MONEY 401(k)s

How the New-Model 401(k) Can Help Boost Your Retirement Savings

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Betsie Van Der Meer—Getty Images

As old-style pensions disappear, today's hands-off 401(k)s are starting to look more like them. And that's working for millennials.

If you want evidence that the 401(k) plan has been a failed experiment, consider how they’re starting to resemble the traditional pensions they’ve largely replaced. Plan by plan, employers are moving away from the do-it-yourself free-for-all of the early 401(k)s toward a focus on secure retirement income, with investment pros back in charge of making that happen.

We haven’t come full circle—and likely never will. The days of employer-funded, defined-benefit plans with guaranteed lifetime income will continue their three-decade fade to black. But the latest 401(k) plan innovations have all been geared at restoring the best of what traditional pensions offered.

Wall Street wizards are hard at work on the lifetime income question. Nearly all workers believe their 401(k) plan should have a guaranteed income option and three-in-four employers believe it is their responsibility to provide one, according to a BlackRock survey. So annuities are creeping into the investment mix, and plan sponsors are exploring ways to help workers seamlessly convert some 401(k) assets to an income stream upon retiring.

Meanwhile, like old-style pensions, today’s 401(k) plans are often a no-decision benefit with age-appropriate asset allocation and professionally managed investment diversification to get you to the promised land of retirement. Gone are confusing sign-up forms and weighty decisions about where to invest and how much to defer. Enrollment is automatic at a new job, where you may also automatically escalate contributions (unless you prefer to handle things yourself and opt out).

More than anything, the break-neck growth of target-date funds has brought about the change. Some $500 billion is invested in these funds, up from $71 billion a decade ago. Much of that money has poured in through 401(k) accounts, especially among our newest workers—millennials. They want to invest and generally know they don’t know how to go about it. Simplicity on this front appeals to them. Partly because of this appeal, 40% of millennials are saving a higher percentage of their income this year than they did last year—the highest rate of improvement of any generation, according to a T. Rowe Price study.

With a single target-date fund a saver can get an appropriate portfolio for their age, and it will adjust as they near retirement and may keep adjusting through retirement. About 70% of 401(k) plans offer target-date funds and 75% of plan participants invest in them, according to T. Rowe Price. The vast majority of investors in target-date funds have all their retirement assets in just one fund.

“This is a good thing,” says Jerome Clark, who oversees target funds for T. Rowe Price. Keeping it simple is what attracts workers and leads them to defer more pay. “Don’t worry about the other stuff,” Clark says. “We’ve got that. All you need do is focus on your savings rate.”

Even as 401(k) plans add features like auto enrollment and annuities to better replace traditional pensions, target-date funds are morphing too and speeding the makeover of the 401(k). These funds began life as simple balanced funds with a basic mix of stocks, bonds and cash. Since then, they have widened their mix to include alternative assets like gold and commodities.

The next wave of target-date funds will incorporate a small dose of illiquid assets like private equity, hedge funds, and currencies, Clark says. They will further diversify with complicated long-short strategies and merger arbitrage—thus looking even more like the portfolios that stand behind traditional pensions.

This is not to say that target-date funds are perfect. These funds invest robotically, based on your age not market conditions, so your fund might move money at an inopportune moment. Target-date funds may backfire on millennials, who have taken to them in the highest numbers. Because of their age, millennials have the greatest exposure to stocks in their target-date funds and yet this generation is most likely to tap their retirement savings in an emergency. What if that happens when stock prices are down? Among still more concerns, one size does not fit all when it comes to investing. You may still be working at age 65 while others are not. That calls for two different portfolios.

But the overriding issue is that Americans just don’t save enough and a reasonably inexpensive and relatively safe investment product that boosts savings must be seen as a positive. With far less income, millennials are stashing away about the same percentage of their earnings as Gen X and boomers, according to T. Rowe Price. That’s at least partly thanks to new-look 401(k)s and the target-date funds they offer.

Read next: 3 Ways to Build a $1 Million Nest Egg Despite Lower Investment Returns

MONEY Personal Finance

Oh No! Needing a Fridge, Rubio Raids Retirement Account

Larry Marano/Getty Images

Dipping into retirement savings to fund an everyday expense is a common but costly error.

If Florida Sen. Marco Rubio intends to lead by example, he’s off to a rocky start. The Republican presidential hopeful raided his retirement account last September, in part to buy a new refrigerator and air conditioner, according to a recent financial disclosure and comments on Fox News Sunday.

In liquidating his $68,000 American Bar Association retirement account, Rubio showed he’s no Mitt Romney, whose IRA valued at as much a $102 million set tongues wagging coast to coast during the last presidential cycle. Rubio clearly has more modest means, which is why—like most households—if he doesn’t already have an emergency fund equal to six months of fixed living expenses he should set one up right away.

He told Fox host Chris Wallace: “It was just one specific account that we wanted to have access to cash in the coming year, both because I’m running for president, but, also, you know, my refrigerator broke down. That was $3,000. I had to replace the air conditioning unit in our home.”

Millions of Americans treat their retirement savings the same way Rubio did in this instance, raiding a 401(k) or IRA when things get tight. Sometimes you have no other option. But most of the time this is a mistake. Cash-outs, early withdrawals, and plan loans that never get repaid reduce retirement wealth by an average of 25%, reports the Center for Retirement Research at Boston College. Money leaking out of retirement accounts in this manner totals as much as $70 billion a year, equal to nearly a quarter of annual contributions, according to a HelloWallet survey.

Rubio’s brush with financial stress from two failed appliances probably won’t set him too far back. He has federal and state retirement accounts and other savings. And let’s face it: The whole episode has an appealing and potentially vote-getting Everyman quality to it. Still, it is not a personal financial strategy you want to emulate.

 

 

TIME

These Are America’s Secret Money Habits

Pile of new series American money twenty on top.
Getty Images

You'll be surprised at how we really see ourselves

Young adults spend less on groceries, but eat out more. New Yorkers are suckers for a fancy brand name, Bostonians love giving gifts and Floridians want to get money advice from Warren Buffett.

These are some of the finds in the new TD Bank Saving and Spending Survey, which uncovers some good news as well as some red flags about how Americans manage their money today.

Respondents under the age of 35 have the most financial confidence of any age bracket. They’re less likely to use the words “conservative” or “cautious” to describe their approach to saving, and they’re a full 10 percentage points more likely when compared to the overall pool of respondents to say they’re “very confident” that they’ll be able to save enough for retirement.

This apparent contradiction is because young adults are at very different points in their lives, says Nandita Bakhshi, TD Banks’ head of consumer bank. “Some are just graduating from college while others are married and starting a family. This mixed group lends itself to mixed answers.”

Bakhshi adds that because many of them are landing their first “real” post-college jobs, they’re seeing their financial circumstances shift rapidly. “Many of them… finally have extra income they can use to splurge on items they want,” she says, and they also have the ability to save a meaningful amount for the first time in their adult lives. “Seeing their savings grow, even if it is a small amount, is a big accomplishment and gives them a sense of pride and confidence,” she says.

Other recent research yields similar findings. The Bank of America/USA Today Better Money Habits Millennial Report finds that more than two-thirds of young adults have savings or save regularly each month; more than three-quarters of those who have savings goals say they meet them.

But when people were asked where they tend to overspend, millennial respondents to the TD Bank survey are most likely to say they spend too much in all categories, and more likely to say they wish they could save more.

In particular, they stand out for splurging on restaurants, even though they spend less on groceries than other age groups.

Bakhshi says this is a combination of millennials being unable to resist an option that offers greater convenience, and this demographic’s preference for doing things in groups. “Dining out is also considered to be a social event that many millennials look forward to [even if] it may stretch their budget a bit,” she says.

Both surveys find that parents and friends are a big influence on how young people manage their money. The Bank of America/USA Today survey finds that almost two-thirds of young adults say they get financial guidance from their parents, and nearly 30% get financial information from their friends.

The TD Bank survey found that a little more than half of young adults get financial advice from their parents, just over the average for respondents of all ages, but 14% say they turn to their friends — a considerably higher figure than the 8% of all respondents who say the same.

There are other differences that break down by geography rather than age. TD Bank finds that Florida residents, for instance, are much more likely to say that their ideal person to talk about financial strategy with is famous investor and Berkshire Hathaway CEO Warren Buffett.

“Florida has a high population of retirees [who]may no longer have that support system” of friends and family for financial advice, Bakhshi says.

Bostonians are the only group of respondents who say they overspend on gifts for other people, but that generosity has limits: This is also the category more Bostonians say they’d cut back on if they hit a financial tight spot.

New York City residents report higher spending on purchases like restaurant meals and tickets to sporting events, and overspending on more categories like high-end brands and coffee, than people who live in other places do.

“In many urban areas, such as New York, consumers have easy access to many things such as dining out, entertainment and clothing,” Bakhshi says. “It is hard to walk down the street without passing any of these places.”

MONEY 401(k)s

1 in 3 Older Workers Likely to Be Poor or Near Poor in Retirement

businessman reduced to begging
Eric Hood—iStock

Fewer Americans have access to a retirement plan at work. If you're one of them, here's what you can do.

A third of U.S. workers nearing retirement are destined to live in or near poverty after leaving their jobs, new research shows. One underlying cause: a sharp decline in employer-sponsored retirement plans over the past 15 years.

Just 53% of workers aged 25-64 had access to an employer-sponsored retirement savings plan in 2011, down from 61% in 1999, according to a report from Teresa Ghilarducci, professor of economics at the New School. More recent data was not available, but the downward trend has likely continued, the report finds.

This data includes both traditional pensions and 401(k)-like plans. So the falloff in access to a retirement plan is not simply the result of disappearing defined-benefit plans, though that trend remains firmly entrenched. Just 16% of workers with an employer-sponsored plan have a traditional pension as their primary retirement plan, vs. 63% with a 401(k) plan, Ghilarducci found.

Workers with access to an employer-sponsored plan are most likely to be prepared for retirement, other research shows. So the falling rate of those with access is a big deal. In 2011, 68% of the working-age U.S. population did not participate in an employer-sponsored retirement plan. The reasons ranged from not being eligible to not having a job to choosing to opt out, according to Ghilarducci’s research.

She reports that the median household net worth of couples aged 55-64 is just $325,300 and that 55% of these households will have to subsist almost entirely on Social Security benefits in retirement. The Center for Retirement Research at Boston College and the National Institute on Retirement Security, among others, have also found persistent gaps in retirement readiness. Now we see where insufficient savings and the erosion of employer-based plans is leading—poverty-level retirements for a good chunk of the population.

At the policy level, we need to encourage more employers to offer a retirement plan. On an individual level, you can fix the problem with some discipline. Even those aged 50 and older have time to change the equation by spending less, taking advantage of tax-deferred catch-up savings limits in an IRA or 401(k), and planning to stay on the job a few years longer. That may sound like tough medicine, but it’s nothing next to struggling financially throughout your retirement.

TIME

5 Money Habits of the Filthy Rich You Can Learn Now

How to save and invest your way to seven figures

Think it’s impossible to save a million bucks? It’s not. Fidelity Investments took a look at the 401(k) portfolios of its clients to see if those in the million-dollar-plus club have characteristics that make them stand out from the crowd.

Surprisingly, being super-rich wasn’t one of them. Although the average annual earnings of people with more than $1 million in their 401(k) was a substantial $359,000, Fidelity found that a number of these people had reported earnings of under $150,000.

As of the end of last year, more than 72,000 Fidelity clients had 401(k)s with more than $1 million in them — that’s more than double the number who had reached that monetary milestone just two years ago. Sure, investors across the board have benefitted from the stock market’s recovery, but the most retirement-ready people also displayed some specific saving and investing habits that helped them reach their goals.

They go slow and steady. “They really took a long term approach… took most of their careers to get there,” says Fidelity retirement expert Jeanne Thompson. The average age of Fidelity’s 401(k) millionaires is just under 60, and have been in the workforce for 30 years. It’s also worth noting that many of the people with the healthiest nest eggs also started saving for retirement early. “It’s not like it happened overnight,” Thompson says.

They max out their contributions. Fidelity found that million-dollar investors contribute roughly 14% of their income towards their 401(k)s — $21,4000 a year, on average. Now, this is above the annual amount workers under 50 are allowed to contribute — those workers are capped at contributing $18,000 a year in 2015 — but the average age of Fidelity’s million-plus 401(k) clients skews about 10 years higher than that. In other words, the most aggressive retirement savers seem to ramp up their contributions once they get the legal go-ahead to sock away more. By contrast, those with portfolios under $1 million contribute only $6,050 a year.

They don’t rely on target date funds. Target date funds have been pitched as a kind of “set it and forget it” option for investors, but a peek into the portfolios of the people who accrued $1 million or more shows that they don’t rely on them entirely or even primarily. As of the end of 2014, about 40% of these investors’ portfolios is in domestic equities, another 12% is in company stock and 6% is in foreign equities, on average. Only 10% of the average portfolio is allotted to target date funds.

They stay in equities. “To some extent, if you’re invested in cash you’re only going to have what you put in,” Thompson says. “Many people may be in retirement for 30 years or more,” she points out, so people might want to reevaluate if or when switching to a more conservative allocation is right for them. “As people are working longer and living longer, many will hold higher equity allocations,” she says. “You still have 30 years your money has to last…If you go too conservative too early you might not keep up with inflation.” On average, about three-quarters of the holdings of millionaire 401(k) clients are in equities — and remember, these are investors with an average age of around 60.

They don’t panic. “The key is when the markets go down not to panic,” Thompson says. Although it can be scary watching those numbers go down, selling at a loss only makes it harder to recover when the market eventually recovers. “They did bounce back, and so they’re were able, as equities rose, to ride the upswing,” Thompson says.

MONEY Savings

5 Signs You Will Become a Millionaire

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Martin Barraud—Getty Images

A million isn't what it used to be. But it's not bad, and here's how you get there.

A million bucks isn’t what it used to be. When your father, or maybe you, set that savings goal in 1980 it was like shooting for $3 million today. Still, millionaire status is nothing to sniff at—and new research suggests that a broad swath of millennials and Gen-Xers are on the right track.

The “emerging affluent” class, as defined in the latest Fidelity Millionaire Outlook study, has many of the same habits and traits as today’s millionaires and multimillionaires. You are in this class if you are 21 to 49 years of age with at least $100,000 of annual household income and $50,000 to $250,000 in investable assets. Fidelity found this group has five key points in common with today’s millionaires:

  • Lucrative career: The emerging affluent are largely pursuing careers in information technology, finance and accounting—much like many of today’s millionaires did years ago. They may be at a low level now, but they have time to climb the corporate ladder.
  • High income: The median household income of this emerging class is $125,000, more than double the median U.S. household income. That suggests they have more room to save now and are on track to earn and save even more.
  • Self-starters: Eight in 10 among the emerging affluent have built assets on their own, or added to those they inherited, which is also true of millionaires and multimillionaires.
  • Long-term focus: Three in four among the emerging affluent have a long-term approach to investments. Like the more established wealthy, this group stays with its investment regimen through all markets rather than try to time the market for short-term gains.
  • Appropriate aggressiveness: Similar to multimillionaires, the emerging affluent display a willingness to invest in riskier, high-growth assets for superior long-term returns.

Becoming a millionaire shouldn’t be difficult for millennials. All it takes is discipline and an early start. If you begin with $10,000 at age 25 and save $5,500 a year in an IRA that grows 6% a year, you will have $1 million at age 65. If you save in a 401(k) plan that matches half your contributions, you’ll amass nearly $1.5 million. That’s with no inheritance or other savings. Such sums may sound big to a young adult making little money. But if they save just $3,000 a year for seven years and then boost it to $7,500 a year, they will reach $1 million by age 65.

An emerging affluent who already has up to $250,000 and a big income can do this without breaking a sweat. They should be shooting far higher—to at least $3 million by 2050, just to keep pace with what $1 million buys today (assuming 3% annual inflation). But they will need $6 million in 2050 to have the purchasing power of $1 million back in 1980, when your father could rightly claim that a million dollars would make him rich.

Read next: What’s Your Best Path to $1 Million?

TIME

Why You Won’t Be Splurging This April

We're getting responsible about that "free money" from Uncle Sam

About 80% of Americans who filed taxes got back a refund last year, averaging just under $2,800. Usually, even though it’s our money to begin with, we treat it kind of like a windfall, buying appliances, going on vacation or spending it in other fun ways.

That’s not happening this year.

According to an annual National Retail Federation survey, nearly half of Americans who plan to get a refund say they’re going to be socking part of all of it away into savings — the highest percentage ever recorded. About 40% say they’re going to pay down debt with part of all of their refund, a three-year high. Perhaps surprisingly, it’s young adults leading the charge, with 55% of those under 24 years old planning to save their refund money, the highest percentage of any age bracket.

About 13% of respondents do say they’ll use the money on a vacation, which is a high not seen since 2007’s tax season, before the recession hit. Only about 10% say they’re making a big purchase like a TV or a fridge, a slightly smaller number than last year and the lowest percentage in the survey’s history. About the same number say they’ll splurge on things like dinners out, spa treatments and new clothes.

“Americans are thinking of the future, and remaining financially secure is a big part of that,” NRF president and CEO Matthew Shay said in a release. Getting our hands on those refund checks is another part — when the survey was conducted in early February, almost a quarter of people said they’d already filed their taxes (although 15% are procrastinators who admit they’ll wait until April).

The good news, relatively speaking, is that fewer Americans are relying on their tax refunds to pay for everyday expenses. It’s still about a quarter of survey respondents, but that’s better than the 30% who said they needed that money for everyday expenses just two years ago.

Even with this year’s intention to be diligent about our tax refunds, though, Americans aren’t nearly out of the woods when it comes to the security of their savings accounts. A Bankrate.com survey published this week finds that nearly one in four Americans have more credit card debt than they do money in savings, while another 13% have no credit card debt, but no savings, either. Fewer than 60% have more savings than credit card debt, a situation Bankrate chief financial analyst Greg McBride describes in a release as “teetering on the edge of financial disaster.”

MONEY Kids and Money

The High School Class That Makes People Richer

Graduates with $$ on their caps
Mark Scott—Getty Images

Kids really do benefit from learning about money in school, new data show

Most experts believe students who study personal finance in school learn valuable money management concepts. Less clear is how much they retain into adulthood and whether studying things like budgets and saving changes behavior for the better.

But evidence that financial education works is beginning to surface. Researchers at the Center for Financial Security at the University of Wisconsin recently found a direct tie between personal finance classes in high school and higher credit scores as young adults. Now, national results from a high school “budget challenge” further build the case.

Researchers surveyed more than 25,000 high school students that participated in a nine-week Budget Challenge Simulation contest last fall and found the students made remarkable strides in financial awareness. After the contest:

  • 92% said learning about money management was very important and 80% wanted to learn more
  • 92% said they were more likely to check their account balance before writing a check
  • 89% said they were more confident and 91% said they were more aware of money pitfalls and mistakes
  • 87% said they were better able to avoid bank and credit card fees
  • 84% said they were better able to understand fine print and 79% said they were better able to compare financial products
  • 78% said they learned money management methods that worked best for them
  • 53% said they were rethinking their college major or career choice with an eye toward higher pay

These figures represent a vast improvement over attitudes about money before the contest, which H&R Block sponsored and individual teachers led in connection with a class. For example, among those surveyed before and after the contest, those who said learning about money was very important jumped to 92% from 81% and those who said having a budget was very important jumped to 84% from 71%. Those who said they should spend at least 45 minutes a month on their finances jumped to 44% from 31%.

The budget challenge simulates life decisions around insurance, retirement saving, household budgets, income, rent, cable packages, student loans, cell phones, and bank accounts. Teachers like it because it is experiential learning wrapped around a game with prizes. Every decision reshapes a student’s simulated financial picture and leads to more decision points, like when to a pay a bill in full or pay only the minimum to avoid fees while waiting for the next paycheck.

Block is giving away $3 million in scholarships and classroom grants to winners. The first round of awards totaling $1.4 million went out the door in January.

The new data fall short of proving that financial education leads to behavior improvement and smarter decisions as adults, and such proof is sorely needed if schools to are to hop on board with programs like this in a meaningful way. Yet the results clearly point to long-term benefits.

Once a student—no matter what age, including adults—learns that fine print is important and bank fees add up she is likely to be on the lookout the rest of her life. Once a student chooses to keep learning about money management he usually does. Added confidence only helps. Once students develop habits that work well for them and understand pitfalls and mistakes, they are likely to keep searching for what works and what protects them even as the world changes and their finances grow more complex. Slowly, skeptics about individuals’ ability to learn and sort out money issues for themselves are being discredited. But we have a long way to go.

 

MONEY Personal Finance

Turns Out (Gasp) Millennials Do Want to Own Cars

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Jamie Grill—Getty Images

Young adults want to share everything--except maybe their car

Millennials have spurred the rise of the sharing economy by embracing the notion that renting is almost always better than buying. But even they want to own their own set of wheels, new research shows. Could homeownership, a diamond ring and other traditional purchases be far behind?

Some 71% of young adults would rather buy a car than lease one and 43% are likely to purchase a vehicle in the next five years, according to a survey from Elite Daily, a social site, and research consultants Millennial Branding. This finding suggests young adults that have popularized car-sharing options like Zipcar and RelayRides—and all sorts of other sharing options from wedding dresses to leftover meals—may be warming to traditional ownership.

Could it be that the kids are growing up and want something of their own? Other research shows that millennials, widely regarded as an idealist generation that favors flexibility and personal fulfillment over wealth, have begun backtracking there as well. Increasingly, they link financial health to life satisfaction.

For now, though, home ownership remains largely off their radar: 59% would rather rent a house than buy one and only one in four millennials are likely to purchase a house in the next five years, the survey found. “This shows that millennials don’t know anything about investing, even though they say they do,” says Dan Schawbel, managing partner at Millennial Branding. “A home is a much better investment than a car.”

Schawbel believes millennials are more eager to buy cars because they are delaying marriage and children, and they don’t want to be tied down with real estate. Plenty of research supports that view—and the trend toward delayed family formation. Yet it seems only a matter of time before this generation embraces marriage and homeownership too. The oldest are just 35 and, the survey found, three in five can’t afford to buy a home anyway.

The survey also found that millennials might be struggling less with student debt than is widely believed. Yes, student debt now tops $1.3 trillion. But young adults have money to spend. They are using their income to pay off their loans and getting support from their parents to pay for other things, Schawbel says. That may mean a car now or in the near future, and it seems increasingly clear that eventually it will include real estate. This generation is carving its own path, for sure. But the path may wind up looking more traditional than they know.

MONEY Financial Planning

5 Simple Questions that Pave the Way to Financial Security

Analyzing 20 years of data, the St. Louis Fed found that five healthy financial habits are the key to future wealth.

Want to know how your bank account stacks up against that of your neighbors? You’ll get an idea by asking yourself five simple questions, new research shows.

The St. Louis Fed examined data from the Federal Reserve’s Survey of Consumer Finances between 1992 and 2013 and found a high correlation between healthy financial habits and net worth. In the surveys, the Fed asked:

  • Did you save any money last year? Saving is good, of course. Just over half in the survey earned more than they spent (not counting investments and purchases of durable goods).
  • Did you miss any credit card or other payments last year? Missing a payment isn’t just a sign of financial stress; it may trigger late fees and additional interest. An encouraging 84% in the survey made timely payments.
  • After your last credit card payment, did you still owe anything? Carrying a balance costs money. In the survey, 44% said they carried a balance or recently had been denied credit.
  • Looking at all your assets, from real estate to jewelry, is more than 10% in bonds, cash or other easily sold, liquid assets? If you don’t have safe assets to sell in an emergency, you are financially vulnerable. Just over a quarter of those in the surveys have what amounts to an emergency fund.
  • Is your total debt service each month less than 40% of household income? This is a widely accepted threshold. A higher percentage likely means you are having trouble saving for retirement, emergencies, and large expenses.

The average score on the 5 questions was 3, meaning that the typical respondent—perhaps your neighbor—had healthy financial habits 60% of the time. That equated to a median net worth of $100,000. Those who scored higher had a higher net worth, and those who scored lower had a lower net worth.

In general, younger people and minorities scored lowest, while older people and whites scored highest. Education was far less relevant than age. “This may be due to learning better financial habits over time, getting beyond the financial challenges of early and middle adulthood and the benefit of time in building a nest egg,” the authors wrote.

It should come as no surprise that healthy financial habits lead to greater net worth over time. But the survey suggests a staggering advantage for those who ace all five questions. One of the lowest scoring groups averaged 2.63 out of 5, which equated to median net worth of $25,199. One of the highest scoring groups averaged 3.79 out of 5, which equated to a median net worth of $824,348. So these five questions not only give you an idea where your neighbors may stand—they pretty much show you a five-step plan to financial security.

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