Takeaways From a Conference About Retirement Savings

I recently attended (virtually) a conference about retirement savings sponsored by the Employee Benefit Research Institute (EBRI). Below are some of my key take-aways:

Funded Contentment- I ever heard that phrase before. It means a person’s ability to underwrite a happy and meaningful life. The focus is on having enough money instead of reaching a specific number (i.e., dollar amount of retirement savings). Instead of a “greed is good and more is better” mentality, many retirees want to focus on meaning and purpose in later life.

Narrative Species- One speaker noted that humans are not a “numeracy species” focused on math and numbers but, rather, a narrative species. In other words, people learn best about personal finance (and other topics) through stories and case study examples.

Automatic Non-Decisions- An easy way for people to save money for retirement is to “turn decisions into non-decisions.” In other words, take action once to automate financial transactions such as payroll deductions for a 401(k) or regular automatic deposits to buy stock or mutual funds.

The Impact of Vividness- When people’s “future self” is made vivid through aging apps and other tools, they are more likely to make decisions and sacrifices today to have a better future in later life. For example, they might save and invest more money and eat more healthy food.

RMDs as an Income Withdrawal Strategy- Findings from a study of the effects of increasing required minimum distribution (RMD) age from 70.5 to 72 to 73 were reported using data from a sample of over 3 million IRA owners. The study found that not a lot of people take RMDs until they are required to do so. As the RMD age got pushed back, so did the frequency of people taking later distributions. In other words, changes in RMD age as a result of the two SECURE acts affected investor behavior because many retirees use RMD rules as a default income withdrawal strategy.

Retiree Financial Challenges- Retirees with significant sums in tax-deferred accounts are facing challenges from RMDs, which can trigger tax on Social Security, higher income taxes in general, and higher Medicare premiums call IRMAA. Even still, people have an aversion to withdrawing money from tax-deferred accounts earlier than RMD age.

The Impact of Guaranteed Income- Older adults with guaranteed lifetime income (e.g., pension or annuity) are more likely to spend money and less likely to feel financial stress than those who withdraw money from investments to pay living expenses. The latter group is subject to longevity risk (risk of outliving savings) and sequence of returns risk (risk of withdrawing funds during a market downturn) and tend to hold back on spending. The #1 fear of retirees is running out of money.

Cultural Norms- In some cultures, family members serve as a de facto “emergency fund” for each other. This expectation can hinder the financial progress of those who save. Some people may want to have a place for their money that relatives don’t know about because it is hard to say no to family members. 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Tax-Deferred Retirement Savings Plans in Later Life

One place where there is a gap in adult financial education is programs for older adults age 65+. The bulk of community and workplace programs cover financial tasks and decisions to get “to retirement,” not “through retirement." 

One of the niche audiences for my business, Money Talk, is older adults grappling with financial issues such as creation of a retirement “paycheck,” paying taxes on required minimum distributions (RMDs), and simplifying financial accounts.

 

Below are key points from a recent class that I taught about tax-deferred retirement savings plans:

Tax Diversification- There are three types of investments: 1. Taxable accounts outside of retirement savings plans, 2. Tax-free accounts (e.g., Roth IRAs and municipal bonds), and 3. Tax-deferred accounts (e.g., Traditional IRAs and employer plans). Ideally, investors should have investments in all three categories for greater control over their taxable income.

 

Types of Tax-Deferred Accounts- These include employer-sponsored defined contribution plans (e.g., 401(k), 403(b), 457, thrift savings plan), Traditional IRAs funded with pre-tax dollars, simplified employee pensions (SEPs) for self-employed workers, and annuities.

 

Account Beneficiaries- It is unlikely that long-time savers with large balances will die without leaving some money in one or more tax-deferred retirement plans. It is wise to periodically review named beneficiaries and prepare a master list for periodic review and/or revision. Beneficiary types include a spouse, non-spouse (e.g., child), and qualified charity (if allowed).

 

Account Consolidation- Benefits include fewer account management fees, less maintenance (e.g., account logins, tax statements, e-mails, and investment decisions), and greater ease in calculating and withdrawing RMDs and administering a deceased person’s estate.

 

Direct Rollovers- Custodian A should send account proceeds directly to Custodian B. Indirect rollovers (where an account holder is sent the money) should be avoided because there is a strict 60-day time limit to reinvest the money in a new account and withholding taxes usually apply.

 

Rebalancing and RMDs- When RMD withdrawals are made, account owners may have to rebalance the asset allocation of their portfolio. In bull (rising) markets, consider selling assets (for a withdrawal) that have appreciated more than others to get back to target percentages.

 

RMD Calculation- A new life expectancy table took effect in 2022. Simply divide the balance in a tax-deferred account on December 31 of the prior year by the divisor in the table that matches your age. For example, $100,000 ÷ 26.5 (the divisor for age 73) = $3,774 (rounded). As retirees get older, the RMD percentage of their account balance gradually increases.

 

Account Withdrawal Timing- Account owners can make penalty-free withdrawals from tax-deferred accounts after age 59.5. Those with large balances and those who need money for living expenses may benefit from withdrawals before their RMD start date. Withdrawn money can be used for living expenses, savings in a taxable account, charitable or family gifts, and fun.

 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Ten Trending Topics in Financial Education

Today, I presented a general session program for financial educators and researchers at an online professional conference. My chosen topic was Ten Trending Topics in Financial Education. Below is a brief description of the ten trends that I discussed:

Inflation- The U.S. had an ascending 5% inflation rate (CPI) in May 2021 and a descending 5% CPI in March 2023 and many higher inflation rates in between. Inflation-induced price hikes on goods and services are like a regressive sales tax and hurt those with low incomes the most.

 

Interest Rates- Between March 2022 and May 2023, the Federal Reserve raised interest rates 10 times in an effort to decrease inflation by slowly increasing the cost of borrowing. The goal is a so-called “soft landing” (i.e., not slowing the economy too much to avoid a recession).

 

Savings Rates and Higher APYs- U.S. households are currently saving a lower percentage of income than they were pre-COVID. The savings rate was 9.1% in January 2020 and 5.1% in March 2023. Due to Federal Reserve interest hikes, annual percentage yields range from 3.75% to 4.5%, on average, for online savings and money market accounts.

 

Increasing Debt Loads- The average credit card balance was $5,805 at year-end 2022 and the average credit card interest rate in April 2023 was 24.2%. In addition, 72- and 84-month car loans are more common and 16.8% of new car buyers now have monthly payments of $1,000+.

 

Online Gambling- Online gambling in all forms (sports betting, casinos, poker, etc.) is on the rise and legalized sports betting has spread nationwide. As of January 2023, mobile sports bets are legal in 26 states with three states pending. Young males are especially attracted to this.

 

ChatGPT and AI- Financial practitioners are experimenting with ways to use AI platforms (e.g., ChatGPT) to enhance productivity. AI output often contains mistakes and should only be considered as a “rough first draft” for review and editing by a subject matter expert.

 

Cryptocurrencies- About 16% of Americans say that they have ever invested in or traded cryptocurrencies This has led to greater income tax scrutiny and calls for more government oversight by the SEC and/or CFTC after 2022 collapses of crypto lenders and exchanges.

 

Increased State Financial Education Mandates- As of April 2023, 18 states have passed laws mandating a semester-long financial education course prior to graduation. This means that more young adults will enter college, careers, or the military with personal finance knowledge.

 

Different Types of FIRE- Different paths to Financial Independence, Retire Early (FIRE) have emerged in recent years. In addition to Traditional FIRE, there is Fat, Lean, Barista, and Coast FIRE, all in recognition of alternative paths to aggressively saving 25x annual living expenses.

 

More Attention to Asset Decumulation- Baby boomers were “guinea pigs” for voluntary self-directed retirement savings accounts and the decline of pensions. Many are now scrambling to figure out how to create a retirement “paycheck” for life using accumulated savings. Asset decumulation is a “hot” topic for financial advisors, researchers, and fintech developers.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Highlights From a Conference on Retirement Savings

At the 2022 Retirement Summit sponsored by the Employee Benefit Research Institute (EBRI), there were four main topics: improving individuals’ access to retirement savings plans, reducing plan leakage (i.e., when workers take a pre-retirement distribution), helping people spend down their assets in retirement, and improving investment outcomes for American workers within the retirement system. Below are my key take-aways:

Reluctance to Spend- Many people who saved regularly for decades in retirement savings plans such as IRAs and 401(k)s- as financial experts told them to do- are now hesitant to spend down their assets. Withdrawing money, instead of saving, feels “foreign” and uncomfortable.

 

Savings Fosters Success- Studies have shown that just being in the retirement system in some capacity (e.g., participating in an employer savings plan and/or IRA) increases the odds of having a successful retirement (i.e., not running out of money to live a comfortable lifestyle).

 

Workplace Savings Matters- The general consensus was that, if people are not covered by a workplace savings plan (e.g., 401(k) plans), they generally don’t save for retirement. Some states have started to require employers to offer a workplace savings plan. An example: CalSavers in California.

 

Auto-Enrollment is Effective- Research indicates that most workers who are auto-enrolled in retirement plans stay in them, even in the absence of an employer match. Speakers suggested three types of “nudges” (i.e., automatic features): auto-enrollment, auto-escalation (where workers’ savings deposits increase over time), and auto-re-enrollment (where workers who opt out of a retirement savings plan are auto-enrolled again at designated time intervals).

 

Streamlined Portability- There needs to be a more streamlined process for workers who are leaving jobs to rollover their retirement account balances to another tax-deferred plan, thereby preventing leakage. Currently, many workers “cash out” their accounts and say “just give me a check” because it is much easier than the “paperwork hassles” required to transfer funds.

 

Decumulation Assistance- Workers get help from their employers setting up and contributing to retirement savings accounts (accumulation) but very little “on the back end.” Without personal assistance or planning tools, it is hard for older adults to budget their money and decide how much they can withdraw from savings. Older adults need help with decumulation.

 

Technology Tools Exist- Many speakers stated that retirees don’t know how to draw down their savings, but technology already exists to help them. An example given was a default to move 3% of workers’ target date fund (TDF) balance to an annuity at age 55 and 3% more each year so about 25% of the account would be in an annuity and 75% in the TDF at age 65.

 

In summary, addressing retirement savings gaps with innovative solutions is a necessity, not an option. The alternative (i.e., doing nothing) is a cadre of destitute older people falling back on limited government resources. The most vulnerable people are minorities and low-wage and small business workers.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

IRA Basics for Retirement Savers

While taxpayers have until the tax filing deadline in April 2023 to contribute to an individual retirement account (IRA) for 2022, many people prefer to make all of their current year tax-saving moves before year-end. This leaves about two months to make an IRA deposit during the 2022 calendar year or up to six months if you wait until April.

Below is a discussion of IRAs and details about how they can lower your taxes and provide a retirement savings nest egg:

Description- An IRA enables workers with earned income (salary from a job or net earnings from self-employment) to save and invest for retirement. IRAs are not an investment, per se, but, rather, a special classification for tax purposes.  The actual investment can be in stocks, bonds, certificates of deposit, mutual funds, or virtually any security except one that is already tax-exempt (e.g., municipal bonds or bond funds).

History- In the early 1980s, federal legislation created a tax-deductible IRA for anyone with earned income. Significant changes in 1986 established income limits for participants in an employer-sponsored retirement plan that eliminated the tax deductibility of traditional IRA contributions for some people. The Roth IRA became available January 1, 1998. While contributions are not tax-deductible, Roth IRAs provide federal income-tax-free growth.

Contribution Limits- Federal tax law limits 2022 contributions to either a traditional or Roth IRA to $6,000 for a worker with earned income. An additional $6,000 can also be saved for a worker’s spouse (in a Spousal IRA), regardless of whether or not the spouse is employed. In addition, workers or spouses who are age 50 or older can make an additional $1,000 catch-up contribution ($7,000 total).

Account Custodians- IRA account custodians include banks, credit unions, brokerage firms, and mutual fund investment companies. Minimum deposits required to set up an IRA vary with the financial institution and type of investment that is selected. For example, a bank may require $500 to purchase a CD for an IRA and a mutual fund company may require a $1,000 minimum deposit.

Account Set-Up- It is easy to set up an IRA. Simply, choose the custodian where you want to open an IRA account, fill out an application, designate one or more beneficiaries, and make an opening deposit. Many mutual fund families require lower deposits for IRAs than for taxable accounts. IRAs that let investors choose among different types of investments are known as “self-directed” IRAs. Costs for IRAs, including initial fees and annual maintenance fees, can vary so it is important to shop around. 

Income Limits-     There are a number of 2022 income limits with respect to IRAs that taxpayers must pay attention to:

*  Roth IRAs are fully available to joint filers whose current adjusted gross income (AGI) is less than $204,000. There is a phase-out range between $204,000 and $214,000. Roth IRA deposits cannot be made if AGI exceeds $214,000.

*  Roth IRAs are fully available to single filers whose AGI is less than $129,000. No participation is allowed if AGI is more than $144,000. The phase-out range is between $129,000 and $144,000.

*  A working spouse who is not covered by an employer-sponsored plan may have a fully deductible Traditional IRA, even if his/her spouse participates in an employer-sponsored plan, if the household AGI is less than $204,000. The phase-out range is from $204,000 to $214,000.

* The maximum annual AGI for a traditional IRA, under which single filers can qualify for a full tax deduction, is $68,000 in 2022 with a phase-out range of $68,000 to $78,000. For married couples filing jointly, the income limit for a full IRA deduction is $109,000 with a phase-out range of $109,000 to $129,000.

Income Uncertainty Delay- Taxpayers who are uncertain about whether or not their 2022 income will exceed the Roth IRA contribution limit may want to wait until their income for the year (including investment account dividend and capital gain distributions) is confirmed sometime in early 2023. Otherwise, they run the risk of having to make an “excess contribution withdrawal” of an unwarranted deposit by the tax filing deadline or October 15 if they file for an extension.

No Income Uncertainty Delay- Taxpayers who know that their 2022 income will not exceed the Roth IRA contribution limit should consider making an IRA deposit early in each tax year. The earlier in each tax year that money is deposited in an IRA, the longer it will have to grow through compounding.

IRA Returns- Returns on IRA accounts depend on the securities selected and on the condition of financial markets over time. In addition, returns depend on whether a commission (load) is paid or if there is no commission (no-load fund) and the amount of annual management fees that are charged.

For additional information about IRAs, review this U.S. Securities and Exchange Commission website.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Financial Concerns of Older Adults

 Last fall, I participated in a group discussion among personal finance content creators (e.g., authors, speakers, bloggers, and podcasters) attending the FinCon 2021 conference. Our topic: financial concerns of older adults. The consensus was there is no “one size fits all” content. Personal finance messages need to be customized for specific older adult audiences.

 

Below is a description of eight key topics that were discussed:

Adequate Health Insurance- Health issues are a big drain on even the best laid financial plans because “the greatest wealth is health.” Older adults worry about health care costs and how much their health insurance will cover. Managing chronic conditions, such as diabetes, over a lifetime can, especially, be expensive. A local SHIP (called SHINE in some states) State Health Insurance Assistance Program office can help older adults compare Medicare supplement policies. The Extra Help program can help those with limited incomes and resources to pay for prescription drugs.

 

Use of Time- Some older adults miss the daily structure and socialization that work provided and become bored, even depressed. Suddenly, they have about 2,500 hours of free time available when they exit the labor force. The key to avoiding this situation is to identify one or more “big rocks” that take up 6-8 hours each day. As I wrote in my book, Flipping a Switch, examples of “big rocks” include working, volunteering, blogging, care-giving, and socializing.

 

Too Much Togetherness- Some couples decide to retire simultaneously while others leave their jobs at different times. Unfortunately, some spouses feel compelled to retire because their spouse keeps “bugging them.” This can cause resentment and can especially disadvantage women who are often younger and have shorter work histories than male spouses. This Wall Street Journal article has some good insights about assessing retirement readiness.

 

Inadequate Savings- Many older adults are afraid of a big gap between their Social Security benefit and other income versus the amount of money they need to live on monthly to retire comfortably. Others are afraid of running out of money during their remaining lifetime. The best way to address these concerns is to plug some numbers into a retirement savings calculator, such as the Retirement Calculator from the FINRA Investor Education Foundation, and see where they fall. Strategies to close the gap include increasing income, reducing expenses, or doing both.

 

Shame About Savings Shortfalls- Some older adults are experiencing shame and embarrassment about their lack of retirement savings. This is especially true if their adult children are regular savers and the parents fear they may need to “lean” on their family in the future. Many are afraid to look at their numbers and just plan to keep working indefinitely because they know they don’t have enough. Again, calculators or a financial counselor or coach may be able to assist.

 

Skepticism About Social Security- Some of the content creators reported hearing doubts expressed about the long-term sustainability of Social Security and people viewing it as “gravy” that they can’t count on. Indeed there is cause for concern as the Social Security trust fund is projected to be depleted by 2033, with just 76% of benefits able to be paid at that time. This potential “haircut” speaks to the need to have multiple streams of income available in later life.

 

Gray Divorces- Two types of divorces in later life were discussed: 1. the kind where couples have grown apart  and 2. the kind where one spouse with health or long-term care issues and major expenses does not want to drain the finances of the other. Women tend to fare more poorly after divorces than men due to lower average earnings and retirement benefits. This helpful article from Kiplinger encourages readers to treat a gray divorce like what it is: a business deal.

 

Need for Flexibility and Resilience- One content creator noted “There are many things that come up in life and you have to be willing to adapt.” Another advised “Plan for good and bad times because it is going to rain sometimes.” A third participant noted that “present choices affect your future options.” Resiliency resources don’t just include financial assets such as savings and insurance. Relationships (social capital) and skills (human capital) also foster resilience.

 

For more information about older adult finances, review this Consumer Financial Protection Bureau (CFPB) website.

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Savings Soundbites for ASW 2022

The week of February 21-25, 2022 is America Saves Week (ASW), an annual event (since 2007) that encourages Americans to save money and build wealth. Part of the America Saves program, ASW encourages people to take an online pledge to save money, set personal savings goals, and create an action plan to save money. 

The theme for ASW is “Building Financial Resilience,” i.e., the capacity to handle financial “shocks” such as income loss or emergency repairs.

Below are eight insights about savings that I gleaned from the America Saves program and government data sources:

 

Savings Rates Dropped in 2021- The U.S. personal savings rate was 33.8% in April 2020 as pandemic lockdowns  took hold. Many people could not spend money so they saved it. By January 2021, as vaccines started to roll out, the savings rate was 19.9%. In April, July, and December 2021, savings rates were 12.6%, 10.6%, and 7.9%, respectively. As people began to spend more on travel, entertainment, and other discretionary expenses, savings rates were back in single digits.

 

Repaying Debt is a Form of “Savings”- Debt is one of the biggest barriers to savings because payments for loans, credit cards, and other obligations suck up available income. Paying down debt usually pays a higher “return” than earnings on a savings account or investments. For example, compared to paying off the balance on a credit card with an 18% APR (interest), where else could you get a guaranteed, risk-free, 18% return? That said however, it is wise for people with debt to have emergency savings and retirement savings, especially with employer match. Ideally, try to do all three things.

 

Automated Savings is Powerful- At America Saves forums in past years, financial institutions and fintech firms reported success with round-up apps for saving money. People can accumulate significant sums over time by rounding up their purchases to the nearest dollar. For example, if you spend $5.25 with a debit or credit card for coffee and a bagel, the extra 75 cents gets put into savings. Examples of round-up apps include Acorns, Chime, Qoins, and Keep the Change.®

 

Pre-commitments Encourage Savings- People save more money when they commit today to increased savings in the future (e.g., when they receive a raise or promotion). This is typically done in employer retirement savings plans with an auto-escalation feature that automatically increases an employee’s contribution amount by a specific percentage of pay. Research has shown that auto-escalation at the time of a pay raise minimizes feelings of “loss” because people can save more money without decreasing their take-home pay. It also uses inertia positively because most workers do not opt out.

 

Vivid Goals Are Powerful and Motivational- Saving for something specific is easier than saving for savings sake. Vivid goals can be specific dollar amounts or tangible items such as a certain make/model car. Anything people can do to make savings vivid is a good idea. Examples: posting photos of goals in prominent places (e.g., fridge) and online calculators and apps to break a goal down into a series of steps and progress points. Another strategy is to set up savings accounts for specific goals and name the accounts (e.g., “2022 vacation fund”) so you are less likely to spend the money elsewhere.

 

Emergency Savings is Vital- While financial experts recommend three to six months expenses for emergency funds, any amount of savings is better than none. Emergency funds reduce stress and worry about unexpected events (e.g., loss of income) and expenses (e.g., a car repair). Start with small steps…first $100, second $100…etc. and gradually work up to higher amounts. According to America Saves, research shows that low-income families with at least $500 in an emergency fund were better off financially than moderate-income families with less than this amount.

 

Most People Can Save Something- Research studies have found that most low- and moderate income consumers can save something, especially if they receive supportive services such as employer savings match, financial coaching, and individual development account (IDA) program financial education and savings match. Financially-strapped individuals can start their savings journey very simply by saving their loose change in a jar or completing a simple savings challenge. Once people save small dollar amounts, they develop confidence and pride and often go on to save larger amounts.

 

An Optimistic Mindset Helps- Pessimism is a big barrier to savings. If people have had no savings role models, negative savings experiences, or don’t think they can save money, they are unlikely to try. This is why financial coaches and culturally relevant financial education can be so useful to break down pessimism and convince people that they can save. The key is to get savings on your radar and adopt positive savings habits. What people think about, they bring about. 

Happy America Saves Week 2022. Take time to consider your savings goals and if you are on track to achieve them.

 

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.