's close was among the lowest of the year, with the VIX at a little more than 15, versus an historical average closer to 20. Things have indeed been calm.
A VIX in the low to mid-teens suggests market participants believe stocks won���t be too volatile in the near term. For perspective, it spiked above 80 during 2008���s financial crisis and 2020���s COVID-19 crash.
This time of year can be feast or famine for stock market volatility. Trading volume is typically lower than usual, with many investors away on vacation���or, at least, that���s the default explanation. August is also a time that can precede significant volatility. September and October are infamous for featuring bouts of wild market movements.
Don���t feel the need to check the VIX each day. Here���s why.
Do check that your portfolio aligns with your ability, willingness and need to take risk. If you haven���t done so lately, consider rebalancing back to your target asset allocation. Whenever volatility returns, you don���t want to discover that your holdings were riskier than you thought. Nobody knows if a prolonged market correction is imminent, but there might be some reversion��to the mean before long. Use these calmer days to ensure your stock-bond mix is where it ought to be.
The VIX is the most ��commonly cited indicator of market volatility. Turn on CNBC or flip through The Wall Street Journal and you���ll likely learn the latest reading for the ���fear gauge.��� Last Friday's close was among the lowest of the year, with the VIX at a little more than 15, versus an historical average closer to 20. Things have indeed been calm.
A VIX in the low to mid-teens suggests market participants believe stocks won���t be too volatile in the near term. For perspective, it spiked above 80 during 2008���s financial crisis and 2020���s COVID-19 crash.
This time of year can be feast or famine for stock market volatility. Trading volume is typically lower than usual, with many investors away on vacation���or, at least, that���s the default explanation. August is also a time that can precede significant volatility. September and October are infamous for featuring bouts of wild market movements.
Don���t feel the need to check the VIX each day. Here���s why.
Do check that your portfolio aligns with your ability, willingness and need to take risk. If you haven���t done so lately, consider rebalancing back to your target asset allocation. Whenever volatility returns, you don���t want to discover that your holdings were riskier than you thought. Nobody knows if a prolonged market correction is imminent, but there might be some reversion��to the mean before long. Use these calmer days to ensure your stock-bond mix is where it ought to be.
The post Summer Lull appeared first on HumbleDollar.
Retiring on Purpose
WHEN I GIVE presentations on retirement, I ask folks about their worries. For pre-retirees, their biggest concern is not having enough money. That���s no surprise. Financial firms spend millions pushing the importance of saving for retirement.
But when I pose the same question to recent retirees, I get a completely different answer. Overwhelmingly, their biggest concern is finding purpose in retirement. Similar results emerge from a recent survey by Age Wave and Edward Jones, which found that 92% of retirees agree that ���having purpose is key to a successful retirement.��� Indeed, 93% believe ���it���s important to feel useful in retirement��� and 87% agree that ���being useful helps them to feel youthful.���
I���ve always believed that doing work you love and are passionate about can serve as a personal ���fountain of youth.��� After initially failing miserably at retirement, what I���ve learned is that a successful retirement is much more than a money problem. Instead, it���s a design problem that needs to be solved.
It takes a lot of thought, time and planning to design a sustainable, satisfying retirement that you���ll be happy with for the next 30-plus years. But if you do it right, the payoff is enormous.
Don���t make the same mistake that I made and expect to fall into a happy retirement simply because you���ve accumulated a lot of money. The key to a successful retirement is to figure out exactly what you���ll be retiring to. Prior to retirement, your goal is to identify what your sources of purpose will be and then build a life around that. Do that, and retirement will be pretty good.
But when I pose the same question to recent retirees, I get a completely different answer. Overwhelmingly, their biggest concern is finding purpose in retirement. Similar results emerge from a recent survey by Age Wave and Edward Jones, which found that 92% of retirees agree that ���having purpose is key to a successful retirement.��� Indeed, 93% believe ���it���s important to feel useful in retirement��� and 87% agree that ���being useful helps them to feel youthful.���
I���ve always believed that doing work you love and are passionate about can serve as a personal ���fountain of youth.��� After initially failing miserably at retirement, what I���ve learned is that a successful retirement is much more than a money problem. Instead, it���s a design problem that needs to be solved.
It takes a lot of thought, time and planning to design a sustainable, satisfying retirement that you���ll be happy with for the next 30-plus years. But if you do it right, the payoff is enormous.
Don���t make the same mistake that I made and expect to fall into a happy retirement simply because you���ve accumulated a lot of money. The key to a successful retirement is to figure out exactly what you���ll be retiring to. Prior to retirement, your goal is to identify what your sources of purpose will be and then build a life around that. Do that, and retirement will be pretty good.
The post Retiring on Purpose appeared first on HumbleDollar.
Why I Won’t Wait
FINANCIAL EXPERTS often advise retirees to delay claiming Social Security. Their actuarial tables and statistics make a compelling case. Still, as soon as I���m eligible, I���ll strongly consider claiming Social Security.
Why? I never knew either of my grandfathers. My mom���s dad died of a stroke when she was age 19. One of my favorite photos of my parents��� wedding is that of my uncle���my mom���s oldest brother���walking her down the aisle. My grandfather never got to see my parents wed.
My dad���s father died very young as well. Dad had no memory of his father. My dad Jorge passed away at 72. I was grateful he had 10 years of retirement, and was able to enjoy his grandchildren and have some years of leisure. He had earned it after almost 40 years at a retread factory.
One summer, I worked as a temp at the same factory. Despite the modern machines and far safer working conditions, it was hot and the work physically demanding. I was 25 years old and in good shape, but it was still tough. It made me appreciate the work my dad did to support our family all those years. Along with his pension, he was able to retire only by claiming Social Security benefits at age 62.
My father-in-law Mike was a kid from a working-class background. The only high school graduation gift he received was a Vietnam draft letter. After a tour of duty that exposed him to Agent Orange and constant military combat, he came home and started a small business as a plaster contractor. He made a living. He didn���t get rich. For more than 15 years, to earn extra money, he worked at the local bowling alley after a full day of backbreaking plaster work.
When I met my wife, he no longer had his second job, but continued hanging plaster ceilings and doing repair work fulltime until he claimed Social Security ���early.��� He continued to work part-time, doing small jobs until he paid off his mortgage and was able to retire fully. To say his work was hard on his body is an understatement. His knees, back, hands and neck all paid a price for the incredible workmanship he displayed with his craft.
I���ve had it easy compared to my dad and father-in-law. But I did work a swing shift for 20 years. One week, I���d work 7 a.m. to 3 p.m. I���d get the weekend off and go in Sunday night for my week of graveyard shifts, 11 p.m. to 7 a.m. On Friday morning, I���d get off work at 7 a.m. and not have to return until Monday at 3 p.m. when I���d start my week of 3-11s.
I always slept fine when I was on the graveyard shift. But as I got older, it began to wear on me. Currently, I���m just working straight days. I didn���t expect working a straight day-shift schedule at the plant to be that different, but it���s been enlightening to see how much better I sleep and feel.
I understand the numbers and statistics that support claiming Social Security benefits early. But I can���t help but want to hedge my bets and claim my benefits at age 62. I���m 100% certain that, if I���m still working at the plant at that age, I won���t hesitate to retire and claim my benefits. That would go double if I was still working a swing shift.
Hooking up a railcar in subzero temperatures at 3 a.m. in January isn���t something I���ll be doing if I can supplement my retirement savings with Social Security. The numbers a financial advisor can show me in his temperature-controlled office won���t be enough to convince me to go to work on a wintry Iowa Sunday night for one more shift than is absolutely necessary.
Juan Fourneau���s goal is to retire at age 55. When he isn���t at his manufacturing job, he enjoys reading about personal finance and investing. Juan, who is married with two children, can still be seen in the ring on the independent professional wrestling circuit. He wrestles as a Mexican
Luchador
under the name
Latin Thunder
. Follow him on Twitter
@LatinThunder1
. Juan's previous article was Taking on Tenants.
Why? I never knew either of my grandfathers. My mom���s dad died of a stroke when she was age 19. One of my favorite photos of my parents��� wedding is that of my uncle���my mom���s oldest brother���walking her down the aisle. My grandfather never got to see my parents wed.
My dad���s father died very young as well. Dad had no memory of his father. My dad Jorge passed away at 72. I was grateful he had 10 years of retirement, and was able to enjoy his grandchildren and have some years of leisure. He had earned it after almost 40 years at a retread factory.
One summer, I worked as a temp at the same factory. Despite the modern machines and far safer working conditions, it was hot and the work physically demanding. I was 25 years old and in good shape, but it was still tough. It made me appreciate the work my dad did to support our family all those years. Along with his pension, he was able to retire only by claiming Social Security benefits at age 62.
My father-in-law Mike was a kid from a working-class background. The only high school graduation gift he received was a Vietnam draft letter. After a tour of duty that exposed him to Agent Orange and constant military combat, he came home and started a small business as a plaster contractor. He made a living. He didn���t get rich. For more than 15 years, to earn extra money, he worked at the local bowling alley after a full day of backbreaking plaster work.
When I met my wife, he no longer had his second job, but continued hanging plaster ceilings and doing repair work fulltime until he claimed Social Security ���early.��� He continued to work part-time, doing small jobs until he paid off his mortgage and was able to retire fully. To say his work was hard on his body is an understatement. His knees, back, hands and neck all paid a price for the incredible workmanship he displayed with his craft.
I���ve had it easy compared to my dad and father-in-law. But I did work a swing shift for 20 years. One week, I���d work 7 a.m. to 3 p.m. I���d get the weekend off and go in Sunday night for my week of graveyard shifts, 11 p.m. to 7 a.m. On Friday morning, I���d get off work at 7 a.m. and not have to return until Monday at 3 p.m. when I���d start my week of 3-11s.
I always slept fine when I was on the graveyard shift. But as I got older, it began to wear on me. Currently, I���m just working straight days. I didn���t expect working a straight day-shift schedule at the plant to be that different, but it���s been enlightening to see how much better I sleep and feel.
I understand the numbers and statistics that support claiming Social Security benefits early. But I can���t help but want to hedge my bets and claim my benefits at age 62. I���m 100% certain that, if I���m still working at the plant at that age, I won���t hesitate to retire and claim my benefits. That would go double if I was still working a swing shift.
Hooking up a railcar in subzero temperatures at 3 a.m. in January isn���t something I���ll be doing if I can supplement my retirement savings with Social Security. The numbers a financial advisor can show me in his temperature-controlled office won���t be enough to convince me to go to work on a wintry Iowa Sunday night for one more shift than is absolutely necessary.
Juan Fourneau���s goal is to retire at age 55. When he isn���t at his manufacturing job, he enjoys reading about personal finance and investing. Juan, who is married with two children, can still be seen in the ring on the independent professional wrestling circuit. He wrestles as a Mexican
Luchador
under the name
Latin Thunder
. Follow him on Twitter
@LatinThunder1
. Juan's previous article was Taking on Tenants.The post Why I Won’t Wait appeared first on HumbleDollar.
August 14, 2021
Fear Some
FEAR GETS A BAD RAP. From the old No Fear apparel line to mantras such as ���only bad decisions come from fear,��� our society seems to say that fear is always the creator of regrettable decisions.
I disagree. I think we need to distinguish between irrational and rational fear. Irrational fear is worrying that all strangers are a threat or believing that stepping out of your comfort zone is too fraught with peril to make it worthwhile.
By contrast, rational fear is what made the caveman long ago think twice about petting the sleeping tiger. Fear led to parachutes. In finance, a healthy amount of fear keeps people from betting the house on the latest get-rich-quick scheme. Fear of losing their never-failing stream of paychecks can motivate people to have savings, just in case.
We give such decisions other names: caution, trepidation, appreciation of risk. But it still comes down to that shiver invoked by a ���what if��� scary thought.
Rational fear keeps us from rushing in like fools. Thoughtful consideration is preferable if you have time, but fear can throw up the caution flag faster. Honestly, when you see the cop with a radar gun, do you consider the dangers of speeding and reflect on your duty as a member of the community to obey rules? Or is it your fear of a fine and insurance points that sends your foot crashing on the brake?
We don���t like acknowledging fear because it signals that we don���t have complete control over our destiny and that there are outside forces perhaps too big to overcome by just staring them down. After the past year and a half, and the prolonged effects of people not heeding health warnings, my fear���rational, I���d argue���is that not enough people have learned the value of rational fear.
I disagree. I think we need to distinguish between irrational and rational fear. Irrational fear is worrying that all strangers are a threat or believing that stepping out of your comfort zone is too fraught with peril to make it worthwhile.
By contrast, rational fear is what made the caveman long ago think twice about petting the sleeping tiger. Fear led to parachutes. In finance, a healthy amount of fear keeps people from betting the house on the latest get-rich-quick scheme. Fear of losing their never-failing stream of paychecks can motivate people to have savings, just in case.
We give such decisions other names: caution, trepidation, appreciation of risk. But it still comes down to that shiver invoked by a ���what if��� scary thought.
Rational fear keeps us from rushing in like fools. Thoughtful consideration is preferable if you have time, but fear can throw up the caution flag faster. Honestly, when you see the cop with a radar gun, do you consider the dangers of speeding and reflect on your duty as a member of the community to obey rules? Or is it your fear of a fine and insurance points that sends your foot crashing on the brake?
We don���t like acknowledging fear because it signals that we don���t have complete control over our destiny and that there are outside forces perhaps too big to overcome by just staring them down. After the past year and a half, and the prolonged effects of people not heeding health warnings, my fear���rational, I���d argue���is that not enough people have learned the value of rational fear.
The post Fear Some appeared first on HumbleDollar.
Senior Class
FORGET BUYING a home or paying for college. In terms of complexity and cost, nothing comes close to retirement—a topic that encompasses saving, investing, taxes, Social Security, health care expenses and countless other financial issues.
Fortunately, there’s a growing body of research to guide us, and some of the best studies come from Boston College’s Center for Retirement Research (CRR). Here are just some of the insights I’ve lately garnered from CRR studies:
Valuing annuities. Many retirees question the value of immediate fixed annuities that pay lifetime income and, in one sense, they’re right. The present value of these annuities works out to about 80 cents for every $1 invested, meaning the typical retiree wouldn’t recoup the full amount of his or her investment plus interest. On top of that, of course, there’s also the risk that you’ll lose the life expectancy lottery and recoup far less than 80 cents.
Still, for affluent individuals who have looked after their health, the payback will likely be well above 80 cents. Moreover, as a recent CRR study notes, the value of income annuities goes beyond raw dollars. There’s also an insurance component. The notion: Retirees can generate more income from their nest egg if they buy income annuities because they don’t have to worry so much about outliving their money. This is one reason I plan to stash a significant portion of my retirement savings in immediate fixed annuities. An added reason: The resulting stream of large, predictable income will allow me to invest much of my remaining money in stocks—and, fingers crossed, that should result in greater long-run wealth.
Claiming Social Security. Like many others, I’ve lamented how many retirees claim Social Security benefits at age 62, which is the earliest possible age, rather than delaying benefits so they get a larger monthly check. But it seems retirees are wising up.
There are two key ways to look at the data. The usual way: Calculate what percentage of those claiming benefits each year are age 62. That number has been trending lower since 2005 and, as of 2019, stood at 34% of female claimants and 31% for men.
But as CRR researchers note, the number of folks turning age 62 each year has been growing rapidly in recent decades and that distorts the data. Why? There are more 62-year-olds than, say, 68-year-olds. That’s why CRR researchers offer an alternative way of looking at the issue: They calculate the percentage of those turning age 62 each year who opt to claim Social Security at that age. That number is even lower, with just a quarter of 2019’s 62-year-olds opting to claim right away.
In a separate study, the CRR examined whether Social Security’s actuarial adjustments are correct. In other words, based on current life expectancies and interest rates, are you—on average—likely to do equally well whether you claim benefits at, say, age 62, 66 or 70? It seems not.
CRR researchers concluded that the reduction in benefits for claiming at age 62 rather than 65 is too large given today’s greater life expectancy and lower interest rates. (Those lower interest rates also mean you’re less likely to come out ahead by claiming benefits early and then investing the money in bonds.) The implication: For the typical retiree, it makes financial sense to delay benefits, and that’s especially true for high-income earners, who tend to live longer than average.
Needing care. Many retirees end up needing help with daily living, but the amount varies greatly. Some might need assistance with routine tasks like shopping or preparing meals, while others might need help because they have dementia or have trouble, say, dressing and bathing themselves.
CRR researchers looked at what percentage of 65-year-olds end up needing help with at least one activity of daily living (think bathing, dressing, toileting and so on) for three years or more. That came to 24%. At the other end of the spectrum, 17% of retirees needed no help at all. The remainder fell somewhere in between—their need for care during retirement was modest or it lasted less than three years.
If that sounds like a mixed bag, it is. But here’s an intriguing data point: Among those ages 65 to 70 who describe their health as “excellent” or “very good,” the probability of not needing any help was 30%, versus 5% for those who said their health was “fair” or “poor.”
Working longer. We know that working longer is financially beneficial: It gives us more time to save and collect investment returns, leading to a larger nest egg. It also allows us to postpone Social Security and any annuity purchases, resulting in more retirement income.
According to a 2021 CRR study, there’s an added bonus: It seems those who work longer also tend to live longer. The study in question looked at men in the Netherlands who opted to stay in the workforce in response to what proved to be a temporary tax law change. The upshot: Those who worked between ages 62 and 65 were less likely to die over the next five years than those who didn’t work. The long-term impact isn’t yet known, but the researchers suggest that the improvement in life expectancy might be as much as two years.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
Suppose you're married and one of you dies. What now? James McGlynn lists 10 key financial issues to keep in mind.
"I told my wife I couldn’t recall my father ever talking to me about money," writes Dick Quinn. "The same was true about college and getting a job." Instead, Dick learned from his father's example.
Just celebrated the birth of a child or grandchild? It's time to revise wills, revamp insurance, protect the baby's identity and take other crucial financial steps, says Howard Rohleder.
"More than 40,000 people die on U.S. roads annually," notes Greg Spears. "But until self-driving cars are 1,000 times safer than human drivers, Kahneman writes, people won’t trust their cars to drive them."
The data tell us that most actively managed funds underperform competing index funds—and yet many folks still buy active funds. Why? Adam Grossman lists seven possible reasons.
Talk about unloved: William Ehart is betting on Japanese stocks—by investing in a small-cap value fund.
Also be sure to check out the past week's blog posts, including Jim Wasserman on work-life balance, Don Southworth on his investment buckets, Jiab Wasserman on living small, Dennis Friedman on staying put and David Powell on mean reversion.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
Fortunately, there’s a growing body of research to guide us, and some of the best studies come from Boston College’s Center for Retirement Research (CRR). Here are just some of the insights I’ve lately garnered from CRR studies:
Valuing annuities. Many retirees question the value of immediate fixed annuities that pay lifetime income and, in one sense, they’re right. The present value of these annuities works out to about 80 cents for every $1 invested, meaning the typical retiree wouldn’t recoup the full amount of his or her investment plus interest. On top of that, of course, there’s also the risk that you’ll lose the life expectancy lottery and recoup far less than 80 cents.
Still, for affluent individuals who have looked after their health, the payback will likely be well above 80 cents. Moreover, as a recent CRR study notes, the value of income annuities goes beyond raw dollars. There’s also an insurance component. The notion: Retirees can generate more income from their nest egg if they buy income annuities because they don’t have to worry so much about outliving their money. This is one reason I plan to stash a significant portion of my retirement savings in immediate fixed annuities. An added reason: The resulting stream of large, predictable income will allow me to invest much of my remaining money in stocks—and, fingers crossed, that should result in greater long-run wealth.
Claiming Social Security. Like many others, I’ve lamented how many retirees claim Social Security benefits at age 62, which is the earliest possible age, rather than delaying benefits so they get a larger monthly check. But it seems retirees are wising up.
There are two key ways to look at the data. The usual way: Calculate what percentage of those claiming benefits each year are age 62. That number has been trending lower since 2005 and, as of 2019, stood at 34% of female claimants and 31% for men.
But as CRR researchers note, the number of folks turning age 62 each year has been growing rapidly in recent decades and that distorts the data. Why? There are more 62-year-olds than, say, 68-year-olds. That’s why CRR researchers offer an alternative way of looking at the issue: They calculate the percentage of those turning age 62 each year who opt to claim Social Security at that age. That number is even lower, with just a quarter of 2019’s 62-year-olds opting to claim right away.
In a separate study, the CRR examined whether Social Security’s actuarial adjustments are correct. In other words, based on current life expectancies and interest rates, are you—on average—likely to do equally well whether you claim benefits at, say, age 62, 66 or 70? It seems not.
CRR researchers concluded that the reduction in benefits for claiming at age 62 rather than 65 is too large given today’s greater life expectancy and lower interest rates. (Those lower interest rates also mean you’re less likely to come out ahead by claiming benefits early and then investing the money in bonds.) The implication: For the typical retiree, it makes financial sense to delay benefits, and that’s especially true for high-income earners, who tend to live longer than average.
Needing care. Many retirees end up needing help with daily living, but the amount varies greatly. Some might need assistance with routine tasks like shopping or preparing meals, while others might need help because they have dementia or have trouble, say, dressing and bathing themselves.
CRR researchers looked at what percentage of 65-year-olds end up needing help with at least one activity of daily living (think bathing, dressing, toileting and so on) for three years or more. That came to 24%. At the other end of the spectrum, 17% of retirees needed no help at all. The remainder fell somewhere in between—their need for care during retirement was modest or it lasted less than three years.
If that sounds like a mixed bag, it is. But here’s an intriguing data point: Among those ages 65 to 70 who describe their health as “excellent” or “very good,” the probability of not needing any help was 30%, versus 5% for those who said their health was “fair” or “poor.”
Working longer. We know that working longer is financially beneficial: It gives us more time to save and collect investment returns, leading to a larger nest egg. It also allows us to postpone Social Security and any annuity purchases, resulting in more retirement income.
According to a 2021 CRR study, there’s an added bonus: It seems those who work longer also tend to live longer. The study in question looked at men in the Netherlands who opted to stay in the workforce in response to what proved to be a temporary tax law change. The upshot: Those who worked between ages 62 and 65 were less likely to die over the next five years than those who didn’t work. The long-term impact isn’t yet known, but the researchers suggest that the improvement in life expectancy might be as much as two years.
Latest Posts
HERE ARE THE SIX other articles published by HumbleDollar this week:
Suppose you're married and one of you dies. What now? James McGlynn lists 10 key financial issues to keep in mind.
"I told my wife I couldn’t recall my father ever talking to me about money," writes Dick Quinn. "The same was true about college and getting a job." Instead, Dick learned from his father's example.
Just celebrated the birth of a child or grandchild? It's time to revise wills, revamp insurance, protect the baby's identity and take other crucial financial steps, says Howard Rohleder.
"More than 40,000 people die on U.S. roads annually," notes Greg Spears. "But until self-driving cars are 1,000 times safer than human drivers, Kahneman writes, people won’t trust their cars to drive them."
The data tell us that most actively managed funds underperform competing index funds—and yet many folks still buy active funds. Why? Adam Grossman lists seven possible reasons.
Talk about unloved: William Ehart is betting on Japanese stocks—by investing in a small-cap value fund.
Also be sure to check out the past week's blog posts, including Jim Wasserman on work-life balance, Don Southworth on his investment buckets, Jiab Wasserman on living small, Dennis Friedman on staying put and David Powell on mean reversion.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.The post Senior Class appeared first on HumbleDollar.
August 13, 2021
The Next $1,000
AS I MENTIONED in an article back in June, my wife and I funded a custodial account for our son three years ago. He used the $1,000 we gave him to buy shares of Nike and Exxon.
We figured what’s good for our oldest child would also be good for No. 2. Our daughter recently completed fifth grade and is now age 11. Earlier this summer, we set up an account for her and added $1,000. While she hasn’t shown as much interest in investing as our son, there were three solid learnings from opening her account and making her initial investments:
She took the responsibility of picking stocks very seriously when she understood that “real money” was in her account and not just points that had accumulated in an app. After some basic financial analysis coupled with consideration of her personal interests, she selected Nintendo and Gap as her two stocks to purchase.
As with my son, she had to decide whether she’d reinvest dividends. While my son picked up on the power of compounding as part of the reinvestment decision, my daughter was more focused on the “real money” that companies would pay in dividends. I explained that if companies are profitable, they can elect to pay a portion of profits to shareholders. She liked the notion that she’d likely get cash each quarter from both companies.
Finally, upon purchase of Nintendo’s stock, we discussed that "ADR" was appended to the end of the company’s ticker symbol. I was able to share that while Nintendo is a Japanese company, we can buy an ADR—or American depositary receipt—for Nintendo that’s traded on a U.S. stock exchange. While this concept was over her head, it at least introduced the notion, and no doubt we’ll talk about it again.
We figured what’s good for our oldest child would also be good for No. 2. Our daughter recently completed fifth grade and is now age 11. Earlier this summer, we set up an account for her and added $1,000. While she hasn’t shown as much interest in investing as our son, there were three solid learnings from opening her account and making her initial investments:
She took the responsibility of picking stocks very seriously when she understood that “real money” was in her account and not just points that had accumulated in an app. After some basic financial analysis coupled with consideration of her personal interests, she selected Nintendo and Gap as her two stocks to purchase.
As with my son, she had to decide whether she’d reinvest dividends. While my son picked up on the power of compounding as part of the reinvestment decision, my daughter was more focused on the “real money” that companies would pay in dividends. I explained that if companies are profitable, they can elect to pay a portion of profits to shareholders. She liked the notion that she’d likely get cash each quarter from both companies.
Finally, upon purchase of Nintendo’s stock, we discussed that "ADR" was appended to the end of the company’s ticker symbol. I was able to share that while Nintendo is a Japanese company, we can buy an ADR—or American depositary receipt—for Nintendo that’s traded on a U.S. stock exchange. While this concept was over her head, it at least introduced the notion, and no doubt we’ll talk about it again.
The post The Next $1,000 appeared first on HumbleDollar.
Reversion Can Be Mean
MONEY MANAGER GMO recently noted that, “There are no bad assets just bad prices.” The occasion was the S&P 500’s price outrunning earnings by 70% over the seven years through March. GMO’s punchline: The same thing happened in the seven years that ended with the dot-com peak in March 2000. This, of course, did not end well.
Two decades ago, I remember a friend telling me of steep losses in his retirement savings, the result of moving his entire 401(k) into aggressive, tech-heavy mutual funds during the runup. For some, it’s hard to be fearful when others are greedy. We hold out for the “last dance” in a market that hasn’t yet peaked.
As I write this, the S&P 500 continues its seemingly relentless march higher, even as we wait for corporate earnings to claw their way back to the levels we enjoyed in March 2020, when the bottom dropped out of the economy.
We read all the time that “past performance is no guarantee of future results.” For investing decisions grounded in principles that change slowly, if ever, there are some things we can count on. One principle that comes to mind: After a period of extremes, each investment’s rate of return eventually reverts to its long-term average.
Two decades ago, I remember a friend telling me of steep losses in his retirement savings, the result of moving his entire 401(k) into aggressive, tech-heavy mutual funds during the runup. For some, it’s hard to be fearful when others are greedy. We hold out for the “last dance” in a market that hasn’t yet peaked.
As I write this, the S&P 500 continues its seemingly relentless march higher, even as we wait for corporate earnings to claw their way back to the levels we enjoyed in March 2020, when the bottom dropped out of the economy.
We read all the time that “past performance is no guarantee of future results.” For investing decisions grounded in principles that change slowly, if ever, there are some things we can count on. One principle that comes to mind: After a period of extremes, each investment’s rate of return eventually reverts to its long-term average.
The post Reversion Can Be Mean appeared first on HumbleDollar.
Budgeting 101
AS MY TWINS DEPART for college, they leave behind a home base where they find food in the refrigerator, get new clothes and shoes when needed, have bills paid and extra-curriculars funded, and receive a small weekly allowance to save or spend.
Now, they���re headed far from familiar security. They gain instead independence and the opportunity to explore other ways of living and spending, all part of their higher education. Cold cereal for supper? An extra pair of jeans instead of a recommended second textbook? Out for coffee with a friend or perhaps a show and dinner? A part-time job or a double major?
I���ve got a dollar figure in mind for expenses I���ll be covering, beyond tuition and housing that���s already paid. One twin���s housing comes with a meal plan. The other���s dorm room has a kitchenette. That one will need to include food in her budget.
I���ve made my estimate for their first semester and will add money to their existing credit union accounts once a week. Each has a debit card to take to college. This way, I imagine they will mostly use their incidental money appropriately, making minor miscalculations early on that can easily be corrected.
If one twin finds my frugal estimate too low, she can contact me, and we can strategize why that���s happening and adjust the budget accordingly. If I���ve estimated correctly, it���s possible I might not hear much from either twin until the holidays, when I hope both will take a break from school for a visit home, where they can regale me with tall tales. Putting a thumb on the scale, I���m buying the roundtrip tickets home now���before they leave.
Now, they���re headed far from familiar security. They gain instead independence and the opportunity to explore other ways of living and spending, all part of their higher education. Cold cereal for supper? An extra pair of jeans instead of a recommended second textbook? Out for coffee with a friend or perhaps a show and dinner? A part-time job or a double major?
I���ve got a dollar figure in mind for expenses I���ll be covering, beyond tuition and housing that���s already paid. One twin���s housing comes with a meal plan. The other���s dorm room has a kitchenette. That one will need to include food in her budget.
I���ve made my estimate for their first semester and will add money to their existing credit union accounts once a week. Each has a debit card to take to college. This way, I imagine they will mostly use their incidental money appropriately, making minor miscalculations early on that can easily be corrected.
If one twin finds my frugal estimate too low, she can contact me, and we can strategize why that���s happening and adjust the budget accordingly. If I���ve estimated correctly, it���s possible I might not hear much from either twin until the holidays, when I hope both will take a break from school for a visit home, where they can regale me with tall tales. Putting a thumb on the scale, I���m buying the roundtrip tickets home now���before they leave.
The post Budgeting 101 appeared first on HumbleDollar.
Flawed Judgment
ONE FUN FACT I TELL my students about Daniel Kahneman: He won the Nobel Prize for economics without ever taking an economics course in college. Kahneman is a psychologist whose discoveries laid the foundation for the new science of behavioral economics.
One of his most important findings is that loss feels twice as painful to us as gain feels good, so the emotional scales aren���t balanced when we make economic decisions. For instance, workers will wait years to join a 401(k) because contributions can feel like a loss in spending power. The bottom line: People aren���t the rational maximizers imagined by older order economists like Milton Friedman. What followed was a new economic model built on how people actually behave, warts and all.
Now Kahneman has issued a new book on flaws in human decision-making. In Noise: A Flaw in Human Judgment, Kahneman���along with co-authors Cass R. Sunstein and Olivier Sibony���define noise as unwanted variability in professional judgment, which they find just about everywhere. Consider:
An insurance company gave its underwriters identical facts and asked them to work up quotes. The median difference in the suggested premiums varied by 55%. The company realized its prices are set by lottery���it all depends on who gets the assignment.
An asset management firm gave 42 analysts the same one-page description of a fictional company and asked each to determine the fair market value of its shares. Their estimates varied by 41%, suggesting little shared perspective among the professionals.
When 108 surgeons were asked to examine identical videos to identify the number and location of endometriotic lesions, they disagreed sharply. There was weak correlation in how many lesions there were and where they were located.
Results like these reveal a gaping hole in expert judgment, yet it usually goes unseen and uncorrected for three reasons, Kahneman and his colleagues argue. First, professional judgment often lacks a clearly right answer, so a wrong result isn���t immediately obvious. Second, professionals offer smooth, coherent reasons for their decisions, which sound awfully convincing to laypeople like us. Third, the great disparity in professional judgment is perceived only when many judgments are examined side-by-side. This statistical approach isn���t our natural way of thinking. It takes time, effort and training. Yet it tends to reveal thousands of errors that don���t cancel one another out. Rather, the mistakes add up.
Studies of federal judges show how this noise can be reduced���and how unpopular such efforts can be. In a 1974 study, judges were given identical hypothetical cases and asked to recommend prison sentences. The same heroin dealer could be sentenced to one year by one judge and 10 years by another. A bank robber might get five years or 18, depending on who was pronouncing sentence.
The study won the attention of Senator Edward M. Kennedy, who���after a decade of work���won passage of the Sentencing Reform Act of 1984. Once the severity of a crime and the criminal history of the defendant were tabulated, new sentencing guidelines held judges to a narrow range. The guidelines worked. The difference in sentence lengths between judges fell from 4.9 months to 3.9 months, on average.
The experiment showed that a ���model of the judge��� can deliver more reliable results than a living, breathing judge. The factors that went into sentences were cut-and-dried, so the human tics of the living judges were nullified. A similar success was achieved in bail hearings for defendants awaiting trial. A ridiculously simple, two-factor model more accurately predicted a defendant���s likelihood of jumping bail than most human judges could. (The factors were the defendant���s age and the number of prior court hearings the prisoner had missed.) The model lowered incarceration rates, as well as racial discrimination in jail populations, without an increase in the numbers of runaway defendants.
Despite their evident success, many federal judges hated the new guidelines. They said it tied their hands and robbed them of their professional discretion. I recall writing a story about a judge who cried from the bench when pronouncing sentence, saying he was unable to show mercy on a prisoner only tangentially involved in a crime. After many anecdotes like this, Congress repealed the guidelines and sentencing disparities began to rise.
Kahneman writes that people resist replacing professional judgment with models of the professional, even if they yield more reliable results. As humans, we know we make mistakes, and yet we expect perfection in a machine or an algorithm. More than 40,000 people die on U.S. roads annually. But until self-driving cars are 1,000 times safer than human drivers, Kahneman writes, people won���t trust their cars to drive them.
Buckle up. We���re in for a bumpy ride.
Greg Spears worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger���s Personal Finance magazine. After leaving journalism, he spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. Greg currently teaches behavioral economics at St. Joseph���s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. He is also a Certified Financial Planner certificate holder. Check out Greg's earlier articles.
One of his most important findings is that loss feels twice as painful to us as gain feels good, so the emotional scales aren���t balanced when we make economic decisions. For instance, workers will wait years to join a 401(k) because contributions can feel like a loss in spending power. The bottom line: People aren���t the rational maximizers imagined by older order economists like Milton Friedman. What followed was a new economic model built on how people actually behave, warts and all.
Now Kahneman has issued a new book on flaws in human decision-making. In Noise: A Flaw in Human Judgment, Kahneman���along with co-authors Cass R. Sunstein and Olivier Sibony���define noise as unwanted variability in professional judgment, which they find just about everywhere. Consider:
An insurance company gave its underwriters identical facts and asked them to work up quotes. The median difference in the suggested premiums varied by 55%. The company realized its prices are set by lottery���it all depends on who gets the assignment.
An asset management firm gave 42 analysts the same one-page description of a fictional company and asked each to determine the fair market value of its shares. Their estimates varied by 41%, suggesting little shared perspective among the professionals.
When 108 surgeons were asked to examine identical videos to identify the number and location of endometriotic lesions, they disagreed sharply. There was weak correlation in how many lesions there were and where they were located.
Results like these reveal a gaping hole in expert judgment, yet it usually goes unseen and uncorrected for three reasons, Kahneman and his colleagues argue. First, professional judgment often lacks a clearly right answer, so a wrong result isn���t immediately obvious. Second, professionals offer smooth, coherent reasons for their decisions, which sound awfully convincing to laypeople like us. Third, the great disparity in professional judgment is perceived only when many judgments are examined side-by-side. This statistical approach isn���t our natural way of thinking. It takes time, effort and training. Yet it tends to reveal thousands of errors that don���t cancel one another out. Rather, the mistakes add up.
Studies of federal judges show how this noise can be reduced���and how unpopular such efforts can be. In a 1974 study, judges were given identical hypothetical cases and asked to recommend prison sentences. The same heroin dealer could be sentenced to one year by one judge and 10 years by another. A bank robber might get five years or 18, depending on who was pronouncing sentence.
The study won the attention of Senator Edward M. Kennedy, who���after a decade of work���won passage of the Sentencing Reform Act of 1984. Once the severity of a crime and the criminal history of the defendant were tabulated, new sentencing guidelines held judges to a narrow range. The guidelines worked. The difference in sentence lengths between judges fell from 4.9 months to 3.9 months, on average.
The experiment showed that a ���model of the judge��� can deliver more reliable results than a living, breathing judge. The factors that went into sentences were cut-and-dried, so the human tics of the living judges were nullified. A similar success was achieved in bail hearings for defendants awaiting trial. A ridiculously simple, two-factor model more accurately predicted a defendant���s likelihood of jumping bail than most human judges could. (The factors were the defendant���s age and the number of prior court hearings the prisoner had missed.) The model lowered incarceration rates, as well as racial discrimination in jail populations, without an increase in the numbers of runaway defendants.
Despite their evident success, many federal judges hated the new guidelines. They said it tied their hands and robbed them of their professional discretion. I recall writing a story about a judge who cried from the bench when pronouncing sentence, saying he was unable to show mercy on a prisoner only tangentially involved in a crime. After many anecdotes like this, Congress repealed the guidelines and sentencing disparities began to rise.
Kahneman writes that people resist replacing professional judgment with models of the professional, even if they yield more reliable results. As humans, we know we make mistakes, and yet we expect perfection in a machine or an algorithm. More than 40,000 people die on U.S. roads annually. But until self-driving cars are 1,000 times safer than human drivers, Kahneman writes, people won���t trust their cars to drive them.
Buckle up. We���re in for a bumpy ride.
Greg Spears worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger���s Personal Finance magazine. After leaving journalism, he spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. Greg currently teaches behavioral economics at St. Joseph���s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. He is also a Certified Financial Planner certificate holder. Check out Greg's earlier articles.The post Flawed Judgment appeared first on HumbleDollar.
