July 26, 2011

There’s something about getting a will together, checking in on one’s retirement fund, or finally paying down that credit card that causes the procrastination gene to kick in.

In this recent video on CBS, Harvard behavioral economist David Laibson explains the reason for this tendency: “present bias.” Humans put more weight on the present than on the future, so it’s easier to delay the hard work until later. No surprise that’s true for financial tasks, which can be overwhelming, emotional, complex, or unpleasant.

“We humans have wonderful intentions about what we’re going to do,” he explains in this video. But when the time comes to do it, “We decide once again to push it further into the future.”

Laibson uses a simple example from a well-known 1980s experiment in which researchers asked people at Amsterdam workplaces whether they would want a healthy fruit snack, an indulgent chocolate bar, or potato chips next week. Most chose fruit.

On the day they were to receive the snack, the researchers said they lost the workers’ previous selection and asked them to pick again. The preferences flipped, and most chose chocolate.

Laibson goes on to apply the fruit/chocolate concept to financial decisions. The video was recorded last month, but the topic – human behavior – never gets old for Squared Away.Learn More

July 12, 2011

Americans have squirreled away some $7.1 trillion in their retirement accounts. But once they actually retire, they don’t seem to know what to do with their money.

The U.S. income retirement system is in the throes of a foundational shift from guaranteed employer pensions to a system that puts most of the burden onto employees to make sure they have enough retirement income. I’ve been hearing recently about the heated debate on how Americans who are retiring are handling their finances under the new system.

Some worry that retirees are using up their personal retirement account (PRA) assets too quickly, while others believe they aren’t using the funds as retirement income, as intended when they were working and saving the money. By not spending it, they may be unnecessarily lowering their standard of living. …
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June 30, 2011

“The Big Chill” was the iconic movie for baby boomers in their prime in 1983.  Perhaps The Big Freeze is the best way to describe where we’ve ended up.

 
Two recent reports based on in-depth interviews with retirees and pre-retirees arrived at the same conclusion about how we are approaching the dreaded retirement: paralysis.

A report commissioned by Boston College’s Financial Security Project, which sponsors the Squared Away blog, found that the baby boomers and pre-retirees felt “immobilized in retirement planning efforts by a combination of practical and emotional factors.”

These emotions include fear and confusion about not having enough money, not knowing how much they’ll need, and not knowing how or where to get information or help.Learn More

Behavior

June 9, 2011

A 29-year-old Ph.D. candidate is challenging the belief that elderly women don’t prepare to take over the household finances after their husbands die and leave the task to them.

The stereotype about older women probably springs from pervasive evidence that women generally have lower levels of financial literacy than men.

But Joanne Hsu at the University of Michigan found that women prepare for the high likelihood that their husbands will die first by beginning to acquire financial knowledge.  Some 80 percent of the women in her sample are on track to catch up with their husband’s level of financial knowledge.  Her study controlled for low cognition, so her findings measure the wife’s improvements that are above and beyond her husband’s. …Learn More

Money Culture

June 7, 2011

Laid off from his job as a software engineer, Ken Wadland did something smart: he downsized.

After losing his job in June 2009, it immediately became obvious to Wadland that he could not afford his large house in the Rhode Island countryside. He sold it and purchased a condominium to reduce his housing costs, which are the largest single expense for most households.

The financial-services industry barrages baby boomers with tips for saving and investing their retirement nest eggs. But little attention is paid to the strategy of downsizing, an effective way for baby boomers to improve their retirement security by cashing in on the large amounts of equity built up in their homes over decades.

“I’d rather not have the expense,” Wadland, who is 60, said in this video.

Ken Wadland from Over Fifty and Out of Work on Vimeo.

Wadland explained how he came around to his decision in the online video series, “Over 50 and Out of Work,” which is featured occasionally in Squared Away.

His most recent job was at a large company, which once awarded him for being an innovator. “My passion is solving puzzles,” said Wadland. …
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Money Culture

May 31, 2011

Rudy Limas, a laid-off truck driver, resorted to applying for unskilled labor jobs – anything to get back to work and support his family.

“They look at your age and think, ‘He can’t handle it’ – even though I can,” the 61-year-old Oregon resident said. “They look at your age [and] they’re not going to hire you.””

Limas’ video interview, included in the online project, “Over 50 and Out of Work,” was selected by Squared Away for a series about the particular financial issues facing people approaching retirement age who lose their jobs.

Rudy Limas from Over Fifty and Out of Work on Vimeo.

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May 26, 2011

To help retirees choose the best way to spend down the 401(k) savings they have built up over a lifetime, Nobel Prize laureate William Sharpe urged them to focus on a single outcome: the size of their monthly check.

This video was created by Professor William Sharpe of Stanford University.

Financial advisors should say to their clients, “Don’t worry about the strategy or model. Look at the outcomes that matter: what you can spend year by year in retirement,” he said.

Speaking at a conference this week at Boston University’s School of Management, which brought financial practitioners together with top minds in academic finance and Washington think tanks, Sharpe said advisors should present clients with various payout schedules and then explain the probability of success for each one they’re considering. Learn More