Before Retiring, Take This Simple Test

By Shlomo Benartzi & Martin Weber, Oct. 26, 2016, Wall Street Journal

For some people, the prospect of getting an immediate reward is simply too difficult to resist. One of the most important financial decisions people make is when to retire. It’s also one of the worst decisions many people make. Specifically, they retire too early, resulting in serious financial shortfalls in old age.

The good news is that, according to a new study by Philipp Schreiber and Martin Weber at the University of Mannheim in Germany, there’s a simple two-question quiz that can help predict whether you’ll regret the timing of your own retirement. Here are the questions:

Question 1: You just learned that you are due a tax refund. If you’d like, you can get the $1,000 refund right away. Alternatively, you can get a $1,100 refund in 10 months. Which do you prefer?

Question 2: You just learned that you are due a tax refund. If you’d like, you can get a $1,000 refund in 18 months. Alternatively, you can get a $1,100 refund in 28 months? Which do you prefer?

The two questions are nearly identical. Each poses the same kind of choice. But the second question postpones the two options for delivery by 18 months, while the first offers an option for immediate delivery.

Time will tell

The point of the exercise is to measure the consistency of a person’s time preferences. Someone with consistent time preferences should answer both questions the same way—choosing the early option both times, or the delayed option both times. Such consistency is a requirement for making financial plans that you stick with.

Some people, however, choose inconsistently. They will take the larger tax refund if both refunds require a delay, as in the second question. But they choose to accept the smaller amount when it is available immediately, as it is in the first question. For these people, the prospect of getting an immediate reward is simply too difficult to resist.

The respondents with inconsistent answers exhibit a tendency known as present bias, or hyperbolic discounting. They strongly prefer rewards that arrive right away. While previous research has linked present bias to a lack of retirement savings, this new study, which tallied results from more than 3,000 Germans, shows that present bias can also lead people to retire before they are financially ready.

The researchers found that people who give the most inconsistent answers tend to retire significantly earlier (about 2.2 years on average) than those with consistent preferences. This leads to a roughly 13% reduction in their monthly benefits. Over time, these people are also far more likely to say they regretted the timing of their retirement.

Help steering

This research helps us better understand why people choose to retire early. It can also help us find ways to stop people from retiring too early. For instance, many workers now benefit from automatic savings programs that rely on default payroll deductions to help them save for retirement. These programs generally use a one-size-fits-all approach, recommending the same savings rate for all workers.

While these defaults have boosted savings for many Americans, they could be even more effective if they were personalized according to the results of the two-question quiz. Consider a person who exhibits a strong bias for receiving rewards in the present. Given the likelihood that she’ll be tempted by an early retirement, she might want to be defaulted to a higher savings rate during her working years. This will help her avoid future regret over the timing of her retirement decision, since she will have sufficient savings.

We can also redesign the Social Security enrollment process to minimize the possibility of regret. The program is structured so that you can start receiving payments at any time after the age of 62. However, the monthly payments will be larger for every month you delay signing up to receive benefits, at least until you turn 70. For instance, a person who can expect to receive $1,000 per month if they retire at 62 will see his benefits increase to approximately $1,750 per month if he can wait until he’s 70 before collecting.

A number of economists have argued that waiting for the larger payment is usually a much better deal. Nevertheless, most people aren’t willing to wait. According to an analysis by Alicia Munnell and Anqi Chen at Boston College, the most popular age, by far, to start Social Security is 62.

Fewer regrets

With the new research from Germany, we can come up with strategies to encourage better decisions. One approach is to ask people to estimate their preferred retirement age when they are still working. Because retirement benefits are far off, they probably won’t be tempted by the smaller/sooner amount and will likely predict an age well past 62. While this estimated age isn’t binding, it will allow Social Security to personalize communication with that person in a way that might reduce their future regret. (The monetary amount itself won’t change, just the way the options are presented.)

Let’s say, for instance, that a person stated a preferred retirement age of 70 during his working years. When presenting his retirement options, Social Security could describe the benefits he’d collect at 62 as a relative loss of approximately $750 per month, at least compared with the benefits he’d receive if he waited until his preferred retirement age. Such framing could make the possibility of starting benefits right away far less appealing.

Nobody wants to regret his or her retirement choices; many of these decisions cannot be undone. By identifying those workers who are planning for a late retirement but are likely to succumb to the temptation of an early one, we can take steps to prevent mistakes before they occur.

 To Your Successful Retirement!

 Michael Ginsberg, JD, CFP®


Are Retirement Calculators Accurate? Financial Gurus Don’t Think So

By Brian O’Connell, March 6, 2016 TheStreet.com

U.S. workers saving for the long-term understandably rely on retirement calculators to benchmark their progress and to create a blueprint of how they need to operate to meet their outstretched financial goals. But some financial seers doubt the accuracy of these retirement calculators and view them as dangerous in the way they falsely inspire confidence in the average retirement saver.

A recent Texas Tech study on retirement planning tools, takes a close look at 36 financial calculators and states “in most cases, the available offerings are extremely misleading.” While the calculators studied claimed users had a 70% chance or better odds of reaching their retirement goals, researchers say the figure is closer to 53% — a significant reduction on likely retirement assets.

“The lack of consistency in inputs and default settings make these tools questionable for planning and educational purposes for households, financial professionals, and academics alike,” the study concludes. Pull the lens back, and the real issue with retirement calculator critics is users not getting reliable data, but using that unreliable data to make big investment decisions.

“As there are apparently many retirement planning tools available — many from well-known personal finance sites and or financial services providers — the real issue is accuracy,” explains Carla Dearing, CEO of SUM180, a Louisville, Ky.-based online financial planning service designed specifically for women. “In an industry so governed by regulators’ standards and rules, it’s surprising there is not a set of standards for what variables to include in a retirement calculation.” Perhaps surprisingly, there is no shortage of investment industry insiders who agree, and are highly critical of retirement planning calculators.

“Most calculators are, indeed, rubbish,” says James Carlson, chief investment officer at Charleston, S.C.-based Questis, Inc., a software company currently engaged in building its own retirement planning calculator. The problem, Carlson states, is that most tools only focus on a one-part equation, which is accumulating a nest egg of assets by some future retirement date. ”While many do properly simulate a wide variety of outcomes using Monte Carlo analysis, the best of breed calculators do not stop with computing a nest egg number,” he says. “Only a handful of calculators are incorporating the latest asset management concepts.”

Others say retirement calculators have some value, but are no substitute for a more thorough, carefully-crafted long-term savings plan. “Retirement calculators are a good start in looking at your retirement picture but not enough to build your lifetime goals and financial plan,” says Michael Sander, vice president at The Creative Planners Group, Ltd., in Tarrytown, N.Y. “A retirement calculator is too simple and does not take into account many items such as inflation, health costs, and many other key issues,” Sander states.

“As for their accuracy, I’d have to say ‘no’,” he adds. “Planning for retirement requires the use of two things — a financial advisor with vast experience of using financial planning software, and actual financial planning software, like MoneyGuidePro, which includes everything that one will face in their financial life.” Fair enough, but few financial experts say consumers will stop using retirement calculators. So what embedded features should they look for to gain maximum advantage from retirement calculators?

“There are a few components that better online retirement calculators should have,” says Ben Birken, a financial advisor with Woodward Financial Advisors, in Chapel Hill, N.C.. “The best one should include questions about health and lifestyle, in order to come up with a more realistic life expectancy than just using averages. Additionally, they should include the ability to factor in different types of accounts — e.g., after-tax, tax deferred and tax free — to better model tax consequences of withdrawals, rather than just lumping everything together.” ”For married people, a good calculator should also have the ability to maximize Social Security claiming strategies, and posses forward looking return assumptions that are reasonable,” Birken notes.

The consensus gleaned from talking to finance experts is not to stop using retirement calculators altogether (at the very least, they get you thinking about long-term planning, which is a big positive.) The main takeaway is to adopt a “buyer beware” attitude and understand the limitations that come part and parcel with such tools. And leave the real retirement planning to the human element – - specifically, you and your financial advisor.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Will Student Loans Debt Destroy Your Retirement?

Fool.com, March 6, 2016

We all hear a lot about the student debt crisis. The fact that college graduates have amassed a collective $1.2 trillion in loans is nothing short of ludicrous.

When you think of those affected by student debt, you probably picture recent grads in their early 20s, struggling to make their monthly loan payments on their skimpy entry-level salaries. But student debt isn’t limited to those fresh out of college, or even those a decade or two into the workforce with loans still looming. Many of the people who owe big money on their loans are soon-to-be retirees.

In recent years, the amount of student debt carried by retirees and pre-retirees has skyrocketed. Back in 1989, pre-retirees with debt carried an average of just $600 in student loans apiece, but by 2013, that average grew to almost $8,000. Meanwhile, retirees with debt carried an average of just $400 in student loans in 1989, but in 2013, that figure reached a frightening $2,300.

As of 2013, the 65-and-older crowd is on the hook for approximately $18.2 billion in student loans, and about 706,000 senior citizen households are still carrying some amount of student debt. And while student loan balances have increased significantly among borrowers of all ages in the past 10 years, the fastest growth has been seen among borrowers aged 60 or older.

So where is all that added debt coming from, and what can aging Americans do to avoid it?

Who’s that loan for, anyway?

Taking out loans to finance your own education is one thing, but taking on debt near retirement to help a child or grandchild is a totally different ballgame. While most seniors with student debt took out loans for their own educational purposes, according to the U.S. Government Accountability Office, approximately 18% of federal educational debt held by seniors stems from Parent PLUS loans taken out for children or grandchildren.

Of course, it’s noble to help a child or grandchild avoid debt. However, while it might make sense to take on loans to further your own education, saddling yourself with debt on behalf of a much younger person is not such a wise move.

For one thing, someone who’s two to four decades your junior has a lot more time to pay off those loans before retirement than you do. Once you leave the workforce, you’ll be limited to a fixed income, and a monthly loan payment won’t work wonders for your budget. Additionally, your salary is more likely to remain stagnant in the years leading up to retirement, whereas a 20-something college graduate has many years to build a career with steadily increasing earnings.

 Keep those loans to a minimum

If you’re taking on student debt later in life to cover the costs of your own education, then it might pay off if the resulting salary boost more than makes up for the cost. But before you sign those loan documents, make sure the numbers really add up. If you’re looking at a monthly loan payment of $500 but only expect your salary to go up by $5,000 a year, then you’ll lose money by furthering your education. On the other hand, if a $500 monthly loan payment for three years results in a $25,000 salary boost upon obtaining your degree, and you have enough working years ahead of you to repay that loan and then some, then taking on debt makes more financial sense.

Of course, you can still do your part to keep your education costs to a minimum. If you’re going back to school later in life, skip the fancy private college, which, for the 2015-2016 school year, will probably cost you about $30,000-plus in tuition. Instead consider a local community college, where you’ll pay about a tenth of that. Even a public four-year in-state school is a bargain compared to a private college. In-state students pay an average of $9,400; cross state lines, however, and you’re looking at an average of $24,000.

 Save for retirement first

A recent study by the U.S. Government Accountability Office found that about half of households with members aged 55 and older have no retirement savings whatsoever. If you’re one of them, then you’re better off steering clear of student debt altogether and focusing on saving for retirement instead. Even if you’ve been contributing to your IRA or 401(k) for years, if you’re within a decade of retirement and that balance isn’t where it should be, it’s more important to build your nest egg than to worry about making loan payments during the last 10 years of your career.

Besides, if you have any money to spare as you near the end of your working years, putting it into a retirement account will go a long way. Over a five-year period, adding $400 a month to your 401(k) or IRA will result in an extra $24,000 for retirement, assuming a modest annual return of 6%. Remember, too, that if you’re 50 or older, you’re entitled to make tax-free catch-up contributions to your retirement accounts. You can put an extra $6,000 into your 401(k) and an additional $1,000 into your IRA, which is a much better use of that money than earmarking it to cover loan payments.

As a retiree or soon-to-be retiree, the last thing you want is to become a gray-haired poster child for student debt. At a time in your life when you deserve to be looking forward to retirement, you don’t need the added pressure of student loan payments dragging you down — especially if they’re for somebody else.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


School Daze: Limiting Liabilities of College Students

By Kathleen Tierney COOChubb Personal Insurance Thinkadvisor.com

They’re off to college! Millions of teenagers are headed back to college or on their way there for the first time to develop the skills needed to lead productive lives. They’re on their own and, in their eyes, grown-up adults. If only.

We’ve all been teenagers, and some did risky things and survived. Not everyone survived, however. I thought about this after reading a sobering article in The New Yorker as summer drew to a close. It discussed the neuroscience of the unfinished adolescent brain. The bottom line: We’re not fully wired in our teen years, making us do things our adult selves would blanch at.

For example, we all have heard the stories about students who live off campus and host a liquor-fueled party where walls are punched in or someone is injured on the premises or in an automobile accident afterwards. The resulting consequence is often a lawsuit. In addition, when the parents are of significant means, such cases may unduly target them, based on the plaintiff attorney’s perceptions of their greater wealth and inclination to settle. By the time a case is settled, the full policy limits of all involved parties may be exhausted in the settlement.

I brought up this point during a recent luncheon I enjoyed in the company of Ashleigh Trent, personal insurance advisor at Swingle Collins & Associates, a Dallas-based insurance agency serving a high-net-wealth clientele. As Ashleigh put it, “You’re basically opening up your assets and net worth to your 18 year-old and their habits, putting your money in their hands and hoping they don’t do anything stupid.”

Is this something any parent in his or her right mind should do? Ashleigh emphatically stated the obvious answer—a resounding NO. Teenagers may be bound to do some stupid things, but parents can still be proactive in helping their children understand the risks.

Liability Concerns

It is understandable that college students serving alcohol at their shared rented premises to a guest who is injured or causes an injury would be vulnerable to a lawsuit.

For example, in one incident, an 18-year old college student threw a keg party at his leased off-campus housing with his college friends. Many attending the party were also under 21. Two people passing by the party got into a physical altercation with some of the partygoers who were sitting outside. As a result, the two passersby sustained serious injuries, and they ultimately sued their party-going assaulters, the homeowner, and all of the students listed on the rental agreement who hosted the party.

A person also can be sued for the injury even if he or she had nothing to do with the purchase of alcohol or had no involvement in hosting or attending the social event. As long as his or her name is on the rental agreement, the student and his or her parents are potentially liable. As a parent, make sure you are comfortable with all of your child’s roommates, including their parents, before the lease is signed.

Liability claims also may result from today’s sharing economy. “There are these get-rich-quick schemes where a wealthy student is given a luxury car as a graduation gift, and decides when away from home to rent it out for money—more for the prestige than the cash,” Ashleigh said. “What they fail to realize is that they are now engaging in a business transaction, and their automobile insurance has an exclusion for using the vehicle for commercial purposes.”

If the renter gets into a devastating car accident, the insurance is no longer a financial buffer for the child. Rather, his or her parents will potentially be on the hook now for a multi-million dollar uninsured lawsuit.

A similar scenario is possible if a student subleases his or her apartment to someone who inadvertently burns down the building. Many (but not all) renter insurance policies exclude the use of an apartment for income-based business purposes. In this case, the property damage costs are likely to be borne by the parents’ insurance.

Tough Talk

Now is the time for financial advisors to discuss these and other risk scenarios with clients who are the parents of college-bound students. Before the ink is dry on an off-campus apartment lease, parents should be counseled on the need to coach their children about their responsibilities as a tenant, including the rules of hosting a party.

Chief among them—limit the number of guests and do not serve alcohol unless everyone is of legal age. Even then, parents should remind their young adult children to collect keys when someone has had too much to drink or to not be afraid of calling the police if a party gets out of hand.

It is equally advisable for parents to become personally involved in inspecting a rental property before their kids move in. Many rentals near college campuses are in relatively poor condition, with rotting floorboards, a missing handrail or a leaky faucet.

Once the rental agreement is signed, take photographs of the premises to demonstrate its condition in the event a landlord alleges property damage in a lawsuit or a party guest falling down the stairs because of the missing banister files a bodily injury lawsuit.

Prior to children heading off to college, it is especially prudent for parents to schedule a sit-down with their insurance agents or brokers. Aside from imparting a fuller understanding of the singular property damage and liability risks, agents and brokers also can explain the intricacies of different insurance policies and coverages.

For instance, while most homeowners and renters insurance policies no longer exclude liquor liability, many policies (but not all) exclude coverage for adults who knowingly provide alcohol to underage drinkers and drivers.

“Say the student is a 21 year-old college senior, and he invites several freshmen and sophomores to a party at which alcohol is served,” Ashleigh noted. “If the student is aware of the guests’ age and does nothing to prevent the supply of alcohol to them, this is strictly excluded from some policies.”

Parents need to do more than discuss with their college-age children the responsibilities they are now assuming. “They’re adolescents—they tend to hear only what they want to hear,” Ashleigh said, with a knowing grin. “My advice is for parents to take charge of the situation and buy separate personal liability insurance policies for their away-from-home children. This way if something goes wrong, the first line of defense would be the child’s policy.”

Another smart idea is to provide college-age kids with an umbrella liability policy that extends the limits of financial protection in their underlying homeowners, renters and automobile insurance policies. Most (but not all) such policies provide no more than $500,000 in financial limits. “The goal is to push off as much liability as possible onto the child’s policies, reducing the possibility that the parents will be called into a lawsuit,” Ashleigh said.

As backup, parents should consider increasing the financial limits of their own policies as well. When the kids have graduated and their brains reach fully wired status, the extra precautions can fade. Thankfully, we’re all young once.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Gen Y Rejects the School-Work-Family-Retirement Cookie-Cutter Mold?

Hal M. Bundrick, MainStreet.com, Sep 15, 2014

NEW YORK (MainStreet) — Compared to those in older generations, Gen Y investors are more hands-on and less focused on traditional life stage planning, according to new reports out of Vanguard, the venerable index investment firm. As a result, financial advisors must change their behavior to attract business from this cohort of Millennials, those born between the early 1980s and the early 2000s.

For Baby Boomers the generation gap meant “don’t trust anyone over 30.” That revolutionary rally cry against the establishment in the ‘60s quickly morphed into a population absorbed into a corporate culture: work hard for your employer, “pay your dues” and plan for retirement.

Today, youthful adults are living the “peace and love” lifestyle more than Boomers ever did. The school-work-family-retirement life path has been replaced by a generation seeking self-expression, personal fulfillment at work and a life built on experiences rather than possessions.

Vanguard’s series of position papers guiding financial advisors in the best practices of connecting with younger investors serve as a roadmap any industry could find valuable in developing marketing and products targeting Gen X – and particularly Gen Y. The refusal to follow a traditional life path is a fundamental component to understanding today’s young adults.

“Instead, they tend to wait longer to start a family, and are more apt to experience multiple career changes, hold more than one job at once, and engage in contract employment,” the Vanguard report says. “They’re also more willing to dip into savings for things such as additional schooling, a start-up business, or an artistic pursuit. “Millennials really hold a world view and place a priority on charitable and social causes. Vanguard cites a 2013 Pew research survey that found Gen Y placed a higher priority on “helping others in need” than “owning a home” and “having a high-paying career.”

This focus also impacts investing behavior too, with Gen Y admitting that social causes influence their investment decisions — to a significant degree more than their older peers. “Younger clients tend to see themselves as hands-on investors,” the report says. “Yet studies show that although they display confidence, they also seem to lack thorough investment knowledge.”

2013 Fidelity study of high-net-worth Generation X and Y investors found that nearly 75% said they enjoyed investing, felt reasonably knowledgeable and were active in the management of their money. However, these same investors averaged 30 trades per month — suggesting they could benefit from education on factors such as risk and the long-term effects of cost.”

For financial advisors, or anyone looking to do business with Gen Y, here are relevant points to consider, according to the research:

  • Brevity and relevance are vital. Rather than launching a lengthy pitch that focuses on accomplishments or accolades, focus on asking probing questions that “leave younger prospects feeling understood and valued.”
  • Take a partnership approach, rather than proclaiming authority. Vanguard says younger investors “are looking for education, collaboration and validation of their choices.”
  • Streamline and modernize communications. “Advisors who don’t keep pace risk being seen as outdated and out of touch, especially to Millennials,” Vanguard says. “In other words, if your default communication is a phone call, it’s time to rethink your strategy.” Young adults often prefer e-mail, texts and social media.
  • Update your website. “Your website alone has the potential to make or break a deal — and possibly before you’ve even spoken to the prospect,” the report claims. Consider highlighting your community involvement or charitable projects.

With more than $41 trillion in inheritance assets in motion during the next four decades, it’s wise for all facets of the financial services industry to reevaluate how Gen Y does business.

 To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Should boomers give millennials money advice?

blog graphA new survey contains some mixed news about the savings habits of the 20- and 30-somethings in the so-called millennial generation—along with a wake-up call for their boomer parents.

According to a survey Fidelity Investments released on Wednesday, 47% of individuals ages 25 to 34 are saving for retirement. Overall, 43% are putting money into a 401(k) plan, while 23% have individual retirement accounts (IRAs).

But about half of millennials aren’t saving for retirement at all. Aside from short-changing their retirements, they are “potentially leaving (free) money on the table” in the form of employer matching contributions, says Kristen Robinson, senior vice president at Fidelity Investments.

Fidelity believes one way to motivate those who aren’t saving is to enlist the aid of their parents. In part, that’s because the Fidelity survey echoes previous findings—from the Pew Research Center, among others—that indicate the millennials and their parents share tighter bonds than previous generations did.

Overall, 60% of respondents say their parents are good financial role models—a high vote of confidence, given the challenges many families encountered during the recent deep recession. Perhaps as a result, when asked who they trust as a source of financial advice, 33% of millennials put one or both parents at the top of the list. (More specifically, 14% said they trusted their parents the most, 11% said they trusted their mother the most, and 8% trusted their father the most.)

There’s certainly a vacuum for the parents to fill: Only 13% of the millennials surveyed say they trust financial professionals the most for money advice, and 25% say they trust no one.

To instill good savings habits, parents of millennials should have money talks with their children around the time of key life events, such as college graduation and before a first home purchase, says Robinson. Millennials also need their parents’ help to cope with information overload.

At the other end of the spectrum are the 25% who say they don’t trust anyone—including their parents. Amid the recession, “many became skeptical of financial institutions,” says Robinson, who speculates that those in this camp may also have seen their parents prove themselves poor financial role models since 2008. Indeed, the average boomer isn’t in great shape with regard to retirement saving: In 2013, the median household between the ages of 55 and 64 had only $111,000 saved in their 401(k)s and IRAs, according to a recent survey by the Federal Reserve.

Otherwise, the survey indicates the millennials are serious about saving. Their top three financial goals are to: accumulate more savings for retirement (52%); pay off credit card debt (41%) and pay off student loans (28%).


To Your Successful Retirement!

Michael Ginsberg, JD, CFP®



How to Prepare for a Mini-Retirement – Instead of saving up for old age, plan to take a career break sooner.


It’s easier to save up for a one-year sabbatical than 30 years of retirement.

US News and World Report, By Joe Udo Oct. 9, 2014 | 10:31 a.m. EDT

Saving for retirement is very difficult when you’re young because retirement is so far off. I certainly didn’t want to save for retirement when I was 21 years old. Retirement was 40 to 50 years away at that point and the timeline was too long to contemplate. However, my dad convinced me to start contributing to my 401(k) and I’m still very thankful for that. I’m 40 now and 65 will be here before I know it. One alternative way to look at retirement saving is to plan for mini-retirements instead. This will break up the timeline so retirement isn’t so far away.

In the past, many workers stuck with one job at a single company for their entire working life. Then they retired with a pension and enjoyed their golden years in comfort. However, this is no longer the case. Companies need to optimize their revenue and layoffs is one of the easiest ways to achieve this. Also, companies often merge or go out of business and employees can’t count on a long career anymore. One result is that employees are less loyal and switch jobs every few years.

Career instability often makes life more difficult but there is an opportunity to look at it from a different angle. Why not plan to take a break from work and recharge your batteries? Workers are increasingly stressed and dissatisfied with their jobs and an extended break can do some good. A year or two off can rekindle the passion you once had for your career or give you the time to find a different career altogether. In the traditional retirement model, workers have many decades to save, but most of us put off this important action. If you plan to take a long sabbatical every 10 to 15 years, then you’ll have to start saving seriously right away.

Here is what you need to do to prepare for a mini-retirement.

1. Save a big percentage of your income. Financial advisors typically recommend saving 10 to 15 percent of your income for retirement. This won’t be enough if you want to retire several times throughout your working life. You will need to increase your savings rate to 30 to 50 percent of your income to have a shot.

2. Reduce expenses and keep lifestyle inflation under control. We tend to spend more when our income increases. But almost everyone can reduce their expenses if they take a good look at what they spend on. Cutting back on non-essential and keeping lifestyle inflation under control can be difficult. You just have to keep the bigger goal in mind and prioritize your spending accordingly.

3. Find alternative ways to generate income. An alternative source of income will greatly help you through those lean years during the breaks. There are many ways to generate income other than a full-time job. For example, you can invest in dividend stocks, buy a rental property, house sit, work odd jobs or start a part-time online business. The income from alternative sources might not be as high as your full-time job, but you won’t be working 60 hours per week either.

4. Track your expenses and budget for travel, retraining and health care. Of course, you don’t want to just hang out at home during your mini-retirements. Many people take this time to travel and see the world at their leisure. You need to track your expenses so you can figure out how much you need to fund a year without a full-time job. Also, depending on your career, you might need to retrain when you’re ready to go back to work. Health care is another big concern, and you need to check how much it will cost to buy private health insurance. All these items are expensive and you’ll need to budget for them.

5. Have an open mind. Taking a year or two off from work can change your life. You’ll have time to pursue your interests and who knows what doors will open. You have to be flexible and look for opportunities when you’re not working full-time.

Taking periodic mini-retirements isn’t for everyone. If your identity is tied to your job, then the traditional retirement model might be a better fit. Financially, you probably won’t be able to build up as much wealth if you take mini-retirements throughout your working years. However, there are many benefits, too. You won’t be burned out from working at the same job for 30 years. You will be able to do whatever you want during those breaks. How many people can live life on their own terms while they’re young? Retirement saving will also be much more urgent because you’ll need to fund those years away from a full-time job.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Is College Debt the Next Bubble?

What might a 23-year-old recent college graduate, a 45-year-old entrepreneur, and a 60-year-old pre-retiree have in common financially? They may all be hobbled by student loan debt. According to financial aid expert Mark Kantrowitz, the student loan “debt clock” reached the $1 trillion milestone last year.1 And even as Americans have reduced their credit card debt over the past few years, student loan debt has continued to climb–both for students and for parents borrowing on their behalf.

A perfect storm

The last few years have stirred up the perfect storm for student loan debt: soaring college costs, stagnating incomes, declining home values, rising unemployment (particularly for young adults), and increasing exhortations about the importance of a college degree–all of which have led to an increase in borrowing to pay for college. According to the Federal Reserve Bank of New York, as of 2011, there were approximately 37 million student loan borrowers with outstanding loans.2 And from 2004 through 2012, the number of student loan borrowers increased by 70%.3

With total costs at four-year private colleges pushing $250,000, the maximum borrowing limit for dependent undergraduate students of $31,000 for federal Stafford Loans (the most popular type of federal student loan) hardly makes a dent, leading many families to turn to additional borrowing, most commonly: (1) private student loans, which parents typically must cosign, leaving them on the hook later if their child can’t repay; and/or (2) federal PLUS Loans, where parents with good credit histories can generally borrow the full remaining cost of their child’s undergraduate education from Uncle Sam.

The ripple effect

The implications of student loan debt are ominous–both for students and the economy as a whole. Students who borrow too much are often forced to delay life events that traditionally have marked the transition into adulthood, such as living on their own, getting married, and having children. According to the U.S. Census Bureau, there has been a marked increase in the number of young adults between the ages of 25 and 34 living at home with their parents–19% of men and 10% of women in 2011 (up from 14% and 8%, respectively, in 2005).4 This demographic group often finds themselves trapped: with a greater percentage of their salary going to student loan payments, many young adults are unable to amass a down payment for a home or even qualify for a mortgage.

And it’s not just young people who are having problems managing their student loan debt. Borrowers who extended their student loan payments beyond the traditional 10-year repayment period, postponed their loans through repeated deferments, or took out more loans to attend graduate school may discover that their student loans are now competing with the need to save for their own children’s college education. And parents who cosigned private student loans and/or took out federal PLUS Loans to help pay for their children’s education may find themselves saddled with education debt just as they reach their retirement years.

There’s evidence that major cracks are starting to appear. According to the Federal Reserve Bank of New York, as of 2012, 17% of the 37 million student loan borrowers with outstanding balances had loans at least 90 days past due–the official definition of “delinquent.”5 Unfortunately, student loan debt is the only type of consumer debt that generally can’t be discharged in bankruptcy, and in a classic catch-22, defaulting on a student loan can ruin a borrower’s credit–and chances of landing a job.

Tools to help

The federal government has made a big push in recent years to help families research college costs and borrowers repay student loans. For example, net price calculators, which give students an estimate of how much grant aid they’ll likely be eligible for based on their individual financial and academic profiles, are now required on all college websites. The government also expanded its income-based repayment (IBR) program last year for federal student loans (called Pay As You Earn)–monthly payments are now limited to 10% of a borrower’s discretionary income, and all debt is generally forgiven after 20 years of on-time payments. (Private student loans don’t have an equivalent repayment option.)

Families are taking a much more active role, too. Increasingly, they are researching majors, job prospects, and salary ranges, as well as comparing out-of-pocket costs and job placement results at different schools to determine a college’s return on investment (ROI). For example, parents might find that, with similar majors and job placement success but widely disparate costs, State U has a better ROI than Private U. At the end of the day, it’s up to parents to make sure that their children–and they–don’t borrow too much for college. Otherwise, they may find themselves living under a big, black cloud.


To Your Successful Retirement!

Michael Ginsberg, JD, CFP®