Retirement Spending Research Insights

At the July 2018 meeting of the American Savings Education Council, there was a presentation about a spending in retirement by the Employee Benefit Research Institute (EBRI).  Below are some take-away findings that caught my attention:

 

¨     Non-housing assets of three groups of retirees were studied: those with assets of less than $200,000, those with $200,000 to $500,000, and those with more than $500,000. Not surprisingly, the highest asset group had the smallest decline in the value of their assets between year 2 and year 18 of retirement.

 

¨     A significant number of households exhaust almost all of their non-housing assets. On the other hand, a large number of households actually continue to grow their assets throughout retirement. Many spend considerably less than they could afford to.

 

¨     Most retirees believe it is not difficult to maintain their pre-retirement standard of living. However, 44% of workers are not confident that they will be able to afford their current lifestyle. One possible explanation for this difference is that spending patterns and daily activities change as people get older.

 

¨     A longer life expectancy means a higher probability of entering a nursing home. The statistics found by the EBRI researchers were that 15.3% of those who died between ages 70 and 74 and 61% of those who died at or after age 95 reported a nursing home stay.

 

¨     Drivers of overspending and running out of money in retirement include potential financial shocks (e.g., divorce, widowhood, and disability), uncertainty and confusion, and lack of knowledge about later life financial decisions (e.g., long-term care planning and required minimum distributions).

 

¨     Drivers of people unnecessarily living below their means include bequest motives, the joy of having an increasing nest egg, and fewer material needs in later life. In addition, investors hate to experience monetary losses and pulling money out of personal savings may feel like a “loss” to some people.

 

¨     Uncertainty in retirement was predicted to grow in the future due to the following four factors: 1. Fewer people will have defined benefit pension plan income, 2. Potential reductions in Social Security, Medicare, and Medicaid, 3. Longer life spans, and 4. Fewer children to rely on.

Cryptocurrencies: What Consumers Need to Know

The New Jersey Coalition for Financial Education (NJCFE) recently held a meeting that included a panel presentation about cryptocurrencies. Below are some key points that were presented:

• Cryptocurrencies are virtual currencies that reside within computers. They are a digital representation of value that is used as a store of value and a medium of exchange. While they cannot physically be held like dollar bills, they can be digitally transferred between people without a middleman (e.g., bank).
   
• The security behind cryptocurrencies is the mathematics behind their software. Instead of the “In God, we trust” wording seen on U.S. paper currency, the slogan for cryptocurrencies is “In math, we trust.” Cryptocurrencies are not backed or supported by any government or central bank.
   
• There are hundreds of cryptocurrencies in existence with Bitcoin and Ethereum among the most well-known. Transactions between parties are anonymous and they do not need to know each other. Users are identified by unique alpha-numeric addresses and have a “personal wallet.”
   
• If people lose their password, or people die without telling other trusted parties their password, their cryptocurrency account will not be able to be accessed and all of its value will be lost.
   
• Blockchain is the underlying technology behind cryptocurrencies. It is a permanent publicly distributed ledger that is visible to the entire network. Blockchain is literally “flattening the world” and is expected to grow exponentially and be adopted for use in a wide variety of industry sectors.
   
• Cryptocurrencies are best used for purchase transactions and not for storage of value. Their value can be very volatile and is derived by market forces of supply and demand. Governments generally oppose cryptocurrencies because they cannot collect sales tax on purchases made “in the ether.”
   
• Environmental concerns have plagued cryptocurrencies. They run on a network of computers using a process called mining that validates and logs transactions. Mining requires computers to run on sometimes non-clean power sources constantly. There have been reported power shortages in some areas where mining is done.
   
• Cryptocurrencies are bought and sold on the cash (spot) market and can also be bought through initial coin offerings (ICOs). They are currently the “wild, wild west” and there are many reasons for consumers not to use them. However, we should be aware of them and of blockchain technology.

Protect Your Assets with Insurance- Part 1

Every day, people are exposed to risks which can cause a financial loss. Accidents, property damage, illness, disability, and even death are risks they need to consider. Without a risk management plan, people often have to go into debt or use funds set aside for other financial goals in the event of a financial loss. Below are four insurance recommendations:

• Insure Against Large Potential Losses- Purchase insurance for large financial risks that could deplete your savings or future earnings. This includes at least $300,000 ($500,000 is better) of liability coverage on property insurance policies to cover the risk of court judgments resulting from an accident at your home or with your car and disability insurance to protect against the loss of income due to illness or injury.

• Consider Life Insurance- Purchase life insurance if you have dependents who would suffer financially if you died. Another good candidate for life insurance is a young adult without dependents whose parents co-signed private student loans which are not forgiven in the event of death. An online life insurance calculator or worksheet can be used to determine the amount of life insurance coverage that is needed.

• Protect Real and Personal Property- Purchase property insurance with a replacement cost rider on personal property to replace items at their current cost up to the policy limit. Otherwise, only the actual cash value after depreciation will be reimbursed in the event of a loss.

• Build Relationships- Establish an ongoing relationship with one or more insurance professionals who can provide a periodic review of coverage and information about available cost-saving options such as discounts for military service and short commutes and “bundling” of auto and homeowners insurance.

Miscellaneous Nuggets from a Professional Conference (AAFCS)

I recently attended the annual conference of the American Association of Family and Consumer Sciences. Below are some ideas that resonated with me from this meeting:

• People often learn from stories. When you hear others’ stories, you realize that they are human just like you.
   
• There are 300,000 items in an average American home and 10% of Americans rent offsite storage space.
   
• Some digital assets are under a user license that expires at the time of a user’s death.
   
• People can identify their own financial “rules of thumb” instead of using established ones (e.g., 3 to 6 months of savings for emergencies).
   
• When doing strategic planning, people should use the SOAR (Strengths, Opportunities Aspirations, Results) method instead of SWOT (Strengths, Weaknesses, Opportunities, Threats) for a more positive focus.
   
• A good activity to use for financial education classes is “Six Word Story” (summarize a topic with a photo or graphic image and exactly six words).
   
• Workers need social and emotional intelligence to succeed at their jobs. Employees are often hired for their “hard skills” (e.g., subject matter knowledge) and fired for a lack of “soft skills” (e.g., working in teams).
   
• People need to understand the emotions and previous life experiences that drive their financial decisions.