Archives for May 3, 2019

Older workers have seen their wages come to a halt.

That’s the takeaway from a new report by researchers at the Retirement Equity Lab at the New School for Social Research.

Weekly earnings for workers aged 55 to 64 were only 0.8% higher in the first quarter of 2019 than they were in the first quarter of 2007, after accounting for inflation, they found.

For comparison, earnings rose 4.7% during that same period for workers between the ages of 35 and 54.

As the wages of older workers peter out, the number of them in the workforce are only growing. Some 10,000 baby boomers turn 65 every day. More than half of the 11.4 million jobs expected to be added to the U.S. economy over the next seven years will be filled by workers over 55.

Why are these workers getting the short end of the stick?

“The main reason people working at older ages don’t have higher wages is because they don’t have bargaining power, and the reason they don’t have bargaining power is they don’t have a good fallback pension,” said Teresa Ghilarducci, an economics professor at the New School for Social Research.

“If everyone has a really secure pension plan, they can go to the labor market and bargain with employers,” she said.

However, today less than half of older employees have access to a retirement plan though their job.

Employers also exploit the fact that many older people can’t pack up and move across the country for different job opportunities, Ghilarducci said.

As a result, employers “can basically offer them just enough money to get them above the poverty line and they have to take it or leave it.”

Another problem? The growth of the gig economy, where wages are low and uncertain, and retirement plans basically are non-existent, Ghilarducci said.

In 2015, nearly 25% of older workers said they were in an “alternative work arrangement,” defined as on-call, contract or gig work, up from 15% in 2005, the researchers at the New School found.

What’s more, workers over the age of 55 are three times more likely than workers under 35 to be in alternative work arrangements.

Harry Campbell, the founder of TheRideshareGuy.com, surveyed more than 1,000 Uber and Lyft drivers last year. He found that 66 percent of them were over 50.

Older drivers find it hard to plan for the future, he said.

“It’s a good job to help pay the bills but very difficult to save for big purchases like the house or retirement,” Campbell said.

A vicious cycle develops, in which older workers lack the retirement savings to negotiate better wages, and then the lower wages they pick up make it all that much harder for them to walk away from the workforce.

“More people will die in their boots,” Ghilarducci said. “They’ll never be able to retire.”

After paying into Medicare through payroll withholdings at work for many years, some people approach their eligibility age of 65 with a misconception that their coverage will be free.

In reality, Medicare comes with a variety of expenses — including premiums, copays and deductibles. High earners pay more for certain premiums, and there’s no out-of-pocket maximum.

“I’d say a full third of people we talk to, who are just starting to do their research, are surprised — some are appalled and flabbergasted — that they have to pay anything for Medicare,” said Danielle Roberts, co-founder of insurance firm Boomer Benefits in Fort Worth, Texas.

“The ‘Medicare for all’ conversation might contribute to that, because consumers hear ‘free, free, free’ and assume Medicare is already free,” she said.

While Congress begins wading through various bills that aim to overhaul the nation’s health-care system — including a “Medicare for All ” version in both the House and Senate that would come with no premiums, copays or deductibles — it’s important to know that the existing Medicare program begins costing you when you enroll. And if you fail to sign up on time, you could pay a life-lasting penalty.

Each day, about 10,000 baby boomers turn 65. Fidelity Investments estimates that the average male-female couple will spend a whopping $285,000 on health care from that age on.

And, that’s just a starting point. Things that are not covered by Medicare — dental, basic vision, over-the-counter medicines, long-term care — would be on top of that.

This makes figuring out your Medicare coverage a key part of managing your expenses. Here’s what you need to know.

The cost

As long as you have at least a 10-year work history, you pay no premiums for Medicare Part A, which covers hospital stays, skilled nursing, hospice and some home health services. However, it has a deductible of $1,364 per benefit period, along with some caps on benefits.

Part B — which covers outpatient care and medical supplies — has a standard monthly premium of $135.50 this year, although higher earners pay more (see chart below). It also comes with a $185 deductible (for 2019). After it’s met, you typically pay 20 percent of covered services.

Those parts of Medicare don’t cover prescriptions. That’s where a Part D drug plan comes in.

You can get a standalone plan to use alongside original Medicare. Or, you can sign up for an Advantage Plan (Part C), which typically includes prescription drug coverage. If you go this route, your Parts A and B benefits also will be delivered via the insurance company offering the Advantage Plan.

The average cost for Part D coverage in 2019 is $32.50 per month, according to the Centers for Medicare and Medicaid Services, although high earners pay extra for their premiums (see chart below). The deductible for 2019 is $415.

If you fail to sign up for Medicare when you first qualify for coverage and you change your mind later, you could face life-lasting penalties, which would make your monthly premiums higher.

Some people with low incomes qualify for programs that reduce their Medicare-related costs. There’s extra help for prescription drug coverage, and some state-run savings programs help with copays, coinsurance, deductibles and premiums.

Avoiding life-lasting penalties

If you tapped your Social Security benefits before age 65, you’ll automatically be signed up for original Medicare (unless you live in Puerto Rico).

“About a month or two before you turn 65, you’ll be automatically enrolled, and your card will just show up in the mail,” Roberts said.

In this situation, you’ll see your Social Security check reduced by the cost of the Part B premium.

If you haven’t yet tapped Social Security, the burden is on you to sign up. In that case, you get a seven-month enrollment period that starts three months before your birthday month and ends three months after that.

Penalties if you don’t enroll

If you fail to sign up for Part B when you’re supposed to, you’ll face a 10 percent penalty for each year that you should have been enrolled. The amount gets tacked on to your monthly premium.

While Part D prescription coverage is optional, the penalty for not enrolling when you were first eligible is 1 percent for every month that you could have been signed up — unless you have qualifying coverage through an employer’s plan.

“We advise people even if they don’t take medicine right now, at least sign up for the cheapest drug plan just so you don’t face a penalty,” Roberts said. “And if something bad happens, you’re making sure you aren’t caught with no coverage.”

Coverage gaps in Medicare

Be sure to think about how you’ll pay for the things Medicare doesn’t cover. For instance, it generally doesn’t cover dental work and routine vision or hearing care. Same goes for long-term care, cosmetic procedures and — for the jet-setters — medical care overseas.

Many people decide to pair original Medicare with a supplemental policy — called Medigap — to help cover out-of-pocket costs such as deductibles and coinsurance. You cannot, however, pair a Medigap policy with an Advantage Plan.

If you end up choosing an Advantage Plan, there’s a good chance limited coverage for dental and vision will be included.

For long-term care coverage, some people consider purchasing insurance specifically designed to cover those expenses.

When you’re in the early stages of your personal finance journey, the majority of your financial goals tend to revolve around specific numbers:

I need $12,000 in my savings account for my three-month emergency fund.

I need to pay off $45,000 in student loans.

I need to contribute 10% of my salary to my 401(k).

I need to put $6,000 in my IRA by the end of the year.

Once you start achieving those goals, you’re probably going to set a few new ones—and you’re probably going to structure them the same way. “I need a three-month emergency fund” becomes “I want a six-figure net worth,” and so on.Outstream Video 00:0000:00

However, as The Financial Diet reminds us, there’s more to personal finance than stacking up a big pile of cash.

Business Insider asked Financial Diet co-founder Chelsea Fagan to elaborate on this philosophy:

Money, according to Fagan, should be viewed as a way to facilitate a good life that provides things like security, comfort, freedom, options, and, occasionally, risks — not as a material to be hoarded.

There are two reasons why focusing on what you do with the money is more important than focusing on how much money you have.

First, because it’s always a smart idea to have a plan for your money. Sometimes there’s a specific plan: maybe you’re saving for retirement, for a down payment, or for a once-in-a-lifetime vacation. Other times, you’re saving and investing money now because you want more options in the future. (That still counts!)

Second, because making your financial goal about an result and not about a number can often help you find ways to achieve that result while spending less money. Telling yourself you need to save up $75,000 before you can make a down payment on a house, for example, is a lot different than telling yourself that you want to find and purchase an affordable home.

Likewise, setting the goal of “visiting Paris” instead of the goal of “saving $5,000 so I can visit Paris,” might help you find ways of making the trip less expensive—and getting you in front of the Eiffel Tower even faster.

How do you structure your financial goals? Do you tend to tie them to numbers, or actions and experiences? If you switched your biggest financial goal around and based it on a result instead of an amount of money, even if that means thinking “I want to be debt-free” instead of “I need to pay off $3K in credit card debt,” would you be able to find a less expensive way of getting there?

We get blanket advice about preparing for retirement, but is that hurting more than helping?

Americans are often told not to touch their retirement savings until the future, but the government isn’t entirely sure how well they’re listening because there’s no solid data to show it.

The U.S. Government Accountability Office said this week it had trouble finding certain key statistics around retirement plans, such as why individuals take early withdrawals from their 401(k) plans and individual retirement accounts. The agency recommended the Department of Labor and Internal Revenue Service revise the tax form plan sponsors and financial firms use to report such information, which would help paint a picture for the state of retirement savings. “It just means it’s harder to target reforms or measure the effects of potential changes than if we had better statistics,” said David John, a senior strategic policy adviser at the AARP Public Policy Institute. “We have some information but we know that information is less than perfect.”

If there were more data around retirement savings, there could be more eloquent policy changes and precise financial planning advice for Americans, experts argued. Companies could help their employees balance saving for retirement, buying a home and paying off student debt. Lawmakers could see how much of a strain everyday expenses are having on a retiree’s budget, and where Social Security fits in. Financial services firms could give more targeted advice to various demographics across the country, some of whom may have higher costs of living than others but no way of knowing how best to contribute to a retirement account simultaneously. The GAO said accessing retirement assets too soon, whether by early withdrawal or a loan, could have an adverse effect on future savings, but there’s little understanding of why some may go that route — and thus, less ways for companies or financial institutions to help.

A steady stream of reports, studies and surveys come out nearly every week about retirement savings, most of which lay out the dire consequences of being unprepared for retirement. But consider this: when financial firms release studies about Americans’ retirement accounts, they’re typically only referring to their own clients; some surveys may not show a nationally-representative number of participants; and research could be focused on a very specific faction of the retirement landscape, which makes it difficult to compare to other findings and verify.

Experts offer Americans financial guidelines, based loosely on what we know about retirement savings (that they need more), but having a deeper understanding of where people stand, how many accounts they have, what debts they’re stressing out about, if they’re expecting any pension or Social Security benefits and their retirement trajectory would allow for more personalized advice. People don’t always perceive guidelines the same, said Meghan Murphy, vice president of Fidelity, the Boston-based financial services firm. When some readers read Fidelity’s benchmark goal of saving twice their salary by age 35 in a MarketWatch article, they were angry — a few millennials said it simply wasn’t possible given their current expenses, and were discouraged by the suggestion.

Having more data could let people see more clearly where they compare to others like them, and what they need to do to live comfortably in retirement. In the meantime, Americans can work with financial advisers to get more personalized recommendations or use retirement tools and calculators as a starting point for planning.

Many research groups do their best with what they have. Teresa Ghilarducci, an economist and director of the Schwartz Center for Economic Policy Analysis at The New School, said there isn’t very comprehensive regional data. The Census Bureau’s Survey of Income and Program Participation (SIPP) only records metro areas or states that have more than three million people. “It’s a shame we have no idea how retirement readiness differs by region,” she said. Having that information would allow organizations and policy makers to approach retirement planning differently in various parts of the country.

“There’s no truer picture of retirement readiness than looking at individuals,” Murphy said. Comparing average savings rates isn’t always helpful, as there are so many moving parts underneath the figures — such as gender, salaries, debt, household information and age. “If we compare the average savings rate for a man versus a woman, you can see men are saving more money, but when we look past those averages of men and women in the same income pools, we actually see women are saving more,” she said.

Researchers may also use differing definitions of a term. Take for example, the “retirement crisis” Americans are facing.

Experts and various studies point toward a shortfall in retirement assets for future retirees, but the country is nowhere near an actual crisis, said Andrew Biggs, a resident scholar studying Social Security reform and pensions at the American Enterprise Institute, a conservative think tank. Department of Labor and Federal Reserve data show retirement plan contributions are rising, more private sector workers are saving and that retirees aren’t running out of money, he said. “If you look up today’s retirees, they’re not in a crisis,” he said. (The Federal Reserve has its triennial Survey of Consumer Finances, which asks Americans about their household finances and retirement but is answered on a voluntary and self-discretionary basis).

Though there are near-term problems, he added, there always has been, as employees weren’t always protected with a pension. The number of 401(k) plans has grown dramatically since pensions first began declining, and with auto-enrollment features, target-date funds and lower costs associated with these investments, future retirees are poised to do and be well.

Many retirement researchers do believe Americans are in some sort of danger come retirement. There may not be comprehensive countrywide data available for various states, regions and type of retirement plan, but that numerous studies have concluded future retirees are in trouble says something, AARP’s John said.

Current retirees may have pensions to fall back on, but future retirees likely won’t have that benefit. Investors are also in a low-return environment, and the Social Security Administration expects to run out of reserves within 15 years, at which point retirees may see a cut benefit if Congress does nothing. “The macro trend doesn’t depend on whether you can say something has 90% accuracy or 98.99% accuracy,” John said. “Yes, we need better statistics, but it doesn’t imply in any sense of the word that we cannot use what we have current to see where a problem is developing.”