TIME Retirement

The Share of Retirees with a Mortgage Is Soaring

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Thanasis Zovoilis—Getty Images/Flickr RF

Bad habits are coming home to roost as retirees cannot shake their biggest debt.

Retirees are carrying more debt than ever, and a rising chunk of it is the mortgage on the house they live in, new research shows. This not only threatens their retirement lifestyle but also leads to a growing percentage of elders eventually tapping out and filing for personal bankruptcy.

The financial crisis plays a big role in this new reality, having forced millions to borrow more and for longer than they expected in order to make ends meet. But also to blame are some dicey consumer practices that came into vogue before the downturn: small down payments, home equity lines of credit to fund basic expenses, and cash-out mortgage refinancing to pay for cars and vacations otherwise out of reach.

Americans past the age of 65 have the highest home ownership rate of any group; roughly 80% own their house. But while that rate has remained constant the past decade the share with a mortgage has risen dramatically, according to a report from the Consumer Financial Protection Bureau.

Among homeowners 65 and older, 30% had mortgage debt in 2011, vs. just 22% with mortgage debt in 2001, the CFPB found. The trend is more extreme among those 75 or older, where 21.2% had mortgage debt in 2011, vs. just 8.4% a decade earlier. The numbers have come down only marginally since 2011. Meanwhile, the typical amount of retiree mortgage debt has soared 82% to $79,000 from $43,300.

Don’t look for the trend to ease much in the years ahead. Other research shows that pre-retirees also are carrying more debt than at any time in history. This will push them to work longer. But it’s unlikely the vast majority of the next generation of retirees will be anywhere near debt free, or even mortgage free, when they call it quits for good.

The fallout can be found in delinquency and bankruptcy data. The bankruptcy rate of those past age 65 is the fastest-growing segment, jumping from 2% in 1991 to more than 6% in 2007. Mortgage delinquency and foreclosure rates among those aged 64 to 75 jumped five-fold since the recession.

Once upon a time, most homeowners didn’t retire until their mortgage and other biggest debts were paid off. Then again, they rarely put down less than 20% or used the equity in their home like an ATM. We’ll be paying for our bad habits for years to come.

 

 

MONEY Economy

Americans Still Worried About Their Financial Future

Six out of 10 people surveyed by Money magazine own up to being worried about their family's long-term economic security.

Most Americans believe that the Great Recession is over, according to MONEY magazine's new national survey. But a Great Insecurity seems to have emerged in its wake.

Many of us are sticking to the good financial habits we adopted after the crash — a trend explored in Part 1 of this story. One reason for that: Once you look beyond the immediate future, optimism fades and it becomes clear that Americans remain deeply worried about their long-term economic prospects.

Consider: In the MONEY survey, nearly two-thirds of those earning less than $100,000 and roughly half of those making six figures said they were worried about their family’s economic security; roughly six in 10 Americans were anxious about how they would pay their health care costs.

The majority fell behind on their savings, given their stage of life, and almost three out of four were concerned that their money wouldn’t last through retirement. Other recent studies have found similar concerns: New research from the Consumer Federation of America, for instance, found that only a third of Americans feel prepared for their long-term financial future.

Why does the outlook seem so scary? Some experts think the events of the past six years have shaken the belief in our ability to accumulate wealth over the long haul.

“When the housing market fell, that really scared people,” says Michael Hurd, a senior researcher at Rand, who studied the effect of the recession on household finances. Hurd found that a decline in home values caused people to cut back on their spending more than a similar drop in the stock market.

In addition, the erosion of trust in our financial system will have a lasting effect, says Tyler Cowen, professor of economics at George Mason University.

“If you don’t believe that your environment will persist, you’re not willing to stake out plans,” Cowen notes. “For example, you won’t buy a home based on the premise that in five years you’ll be earning more money. The volatility of the stock market and the government shutdown have only made it harder.”

Speech pathologist Janel Butera, 47, is one who isn’t counting on anything. A divorced mom of two sons, ages 12 and 13, from Corona, Calif., Butera has made reducing spending and boosting savings a priority over the past five years. Out went the gym membership and vacations; packed lunches and day trips to the beach are the new norm.

“The economy as a whole — I don’t put a lot of faith in it,” she says. “I’m not counting on getting any retirement help, not even Social Security.”

Butera is proud that she’s managed to rebuild her finances after suffering the twin hits of divorce and the recession but is still anxious that she might one day become a burden to her boys. “I worry about them having to provide for me when I’m older,” she says.

Her concern is shared by many: In the MONEY poll, one in five Americans with children said they would probably need their kids’ financial support someday.

We’re living close to the edge

One reason we’re not feeling so hot: While our 401(k)s may be flush again, our emergency savings are not. Half of the respondents in the MONEY poll confessed to living paycheck to paycheck; roughly six in 10 felt they didn’t have enough money set aside for emergencies and didn’t think the family’s breadwinner would find it easy to get another job if laid off.

And almost all people, it seemed, felt like they’d need a higher income than they now earn to really be financially secure — even those who currently bring home a six-figure income. No wonder that anxiety about how we’d cope with a real financial emergency tied with concerns about outliving retirement savings as the most prevalent money worry.

In fact, money has gotten tighter for many lately. Household income, adjusted for inflation, has dipped 4.7% since the recession, economist Cowen points out.

One thing’s for sure: All this stress isn’t helping our love life. The MONEY poll found that finances are both the most frequent source of spats between couples and the cause of the most serious arguments — far ahead of the second-place finisher, household chores, and snoring, which came in third.

Edward Martinez of Tyler, Texas, is one of the many who are worried about not having an adequate cushion. Though Martinez, 44, made $140,000 working for a military contractor in Iraq after the recession, he now earns less than six figures as a technical specialist with the Smith County appraisal district.

He and his wife, Jennifer, 38, a professor at the University of Texas, have an 18-year-old daughter living at home and also help support Martinez’s 22-year-old daughter from his first marriage.

Right now the family has only about a month’s worth of savings, which could easily be wiped out by a run-of-the-mill financial emergency, Martinez acknowledges. He’s in the process of getting a pharmaceutical degree, which he hopes will boost his earning power a few years from now.

Like Martinez, many parents these days are helping grown kids, making it even harder to save. More than a third of the parents of children 22 and older in the MONEY survey are helping out at least one of their brood; of those, three in 10 are shelling out $5,000 or more a year. And that’s not likely to change anytime soon: In the survey, parents providing such support believed their adult child wouldn’t gain full independence until age 30; adult kids supported by a parent put that age at (gulp) 32.

The kids may be all right in the end after all

Such findings are in keeping with alarms many experts have sounded predicting that young adults would bear the most lasting scars from the Great Recession, just as the Depression had a lifelong impact on the way people who came of age at that time managed their money.

Certainly millennials have had a tough slog so far: The job market for this youngest generation of workers is grim (nearly half of those unemployed are under 34, a Demos study has found), and the average student-loan debt for recent college grads is $30,000.

Atlanta resident Courtney Clemons, 25, has a typical millennial story. The Georgia State University grad interned at a travel agency while in school and was hired there full-time after she got her degree. But her earnings, ranging from $25,000 to $35,000, depending on bonuses, aren’t enough for her to get by on her own. So her parents provide about $500 a month to cover her car and health insurance, cellphone bill, and some spending money. Contributing to the problem: She has $90,000 in student loans.

“The jobs you get after graduation aren’t conducive to living on your own,” she says. Morley Winograd, co-author of Millennial Momentum: How a New Generation Is Remaking America, agrees. “Millennials are a very economically stressed generation, and that stress will last for their lifetime,” he says.

Yet MONEY’s survey, among others, shows a more mixed picture. Today’s younger folks do seem at least as value-conscious as their elders, and maybe even more so: A greater percentage of millennials say they are eating at home these days than they were in 2011, for example, while the numbers had dropped slightly for the general population. And for now at least, younger investors also seem more nervous about the stock market, keeping a greater percentage of their portfolios in cash than older people do.

When it comes to other attitudes about spending and saving, however, millennials seem to be pretty much like everyone else. They are just as likely to covet new, innovative products. And they aren’t cutting back on luxury spending or postponing vacations with any greater frequency than their elders either. Nor do they place more importance on saving; almost everyone, young and old, affluent or not, says that saving money is more important to them now than it was a few years ago. And for all the lamentation about how dim the prospects are for this generation, younger folks are surprisingly upbeat about their future: The vast majority (86%) expect to live as well as or better than their parents.

For now, though, while millennials may be having difficulty leaving the nest, no one seems particularly unhappy about it.

“Boomers created a helicopter parenting style and went out of their way to be friends with their kids,” says Winograd. “Many are delighted to have their adult children home.” The kids apparently don’t mind either. A recent Pew study found that 78% of adults ages 25 to 34 who were staying with their parents said they were satisfied with their living arrangements.

Some experts believe this turn toward family may be one recession-induced change that truly lasts. Reality is causing more people to let go of the postwar expectation that living standards will naturally just keep getting better, says Stephanie Coontz, a professor of history and family studies at Evergreen State College in Olympia, Wash.

Many may end up caring less about keeping up with the Joneses and more about being with the people who matter the most to them as a result. And indeed, almost 80% of the respondents to the MONEY survey say spending time with family is more important than ever to them, an increase of 10 percentage points over the past five years.

Janel Butera is one of them. The speech pathologist and mom felt her financial situation was secure enough last year to cut back her workweek from five days to four, so she went for it. “Sure, I could use the money,” she says, “but spending time with my kids is more important.”

Additional reporting by Kerri Anne Renzulli.

 

TIME Kids and Money

Here’s a Dead-Simple Way to Guarantee Your Retirement Security

Piggy Bank
Getty Images

A new, free financial guide for Millennials makes the critical point that saving early is a cure-all. And it's not torture to read.

Just in time for graduation season, investment adviser and writer William Bernstein has published a financial guide that even members of the YouTube generation may absorb in one sitting. He doesn’t break any new ground. But that’s kind of his point: saving enough for retirement is alarmingly simple—if you start early.

This is a theme that I have been pounding for years and which I come back to as often as seems bearable. It’s that important. Young people may face a poor job market, slow wage growth and mounds of student debt. But they also possess a silver bullet: time. If you start saving with your first paycheck, long-term financial success is all but assured. You’ll achieve what I call Self Security; you won’t need Social Security (even though it will still be around).

Financial planners generally advise saving at least 10% of pay; Bernstein wants them to save 15%. But let’s not quibble. What really matters is that Millennials get started right away and never stop. A critical aspect of this is paying yourself first. That means socking away 10% or so of every check before you even cash it—and living off what remains. Compound growth will do the heavy lifting.

The results over four or five decades are stunning. Say you make $50,000 a year and save 10%, or $5,000, every year in a tax deferred account like an IRA or 401(k) plan that returns 6% a year. Starting at 25 and retiring at 65, you’ll amass $824,000. If you start at 22 and work until 72, you’ll amass more than $1.5 million. This does not account for expenses. But it also does not account for any company match or additional savings that would come with each pay raise. The point is that saving for retirement is all about getting started young enough to benefit from those extra years of compounding just before retiring.

Most people are amazed to learn than if you start with a penny and double it every day you’ll have $10 million in just a month. For most of the month you have very little—just $10,500 after three weeks. But magic occurs the last few days, when a large sum keeps doubling. Saving for retirement is like that too. The extra years at the end—which you earn by starting early—make all the difference.

Bernstein hits on other favorite themes, such as tuning out stock market noise and sticking to your plan. “There are only two kinds of investors,” he writes. “Those who don’t know where the market is headed, and those who don’t know that they don’t know.” His advice: ignore their warnings and attempts to trade in and out of the market, and keep investing in a regimented way.

This echoes a line I have used since writing my first investing column (for USA Today) 22 years ago. It goes like this: There are three steps to becoming a good stock market reporter. First, you know you don’t understand how the market works, and you believe others do. Second, you think you understand how the market works, but you really don’t. Third, you finally understand that you don’t know how the market works, but it’s okay because no one else does either. That’s when they give you a column.

Bernstein has lot more to say about Millennials and what they need to keep it simple and get started, and why they must not delay. I’m on board with all of it—including making small spending sacrifices now (like avoiding brand-name sneakers and fully loaded cable packages) in order to hit your savings goal and make a difference later on, and sticking with low-cost index funds and a simple portfolio that may be nothing more than a single target-date mutual fund.

I’m putting his plainly written 16-page guide on my favorite Millennials’ reading list. It’s free on his website. There’s no YouTube version, but something tells me the kids can handle it.

 

TIME Financial Education

Why Starbucks Could Become Your New Favorite Bank

Inside A Starbucks Store And The "Returning Moms" Program Ahead Of International Women's Day
Bloomberg/Getty Images

As Millennials come into focus for banks, research consistently shows that this generation knows it must fend for itself and craves trustworthy guidance.

Amid the emerging flood of research on the financial practices and whims of Millennials, one consistent finding stands out: this group craves information and advice that it can trust. It’s not clear that banks, with the most at stake, will ever get it right.

Well, duh, you might say. We all crave advice we can trust. But not like Millennials. They represent a full swing of the pendulum. Consider our oldest generation, those now 70-plus. Many sacrificed mightily in The Depression and World War II. But they were rewarded with lifetime job security and generous health and pension benefits. They have always had faith in our institutions, from government and religion to private enterprise.

Boomers questioned the establishment. We fought for civil rights and casual Fridays. Yet we generally trusted our financial institutions to guide us to long-term security. That may be why we weren’t paying attention when the switch to defined-contribution plans from defined-benefits plans went awry. Suddenly, an entire generation is woefully under saved and ill prepared for retirement.

Generation X, the first reared by TV and exposed to 24-hour cable news, saw this misplaced faith and developed a more skeptical worldview. How many times can you watch a greedy Wall Street type or crooked politician do a perp walk on CNN before you lose faith in those holding the puppet strings? But rather than rebel, this comparatively small generation withdrew and has simply made the best of things.

Enter Millennials and a whole new attitude. They have come of age amid rampant underemployment and runaway college debt. They have seen their parents lose their nest egg or home, or both, in the Great Recession. They blame banks more than government or individual error. They are ultra-wary of fees and pricing, and skeptical of anything they hear from a financial institution.

Millennials would rather go to the dentist than a bank. A third of them envision a bankless future and a third are ready to switch banks in the next 90 days. With such little faith in financial institutions, three in four Millennials turn first to peers for financial guidance. Their reasoning: at least with peers, if they are misled it will be an honest mistake.

All this poses unusual challenges for banks that want to stay relevant as Millennials grow into better jobs and begin to gather assets. Already, this generation shows openness to banking and investing start-ups like Square, Betterment, Robinhood, and Wealthfront, which tout transparency and low fees.

But the game is far from over. In The Millennial Shift: Financial Services and the Digital Generation, market research firm Corporate Insight notes that one way banks can capture this generation’s attention is by shifting the bank branch focus from transactions to education and guidance. According to the report:

Traditionally, financial services firms have offered a library of static articles on their websites and called this financial education. That approach won’t work with this audience. Interactive features like video-based lessons and quizzes are a must have. Gamification and community can also help spur engagement.

Millennials are saving more now than boomers did at their age. They know they must manage their own financial future and want someone to guide them in a way that makes sense to them. Online and mobile tools and social media appeal to them. But so would a bank branch that had more of a Starbucks feel and where the staff was as ethnically and gender diverse as this most diverse of generations. It’s not enough for a bank to just offer guidance; it must be sincere, inexpensive, accessible, and above all trustworthy.

 

 

 

MONEY

American Airlines Employees Grounded from Trading 401(k) Funds

American Airlines pilot Jim Irvine's aggressive 401(k) trading style cost him access to some of the plan's highest-performing funds. Photo: Pat Molnar

Jim Irvine had his compass set on an ideal retirement. With two generous pensions and a 401(k) that he maxed out every year, the American Airlines pilot had been on track to retire by 60 and live out his dream of sailing around the world with his family.

Then a fierce squall hit: AA filed for bankruptcy in 2011. Subsequently one of his pensions was frozen, the other paid out. Suddenly Irvine’s retirement dream hinged entirely on his growing his 401(k).

“It’s all up to me to invest well,” says Irvine, now 48.

Not surprisingly, people who fly aluminum canisters at nearly the speed of sound 40,000 feet above the earth tend to be fairly confident. “We’re goal-oriented, take-charge guys,” says Irvine. So rather than buying mutual funds to hold for the long haul, he responded by ramping up his already aggressive trading style in hopes of growing his money faster.

Irvine took most of his cues from a newsletter called EZ Tracker that he had begun subscribing to a few years earlier. The newsletter had reported solid returns, and Irvine loved the convenience. He could easily follow EZ Tracker’s recommendations — making about two dozen trades a year, including a few of his own — and not give up much of the free time between flights that he’d rather spend with his wife, Lisa, and four young kids (ages 4 to 8) in Cleveland.

Related: What’s your money state of mind?

He didn’t pay much attention to his returns as his balance rose, and he had no idea that trading activity was attracting attention of its own. The first indication of this came in 2012, when he got a warning letter from his 401(k) administrator saying his trading activity was “disruptive” to the T. Rowe Price funds in his plan. Undeterred, Irvine continued to buy and sell on EZ Tracker’s advice — until January 2013, when a second letter informed him that he was prohibited from trading into any of the plan’s four T. Rowe funds for a full year. “I couldn’t believe they actually did it,” he says. “It was like one of my kids throwing a tantrum.”

He wasn’t the only one to get such a letter. From 2011 to 2013, some 1,300 AA employees were barred from trading into T. Rowe funds in their 401(k) plans — some for a year, some for life. Vanguard recently acknowledged that it’s had a similar issue with airline workers: For years, the company says, it’s been telling Southwest to inform its staffers that their purchases could be blocked if they trade on the advice of investing newsletters.

A strange set of cases, yes — but you may have more in common with these highflying investors than you think. While only 15% of 401(k) participants in the U.S. initiated a trade in 2012, according to benefits firm Aon Hewitt, nearly a third of MONEY readers polled made more than five trades last year, and 17% made more than 10.

Related: How to get in trouble in your 401(k)

Even if you’re not trading as often as the newsletter subscribers, you’re hardly immune to the pressures that drove them to do so. The percentage of Americans enrolled in traditional pensions is now only 14%, down from 38% in 1979, according to the Employee Benefit Research Institute, leaving workers increasingly reliant on 401(k) savings. And most are falling behind, countless studies show.

So is it really all that wrong that these airline workers took their plans off autopilot in hope of getting a boost? The fund companies argue that it is, since the kind of trading they’re doing can hurt long-term investors (that is, most of you reading this). Meanwhile, subscribers contend they should be able to invest any way they please. But they’re missing a more important point: Frequent trading probably won’t give them the lift they’re hoping for. “The terrible irony,” says Frank Murtha, co-founder of MarketPsych, a behavioral-finance consulting firm, “is that by trying so hard to achieve superior returns, you virtually ensure that you will underperform.”

Where the trouble began

The curious tale of AA trading bans starts in 2002 with two men: Mike DiBerardino, then an AA pilot, and Paul Burger, who’d just left his job as COO of an ad agency in Philly. The pals had met while working as securities dealers in the ’70s.

Long after changing careers, DiBerardino often found himself advising his airline colleagues on retirement investing. “I’d show them what I was doing, and they’d say, ‘Send me that!’ ” he recalls. After he mentioned this to Burger, the two hatched a plan for a newsletter aimed at helping AA employees pick funds in their 401(k). Thus was born EZ Tracker.

Today the AA newsletter has more than 3,000 subscribers, and EZ Tracker’s publishers — who both work at it full-time since DiBerardino’s retirement in 2007 — also produce separate editions for employees of Southwest, JetBlue, United, and US Airways, as well as for pilots of UPS. For pilots, a one-year subscription costs $100; for flight attendants, $85.

On the last Sunday of every month, subscribers get an email containing a link to the newsletter. Each issue offers a market overview, news on plan changes, and, of course, investment picks. Readers can model their investments on one of three portfolios — aggressive, moderate, and conservative — each consisting of about six to eight funds from the plan’s offerings (which, in AA’s case, number 30). And every month the newsletter recommends a handful of trades.

While DiBerardino and Burger don’t like the terms “market timing” or “momentum investing,” their advice is essentially that: They suggest buying funds that have performed well over the past 12 months and selling those that are cooling off. To make picks, they look purely at price, rather than the fundamentals of the underlying holdings. They also employ a basic asset-allocation strategy to ensure a diverse mix.

EZ Tracker’s publishers are not registered investment advisers. They also acknowledge that they are not offering anything the airline employees couldn’t find out for themselves. But they say they save workers time by doing the research.

“We’re not gurus,” says Burger. “There is no crystal ball. We don’t know where the market is going, but we can tell you what are the best-performing funds right now.”

Their results, which aren’t audited by any third party, certainly look impressive. Over the past 10 years EZ Tracker reports an annualized return of 10.7% in the AA aggressive portfolio, compared with 7.4% for the S&P 500. The newsletter’s hallmark year — and the year after which subscriptions “took off,” the founders say — was 2008, when the aggressive portfolio fell just 14.6%, vs. the S&P 500’s 37% plunge.

Why airline employees bit

Some time after the debut of EZ Tracker, its publishers noticed the appearance of a competitor called 401k Maximizer, that is today targeted at employees of AA, Southwest, US Airways, and Delta. (The publication’s founder, who’s been reported to be an AA pilot, did not respond to requests for comment.)

Mark Hulbert, who as editor of the Hulbert Financial Digest has studied the investing newsletter industry for three decades, says it’s unusual to see a publication focused on one company’s retirement plan because it limits the audience. Yet the airline industry seems to be able to support not one but two newsletters for active 401(k) traders. How come?

Ego is probably one factor. People in high-achieving fields like aviation often have the kind of type A personality that makes them think they can beat the market by trading, says MarketPsych’s Murtha. He points to a 2011 study by the University of California showing that investors with an inflated sense of their abilities tend to trade more.

Related: How we feel about our finances now

Mike Close, a Southwest pilot from Cape Canaveral, Fla., agrees with Murtha’s assessment of his peers: “We all know how to solve the world’s problems — we know the answer to everything,” jokes Close, who has subscribed to 401k Maximizer for six years and was among those who received a warning from Vanguard. “This makes a pilot a horrible person to take advice from, especially investment advice,” he adds. (Nevertheless, he says, he’s been happy with how he’s done with Maximizer.)

Meanwhile, a culture of trust and conformity may make pilots more inclined than others to put blind faith in advice from a peer, says Andy Simonds, a pilot for a major airline and a writer for Future & Active Pilot Advisors, a career and financial advisory service. Because they must entrust their lives to co-pilots who can be strangers, he says, it follows that they’d trust colleagues with lesser decisions, like investing.

The reasons Brigitte Laurent, 49, an AA flight attendant from Playa del Rey, Calif., started subscribing to EZ Tracker eight years ago could apply to anyone. Until co-workers suggested she try the newsletter, she had her whole nest egg in a single index fund. “But I always felt like I could do better, like I was missing out,” she says. “I feel like I’m more in control now, even though I’m following their advice.” And after the AA bankruptcy froze her pension, cut her pay, and cost her vacation days, the 25-year vet of the airline says she needed that sense of stability more than ever.

Sometimes when feeling out of control, we reach for a narrative that will help us feel like we’re in the driver’s seat, says Dan Ariely, a leading behavioral economist, whose latest book is The (Honest) Truth About Dishonesty. “We don’t like randomness,” he adds. “We try to force order on life around us, so we tell ourselves a story.”

The story the newsletters tell is that by trading you can beat the market. Our neurons compound the problem: Studies have shown that the pleasure centers in our brains are activated more when we do something to earn money rather than passively receive it. Add in diminished expectations — such as those following the market plunge, pension cuts, and pay freezes suffered by AA employees — and the temptation to act gets even stronger. “When people expect to achieve a certain level of wealth, they can get emotionally anchored to it,” says Murtha. So when your actual wealth falls below where you think it should be, you can get an itch to do something to rectify the situation.

But with investing, as with flying, our instincts can be wrong, warns William Bernstein, the neurologist-turned-investment-guru who also has a pilot’s license. “When a pilot comes in for a landing while flying slowly and descending rapidly, the instinct is to pull the nose up, but you actually need to point it to the ground to get enough airspeed to fly again,” he says. “Investing is the same way: We instinctively react to danger with fight or flight, which is a useful instinct in nature but all wrong in finance. You shouldn’t sell when the fund goes down; you should hold on and do nothing.”

Why they were banned

Cole Seckman, 58, an AA pilot since 1990 and EZ Tracker subscriber since 2002, was among the first to be barred. Ignoring a warning letter received in fall 2010, Seckman followed EZ Tracker’s advice in June 2011 to sell T. Rowe’s Science & Technology Fund. That September he was blocked from transferring money into T. Rowe funds for a year. “It was the most ridiculous thing that’s happened to me,” he says.

T. Rowe won’t say how many letters were sent, but DiBerardino and Burger believe that everyone who made that particular trade soon after the issue was published got barred. (A mutual fund has no way of knowing which of its investors are newsletter subscribers, of course, but it can see which participants in a 401(k) are making the same trades at the same time.)

The editors were defiant. “Who the hell are they to tell us how to run the portfolio?” says DiBerardino. So a month after the first ban ended, in August 2012, they advised buying T. Rowe’s New Horizons Fund, and three months later advised selling it. Seckman made those moves — and was promptly barred for another year.

Laurent, who was also banned twice, but on a different timetable, asks the question that plagued many of her fellow subscribers: “T. Rowe Price is huge. How can we disrupt the performance of their funds?”

How indeed? In response to MONEY’s inquiry, the company sent a statement: “Collective trading of fund holders acting on the recommendations of others, such as the advice of a newsletter, could cause large cash flows in and out of the T. Rowe Price funds …”

In other words, it’s not the frequency of trades that’s a problem, but that so many people are trading at once.

AA employees have nearly $11 billion in their 401(k)s, and pilots specifically have an average balance of $370,000, according to BrightScope, which ranks retirement plans. So if many of EZ Tracker’s AA subscribers buy one of the T. Rowe funds in the 401(k), the funds’ managers may have to invest in lesser-quality companies or park money in cash. Lots of sell orders, meanwhile, could force managers to unload assets before they reach peak value and drive down the market price of those assets. Buy or sell, managers also incur fees for executing trades. All those moves eat into a fund’s return and hurt investors who stay put.

A similar dynamic is responsible for Vanguard’s frustration with Southwest employees. The company’s pilots can generate up to $45 million in trades in a given fund the week after 401k Maximizer publishes, according to John Nordin of the Southwest pilot union’s 401(k) committee. “Equity funds are long-term investments,” says Michael Buek, a portfolio manager at Vanguard. “If everybody traded like that, our performance would be horrible.”

Regardless of whether a plan has specific rules governing “collective” trading — as T. Rowe now does — a fund company can block purchases at its discretion. By all accounts, though, bans such as those received by the airline employees are very unusual. Most 401(k) plans and funds do have rules to curb market timing. But enforcement actions on those are rare too: Only about 0.25% of Fidelity’s nearly 13 million 401(k) participants received warning letters for too-frequent trading in 2013.

What’s the real damage?

As it turns out, a ban sounds worse than it is: Those who’ve been barred are still allowed to sell holdings in T. Rowe funds, since by law mutual funds are not allowed to stop a sale. They can even buy into the funds through regular pay-check contributions, since those amounts are smaller and predictable. So the only thing barred employees can’t do is transfer an existing balance into the funds. But with 26 other funds to choose from, it’s not as if they’re out of options.

The real harm of frequent 401(k) trading isn’t the trouble you could get into from a fund company, but the fact that you’ll likely end up behind the market, says financial adviser and Pace University professor Lew Altfest. To beat benchmarks, you have to time two trades well — selling high and buying low. And that’s a hard bar to clear. Individuals tend to move at the wrong times. Even pros have terrible timing, evidenced by the fact that 61% of actively managed U.S. stock mutual funds underperformed indexes over the five years ending in 2013, according to Standard & Poor’s.

EZ Tracker — and most investing newsletters for that matter — chases returns, according to Hulbert. But there’s a reason the phrase “Past performance is not indicative of future results” has become a cliché. In looking at investor returns from 1995 to 2010, investment firm Gerstein Fisher found that while stocks that rose in the previous 12 months tended to continue rising in the short term, the shares got bid up so much that investors ended up underperforming by one percentage point a year. Further, an analysis of newsletters from 1986 to 2010 by Hulbert found that they underperformed the S&P 500 by an average 2.6 percentage points. “About 20% of the newsletters I track will beat the market, and 80% will not,” he says.

MONEY asked Altfest to review EZ Tracker’s published results. His finding? “Their record isn’t terrible, but it could be better.”

Related: Americans still worried about their long-term finances

The newsletter did well from its inception in 2002 to 2010, thanks largely to smart calls in 2008, and overall the 10-year annualized return for its aggressive portfolio topped the S&P 500’s by 3.3 percentage points. But from 2011 to the present, its cumulative three-year gain was 22%, vs. 50% for the S&P 500. “Thaaat’s the problem with a momentum strategy,” Altfest says. “You can have a favorable effect over short periods, but then there’s a change in the market, people start saying, ‘Get me out!’ and you can get bagged.”

Paul Burger acknowledges that market volatility hurt the newsletter’s returns of late but says, “If you look at the entire period of 12 years, we do outperform the indexes.” True, but as often happens when a money manager gets hot, investors piled in after EZ Tracker’s great 2008. Those subscribers don’t get the benefit of the outperformance.

Altfest also dug into Jim Irvine’s performance: In the five years since he began following the newsletter, his return was 9.1%, about half the 18% gain of the S&P 500. He didn’t follow EZ Tracker’s advice completely — a staunch political conservative who heads a gun-rights group, Irvine made some of his own trades based on his fears of a market downturn after President Obama’s reelection — so the newsletter had a better showing at 13.8%. But even a moderate asset-allocation fund in Irvine’s plan delivered 14.2% and an aggressive fund returned 17.5%. “Jim did entirely too much trading during the past year,” Altfest says. “401(k)s should be operated for long-term appreciation with only occasional judicious changes.”

Where they’ll go from here

Though EZ Tracker continued to recommend T. Rowe funds after the first round of one-year bans, DiBerardino and Burger stopped suggesting the company’s offerings after some subscribers were hit with permanent bans last summer. So now readers who follow the newsletter faithfully will miss out on high-performing funds like T. Rowe’s New Horizons (33.7% return for the 12 months ending in March) and Science & Technology (37% for the same period). “We’re definitely at a disadvantage,” says DiBerardino, who has filed a complaint with the SEC. “But we’ve gained subscribers since this happened because of our long-term record.”

In spite of everything, Laurent (who reports a five-year annualized return of 15.1%) is unwavering in her loyalty to EZ Tracker. Seckman, too, is satisfied with how he’s done (15.3% over the same period). “I’m not trying to beat the market,” he says. “They’ve kept me out of trouble and given me reasonable returns.”

Initially Irvine was also committed to EZ Tracker and had shrugged off the ban — “I’ll just use other funds,” he said in his first interview with MONEY. But he had a different view after hearing Altfest’s feedback. The planner estimated that if Irvine continues to underperform, he’d need to work until 72 to hit his savings goal — an impossibility, since the airline has a mandatory retirement age of 65. Altfest suggested Irvine instead opt for a set-it-and-forget-it portfolio with 20% in cash and fixed income and 80% in equities, heavily weighted toward large-cap (38%) and international (25%) funds. With a reasonable 7% return, Irvine could retire at 64.

Related: 5 ways to reduce your financial anxiety

At first taken aback by the critique, Irvine soon saw Altfest had a point. In particular, the planner’s advice to buy three T. Rowe funds (now that his ban is over) made Irvine realize how much lingering anger was hurting him. “I was going to work longer just so I can not invest in their funds?” he says. “That’s cutting off my nose to spite my face.” His new investing plan in place, Irvine has been looking at boats — a 42-foot Jeanneau looks like a beauty — and made a spreadsheet to monitor his progress. “I lost track of the target,” he says. “It’s embarrassing because I’d never do that in an airplane. This has been a good wake-up call to right the ship.”

TIME Retirement

Who Needs a House? Give Me a Nest Egg!

house_for_sale
Thomas Northcut—Getty Images

Retirement savings is trending higher and home ownership lower as our top financial goal.

More people are redefining their financial dream as a retirement nest egg; fewer as home ownership, new research shows. This trend started with the Great Recession and has not let up.

Half of American adults say that having enough money to retire comfortably is now their top financial goal, up from 47% three years ago, according to the National Endowment for Financial Education. Just 13% name home ownership as their most important goal, down from 17% in 2011.

This trend, ignited by the housing bust and deep stock market slump that began in 2008, shows no signs of reversing. The housing market may have begun to recover. But nearly one in five homeowners still owe more than their homes are worth, and so far the recovery has occurred mainly in just a few large cities. Just 2% of adults believe the recession has given way to a full recovery, according to Transamerica Center for Retirement.

Meanwhile, the population is aging and naturally placing a higher value on retirement income than on owning the place they live. There is good news on this front. Fidelity recently announced that the average 401(k) balance reached $88,600 at the end of the first quarter, up more than 9% from a year ago. The average balance has nearly doubled in five years, restoring some of the financial security lost in the crisis.

Still, most Americans are under saved an ill prepared to quit work for good at 66 or 67, an age that is rapidly approaching for a large part of the population. With lingering and persistent doubts about housing as a wealth builder—and the S&P 500’s heady total return of 32% last year—it’s easy to understand why a nest egg has become our top financial goal and perhaps even the new American Dream.

 

 

TIME Retirement

3 Generations, 3 Paths to the Retirement Poorhouse

Every working generation has a unique plan for retirement. Will any of them get there?

Banks and mutual fund companies pump out surveys and data points every day to illustrate the retirement income crisis in America. They want to make sure you don’t forget to save and invest—with them. But they have little to fear. It’s not like this crisis is going away anytime soon.

Every working generation is getting some part of the retirement security equation wrong. Boomers plan to work longer—but they aren’t keeping current on skills. Gen X is socking away cash in 401(k) and similar plans—but they are borrowing too much from those very accounts. Millennials have become dedicated savers and asset gatherers—but they spend too much and aren’t doing enough about their crushing student debts.

These are broad conclusions drawn from recent surveys. The most pointed conclusions come from the newly released 15th Annual Transamerica Retirement survey, which found that the effects of the Great Recession continue to weigh on all generations and are leading them down distinct savings paths.

Boomers Born between 1946 and 1964, the youngest are now turning 50. Boomers are first-generation Guinea pigs as it relates to the new retirement model. Many were mid-career when traditional pensions gave way to 401(k) plans. They haven’t had 40 or 50 years to stuff the new plans with cash and let compound growth do the heavy lifting. The lucky ones still qualify for traditional pensions. But this is a famously under-saved demographic with a median nest egg of just $127,000.

More than a third of boomers say Social Security will be their primary source of retirement income, up from a quarter before the recession, Transamerica found. Just one in five plan to not work at all in retirement. Yet staying at work isn’t always possible. Less than half are keeping job skills up to date and only one in seven are scoping out job opportunities or networking for employment. Meanwhile, just 21% of employers have programs to help older workers scale back at work. Health issues also prevent older people from staying at work as long as they may like.

Gen X Born between 1965 and 1978, this was the first generation to enjoy access to 401(k) savings and growth for nearly all their working years. Nearly all of them—91%—highly value these plans and 84% of those who are eligible participate in their company plan. Unfortunately, this group treats the 401(k) like a piggy bank: 27% have taken a loan or early withdrawal from the plan. In doing so they often incurred taxes and penalties, which on top of lost growth set their savings goals back further.

Gen Xers estimate they will need $1 million to retire, Transamerica found. Their median savings to date: $70,000. The oldest are just turning 50. So they have time if they begin to power save 20% or so of income. But nothing will help if they keep robbing the kitty. “Simply put, 401(k) loans are a wolf in sheep’s clothing,” say Catherine Collinson, president of Transamerica Center for Retirement Studies. “Everyone should know that it’s best to say no to 401(k) loans.”

Millennials Born after 1978, this huge generation about 80 million strong is a budding group of super savers that have heard the message about saving early and often. Seven in 10 are saving for retirement and began at the median age of 22. Millennials participating in a company-sponsored plan that features a match are socking away an impressive 10% of their salary.

Yet while the asset side of their ledger is encouraging, the liabilities side is frightening. More than half of college-educated Millennials owe student loans; 41% have a mortgage (many for greater than their home’s value) and another 41% have auto debt, according to a report from TIAA-CREF Institute. They are also neck-deep in credit card debt. So they’re saving, but their net worth isn’t necessarily rising. To an extent, this generation knows what it doesn’t know; 73% crave more financial information from their employer. Let’s hope they get it, because this a generation without financial safety nets—but ready to do what it takes to build retirement security over the long haul.

 

 

TIME Retirement

There’s a Dangerous New Way to Get a Quick Loan

Getty Images

Americans ratcheted up borrowing from retirement accounts during the recession and have never stopped. Here's why these should be loans of last resort

Lingering fallout from the Great Recession includes the high rate at which workers with a 401(k) plan borrow from that pool of savings, imperiling their future retirement security.

At the end of last year, 18.2% of participants in a defined contribution plan had loans from their plan outstanding, according to new data from the Investment Company Institute. That rate has held above 18% since 2010, having jumped from 15.3% in 2008.

More workers also have taken hardship withdrawals since the financial crisis, further evidence that some at least have come to view their 401(k) plan as a piggy bank—not a retirement account. Hardship withdrawals have held steady the past few years, occurring in 1.7% of plans last year, up from 1.3% in 2008.

Loans seem to be the top choice for families plugging holes in their budget. The average loan balance is around $7,000, representing about 12% of the typical remaining 401(k) balance of $59,000. That’s a big chunk of savings that isn’t available to grow during the period it has been borrowed. You’ll pay yourself interest when you settle the debt, but not enough to replace years of lost growth in a rising stock market. In many cases, the loans never get repaid and become subject to penalties and income tax.

Loans are easily the biggest source of “leakage” from retirement plans. About one in four American workers with a 401(k) plan expect to tap their retirement account for current expenses. This leakage tops $70 billion a year, equal to nearly a quarter of annual contributions, research shows.

The issue is so concerning that experts are looking for reasonable alternatives to 401(k) plans. Some believe funds borrowed from a 401(k) should be insured so that in the case of a worker who loses a job any money borrowed from the 401(k) plan would be replaced—not permanently lost, penalized and taxed.

In general, 401(k) plan loans should be avoided—or used as a last resort. They are not as costly as some pundits would have you believe. But failure to repay is all too common. Default rates on 401(k) plan loans have roughly doubled since the financial crisis and account for about $37 billion a year leaving retirement savings accounts.

 

 

TIME Retirement

This Is How Detroit Found Itself a Mysterious Pot of Gold

A protestor holds a sign outside the federal courthouse in support of Detroit city workers Rebecca Cook—Reuters

Suddenly the cops and firemen and other municipal workers' retirement doesn't look so bleak in the Motor City. But don't try this at home.

To the great relief of firefighters, police and other public employees in bankrupt Detroit, city fathers recently plugged a huge hole in their pension plans. For now, anyway, something close to these employees’ retirement dreams have been restored.

But how did they do it? Just a few weeks ago, Detroit leaders pegged the pension shortfall at $3.5 billion—about 20% of the city’s total indebtedness—and they were threatening to slash benefits beyond already expected cuts of up to 14% for cops and firemen and 34% for other workers. Miraculously, workers are now being assured that benefits cuts will be comparatively tame, amounting to less than a 5% reduction for those hardest hit.

Where did the money come from? Who found the pot of gold that is enabling the city to fill such a big funding gap? The answer, of course, is that no one found so much as a single hard penny. Actuaries simply juggled a few numbers on the city ledger and, voila, a paper windfall appeared. Don’t try this at home.

The most important accounting change was the assumed rate of return on investments held in the city’s two big retirement funds. Previously, the annual rate of return was estimated at 6.25% and 6.5% on the two funds. Now the city is assuming a rate of return of 6.75% on both funds. Why the bump? In part, anyway, the city seems to be taking heart in the stock market’s big gain last year, when after lackluster returns the past decade or so the S&P 500 rebounded with a glowing 32% total return.

A sustained higher rate of return would mean more annual income for the funds, making them better able to meet benefits promises with the same amount of assets. But the question remains: Is the higher return assumption realistic? One year is not a trend. Many planners believe we have decades of slow growth and modest returns ahead. A bankruptcy judge still must rule on the rosier projections.

A pension fund manager boosting the return assumption because stocks finally had a good year is a little like you at home predicting next winter won’t be so cold and slashing your heating budget. You might be right. But it’s just a guess—and if the guess is wrong you will have to find the money elsewhere to heat the house. Your finances only looked better briefly; the picture dimmed as soon as another cold winter hit.

So how realistic is the 6.75% return assumption? In the Detroit General Retirement System, annualized returns over the past seven years have been 3.9%, according to one analysis. The past five years, public pension funds have had a median annualized return of 5.3%, according to another analysis. Not so good, right?

But let’s not throw Detroit’s leaders under the bus just yet. Because people generally work and accrue benefits over 40 years or so, pension funds can take an extremely long view. The median pension fund return over the past 25 years has been 8.6%. The typical pension fund manager today assumes long-term rates of return between 7% and 8%. So Detroit has company, and may even seem cautious.

Among others, Warren Buffett has scolded pension managers for not recognizing a fundamental shift to slower growth and lower returns. But the new assumptions in the Motor City aren’t completely unsupportable. Maybe the city’s employees will catch a much-needed break and get the higher returns that pension managers hope for.

 

TIME Retirement

Turns Out Millennials Are Scary Smart With Their Money

Australian Holiday Makers Celebrate 'Schoolies' Week In Bali
Australian teenagers let their hair down in Bali—a popular destination for school breaks. Aussie teens are top of a newly released list of global youth wellbeing Agung Parameswara—Getty Images

New studies conclude that Millennials understand they must save. Doing it the right way is another matter.

Millennials are quickly becoming the most examined generation in history—and for good reason. Their numbers exceed even those of baby boomers, and with the social safety net fraying it’s never been more critical for young people to start saving early.

The latest string of surveys and studies is encouraging. On the financial front, this generation of mostly twentysomethings displays surprising fortitude. They recognize the importance of saving and tend to be more proactive about planning than their elders, concludes Northwestern Mutual.

Some 62% of Millennials rate themselves disciplined or highly disciplined as money planners, compared to 54% of folks aged 60 or over, according to the firm’s 2014 Planning and Progress study. Certainly, there is evidence that Millennials are making plenty mistakes and may be characteristically overconfident on the financial front. Yet 68% acknowledge room for improvement in managing their finances, suggesting a degree of humility not often seen with this age group. They appear open to learning more but aren’t sure where or how to find a trusted source. Many mistakenly take their cues from online friends.

One of the financial virtues of this group appears to be a slow and steady approach to building a nest egg. Roughly a third favor a long-term tried-and-true strategy, Northwestern Mutual found. Another third would like to take that approach but feel like they are too far behind to play it safe.

Millennials’ cautiousness may be a double-edged sword. Just 14% in the survey say they are pursuing a high-growth investment strategy even though such a strategy would promise superior long-term returns. This may be a case of playing it too safe. Millennials have 40 years to ride out any bumps. If their money is socked away in savings bonds and other ultra-conservative investments it won’t grow fast enough for them to retire even over a long period of time. Now is when they should embrace prudent, low-cost, diversified risk through stock index funds and similar investments.

Other surveys have found that Millennials are generally ahead of earlier generations in terms of understanding the need for saving. Two in three young employees are committed to or have the ambition to save for retirement, according to a report from Aegon and the Transamerica Center for Retirement Studies. One in four are habitual savers who ‘always make sure’ they are putting something away. Two in five intend to begin saving soon and three in five understand that retirement saving is important—they just don’t have the means yet.

In another survey, The Principal Financial Group Knowledge Center found that 84% of Millennials describe themselves as passionate about creating financial security—more than are passionate about raising well-rounded kids (60%), having fun (66%), making a difference (49%) and exercise (44%). One reason: Most believe Social Security will no longer exist when they retire, Principal found.

Millennials need to start right away for a lot of reasons. Many are loaded with student debt and underemployed. They’re not pursuing home ownership in a big way, which leaves them stuck renting in a climate a fast-rising rents and missing out on the housing recovery. This generation is off to a good start in terms of knowing what it needs to do to reach retirement security. Its biggest problems seem to be lack of job opportunity and having started adulthood in a deep hole of student debt.

 

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