The science behind why saving for retirement is hard and what to do about it

"The majority of Americans—59% according to a 2019 study by Charles Schwab—say they live paycheck to paycheck, making saving money a challenge. But beyond the that, there are lots of reasons why people don’t prioritize planning for their future, even though they know they should. It’s here where research in behavioral science can help" writes David Hoffeld.

"One of the primary reasons why we don’t make choices that set ourselves up for a secure retirement is because of how our brains are wired. Each of us has cognitive biases that lead us astray. Yet, by understanding these biases, you can make sure that you do not fall under their influence."

Bias #1: Temporal discounting 
(aka time preference) is a tendency to give greater value to rewards received sooner compared to much larger rewards if one is willing to wait.We are willing to settle for a small reward today rather than wait for a much larger reward in the future.  If you've heard about the "marshmallow test" of delayed gratification with preschoolers, you know what I mean. See: https://www.thoughtco.com/the-marshmallow-test-4707284
Adults who cash out retirement savings when changing jobs suffer from

Bias #2: Loss aversion 
Investors tend to prefer avoiding losses over achieving equivalent gains.
Suppose you decide to move your investments to “safe harbor” accounts (think money markets and CDs) to avoid potential losses in a down market. The longer you stay in these kinds of accounts, the more you risk losing some of your purchasing power to inflation. How do you know when to reinvest in the market?

Bias #3: Recency bias
Recency bias occurs when an investor tends to weigh recent events more heavily than earlier events. They think the recent past will repeat itself in the near future so investors look at what investments did well in the recent past and move their money into those investments at peak prices. See: The Callan Table for a visual example of how investment categories vary over the decades.

Confirmation bias occurs when we favor information that reinforces the things we already believe. It’s a common phenomenon in how we choose our news sources (think FOX vs. CNN), and it’s also common in investing.


Get the details:
https://www.fastcompany.com/90453952/the-science-behind-why-saving-for-retirement-is-hard

OK... now what can you do to address these threats to your financial security?

The Top 3 Blind Spots That Keep You from Building Wealth 

 "DALBAR’s Quantitative Analysis of Investor Behavior study tracks investor returns and finds consistently that the average investor earns much less than market indices suggest. For example, according to DALBAR, the average investor lost 9.42% in 2018, compared to losses by the S&P 500 of only 4.38%. Why? DALBAR attributed the loss to investor behavior ­­— avoiding market volatility by decreasing exposure, and even losing more money by being out of the market during periods of gains."

"How to avoid recency bias: Look for context in long-term trends, not just recent headlines, to provide perspective. If you have worked with your adviser to create a financial plan, stick to it. Jumping in and out of the market places you at greater risk. As David Booth of Dimensional Fund Advisors puts it, “Missing out on big growth has as much of an impact on a portfolio as losing that amount. How long does it take to make that kind of loss back? And how is someone who got out supposed to know when to get back in?”

"How to avoid loss aversion: Focus on your long-term goals instead of worrying about the day-to-day ups and downs of the market. You’ll sleep better and portfolio will continue to grow over time."

"How to avoid confirmation bias: Always consider multiple viewpoints. If you work with an adviser, ask him or her to help you evaluate investments by including the pros and cons of any potential decision."

Temporal discounting

Adults who cash out retirement savings when changing jobs suffer from TD. Do a simple compound interest analysis of how much those dollars would grow if you left them invested until retirement. Teh results can be surprising.  

https://www.valuewalk.com/2020/01/investing-emotional-bias/

Book worth reading- The Financial Diaries: How American Families Cope in a World of Uncertainty

If you feel frustrated or guilty by not following all the personal financial advice you've heard or read this book might provide some relief.
"Deep within the American Dream lies the belief that hard work and steady saving will ensure a comfortable retirement and a better life for one's children. But in a nation experiencing unprecedented prosperity, even for many families who seem to be doing everything right, this ideal is still out of reach."
"In The Financial Diaries, Jonathan Morduch and Rachel Schneider draw on the groundbreaking U.S. Financial Diaries, which follow the lives of 235 low- and middle-income families as they navigate through a year. Through the Diaries, Morduch and Schneider challenge popular assumptions about how Americans earn, spend, borrow, and save―and they identify the true causes of distress and inequality for many working Americans."
"We meet real people, ranging from a casino dealer to a street vendor to a tax preparer, who open up their lives and illustrate a world of financial uncertainty in which even limited financial success requires imaginative―and often costly―coping strategies. Morduch and Schneider detail what families are doing to help themselves and describe new policies and technologies that will improve stability for those who need it most."

529 Education Savings Accounts

Utah's 529 education savings plan is the best way to save for your child's (or your grandchild's or your own) education.
"For the ninth year in a row, (Utah's) my529 has been awarded the coveted Morningstar Analyst Rating™ of Gold."
"Whether through free services or commercial software and online products, you can contribute your refund to your my529 account when you file your state taxes electronically."
Check out: https://my529.org/

Learn the basics of 529 tax-advantaged education savings plans (thanks to Washington Post financial writer Michelle Singletary):

529 plans can help you save for college, so let’s get started with the basics

What people get wrong about 529 college-savings plans

Even if your child is just a few years away from college, it’s not too late to fund a 529 plan

 

FICO Credit Scores to Drop for millions of Americans

Fair Isaac Corp., creator of FICO scores, will start reducing FICO scores for consumers with rising debt levels, those falling behind on payments and those taking out personal loans.
Why? In part because FICO scores for consumers have been rising since the end of the great recession so that many consumers have healthy scores when they are also carrying high debt levels. With higher scores, lenders granted them even more credit. With the longest recovery in history, maybe it's not a great idea to pile on the debt.
The changes reflect a shift in lenders' confidence in the economy and the fact that consumer debt levels are are record highs with many consumers relying on debt to fund their regular expenses (hint! consumers take note!)
While many consumers will see their scores fall, others will see an increase in their FICO score. 
Above 680 is consider a good score while below 600 is considered poor credit.
Fico typically revises its' credit scoring models periodically.
With lenders concerned about how long the recovery from the great recession will last, it's time for consumers to take note. 
A high credit "Utilization ratio" (using most or all of one's borrowing capacity) is always a bad sign.
Reminder: now is a good time to check the accuracy of your credit report (a report is not a score but reflects your current and past credit use. https://www.annualcreditreport.com/

Wells Fargo ex-CEO banned from financial industry for life

At last regulators (U.S. Office of the Comptroller of the Currency) are going after the people behind egregious financial behavior rather than just fining corporations. Former Wells_Fargo CEO John Stumpf was fined $17.5 million over the fake accounts scandal and barred from working in the industry for the rest of his life. (The Wall Street Journal, 1/24/20). Seven of the other top executives responsible for the multiple Wells Fargo scandals were also charged.
The amount of the fine makes me wonder how much money this guy amassed during his banking career (while screwing customers and employees, and ruining their financial lives). He can easily retire in comfort with no need for further employment.
For more explanation of the egregious behavior of the Wells Fargo CEO and his top officers simple do an internet search for Wells Fargo Scandal to get the details.
With so many financial institutions to choose from, why stay with Wells Fargo?

Investment Returns

The Callan Periodic Table of Investment Returns depicts annual returns for 10 asset classes, ranked from best to worst performance for each calendar year over a 20 year period. https://www.callan.com/periodic-table/

The most valuable aspect of the colorful table is how easy it is to see that an investment category that topped the chart two years ago may now be sitting at the bottom. There is never a string of more than a couple years where an asset tops the charts. Investing in last years winner means it will likely be further down the table next year.
For example, Large cap stocks were at the bottom of the 10 assets in 2002, in the middle of the pack from 2005-2012, and at the top in 2015 and 2019. Investors buying large cap stocks at the top of the market today are likely to be disappointed in the near future.

Major take-aways:

• Diversification! Invest in all 10 asset categories
• No one can successfully time the market and predict which investment classes will provide the best returns in coming years. 
• Determine your risk tolerance in relation to your investment time horizon and rebalance your portfolio once a year. 

Search for these key words on my blog to learn more: investing, diversify, asset allocation, rebalance portfolio

What kind of returns can you expect on your investments?

So many investment articles, personal finance textbooks, online calculators, and advisors plan for future returns to be similar to past returns. Much of the research I've been reading over the past few years suggests a very difference future with much lower returns than historical levels. Recent low levels of bond returns due to low interest rates are a factor.
"A MFS Investment Management report predicted that a hypothetical portfolio of 60% equities and 40% bonds could see a 10-year annualized return of about 3.6%, compared with 7.2% seen over the past decade." (Retirement Security Smartbrief, 1/24/20).

According to Jon Barry, senior retirement strategist at MFS:
On the equity side, “We feel good about sales growth and dividends, but we don’t feel as good about corporate margins and profits and just valuations in general,” he says. “Stocks are trading at a very high price-to earnings ratio, and we don’t see that as sustainable. With the trade wars, and as unemployment remains low and wage growth cuts into margins, companies will be restrained.”As for fixed income, Barry says, “Rates are historically low, and we don’t see anything in the near term that will make rates move higher in a meaningful way. Starting yields are a good predictor of where returns will be. Treasuries are yielding around 2%, and it’s not unreasonable to expect the same,” he says. 
https://www.plansponsor.com/consider-conservative-investments-pre-retirees-hold/

So please be realistic when projecting future investment returns as you plan for retirement and other financial goals. 

Palliative Care

As more of us face the long slow deaths of our parents, spouses, and selves, it is essential to learn about "palliative care" whose purpose is to to relieve suffering and improve quality of life for people with serious illnesses.

Check out Atul Gawande's book: Being Mortal at http://atulgawande.com/book/being-mortal/
British author and physician Kathryn Mannix: With the End in Mind: Dying, Death & Wisdom in the Age of Denial. https://withtheendinmind.co.uk/

Other resources:
https://www.webmd.com/palliative-care/what-is-palliative-care#1
https://www.nia.nih.gov/health/what-are-palliative-care-and-hospice-care 

January Financial To-Do List

"January is a good time to review your finances with a focus on the big picture. Those who are saving for retirement should review their plans and adjust contributions accordingly, while retirees should review the rate of withdrawals from their portfolios and make sure the pace is sustainable in the long term." (Retirement Security SmartBrief, 1/22/20)

Watch the video and read the full transcript:
https://www.morningstar.com/articles/961643/your-financial-to-do-list-for-january

Some Highlights:
ask that basic question--how am I doing?--and try to answer it. 
If you are still investing for retirement: use a good basic retirement calculator just to see whether you're on track with your retirement savings.Consider if you can increase your monthly contributions.
For persons with a company retirement plan: If you're under age 50, the contribution limit is going up to $19,500. If you're over age 50, it's $26,000. So, take a look at whether you can adjust your contributions, especially if you're in a position to hit those maximum allowable contributions.

IRA limits are the same as 2019: $6,000 if you're under age 50, $7,000 if you're 50 plus. Spacing out your IRA contributions throughout the year, putting them on autopilot. So, if you're under 50,  contribute $500 a month to hit that $6,000 annual contribution limit.

For people who are already retired, the key gauge of your portfolio health and your overall financial wellness is whether your portfolio withdrawal rate is sustainable over your retirement time horizon.
Check to make sure that whatever you've withdrawn from your portfolio over the past year passes the sniff test of sustainability. Use the 4% rule as a guideline.

For all investors: revisit your asset allocation. The past decade and 2019 in particular have seen high returns on stock markets; look at what percent of your portfolio is in stocks and think about the potential impact of a downturn in 2020. It's likely time for a reallocation of your assets.

Pros & Cons of a Social Security Lump Sum Settlement

"Those who delay Social Security benefits until after their full retirement age will have the option of taking a retroactive lump-sum payment. The lump-sum option can make sense for a retiree who is struggling to make ends meet, but the decision will reduce future benefits and potentially increase the recipient's tax bill." (Retirement Security SmartBrief, 1/22/20.


Advice from many experts today is that people should delay claiming their Social Security benefits for as long as possible, or until age 70, when they have to claim them. But what should retirees do who have delayed taking Social Security even after reaching full retirement age (FRA), and when they make the claim, the government offers them a lump-sum retroactive payment up to six months? Should they take it or not, and what’s the downside, if there is one?

Although this lump sum may be a tempting choice for retirees in financial need, it may not be the right one. The six-month, one-time lump sum offer is only available to those who have reached FRA. The lump sum retroactively resets the benefit amount to the lower benefit of 6 months earlier.

“The answer depends. The main factor is expected longevity. By opting to take the lump-sum option, one rolls back the clock six months for when benefits are calculated. Depending on anticipated longevity (see links in this blog to online calculators) one needs to determine the breakeven point for that to make sense,” he explains. A retroactive lump sum reduces the monthly benefit with a 10- to 12-year catch-up period, so generally it is not prudent if you think you will live another 10-12 years.

If you are married and your spouse is much younger than you with a lower Social Security benefit amount, you may not want to lock in a lower social security benefit over both lives.

 
“However, if you have bills, debt or having trouble making ends meet and the choice is retroactive lump sum or retirement account withdrawal, the retroactive lump sum may be better, even in the long run, because the retroactive lump sum creates less income tax than the retirement account withdrawal. The retirement account withdrawal is taxed dollar-for-dollar, and the retroactive lump sum is taxed at most $0.85 on the dollar, possibly $0.50 on the dollar or maybe even tax-free depending on the family’s other taxable income,”

Taking a lump sum sets the start date back to an earlier age and therefore all future benefit checks will be reduced. However, if one has been diagnosed with a life-shortening disease, taking a lump sum may be the best choice.

According to financial planning analyst C.J. Miller, “It is almost never in the best interest of the client to take the lump sum. The payment eliminates the monthly benefit increase gained by delaying in the first place, which is usually 8% a year. Additionally, taking the lump sum is a taxable event. Many people that elect the lump sum end up paying a higher tax rate and getting less for the benefit than they would have if they had claimed earlier. Most people that delay benefits do it for a reason, and the lump sum eliminates that.”

https://www.thinkadvisor.com/2020/01/10/should-clients-take-a-lump-sum-social-security-payment/

Stocks are over-valued

Stocks are the most overvalued since at least the 1980s based on one measure

"The price-earnings to growth ratio, which gauges whether a stock is properly valued, is at the highest reading since Bank of America tracking began in 1986. Anything above 1 indicates overvaluation, and the ratio is at 1.8."
https://www.cnbc.com/2020/01/16/stocks-are-the-most-overvalued-since-at-least-the-1980s-based-on-one-measure.html

At least once a year investors are urged to review their asset allocation. As stock prices are at an all time high in the longest bull market in history... NOW is the time to evaluate and rebalance your portfolio. For investors nearing retirement and those in retirement in particular: Sell some stocks to take your profits and buy undervalued sectors of the market.
Of course, keep in mind your life stage. Young investors in their 20s, 30s, and 40s should maintain a large percentage of their retirement assets in stocks. But be sure you are diversified in low cost domestic and international index funds.

Social Security phone scams

"Social Security phone scams are becoming more numerous and more sophisticated, with the administration's inspector general warning that telephone scammers are now also sending people official-looking documents via email. If there is a legitimate problem with your Social Security account, officials will almost always contact you via mail, Mary Beth Franklin writes."
https://www.investmentnews.com/social-security-phone-scams-on-the-rise-176257

What is your Financial Well Being Score?

Answer ten questions to measure your current financial well-being and see steps you can take to improve it.
See how your score compares to other U.S. adults from a national survey.

https://www.consumerfinance.gov/consumer-tools/financial-well-being/

Help you can find on this website:

Take control of day-to-day money management

• Track where your money goes. 
• Get a grip on debt.
• Repay student loans wisely.

 Get on track for your financial future

• Look toward home ownership.

• Create an action plan to meet your goals.

• Consider the right age for claiming Social Security.

• Build and maintain your credit record.    

  

Calculate Auto, Mortgage, Credit Card, & Student Loans Interest Rates

Understanding compound interest is one of the most important and fundamental aspects of financial management.  Review the blog post: "Back to Basics: Compound Interest" (2/9/19) and "Compound Interest is Critically Important" (12/12/16).  Whether saving and investing or using debt wisely, it is essential to understand the power of compound interest.

Arizona Central Credit Union offers a Financial Calculator Hub to assist in figuring out how much you will pay for auto, home, credit card debt and student loans. The longer the loan, the greater the impact of compound interest. It pays to shop around for the best rates and to understand the cost of paying interest.

Just type "compound interest" into the search box in this blog to learn more about compound interest. 

The modern woman’s guide to homebuying (great ideas for men, too!)

Live With Plum is a website designed for homebuyers, homeowners and real estate investors. 

The website's mission "is to empower all women on their journey towards homeownership." (It's OK for men to sneak a peak at the website and learn about the homebuying process. The site is not just for first time homebuyers. 
"We think the homebuying process is archaic and convoluted so after years of trying to find an easy-to-understand guide, we set out to create it." https://www.livewithplum.com/

How to Be a Responsible Traveler

Since teen environmental activist Greta Thunberg eschewed air travel to sail across the Atlantic to urge world policy makers to address climate change, we’ve become educated about how much air travel contributes to climate disruption. “Flight shaming” has entered our vocabulary. KLM., the Dutch airline, recently made headlines by encouraging travelers to fly less.

As more affluent Americans have the time and resources to travel the globe and Instagram encourages bragging about our destinations, it’s time to re-think our travel plans.

So… writing for The Washington Post, Hannah Sampson (1/18/20) addresses the issue with “You want to be a responsible tourist.”

“Traveling in an age of heightened concern about climate change, income inequality, over-tourism, animal welfare, corporate greed and exploitation can be fraught. Those who want to see the world while also being kind to the planet face pitfalls, especially as public consciousness shifts and awareness of the potential harms of global jet-setting evolves.”

This does not mean we should not travel but that we should carefully vet our choices about how much to fly, were to stay, and what activities to pursue.

Travel Care Code:

1. Are you respecting your hosts?

2. Are you reducing waste, including energy consumption?

3. Are you making sure the money you spend goes to the local community?

Beyond these general principles:

·         Cut back on flying

o   Take fewer vacations

o   Fly non-stop when possible; fly on newer planes

o   Consider train travel, close to home getaways, or staycations

·         When you fly, offset emissions

o   Buy carbon-offsets through reputable non-profit organizations

o   Buying offsets is NOT a “get out of jail free card” if you continue flying extensively

·         Be thoughtful about lodging

o   Stay in locally-owned hotels that use renewable energy

o   Think twice about Airbnb and similar vacation rentals that may drain the local community of affordable rental options for residents and destabilize the local economy

·         Mind what you eat

o   Dine at locally owned restaurants,

o   Choose locally-sourced items

o   Eat less meat and dairy that are carbon-intensive to produce

·         Choose activities carefully

o   Avoid the “bucket list” mentality which contribute to over-tourism

o   Hire a local guide

o   Walk and bike as much as possible

o   Find local environmental, conservation, or social projects to visit or support.

o   If you choose to volunteer be sure you aren’t taking jobs away from locals, that the project is something the community wants, and that you are qualified to do the work.

Details at: http://travelcarecode.org/

Other resources: https://www.responsibletravel.com/