MONEY

Why Rich People Think the Poor Aren’t That Poor

two couples on a yacht
Mike Watson Images—Getty Images

And why they don't see much need for wealth distribution.

When Jacob Riis published his study of New York tenement life in 1890, he called it How the Other Half Lives, as if people really needed to know.

More than a century later, many of us are still suffering from the same type of myopia, at least according to a recent study by psychologists in the U.K and New Zealand and reported in The Washington Post Tuesday.

The study of 600 Americans, conducted over the Internet, found wealthy people tended to report particularly high levels of wealth in their social circles. While that may not be surprising, that cossetting seemed to lead in turn to wealthier Americans over-estimating average wealth among the general U.S. population — as well as assuming “greater perceived fairness” in the economy.

In other words, the rich still think the most Americans are doing okay– or should be — because they and their friends are.

The results certainly have political implications. The authors suggest the rich might be more open to wealth redistribution if they had a truer sense of America’s income inequality and how the economic landscape appears to the poor.

Students of behavioral finance might also see the new research as the flip side of a behavioral tick that has long bedeviled anyone struggling to keep a budget. It’s long been established that having wealthy friends and neighbors tends to shift your lifestyle expectations: We all want to keep up the the Joneses. But that’s not necessarily healthy for your budget or your sense of well-being.

Read next: Rich People’s Biggest Money Regrets

MONEY mortgage

This City Has Nation’s Healthiest Housing Market

Beacon Hill neighborhood of Boston, Massachusetts
Getty Images/iStockphoto Beacon Hill neighborhood of Boston, Massachusetts

The healthiest market isn't necessarily the most affordable.

The Red Sox may be in the cellar. But when it comes to its housing market, Boston is first in the nation.

That’s according to a recent report by financial Web site WalletHub, which ranked the relative health of real estate markets in the nation’s 25 largest metro areas. Researchers determined a market’s “health” based on factors like how much equity owners had in their homes and who paid the lowest interest rates.

Oklahoma City ranked second; San Antonio was third. Four Florida cities ranked in the bottom 10 (Miami, Jacksonville, Orlando, Tampa), while Las Vegas was dead last.

On average home owners in Boston have 43% equity in their homes, meaning their mortgages amounted to only slightly more than half their home’s value. The rate was second in the nation, just behind New York City.

Boston also had the second smallest pool of “underwater” mortgages — the scenario in which the owner owes the bank more than the home is worth. About 6.7% of Boston mortgages were underwater, placing just behind Rochester, N.Y. In Las Vegas, by contrast, 39% of homes are underwater.

Of course, one thing that a “healthy” housing market doesn’t guarantee is that you can afford to live there. Boston’s median home price is nearly $450,000, according to Zillow. That’s up from $326,000 at the height of the housing crisis.

The key to Boston’s success: Attractive housing stock and a strong technology and life sciences industry that have helped draw investment and educated young people, according the hometown paper, the Globe.

 

 

MONEY

Why 15% of Americans Still Don’t Have the Internet

typewriter
Getty Images/iStockphoto

Age is a big factor, but so is cost.

For many of us Internet service is a fact of modern life. While we may not like the monthly bills, like our phones and electricity, we can’t imagine living without it.

But, according to a new Pew Research Center survey, there is a small minority of Americans—about 15%—who still aren’t online. While that’s down from roughly half in 2000, the rate has changed little in the past three years, according to Pew.

Just who are the holdouts? As you might expect they skew older. About 40% of people 65 and older aren’t online, compared to just 3% in their 20s, according to another recent Pew survey.

But cost is a big factor too. About 14% of people who earned $30,000 to $50,000 weren’t online, and that’s three times the rate for those making $75,000 or more. And when Pew asked non-Internet users why they weren’t logging on, about a fifth cited costs.

While lots of the technology people use to get on the Internet has been getting cheaper, consumers pay an average of $50 a month for broadband, which is $10 more than they did a decade ago, according to Reuters.

Even if you can’t imagine staying offline, there are ways to make the pinch less painful. Among the potential strategies: buying rather than renting a router; avoiding paying extra for higher speeds which you may not need; and asking your service provider for a “basic” Internet package, typically priced at $15 a month.

 

MONEY

Think Health Care is Pricey? Get Ready to Spend Even More

pile of prescription medicine pills and tablets
Jan Mika—Shutterstock

Soon one out of every five dollars Americans spend will to go healthcare.

For the past six years Americans have gotten a respite from fast-rising health care costs. No more.

With millions of baby boomers entering retirement and pricey new drugs hitting the market, U.S. health care spending, which had increased at relatively moderate 4% rate since the financial crisis, grew 5.5% last year, according to a new government study reported on Tuesday by The Wall Street Journal.

You can expect more too. The actuaries who calculated the figures, project that spending will average 5.8% between 2014 and 2024. By then, health care as a share of the nation’s overall economy will have grown to 19.4% from 17.4% in 2013. In other words, our nation’s medical bills will account for one out of every five dollars we spend.

The changes aren’t totally unexpected. A big part of the extra costs are tied to the fact that baby boomers — many now in their 60s — are requiring more care. Important but expensive new drugs, like one that helps treat Hepatitis C, are also a factor, according the Journal.

Still, the rising costs aren’t good news, especially considering a key promise of the Affordable Care Act, which brought access to health insurance to millions of Americans, was to get the growth in health care spending under control, a goal known as “bending the curve.”

For people who get their health insurance coverage at work, rising costs are likely to mean a continued push by employers toward high-deductible plans, which can have steep out-of-pocket costs. Read here for more on tools for keeping medical bills under control.

MONEY 2016 Election

What Hillary Clinton’s New Tax Proposal Would Mean

U.S. Democratic presidential candidate Hillary Clinton speaks during an event at the New York University Leonard N. Stern School of Business in New York July 24, 2015.
Shannon Stapleton—Reuters U.S. Democratic presidential candidate Hillary Clinton speaks during an event at the New York University Leonard N. Stern School of Business in New York July 24, 2015.

Here's how the plan would change capital gains tax rates.

On Friday, Democratic Presidential hopeful Hillary Clinton spelled out her new plan to raise tax rates on capital gains — the profits people reap when they sell an asset a like stock, parcel of real estate or even a business.

The capital gains tax rate has been a political football for years, not least because rich people tend to own — and sell — the most stuff. Here are a few key things you need know about capital gains tax in general, and Clinton’s proposal specifically.

How are capital gains currently taxed?

While the tax rate on capital gains has bounced around a lot over the years, the big tax deal reached in the last hours of 2012 pushed up the top rate on long-term capital gains to 20% — still far lower than the 39.6% top rate on income (although top earners also pay a health-care related 3.8% surtax on investment income). For taxpayers in lower brackets, long-term capital gains tax rates max out at 15% or less.

There is an exclusion for profits of up to $250,000 ($500,000 if you are married) on your primary residence, so many homeowners won’t have to worry about a huge tax bill when they move.

That’s all for long-term capital gains, by the way. Short-term capital gains — that is, the profit made on stocks or other assets held less than a year — get taxed at the same rate as income.

Why do capital gains get a tax break?

In the relatively recent past, both Democratic (Bill Clinton) and Republican (George W. Bush) presidents have cut the capital gains rate in hopes that doing so would spur the economy. Since the capital gains tax is really a tax on investment, economists hope that lowering the tax will prompt people to invest more of their money rather than spend it.

The idea is that if more people are looking to invest, it should be easier for start-ups or existing companies that want to develop new products to find funding.

That’s also why short-term gains get taxed as income — because short-term gains benefit people who make their living buying stuff and then quickly reselling, rather than investing for the long term.

So what’s the problem?

In addition to spurring investment, a low long-term capital gains rate also spurs inequality. It’s not hard to see who the biggest beneficiaries are: people who invest in the stock market or who sell businesses that they own.

The low capital gains rate is one reason America’s 400 biggest earners paid a tax rate of less than 17% in 2012, the latest year for which the IRS has released data. There are also questions about whether the low capital gains rate really does boost the economy.

After all, while the economy took off under Bill Clinton, the stock market has also continued to soar since the most recent increase in the long-term gains rate.

What is Hillary Clinton proposing instead?

Hillary Clinton’s proposal would require wealthy taxpayers to hold their investments much longer to get the full long-term capital gains tax benefit. Instead of a single long-term gains rate that kicks in after one year, her plan would create a series of rates ranging from 36% to 24% for those who hold investments for at least two years but less than six years.

Clinton says she isn’t doing this simply to raise taxes on the rich. Rather it’s to discourage short-termism among big investors. That’s something even many on Wall Street regard as a problem, even if higher taxes might not be their preferred solution. So it looks like good politics.

Is it a good idea?

That, of course, depends on who you ask. Many progressives would simply like to see capital gains taxed as income.

Yet it’s not even clear whether Clinton’s proposal could actually change investor behavior — even if it could pass Congress. “My general impression is deep skepticism,” Leonard Burman, director of the nonpartisan think tank the Tax Policy Center told Reuters earlier this week. “Frankly, I don’t see the logic in trying to encourage people to hold assets for longer than they want to.”

MONEY Pensions

The Trouble With Taking a Lump Sum Pension Payout

dropper squeezing out coins
Yasu+Junko

Tempted to trade your pension for a lump sum? Here's why you should think twice.

Congratulations! You’re one of the shrinking number of Americans who have earned the right to a pension—guaranteed income for life for you and maybe for your spouse as well. Just make sure you don’t give it up too easily.

That’s a real risk. Up to half of companies with pension plans, say experts, give workers the option of taking their pension as a lump sum. On top of that, 47% of corporate plans, including those from Boeing and Hewlett-Packard, either have just made or will soon make pension buyout offers to vested former employees, benefits firm Aon Hewitt reported earlier this year. Driving those offers are IRS rules expected to make buyouts less favorable for employers within a year or so.

Lump-sum checks, often in the hundreds of thousands of dollars, are tempting. Fifty-eight percent of employees take buyouts, and the share taking the lump-sum option at retirement is likely higher, says Aon Hewitt consultant Ari Jacobs.

Pension industry experts and consumer advocates, however, say that for most workers the traditional pension is a better deal. So before you decide, think this over:

When to Take Steady Payments

If you or your spouse is in good health and has a family history of longevity, lean toward taking the monthly pension. The advantages: The money lasts for life. If you make it to age 90—and 28% of 65-year-olds do—you’ll still be getting that check. And, in exchange for smaller benefits, your spouse can continue to receive half or often all of those monthly payments after your death. So if you’re a man and your wife survives you—on average, she will—she’ll get cash for life too. One downside: Unlike Social Security, most private pensions don’t adjust for inflation, so your purchasing power will diminish over time.

Now, you could invest the lump sum (set by a complex IRS formula) and use it to fund a monthly stipend. But even if you’re the next Warren Buffett, you’d likely get less each month than you would from a pension. Say you’re due $1,500 a month, or $1,295 if you opt for a 100% survivor’s benefit. If you took the roughly $240,000 you’d receive instead and sought to have it last a 65-year-old’s average life span of about 20 years (see chart), you’d pay yourself only $1,213, calculates David Blanchett, Morningstar’s director of retirement research. And this strategy would have only an 80% chance of success. To be safe, you’d have to cut your allowance to $1,000 a month—or $855 to last until you’re 90.

Why is the lump-sum income so low? Flying solo, you have to make sure your money lasts a full 20 or 25 years. But in a group plan, a lot of people will live shorter lives, so less money has to be reserved for them. The result is more generous monthly payouts for everyone, says Robert Goldbloom, a principal at pension consultant Penbridge Advisors. “People who don’t live as long subsidize those who live longer,” he says. That makes pensions a particularly good deal for women, given that they generally live longer than men.

When to Take the Lump Sum

If you’re in poor health and don’t have to provide for a spouse, the math favors the lump sum. Given a life expectancy of a decade or less, you’d have more than enough to duplicate a pension. In the above example, you could pay yourself $1,500 a month over 10 years, not invest a dime, and still have $60,000 left over.

A lump sum also makes sense if you have no cash in the bank or investments you can tap for emergencies. You could keep part of that money in the bank for urgent needs, and live off the rest.

Should you be lucky enough to live comfortably off other sources of income, you could take the money and invest it aggressively to maximize a possible inheritance for your beneficiaries.

Finally, take into account your pension plan’s health. Most private-sector plans with at least 26 workers are backstopped by the Pension Benefit Guaranty Corp.—up to about $5,000 a month for a single-employer plan, but far less for a multi-employer plan. Check on your plan’s “funded status”—a measure of its assets and liabilities. If the number, which the plan has to report to you annually, is falling toward 80%, that’s worrisome; you might take the bird in the hand if you’d lose much of your benefits from a failed plan.

In any case, your best bet is to roll the money into a traditional IRA; otherwise, you’ll get a big tax bill. Smaller withdrawals from the IRA, on the other hand, will likely be taxed at a lower rate.


 

150722_RET_CashDrain
MONEY buying a home

These States Offer the Most Help for Buying a Home

"For Sale" sign outside town home in Society Hill neighborhood, Philadelphia, Pennsylvania
Frances Roberts—Alamy Society Hill neighborhood, Philadelphia, Pennsylvania

Grants and no-interest loans are available if you know where to look.

Trying to scrounge together a down payment for a house? Your first instinct may be to hit up mom and dad. One more option you shouldn’t overlook: The state where you live.

Each of the 50 states has some sort of program to help homebuyers, especially those making their first purchase, according to mortgage Web site HSH.com, which recently compiled data and ranked the states.

The most generous state of all is Pennsylvania, where homebuyers have access to no fewer than 11 programs, including ones for first-time and repeat buyers, and even assistance for homeowners looking to make improvements. The Keystone state was followed by Wyoming and New York.

While not necessarily new, state homebuyer assistance programs may be more critical than ever. That’s because seven years after the 2008-2009 financial crises, lingering after-effects like depleted savings and an expensive rental market have made it particularly hard for 20- and 30-somethings to buy homes.

Traditionally, getting a mortgage in the strictly private market requires a down payment of 20%. Yet the Federal Housing Administration makes it possible to buy homes with as little as 3.5% down, with the caveat being that you will be required to pay mortgage insurance. The assistance offered by states — often in the form of grants or no-interest loans — can help get you to the finish line.

Not all programs are available to all would-be homeowners. As well as targeting groups like veterans and the disabled, many state programs have income caps that reduce or eliminate benefits for those making more than a certain amount. One thing you shouldn’t assume, however, is that programs only target the needy. Many are open to middle-income earners.

For instance, Pennsylvania offers closing-cost assistance up to $6,000 in the form of a no-interest 10-year loan to borrowers at participating lenders. The program is open to all borrowers regardless of income or whether it’s your first home. In addition, first-time homebuyers (and some repeat buyers) can turn the first $2,000 of their federal mortgage income tax deduction into a much more valuable tax credit. While incomes are capped, you can earn up to $97,300, or $113,500 if you have kids, and live in relatively high-cost counties like Philadelphia.

Want to find out what your state offers? The HSH directory includes links to state pages with detailed descriptions of individual programs. But you don’t have to be an expert to claim the benefits. Most assistance is arranged through private lenders. So if you think you might qualify, look for participating banks that should be able to help you enroll.

One final thing: If there isn’t much on offer in your state, you should also check Web pages of county and local governments. Even states that offer relatively little help, like Hawaii and Kansas, may fill in the gap with county level programs, according to HSH.

 

MONEY

Five Years Ago Congress Tried to Fix Wall Street. How is That Going?

U.S. President Barack Obama points to co-sponsors of the Dodd-Frank Wall Street Reform and Consumer Protection Act, U.S. Sen. Christopher Dodd and U.S. Rep. Barney Frank, after signing it into law at the Ronald Reagan Building in Washington, July 21, 2010.
Larry Downing—Reuters President Barack Obama and the sponsors of the Wall Street reform act, Sen. Christopher Dodd and U.S. Rep. Barney Frank, in Washington, July 21, 2010.

Here's how the Dodd-Frank law affects you when you bank, borrow and invest. Some parts of the law are still in limbo.

Five years ago Tuesday, in the wake of the worst financial crisis since the Great Depression, the Dodd-Frank bill to reform Wall Street became the law of the land.

The 849-page law largely operates behind the scenes, setting out who will regulate Wall Street and how the government unwinds failing banks.

But two important aspects of Dodd-Frank were aimed squarely at making borrowing and investing safer for everybody. What have these parts of the law accomplished so far? Here’s a closer look:

The Consumer Financial Protection Bureau

Beyond the bank rules, this new agency is the best-known result of the Dodd-Frank law. It was championed by Harvard law professor Elizabeth Warren, who argued that the government should do more to keep consumers’ money safe when they borrow or bank, much as the Consumer Product Safety Commission tries to protect Americans from faulty toaster ovens or power tools. At that time homeowners were facing high payments on houses they suddenly couldn’t sell, often as result of new, complex kinds of mortgages and very aggressive lending practices. So the idea of the CFPB quickly gained steam in Washington. Warren ultimately didn’t get the nod to lead the agency, but she was subsequently elected to the Senate.

The CFPB has endured some growing pains. But the bureau also appears to be making headway in its mission. So far this year, the CFPB has succeeded in writing new rules requiring mortgage lenders to verify borrows can repay loans. It’s also gone after retail banking practives, ordering Citibank to pay $700 million for allegedly deceptively marketing of credit card add-on services.

The CFPB has fielded more than 600,000 consumer complaints against financial companies ranging from mortgage lenders to debt collectors. Last month the bureau began publishing the texts of more than 7,000 of these to highlight frequent problems. Up next: an overhaul of the confusing mortgage documents home buyers get and broader rules governing overdraft fees. However, some consumer advocates are worried these may not turn out to be strict enough.

Standards for investment advisers and brokers

Dodd-Frank also included a key provision that is supposed to protect investors from getting bad advice. Here action has been slower.

The new law gave the Securities and Exchange Commission the option to impose on financial advisers something called a “fiduciary” standard. A fiduciary has a duty to act in clients’ best interests when they recommend investments like mutual funds. While that may seem like a no-brainer, in fact, today many advisers are required only to recommend investments that are “suitable” for the investor, based on factors like age and risk tolerance.

The law stopped short of saying the SEC had to adopt this standard. While the past two SEC chairmen have indicated they would like to move forward, a full-court press by Wall Street lobbyists has successfully stalled those efforts.

The fiduciary standard isn’t dead. The Labor Department has taken up the mantle and is attempting to impose the rule for people advising on investment decisions like IRA rollovers. The Obama Administration has indicated support for the DOL’s effort, but as recently as last month, Republican-led Congress moved to prevent the Labor department from implementing the rule.

MONEY Housing Market

This Is the Best State for First-Time Homebuyers

West Virginia capitol building
Thorney Lieberman—Getty Images West Virginia capitol building

According to GoBankingRates.com, the state where first-time home buyers have seen their lot improve most dramatically is...

When it comes to the nation’s hottest real estate markets, West Virginia usually doesn’t come to mind.

But for first-time home buyers it beats out bigger markets like California and Florida, at least according to banking Web site GoBankingRates.com—and it’s not just because of the majesty of its rolling mountains. The site chose New Hampshire number two and Rhode Island number three.

What makes these states stand out? Over the past decade, they’ve seen biggest growth in the number of first-time home buyers—without facing high foreclosure rates. A decade ago, just 33% of West Virginia home sales were to first-time buyers. In 2013, the latest date for which data are available, the rate had climbed to 57%. Meanwhile foreclosures have remained at 0.01%.

One factor in West Virginia’s favor: Median home prices are a very affordable $115,850. The state also boasts a program that provides up to 100% financing for first-time buyers who meet certain income requirements, GoBankingRates notes.

New Hampshire and Rhode Island saw even bigger jumps in first-time buyers—with the rate nearly doubling in both states—but both also had higher foreclosure rates of 0.05%.

Many Millennials and Gen Xers—demographics now in prime home-buying age—have been struggling to make their first purchase after seeing careers interrupted and savings decimated by the 2008-2009 recession. That dynamic has contributed to a lower homeownership rates than any time since the early 1990s, a recent Harvard study found.

West Virginia isn’t the state with the highest overall first-time homebuyer rate. That honor goes not to a state at all but to Washington, D.C., where 68% of buyers were first-timers, according to the Federal Housing Finance Agency data that GoBankingRates used.

Why not choose Washington as the best market for first time buyers? The FHFA study found that first-time home buyer rates typically fell when real estate prices rose. Washington’s real estate prices have been on a tear and median home prices now stand at more than half a million dollars. In other words, while the city may be full of aspiring first-time homebuyers, their task is getting harder, not easier.

MONEY Bastille day

Happy Bastille Day! The Hidden Investing Lessons of the French Revolution

Erich Lessing—Art Resource, NY The taking of the Bastille, July 14, 1789

There's a difference between risk and uncertainty—and one is much scarier. Just ask the King of France.

It’s Bastille day—in other words, France’s answer to the Fourth of July. The day commemorates the 1789 storming of the Bastille, a notorious prison fortress, and is for most of us in the U.S. just a good excuse to uncork a bottle of French wine. But there’s also a famous story about the Bastille that contains a helpful lesson for investors.

Today, we think of 1789 as one of history’s big turning points, but people had trouble comprehending that at the time. According to a famous anecdote, which may or may not be entirely true, King Louis, hearing news of the crowds at the Bastille, asked one of his advisers, “Is it a riot?” To which the adviser replied, “No, sire, it’s a revolution.”

The difficulty of deciding whether a surprise event is a temporary disturbance or something more profound isn’t just a problem faced by kings. Investors have to deal with it, too. What it really comes down to is the subtle but crucial difference between risk and uncertainty.

For an example of risk, consider a typical bear market, defined as the stock market plunge of more than 20%. That’s happened, on average, every 3.5 years in the past century. Bear markets are the stock-market equivalent of a riot (something that happened pretty frequently in Paris in the late 1700s). They’re scary and confusing, and they can upset your plans.

But because bear markets are a relatively regular occurrence, even if you don’t know precisely when the next one will hit, you should be able to prepare and ride most of them out.

But every once in a while, it turns out things are different. In 1789, for example, the soldiers who in the past had helped corral angry crowds turned their cannons around to face the castle fortress. That’s uncertainty—the possibility that the patterns that held true in the past will cease to hold, and you’ll find yourself in a new world with different rules.

For modern investors, the 2008-2009 financial crisis was a scary brush with uncertainty. The collapse of Lehman Brothers threatened to destroy economic confidence and snarl the operations of all kinds of businesses, crippling the broader economy. And the idea that you could get through bear markets just by buying and holding for long enough began to seem iffy. The ten years from 1999 through 2008 turned out to be a “lost decade” of negative returns for stocks.

Ultimately, the markets did come back. Though perhaps not soon enough for many people who retired just before the crisis, and who had to spend down their nest eggs much more quickly than they expected. And even for younger buy-and-hold investors, the 2008 experience was a reminder to take a look at a broader range of possibilities. There is no natural law that equities must always promptly climb back to previous levels; the Japanese stock market has never returned to its 1989 high.

Handling risk is mostly about planning and discipline—knowing what you can normally expect to lose and not letting your emotions get the better of you when those losses arrive. Dealing with uncertainty is less mathematically precise. It means having a back-up plan even when recent history suggests you probably won’t need it. It’s one very good reason to be broadly diversified, not just among U.S. assets, but with some foreign holdings, too. And it’s a reason why most investors need to hold some assets in U.S. Treasury bonds, even though at today’s low yields they don’t seem very appealing.

Some market commentators will point out that right now those bonds look risky, since they’ll register price declines when today’s rock-bottom interest rates rise. That’s true. But then remember, risk isn’t the only thing you need to worry about. Treasuries are backed by the one payer no one seriously questions—the American taxpayer—and will pay their coupon and principal back when held to maturity. That’s something few other investments can promise. And that’s a hedge against uncertainty.

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