08/9/16

A Quarter Of Recent Retirees Would Delay Social Security If They Had a Do-Over

By Rodney Brooks, July 4, 2016, Washington Post

I seldom write about Social Security without a huge response from readers. That’s not a bad thing. It seems that just about everyone has an opinion about Social Security – especially when it comes to the decision on when to take it.

Many financial advisers recommend that people wait until 70, very few do. In fact, most people don’t even wait until full retirement age, and end up taking it as soon as they are eligible – at 62. Well, a new survey says that, given the chance, a quarter of Social Security recipients would take it later than they did. But that also means that most would not change their decision – for a variety of reasons.

The third annual “Nationwide Retirement Institute” survey of nearly 1,000 people 50 or older, approaching retirement or retired, found that 23 percent would change when they started drawing Social Security to a later age. And 24 percent of recent retirees said their benefits were less than expected.

Of those who said they would not change when they started receiving benefits, 39 percent said they were forced to start drawing benefits by a life event. Thirty-seven percent of current retirees said health problems keep them from living the retirement they expected. And 80 percent of recent retirees say those health problems came earlier than expected. In fact, health care expenses keep one in four current retirees from living the retirement they expected.

Other highlights:

People are waiting longer to take their benefits. In 2016 the average age that men began receiving Social Security is lower than it was in 2014 (60.5 vs. 62.3).

Those who have yet to collect expect to start at age 66 on average, compared to age 62 for recent retirees.

Of future retirees who plan to draw Social Security, only 29 percent plan to draw these benefits early.

The majority of retirees would not change the age they started drawing Social Security. Seventy-seven percent of people who had been retired for 10 or more years say they would not change the age, and 69 percent of recent retirees say they would make the same decision.

Of the people who would not change their decision on when they took benefits, the reasons varied:

They retired earlier than planned (24 percent of recent retirees, 27 percent of people retired for 10+years)

They needed the money (19 percent of recent retirees, 27 percent of 10+)

Forced to by health problems (19 percent recent, 20 percent 10+)

They didn’t think they would live long enough to optimize benefits (12 percent recent, 16 percent 10+)

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

08/1/16

Four Ways To Bust Elder Financial Fraud

By John Wasik, July 4, 2016, Forbes

It’s not hard to sniff out how swindlers prey upon the elderly. They know they respond to mail, phone and front-door solicitations. Older people like to talk to people they don’t know. Holidays are a good time to talk about scam merchants. Families get together and it’s easier to talk about money stuff over beer and bbq.

Swindlers prey upon fear and insecurity. They blanket a neighborhood after a storm, offering to do “free storm damage asssessment.” They’ll pose as IRS agents or bill collectors to collect fake debts. There’s an art to elder financial fraud and it’s practiced every day. If you know the danger signals, you can ward off these scamsters.

The most basic defense is a recognition that when people get into their eighth decades and beyond, they process information differently. While they may have perfect memories of something that happened 60 years ago, it’s difficult for them to make complex decisions, including financial ones. This cognitive decline in “executive function” has been noted by neuro-scientists. The part of the brain responsible for decision making doesn’t work as well as it did 30 years ago. It’s a natural consequence of aging.

“While there are some ‘super agers’ in the population (individuals in their 80′s and beyond who function at much younger intellectual levels),” reports the SIFMA Senior Investor Protection Quarterly, “the vast majority of adults will experience at least some isolated cognitive decline associated with typical brain aging as they progress through their sixth, seventh, and eighth decades (or beyond). Cognitive change in older adults is uneven and dependent on many factors, including educational background, overall intellectual capacity, health conditions, and lifestyle habits.”

 To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

07/25/16

Is Early Retirement Right For You?

By Abby Hayes, July 6, 2016, US News and World Report

Many retirement benefits don’t kick in until your 60s, so early retirees face extra hurdles. Early retirement requires a bigger nest egg because you need to pay for more years of retirement.

When you think about early retirement, you might get a dreamy, faraway look in your eyes. Perhaps you envision time spent traveling while you’re still young, or spending more time as a family because you’re no longer working full time. Or maybe you’re picturing walking away from a job you dislike and never dealing with a stressful deadline or boring meeting again.

Early retirement can be an escape from a bad work situation as well as an opportunity to spend time doing the things you truly want to be doing. However, the reality is that early retirement isn’t for everyone. Early retirement is a difficult goal to achieve, and it may not be what makes you happy in the long run. Here are some of the pros and cons of early retirement:

More leisure time. A boost in leisure time earlier in your life is a major bonus of early retirement. You will have more years to enjoy retirement and to tackle all the projects you have wanted to try. You will be able to invest in your family, spend more time with your children and grandchildren.

Less stress. Not working around the clock for an extra 10, 15 or 20 years can significantly reduce your levels of stress each day. You won’t have to rush to get out of the house every morning and sit in traffic during the morning rush hour, or be expected to work late or through the weekend. Now you don’t have to work at all unless you want to.

Finding health insurance. Early retirees often lose their employer-sponsored health insurance, but aren’t yet old enough to sign up for Medicare. If you retire before you’re eligible for government-funded health care at 65, you will need to find another source of health insurance that could cost much more.

Boredom. While relaxing is fun at the beginning of retirement, you might eventually want to find productive ways to fill your time. If you aren’t proactive about setting up social events or volunteering, boredom could creep into your retirement years.

Early withdrawal penalties. It can be difficult to access the money you’ve saved for retirement if you retire early. If you withdraw money from your individual retirement account before age 59 ½ there is typically a 10 percent early withdrawal penalty. While there are a couple of ways around the penalty, not everyone qualifies. This steep penalty can quickly eat into your retirement savings and make it even more difficult to fund a long retirement.

More years to pay for. When you retire early, your retirement savings needs to last longer. If you retire at 50, you may need to fund another 40 years of retirement using your nest egg. A significant amount of savings is often required to pay for several decades of retirement.

Consider a career change. If you’re tired of your career and want a more laid-back and enjoyable lifestyle, consider a career change. If you make a switch to the right new career, you could gain many of the benefits of early retirement, such as a less stressful life and more time with family, without the drawbacks of early retirement. The key is to figure out how to use your current skill set to transition into a new career. Alternatively, you could launch a completely new career. You might be able to return to school and get new credentials while still working at your current job.

Cut back your hours. There’s no reason you have to go cold turkey from full-time work to full-time retirement. Instead, consider transitioning into retirement gradually. You can start slow by cutting back on your work hours and focusing less on moving up in your career. Another option is to shift to working part time by slowly cutting back your hours and adjusting your lifestyle accordingly. Phasing into retirement can also be a more financially savvy option than retiring early because you still have some money coming in which gives your savings more time to grow.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

07/18/16

Opinion: These Four Steps Would Fix Our Retirement-Savings Crisis

By Silvia Scarelli, July 5, 2016, MarketWatch.com

It’s no secret that Americans are lousy at saving for retirement, and many will struggle to live comfortably in old age.

A Vanguard report from 2015 says its clients over age 65 had, on average, about $214,000 in a 401(k) account — and that doesn’t include the many who don’t have access to one, regardless of which money manager is used. Numbers for households with members between 54 and 65 years old are even grimmer.

That’s the bad part. The good part is we have gotten better, thanks to tweaks to 401(k) policies. Most large companies now make participation in the retirement plan the default choice, meaning the real work is to opt out, not to sign up. And most have two other default choices: a 3% savings rate and a target-date fund.

But a few more changes could do more to get people to save more for retirement, says Richard Thaler, a behavioral economist at the University of Chicago.

“The only thing that works is making savings automatic,” he says.

He sat down with MarketWatch and spelled out his wish list…

Change the default savings rate to 6%

Companies use 3% because a letter from the Treasury Department in the 1990s assured them that automatic enrollment was legal and used that figure as an example, he says.

“That stuck,” he says. “It makes no sense.”

Make Annual Increases in the savings rate the default option

Thaler says we’re bad at starting today and good at procrastinating — whether it’s saving more, starting a diet or something else we know we should do. To capitalize on that, some 401(k) plans now allow participants to pre-program annual increases in their savings rate — something he calls “save more tomorrow” — but it’s not widespread.

“In my ideal plan, we start people at 6%, raise that 1% a year until they hit, say, 12%,” he says. “Those two things would pretty much solve the problem.”

So why don’t more companies do this?

Thaler says one reason may be that it could cost companies more because of the match they offer for some 401(k) savings; according to Vanguard, the most popular company match is 50 cents for every dollar saved for the first 6% of pay. Some might not want to do the programming work involved. Or no one sees it as their job.

“If your employees aren’t saving enough, it’s your fault,” he says he told a gathering of 600 company pension-fund representatives. “We know how to do this. If you have 70% participation rate instead of 90%, that’s your fault. If you have a 3% saving rate, that’s your fault.”

Offer a plan to those without a workplace 401(k)

Roughly 40% of employees don’t have a 401(k) plan offered where they work. Thaler is a backer of the Obama administration’s MyRA idea, a Roth IRA for those without a workplace 401(k). These “starter retirement accounts” were launched late last year but have constraints that 401(k) plans don’t have: They invest only in Treasurys and will be capped at $15,000.

“The irony is this should not be a partisan issue,” he says. “Remember, President George W. Bush wanted to partially privatize Social Security and create what he said was going to be an ownership society. This is really the same thing without touching Social Security. Who would be against facilitating private saving?”

Translate savings into monthly income

This idea borrows from annuities, which turn a pile of money into monthly payments for life. It would add one more line to the monthly statement that shows the resulting monthly income to help people better visualize whether they are saving enough.

“You look at some six-figure number and it looks like a big number,” he says. “You look at what monthly income it would buy and it looks like a small number. That can be highly motivating to get people to save more.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

07/11/16

When Retirees are Forced to Make Withdrawals

By Ray Martin, July 6, 2016, Moneywatch

When it comes to retirement savings plans, the tax code is your friend. The government provides incentives for you to stash money in special tax-deferred accounts, such as IRAs and employer-sponsored 401(k)s. Money saved in these accounts grows sheltered from taxation, including any dividends, interest and capital gains that it earns.

But at the magic age of 70 ½, all that changes. That’s when the IRS springs a trap for everyone who has been programmed to save all of their working careers. They now must begin taking withdrawals from these accounts.

The sole purpose is to make people deplete their savings to generate tax revenue for the government. This perverse requirement goes by the name of ”required minimum distribution” (RMD). Here’s a basic rundown of how these rules work.

First, don’t think you can fly under the radar, not take a distribution and have it go unnoticed by the IRS. Banks, brokerages and other financial firms that serve as the required trustees and custodians for retirement accounts must report to the IRS annually the amount of the RMD for each taxpayer and for each year a distribution is required.

If you don’t follow these requirements, it can really cost you, resulting in a harsh 50 percent excise tax on the amount of the distribution that’s late or insufficient.

The general rule is that if you have a balance in an IRA, you must begin distributions from it no later than April 1 of the year following the year you turn age 70 ½. Those who turn 70 ½ in 2016 can wait until April 1, 2017 to take their first distribution.

But it might be wise to take the first distribution this year because if you wait until the following year, you’ll also be required to take the distribution for 2017 before year-end, causing you to take two distributions in 2017.

Doing this can raise your taxable income and increase the tax you owe on Social Security; it could even disqualify you from claiming some itemized deductions. Check with your tax or financial adviser to see which tax year is best for you to take the first RMD.

The IRS calculates the minimum amount you must withdraw using a factor from the Uniform Lifetime Table, which is specified in IRS Publication 590. The account value as of the most recent year-end is divided by the factor from the table that coincides with your current age.

For example, the factor for individuals age 70 is 27.4. So if you’re 70 in 2016 with IRA whose value is $250,000 on Dec. 31, 2015, your first-year RMD is $9,124. This is about 3.6 percent of your year-end balance.

Each year, the divisor gets smaller, resulting in an increased percentage that you must withdraw. Most financial firms offer a service that will calculate the annual distribution, withhold applicable taxes and deposit the remaining amount into an account of your choosing. I strongly advise signing up for such a service.

A special rule allows people who continue to work to put off distributions from their employer’s retirement plans. If you’re still working and have a balance in your employer’s retirement plan and aren’t an owner of the business that maintains the plan (a “5 percent owner”), you can wait to start withdrawals until the later of April 1 following the year in which you reach age 70 ½ or when you retire.

If you have multiple IRAs, an RMD must be calculated separately for each one. However, these amounts may then be totaled and taken from any one or more of the IRAs.

If you have more than one account in an employer’s retirement plan, you must calculate and withdraw an RMD from each plan. Aggregation isn’t permitted.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

06/27/16

Leaving 401(k) Behind After Job Change Could Be Costly

By Arielle O’Shea, April 26, 2016, Nerdwallet.com

We’re a nation of job hoppers:

According to the latest data from the Bureau of Labor Statistics, wage and salaried workers have been with their current employers a median of just 4.6 years. The average baby boomer, based on a group tracked beginning in 1979, held just over 11 jobs between ages 18 and 48. The kicker: Nearly half of those posts were held by age 24. Those younger years are golden when it comes to saving for retirement, so leaving a job behind is fine, but you’d be wise to take your 401(k) with you.

The truth about 401(k) fees:

We’re big fans of 401(k)s for a couple of reasons — the main one being matching dollars. You may have heard this referred to as free money, and that’s because it is. Many companies with 401(k)s offer some sort of match, ranging from 25% to 100% of employee contributions, up to a limit. The second benefit to 401(k)s is their high contribution limits: In 2016, you can kick in up to $18,000 ($24,000 if you’re age 50 or older). That limit doesn’t include matching dollars.

But these accounts aren’t without their faults: They’re often very expensive. A combination of high administrative costs for running the plan and a limited investment selection makes it tough to find competitive expense ratios when selecting your 401(k) investments. An expense ratio is the percentage of your investment that goes toward the cost of running a fund.

Compound interest means a dollar saved early on is worth much more than a dollar saved later. But the same phenomenon can work against you. Investment fees like those tied to 401(k)s are compounded over time, and the longer you pay them, the more you’ll lose. The average American couple forks over roughly $155,000 in retirement fees over a lifetime, according to public policy organization Demos, amounting to nearly a third of their investment returns.

What to do with your 401(k) when you leave a job:

It’s easy to pack up your desk on your way out the door, but a 401(k) can’t be thrown in a box. Maybe that’s why nearly 30% of us leave these behind. That’s a mistake, due not only to those fees, but also to the fact that you’ve essentially removed yourself from that account. Not only will you lose the support of the plan provider, you may not be informed about plan changes, including potential fee increases or investment options — especially if you fail to keep on top of it or you move and the old employer loses track of your information.

So what do you do with it? The best course of action, in most cases, is to roll over that 401(k) to a traditional IRA or a Roth IRA. You’ll pay taxes on the rollover to a Roth, but you’ll be able to pull money out tax-free in retirement. By rolling over, you’ll also spare yourself some administrative hassle, particularly if your future includes many jobs. Planning for retirement is infinitely easier when all of your money is in just one or two accounts. You’ll be able to quickly get a handle on how much you’ve saved so far, which is key to getting an accurate result from a retirement calculator.

Don’t make a 401(k) rollover mistake:

To avoid a tax fiasco, you’ll want to make sure you initiate a direct rollover, rather than having a check made out to you in the amount of your account balance. Your new IRA plan provider will be glad to walk you through the process, but in general, you’ll open the rollover IRA, then contact your old 401(k) plan provider. Give the old company that new account information and request a direct rollover. The 401(k) company will then transfer the funds or send the new provider a check for the balance.

Whatever you do, don’t take the money as cash, to be turned into a car, TV or new pair of shoes. The return on investment is bad, you’ll give up that aforementioned compounding, and you’ll owe harsh taxes and penalties for the early distribution.

 To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

06/20/16

Net Worth Should Not Be A Mystery To Millennials

By Bobbi Rebell, April 26, 2016, Money Magazine

Ignorance is not bliss when it comes to one big number for millennials: their net worth. The vast majority of millennials (73 percent of those 18 to 34) have no idea what they have versus what they owe, according to a new survey from Harris Poll conducted for online money manager Personal Capital.

John Piazza admits he is one of them, although the Chicago-based banking executive says he has a “decent idea” of his net worth (assets such as cash and mutual funds minus liabilities like student and credit card debt). Piazza estimates that about 80 percent of his friends do not have a handle on their total financial picture.

“It’s time-consuming to gather all the disparate information together initially, and then it’s a laborious process to update it going forward,” Piazza says. While it may be a hassle, not knowing where you stand now makes it much harder to plan for where you need to be later in life, especially for retirement, says Kyle Ryan, a certified financial planner, who is the head of advisory services at Personal Capital.

It is even harder to get a handle on the numbers for those who have an outsized vision of what they might inherit down the road – which might dim their motivation to save now. The Personal Capital survey on retirement readiness found that millennials expect to inherit about a million dollars, on average.

The average inheritance in the United States is just $177,000 according to a 2013 HSBC survey. Counting on any kind of windfall, regardless of size, is a risky business. It certainly does not merit giving up on saving for retirement – as some 40 percent of millennials respondents did on Personal Capital’s survey by saying they had no retirement plan of any kind started yet. Some wealthy families are not even planning on handing down their fortunes. Big names from Warren Buffet to Bill Gates, to Kiss rockstar Gene Simmons have all publicly talked about giving the vast majority of their wealth to charity – not to their kids.

“I’ve worked with many high-net worth individuals, who behind closed doors admit openly that they have no intentions of actually leaving a large sum of money to their children, nor to anyone,” says Shannah Compton Game, a Los Angeles-based certified financial planner who focuses on millennials. “This can be a rude awakening for a millennial who has planned on those funds to continue a lifestyle that they have been living.”

Here are three tips on getting your finances on track now instead of waiting for your retirement fund to be handed to you on a silver platter:

1. Do the math:

The average millennial needs to save upwards of $2 million to live a somewhat comfortable life in retirement, according to Compton Game.

2. Have a sit down with your parents:

Do not assume you know how much money they have, or that it is going to you. ”It can be a hard conversation to start, but it’s easier than having an expectation that isn’t fulfilled,” says Game.

You also have to consider the timeframe involved and factor in the uncertainty. Typical millennials in their 20s today would have parents who are a long way from retirement and, perhaps, 50 years from dying.

3. Save more:

Even if your parents do intend to leave you an inheritance, saving money should still be your top priority. Build a solid emergency fund that can cover three-to-six months of expenses in a high-yield checking account. And contribute to some kind of retirement plan; even if your employer does not offer a 401(k) there are options for IRAs.

If you started contributing $100 a month at age 25 to a traditional IRA, and got a very modest 4 percent return, you would have more than $118,592 before taxes if you retired at age 65.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

06/13/16

Student debt has multi-generational impact on financial wellness

By Sheryl Smolkin, April 27, 2016, Employee Benefit Advisor                                                                

Student debt is not only affecting millennials who are stressed about their finances and distracted by money issues when they are at work. Outstanding student loans are also affecting baby boomers who may be helping their kids to pay down balances owing instead of saving enough money to fund their own retirement.

A new study conducted by PricewaterhouseCoopers reveals that for the fifth year in a row, employees say their top two financial concerns are not having enough emergency savings for unexpected expenses (55%) and not being able to retire when they want to (37%).

However, millennials – who in 2015 surpassed Gen X to become the largest share of the U.S. workforce – tend to be in worse shape than their older counterparts. Nearly half of the full-time employed millennials surveyed find it difficult to meet their household expenses. Forty-two percent of millennial employees have student loans and 79% reported that their student loans have a moderate or significant impact on their other financial goals.

In addition, more than one in four of all employees (37% of millennials) report that personal finance issues have been a distraction at work (up from 20% last year) and 46% of those who are distracted by their finances at work say that they spend three hours or more a week thinking about or dealing with personal finance issues on the job.

The 2016 survey digs a little deeper into the student debt issue than previous reports, says Kent Allison, PwC’s national financial wellness practice leader Kent Allison. “We stripped out that audience vs. everyone else to determine the impact of student debt on millennials,” he says.

Millennials with student loans disclosed they are consistently stressed about their finances (81% of millennials vs. 46% of all employees), carry credit card balances (72% of millennials vs. 46% of all employees) and use credit cards to pay for monthly necessities because they are unable to afford them otherwise (41% of millennials vs. 21% of all employees).

“Millennials are not necessarily making wise choices. Other PwC research shows that as a result of their cash flow challenges, they are heavy users of alternative financial services like pay day loans,” Allison says.

“Running out of money is the baby boomers’ biggest concern about retirement, followed by health issues and healthcare costs.” And millennial student debt is also having a surprising effect on their parents, with 80% of baby boomers saying that student loans are having a significant or moderate impact on their ability to achieve other financial goals. “There are people who are paying off student debt for their kids at the expense of saving for their own retirement,” says Allison. “We’d probably advise them to get their retirement in order first and then go back and help out their kids.

In fact, employees surveyed disclosed that running out of money is the baby boomers’ biggest concern about retirement, followed by health issues and healthcare costs. Yet the majority of employees are not taking advantage of contributing to their health savings accounts and only 18% plan to use these funds for future health costs in retirement.

Also, of the 61% of baby boomers who plan to retire within the next five years, less than half of them know how much they will need at retirement. Moreover, excluding the equity in their homes, only 50% of baby boomers have accumulated as much as $100,000 in savings.

In addition, 26% of baby boomers have already withdrawn money held in their retirement plans to pay for expenses other than retirement and 36% think it’s likely they’ll need to use money held in retirement plans for expenses other than retirement. Forty-eight percent of this group believe they will have to push their planned retirement date into the future because they will not have saved enough money to stop working.

“Furthermore, when you look at the aging employee, the percent that are now supporting parents or in-laws has risen from 16% to 22%. I also saw a statistic a few years ago that retirees are the fastest growing population declaring bankruptcy,” he says. ”Going forward, employers will no longer be able to simply issue a total rewards statement that says ‘here are the benefits we provide and how much we pay.’”

Allison acknowledges that many employers offer a rich array of benefit plans to facilitate employee financial wellness, but he suggests that, overall, employees do not use these plans in the most effective way.

“Matching benefit needs to the needs of particular employee demographics in a more targeted and proactive fashion will help employees use their benefits more frequently and appropriately, he says. “I think going forward, employers will no longer be able to simply issue a total rewards statement that says ‘here are the benefits we provide and how much we pay.’ It’s really about delivering to individuals the information, education and guidance around a particular benefit that matches their particular need.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

06/6/16

‘Alternative Work Arrangements’ are now 16% of the Workforce

By Alicia Munnell, April 28, 2016, Marketwatch.com

Increasingly, commentators refer to the “gig economy,” suggesting that large numbers of workers get a series of short-term jobs through a mobile-app arrangement. Larry Katz (Harvard) and Alan Krueger (Princeton) designed a questionnaire to provide the first nationally representative survey-based estimate of the percentage of the workforce engaged in gig-type activity. They found that only 0.5 percent of all workers identify customers through an online intermediary such as Uber. In the process, however, they uncovered a much more profound shift in the U.S. workforce.

Updating the Bureau of Labor Statistics’ (BLS) Contingent Work Survey, which the agency has been unable to conduct since 2005, the researchers found that the percentage of workers engaged in alternative work arrangements – defined as temporary help agency workers, on-call workers, contract company workers, and independent contractors – rose from 10.1 percent in 2005 to 15.8 percent in late 2015.  This increase is dramatic given that the BLS survey showed virtually no change between 1995 and 2005

The fact that a growing group of workers does not have a traditional employer/employee relationship has enormous implications.  In the United States, most forms of insurance are provided through the workplace. If workers have no employer, they have no one to contribute towards worker compensation in the event they are injured or unemployment insurance in the event they lose their job.  Even more important, these individuals with alternative work arrangements are not automatically provided health insurance, albeit the Affordable Care Act has made it easier for them to acquire health insurance through an exchange.

To someone like me with a laser-like focus on retirement, the most obvious and serious loss for this 16 percent of the workforce is that they are not enrolled in a retirement plan.  And the evidence clearly indicates that people do not go out and open up an Individual Retirement Account on their own.  Moreover, I’m afraid that these people with alternative work arrangements are not going to be picked up by the state savings initiatives underway in California, Connecticut, Illinois, and Oregon. Those initiatives impose a mandate on employers that are not providing a plan to automatically enroll their workers in an IRA.  The people with alternative work arrangements do not have an employer. Other routes exist for coverage, but it will not happen without some special effort.

An important question is whether this shift towards alternative work arrangements is a one-time event or the beginning of a trend.  The answer depends importantly on why the shift is occurring.  On the supply side, Katz and Krueger note that alternative work arrangements are more common among older and more highly educated workers, and the workforce has become older and better educated over time.  But this factor, they conclude, explains only 10 percent of the increase.  Similarly, people could simply prefer more flexible work arrangements and these arrangements are more feasible in the wake of the ACA, but that increase seems very large as a response to the availability of health insurance outside the workplace.

On the demand side, employers may prefer these new arrangements because they do not have to share profits with the workers.  Or more importantly, employers may be responding to technological change, which standardizes job tasks and makes it more feasible for them to hire and monitor contingent workers.  All these explanations suggest the trend will continue.

The only argument for a one-shot event is that the dislocation caused by the Great Recession forced workers to accept other arrangements when traditional jobs were not available. We will know more in 2020.  If the government does not have the funding to undertake the survey (a ridiculous state of affairs!), I hope that Katz and Krueger update their important study.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

05/31/16

Confusion Reigns On Retirement Spending Strategies

By Kelley Holland, April 28, 2016, CNBC

Saving for retirement is hard enough these days, with wage growth lagging and more than 40 percent of workers lacking access to a workplace retirement savings plan.

What’s even harder is figuring out how to draw down those savings when the time comes. Three in 4 respondents to a survey did not know how much they can safely withdraw from savings every year, according to an Ipsos survey for New York Life. Almost a third think they can safely take out 10 percent or more, even though the Social Security Administration estimates that a man turning 65 today will live to age 84. A woman can expect to reach age 86.

“Baby boomers haven’t done a great job saving for retirement,” said Chris Blunt, president of the investments group at New York Life. “If they now screw up the decumulation phase, we are going to take a bad situation and make it worse.”

The survey of 810 people was conducted in late March. It was limited to people age 40 and older with incomes and assets of at least $100,000 — a segment of the population that should be relatively well informed on financial matters, Blunt said.

Yet they were not. For example, 9 percent thought it would be all right to withdraw 15 to 24 percent of their savings annually. Even with positive investment performance, that would almost certainly deplete a nest egg within a decade.

The widespread confusion about how and when to draw down retirement savings could be especially hazardous to many older Americans because millions are facing retirement with little in the way of guaranteed income.

Social Security is available to almost everyone, but the average monthly check for retired workers is just $1,341. And while a number of workers retiring today can still also depend on income from a defined benefit pension plan, those traditional pensions are fast disappearing. Some 73 percent of the 102 plans in a 2015 survey by NEPC, a consulting firm, were either closed or frozen, up from 64 percent.

Part of the confusion around withdrawing savings is that there is no strong consensus on the optimal strategy. Retirement experts long recommended that people draw down savings at a rate of 4 percent a year, but years of low interest rates have made that approach questionable.

The optimal rate for withdrawals also depends on how large the savings are relative to the income a retiree needs, and how they are invested. Historically, portfolios with more stocks than fixed income have outperformed those invested more conservatively, but not all retirees have the stomach for stocks later in life.

Some experts now advise adjusting your drawdown rate based on how the stock market is performing. When stocks have a bad year, the experts advise that you withdraw less and leave more of your money in savings to benefit from the eventual upturn. In good years, you can withdraw more.

Another challenge is that financial advisors generally are less informed on drawdown strategies than they are on accumulating savings, Blunt said. “The vast majority of financial advisors are in their 40s and 50s, or early 60s, and they have been trained on asset accumulation,” he said. “This whole field of retirement income has come about in a big way probably in the last 10 or 15 years.” One of the most popular professional designations advisors are currently earning is that of Retirement Income Certified Professional, he said.

With a new field comes new financial products, of course, and insurers like New York Life and others have rolled out different kinds of annuities in the past few years. Blunt said many have been selling very well. If you steer clear of contracts with overly high fees, annuities can be one way to guarantee some income in later life. But when it comes to a basic understanding of how and when to use retirement savings, most people are coming up short.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®