TIME Money

Americans Still Aren’t Saving for a Rainy Day

Lesson from the recession not learned

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Families in the U.S. still don’t have a substantial amount of cash tucked away for a rainy day despite the beating the economy took in the Great Recession, according to a new survey.

The Financial Security Index from Bankrate.com shows half of American families have no savings or less than three month’s worth of expenses saved for emergencies. The survey’s findings, analysts note, haven’t changed since 2011, when the company first began inquiring about the saving habits of American families.

“Americans continue to show a stunning lack of progress in accumulating sufficient emergency savings,” said Greg McBride, Bankrate’s chief financial analyst.

Analysts say the recession—during which Americans lost about $16.4 trillion in household wealth by 2011—should have been a learning experience, but the struggle of juggling household expenses has left many without extra funds to put away.

Not all Americans are failing to save. About 23% of those surveyed have savings that will last them six months or more in case of a financial emergency—the recommended stash amount. What’s more, the majority of those saving big have larger incomes, though only about 46% of those making $75,000 or more have over six months worth of expenses stored away.

The website notes that while three to six months worth of savings may sound like a lot, starting small and increasing the amount being put away over time can pay off quickly.

MONEY Savings

Despite Lessons of Recession, Many Are Ill-Prepared for a Crisis

Emergency box broken
Peter Crowther—Getty Images

One in four Americans have no savings set aside for an emergency, a new survey finds.

When it comes to your finances, you need to be prepared for the unexpected: a gap between jobs, a health crisis, a leaky roof that needs to be repaired. But 26% of Americans have no savings set aside for an emergency, according to a new report from Bankrate.com.

What’s more, many of those who do have a rainy day fund have too small of one. Only 23% of Americans say they have set aside at least six months’ worth of living expenses—the commonly recommended minimum. For 24% of Americans, an emergency fund would last less than three months, the survey found; another 17% have enough money for three to five months of expenses.

Americans have been poor savers for decades, notes Bankrate.com financial analyst Greg McBride. “What did change since the recession was the recognition of the importance of emergency savings,” says McBride. “Americans know that having emergency savings is important, they know they don’t have enough, and they feel very uncomfortable about that. But despite that, they’re just not making any progress.”

These findings jibe with MONEY’s recent survey of Americans and their finances, which found that while Americans are exercising more financial restraint than they did before the recession, they still aren’t saving as much as they should.

Six in 10 told MONEY that they were trying to build their emergency savings, up from less than 25% who said the same in 2009; three-quarters reported cutting back on spending. Still, 58% wouldn’t be able to handle an unexpected $10,000 expense. Even high-income families would feel the pinch—38% of those earning more than $100,000 said they wouldn’t be able to cover a $10,000 surprise.

Similarly, the Bankrate survey found that insufficient savings crosses all income groups: Among households with incomes of $75,000 or more, only 46% have a six-month emergency reserve.

Another alarming finding: Americans age 30 to 49 are the worst off. One-third don’t have anything saved for a rainy day.

“That’s a pretty scary finding in that they are more likely to have the house, two cars, three kids, the dog,” McBride says. “They need those emergency savings more than anybody.”

The bright spot? Millennials may have learned from their elders’ mistakes. More than half—54%—have three- to five-months’ worth of expenses set aside in cash.”Young adults have had a front row seats for the recession and the anemic recovery,” says McBride. “They’ve recognized the need for emergency savings.”

Need another impetus to build up your rainy day fund? In MONEY’s recent survey on marriage and money, 25% of couples say they fight about insufficient emergency savings.

For more on budgeting and saving:

MONEY long term care

The Retirement Crisis Nobody Talks About: Long-term Care

If you become disabled, you may face huge bills for daily help. And, no, Medicare doesn't cover it.

When you try to gauge the biggest risks to your financial security in retirement, health care costs usually top the list. But there’s even bigger danger that doesn’t get as much attention: long-term care costs.

By whatever measure you use, many Americans aren’t saving enough for retirement. In its latest annual retirement readiness study, the Employee Benefit Research Institute found that some 57% to 59% of Baby Boomer and Gen X households are on track to retire comfortably. But if you factor in long-term care costs, the percentage of households running short of money in retirement soars by 100% or more after 20 years for those in middle-class or upper-income quartiles, according to new study by EBRI. The analysis assumes that Baby Boomer and Gen X households will retire at 65 and spend average amounts for food, housing and other living expenses, in addition to long-term care costs.

The risk of falling short financially is highest for those in the lower-income quartile—by the 10th year of retirement, some 70% in this group would have run short of money, according to EBRI, though the majority were already headed for trouble because of lack of savings. But even households in the highest-income quartile saw the percentage falling short reach 8% by the 20th year of retirement vs. just 1% without accounting for long-term care.

If you become disabled, the costs of assistance with daily living tasks (what’s commonly referred to as long-term care) aren’t generally covered by Medicare. That’s something many people don’t realize. A nursing home in the Midwest might run you $60,000 a year, while the median salary for a home health aide may be $45,000 annually. Some 70% of Americans age 65 and older are expected to need long-term care at some point in their lives. And studies have found that many families end up paying huge amounts out of pocket, as much as $100,000 in the last five years of life.

Planning ahead can help, but unfortunately there are few solutions to the long-term care dilemma. One alternative is to purchase long-term care insurance, but it’s pricey, so few can afford it. “Long-term care insurance is something that nobody wants to buy and the insurance industry doesn’t want to sell,” says Howard Gleckman, senior fellow at the Urban Institute and author of “Caring for Our Parents.” In recent years, many insurance companies have raised premiums on long-term care policies. And other insurers have gotten out of the business—that’s mainly because fewer buyers than expected are dropping policies, and low interest rates have reduced profits.

Another option is Medicaid, which many seniors end up relying on to pay for long-term care. But in order to qualify you will have to spend down most of your assets—not anyone’s idea of a dream retirement. And as more aging Boomers and Gen X retirees require care, Medicaid programs will come under increasing financial pressure, Gleckman says, so it’s not clear what the programs will provide in 20 years.

Until more options develop—perhaps some kind of private-public partnership for long-term care—your best strategy is to stay healthy, save as much as you can, and build a community network. People with strong social ties, research shows, live longer, happier lives.

This article was updated to clarify the percentage of households facing shortfalls in retirement due to long-term care costs.

MONEY retirement planning

Leave a Financial Legacy? Boomers and Millennials Slug It Out

Unlike older Americans, young adults want to leave an inheritance to future generations. Too bad they're investing in cash.

Baby Boomers like to point out that our famously self-absorbed generation advocated for many good causes as youngsters and turned the corner to greater giving in retirement. Much of it is true. But younger generations are way ahead of us, new research suggests.

Maybe it’s a case of our kids doing as we say, not as we do. Boomers are the least likely generation to say it is important to leave a financial legacy—even though they have benefited from an enormous wealth transfer from their own parents, according to a new U.S. Trust survey of high net worth individuals. How’s that for self-absorbed?

More boomers have received an inheritance (57%) than say it is important to leave one (53%). The opposite holds true for younger generations. Some 36% of Gen X and 48% of Millennials have received some type of inheritance while 59% of Gen X and a whopping 65% of Millennials say it is important to leave one.

Circumstances may account for the difference in mindset. The Great Recession struck just as boomers were preparing to call it quits. With more to lose, and little time to make it back, boomers suffered the worst of the crisis from a savings point of view. A financial legacy seems less important when you are downsizing your retirement dreams.

For younger generations, the crisis created an employment nightmare. But it drove home the need to begin saving early, and those that did have seen stock prices double from the bottom and house prices begin to rebound as well. Millennials’ problem may be that they still don’t trust the stock market enough.

Well more than half in the survey remain on the sidelines with 10% or more of their portfolio in cash. Millennials are the most likely to be tilting that direction. Two-thirds of Millennials, the most of any cohort, say they are fine carrying a lot of cash and just 13%, the least of any cohort, have plans to invest some of their sideline cash in the next 12 months. This conservative nature threatens to work against their desire to leave a financial legacy—or even retire comfortably.

Millennials are the youngest adult generation and have the most time to absorb bumps in the stock market and benefit from its long-term superior gains. Intuitively, they know that. In the survey, those holding the most cash, regardless of age, were the most likely to say they missed the market rally the past few years and are not on track to meet their goals.

In our younger days, boomers rallied around things like civil rights and workplace equality for women, among other grand moral battles. But we didn’t necessarily put our money where our mouth was. Today’s young adults are quieter about how to fix the world. But they are willing to invest for change. One-third of all high net worth individuals invest in a socially conscious way while two-thirds of Millennials do so, U.S. Trust found.

By a wide margin, more Millennials say that investment decisions are a way to express social, political or environmental values (67%). Most (73%) believe it is possible to achieve market-rate returns investing in companies based on their social or environmental impact, and that private capital from socially motivated investors can help hold public companies and governments accountable (79%). I’d say the kids are alright.

MONEY Saving

WATCH: Tips From the Pros: The Secret to Financial Success

Financial experts reveal the one thing you must do to build wealth.

MONEY 401(k)s

The Hidden Cost of Taking a 401(k) Loan: Borrower’s Remorse

One-third of Americans are tapping their nest eggs for loans. Do you really want to give up retirement for a great vacation?

In a financial emergency, borrowing from your 401(k) plan seems like an obvious step—and given the tough economy, many people are doing just that. But a new survey finds a surprising number of people are tapping their retirement nest eggs for frivolous spending. And they’re later regretting it.

Nearly one-third of Americans say they have taken a loan from their retirement plan, according to a study by TIAA-CREF, a retirement plan administrator. Many borrowed for urgent reasons: 46% used the money to pay off debt and 35% cited a financial emergency. But a significant percentage of 401(k) savers are using their nest eggs for non-emergencies: 25% report borrowing for a home purchase or renovations, while 15% use the money to pay for weddings and vacations.

With so many depleting their nest eggs for trips to Cancun or lavish floral arrangements, it’s not that surprising that half of borrowers surveyed now say they regret taking out the loan. “People still look as their 401k as an emergency savings fund, not just a retirement plan,” says Rick Meigs, president of the 401k Help Center. “When it comes to a cruise or a vacation, you shouldn’t be borrowing for it in any way, let alone from your retirement funds.”

If you do face a true financial crisis, it’s not necessarily a bad decision to take a loan from your retirement plan, says Meigs. For one thing, 401(k) borrowing is cheaper than most bank loans or credit card rates. Typically you’ll pay one or two percentage points above the prime rate, which is 3.25% currently. Plus, you pay the interest back to yourself. There are few restrictions on borrowing—you can generally take out no more than 50% of your account value up to $50,000. (You can find more details about 401(k) loans here.)

But borrowing against your plan has serious drawbacks. Chief among them: If you lose or quit your job, you must repay the loan in full within 60 days or you’ll be hit with a 10% penalty and income taxes. That trips many people up: More than 80% of workers who left their jobs with a 401(k) loan defaulted, according to the Financial Literacy Center, a joint project by the RAND Corporation, Dartmouth College and the Wharton School. Overall, one out of 10 401(k) loans are not repaid, according to a recent Pension Research Council study, which found such defaults averaged $6 billion annually.

Then there are the costs to your retirement security. More than half of borrowers accounts decreased the amount they’re contributing to their 401(k) while repaying the loan, the survey found. You can’t make up the contributions you lost. What’s more, the money you use to repay the loan ends up being taxed twice—you will be putting in after-tax dollars, which will be taxed again when you take withdrawals at retirement. (To see how a loan might slow the growth of your 401(k) account, consider this explanation from Fidelity.)

“The point of your retirement account is to provide money when you’re no longer earning a pay check,” says Sean Donald Wilson, a wealth advisor at TIAA-CREF. “When you borrow from it, you’re removing money that could be growing for your future needs.”

Concerns over 401(k) borrowing have led some retirement plan experts to recommend more restrictions on loans. That’s not likely to happen anytime soon, however. So put those restrictions on yourself, and avoid tapping your 401(k) until you reach retirement.

MONEY retirement income

To Invest for Retirement Safely, Know When to Get Out of Stocks

201209_GAM_BERNSTEIN
Bill Bernstein Joe Pugliese

Investment adviser William Bernstein says there's no point in taking unnecessary risks. When you near retirement, shift your portfolio to safe assets.

A former neurologist turned investment adviser turned writer, William Bernstein has won respect for his ability to distill complex topics into accessible ideas. After launching a journal at his website, EfficientFrontier.com, he began writing numerous books, including “The Four Pillars of Investing” and “If You Can: How Millennials Can Get Rich Slowly.” (“If You Can,” normally $0.99 on Kindle, is free to MONEY.com readers on June 16.) His latest, “Rational Expectations: Asset Allocation for Investing Adults,” is written for advanced investors. But Bernstein, who manages money from his office in Portland, Oregon, is happy to break down the basics.

Q. Retirement investors have traditionally aimed to build the biggest nest egg possible by age 65. You recommend a different approach: figuring out how much you’ll need to spend in retirement, then choosing investments that will deliver that income. Why is this strategy a better one than the famous rule of withdrawing 4% of your portfolio?

There’s really nothing wrong with the 4% rule. But given the lower expected portfolio returns ahead, starting out with a 3.5% withdrawal, or even 3.0%, might be more appropriate.

It also makes a big difference whether you start out withdrawing 4% of your nest egg and increasing that amount by inflation annually, or withdrawing 4% of whatever you’ve got in your portfolio each year. The 4%-of-current-portfolio-value strategy may mean lower income in some years. But it is a lot safer than automatically increasing the initial withdrawal amount with inflation.

I also think that it makes sense to divide your portfolio into two separate buckets. The first one should be designed to safely meet your living expenses, above and beyond your Social Security and pension checks. In the second portfolio you can take investing risk in stocks. This approach is certainly a more psychologically sound way of doing things. Investing is first and foremost a game of psychology and discipline. If you lose that game, you’re toast.

Q. What are the best investments for a safe portfolio?

There are two ways to do it: a TIPS (Treasury Inflation-Protected Securities) bond ladder or by buying an inflation-adjusted immediate annuity. Neither is perfect. You might outlive your TIPS ladder, and/or your insurer could go bankrupt. But they are among the most reliable sources of income right now.

One other income source to consider: Social Security. Unless both you and your spouse have a low life expectancy, the best version of an inflation-adjusted annuity out there is bought by spending down your nest egg before age 70 so you can defer Social Security until then. That way, you, or your spouse, will receive the maximum benefit.

Q. Fixed-income returns are hard to live on these days.

Yes, the yields on both TIPS and annuities are low. The good news is that those yields are the result of central bank policy, and that policy has caused the value of a balanced portfolio of stocks and bonds to grow larger than it would have in a normal economic cycle—so you have more money to buy those annuities and TIPS. That said, there’s nothing wrong with delaying those purchases for now and sticking with short-term bonds or intermediate bonds.

Q. How much do people need to save to ensure success?

Your target should be to save 25 years of residual living expenses, which is the amount that isn’t covered by Social Security and a pension, if you get one. Say you need $70,000 to live on, and your Social Security and pension amount to $30,000. You’ll have to come up with $40,000 to pay your remaining expenses. To produce that income, you’ll need a safe portfolio of $1 million, assuming a 4% withdrawal rate.

Q. Given today’s high market valuations, should older investors move money out of stocks now for safety? How about Millennial or Gen X investors?

Younger investors should hold the largest stock allocations, since they have time to recover from market downturns—and a bear market would give them the opportunity to buy at bargain prices. Millennials should try to save 15% of their income, as I recommend in my book, “If You Can.”

But if you’re in or near retirement, it all depends on how close you are to having the right-sized safe portfolio and how much stock you hold. If you don’t have enough in safe assets, then your stock allocation should be well below 50% of your portfolio. If you have more than that in stocks, bad market returns at the start of your retirement, combined with withdrawals, could wipe you out within a decade. If you have enough saved in safe assets, then everything else can be invested in stocks.

If you’re somewhere in between, it’s tricky. You need to make the transition between the aggressive portfolio of your early years and the conservative portfolio of your later years, when stocks are potentially toxic. You should start lightening up on stocks and building up your safe assets five to 10 years before retirement. And if you haven’t saved enough, think about working another couple of years—if you can.

MONEY First-Time Dad

Why I’ll Send My Infant Son to College Before I Buy a House

061416_FF_Luke_1
Luke Tepper Taylor Tepper

With housing so expensive, I figure my young family will be renting for foreseeable future. The latest on being a new dad, a Millennial, and (pretty) broke.

Mrs. Tepper and I are 28 years old, and our son is four months. Over the past year, Luke has acquired an $800 stroller, a $250 crib, and a $50 humidifier. (Before you make fun, understand that he constantly bore a stuffy morning nose, and what kind of monster wouldn’t spend a measly $50 to help his only son sleep soundly?!)

We’ve begun funding Luke’s New York 529 college savings account in order to spot his entire higher education bill (provided he goes to a state school), and we, of course, will pay his medical expenses for the next 26 years.

But there is one thing that we will not buy him—a house. In all likelihood (which means unless we win the lottery, or someone gives us a hundred thousand dollars), we will put our son through college before we buy our family a home.

Which, when you think about it, is strange. Last year we earned almost $110,000 and that will (hopefully) increase rapidly as we enter our career primes. We hardly travel (much to our chagrin) and have a reasonable $300 monthly car payment. Mrs. Tepper really only shops for (baby) clothes on sale, online, or both, and my main indulgence is a bimonthly $45 bottle of Templeton rye whiskey.

Why then will we be renters, at least until we’re in our fifties?

Reason #1: It’s (Really) Hard to Save

We live in a two-bedroom apartment in Brooklyn with cheap wood cabinets and a kind of white plaster countertop that stains as easily as a peach bruises. In the afternoon it often takes five minutes for the water to go from warm to hot. We don’t have a washing machine—neither does our building, which was built during the Hoover administration—and I do our dishes by hand because we don’t have a dishwasher.

Next year our rent will be $2,020 (and that doesn’t include gas, electricity, cable, Internet, or whiskey).

Eventually we’ll decamp for the ‘burbs for the sake of space and sanity, but with that move comes higher mass transit costs (an $1,800 yearly increase) and more house to heat and furnish and maintain.

The Dave Ramsey in me says I should find more ways to cut spending: no more occasional brunches or flights to Florida. (Luke can meet his grandparents on Skype!) But those hypothetical savings are peanuts in the grand scheme of things, and the me that wants to stay married shuts Dave Ramsey up.

Read: Half of Millennials Will Ask Mom and Dad to Help Them Buy a Home

Reason #2: Student Loans

In order to gain our cushy, 50-hour-a-week jobs, both Mrs. Tepper and I attended (public) graduate school. That came on top of studying at New York University for four years and (seemingly) $550,000,000.

So we have loans. Lots of them. (I alone owe almost $60,000.) Obviously we are not the only ones tied up in the web of student loan bills. People like me now owe almost $1.1 trillion, according to the Federal Reserve Bank of New York, or about twice as much as in 2008, when my wife and I graduated college.

I’m now paying $350 a month—and that’s mostly interest.

Reason #3: Houses Are Expensive

In New York City, the median home price is $369,000, and that comes with a median down payment of $74,000, per a recent Redfin report. In Nassau County, which is out on Long Island, you need to put $88,000 down.

Needless to say, we don’t have that kind of money, nor will we anytime soon.

And that–expensive rent, student loans, and homes—doesn’t even take into account the $1,500 a month gorilla in the room (child care) or, you know, Christmas presents.

Look, there are worse things than not buying a house (like not having a job or being a Dallas Cowboys fan.) We have a happy, healthy family, with sunny days ahead, and maybe we’ll find a way to save a buck or two over the years.

But not that long ago, it took only one middle class job in the family to afford a home. Now, according to the Redfin report and my life, two doesn’t cut it. When the prospect of owning the roof over your family’s head is so far gone, is it really that crazy to buy a $50 humidifier for your son?

MORE: Why Does My One Baby Need Two of Everything?

MORE: How Can Child Care Cost as Much as Rent?

 

MONEY 401(k)s

Working for a Small Business? Your 401(k) Is Probably Small, Too.

At Mom-and-Pop companies, workers may miss out on perks like employer matches. Here's what to do.

You might call it retirement inequality. Over the past couple of decades, 401(k)s have become our national retirement plan, but you are most likely to be offered one if you work for a large- and mid-sized company. Only 24% of small businesses offer a 401(k).

If you’re working at small business that provides a 401(k), congrats—you can make headway in retirement saving. Many small business 401(k)s are doing a decent job, a new Vanguard survey found. The survey covered 1,418 of the fund group’s small business 401(k)s, those with up to $20 million in assets. The average plan had 44 participants and held $2.4 million.

But your savings are likely to lag your counterparts at larger employers. Compared with overall 401(k) balances, small plan accounts are just half the size—an average $55,657 in 2013 vs. $101,650 for 401(k)s overall. Still, small balances rose 10% gain over $50,610 in 2012. Median balances, which better reflect the typical employee, averaged just $11,171, up just 2% from $10,950 in 2012.

One reason for the difference: Small businesses tend to offer lower salaries than large companies, and many have higher turnover, so workers have less time to save. Company matches may also be less generous. Three out of four small businesses offer an employer contribution, compared with 91% of 401(k)s overall, according to Vanguard. Some 44% provided a matching contribution, 10% offered both a match and non-matching contribution, and 21% gave out a non-matching contribution only.

In other ways, small business plans are keeping up with larger 401(k)s. Participation averaged 73%, similar to overall levels. The savings rates were lowest for employees younger than 25—only 46% contributed in 2013. And just 47% of those earning less than $30,000 saved in their plans. For those who did join, the typical savings rate was 7.1% of pay, nearly identical to the overall savings rate.

Mirroring larger plans, the most popular investment was a target-date fund, which gives you an all-in-one asset mix that shifts to become more conservative as you near retirement. Two-third of small business workers had all or part of their portfolio in a target date fund, while 46% held one as their only investment. Another 6% opted for a balanced fund or other model portfolio.

The one 401(k) feature not explored in Vanguard’s small business survey: costs. Of course, Vanguard is famous for its inexpensive fund and ETF offerings. But outside of Vanguard’s orbit, many 401(k)s are saddled with with high fees—and that’s especially true for small plans, which lack economies of scale.

If you’re investing in a small business 401(k) plan, save at least enough to get a full match, if one is offered. And choose low-cost, broad index funds, if they’re available. If your plan charges a lot—more than 1.25%—put any additional money in a Traditional or Roth IRA. Aim to save as much as 15% of pay, both inside and outside your plan. That way, your nest egg will grow bigger, even if the business remains small.

 

MONEY Kids and Money

WATCH: Tips from the Pros: Best Money Advice for Teenagers

Financial planner Allan Katz talks about the most important financial habit a teenager can develop

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