Retirement | timiacono.com

Means and Medians, Good News and Bad

It’s not really clear if rising 401k balances as noted in this CNN/Money story are the good news it portends to be for the nation’s future retirees as a whole, or if it’s just another example of how the mean can sometimes be very different from the median.

First, we’re told retirement accounts are bulging, due primarily to soaring U.S. stock prices:

The surging stock market helped boost average 401(k) balances to yet another record high in 2013. But many young and low-income workers are not doing such a great job of keeping that cash in their accounts.

The average 401(k) balance hit $89,300 at the end of the year, up 15.5% from $77,300 in 2012, according to an annual tally by Fidelity Investments.

But, the bad news comes  much later:

A 2013 study by the Employee Benefit Research Institute found that nearly half of workers had less than $10,000 saved.

That’s quite a disparity and it’s a pretty safe bet it’s widened over the last year or so, adding to the growing concern over the nation’s growing wealth inequality problem.

Combine this with the far greater likelihood that small retirement accounts will be cashed out rather than rolled over when a worker changes jobs – a problem that gets a good deal of attention in this story – and the situation is only likely to get worse.

I never cashed out a retirement account, but many, many years ago I do recall not really paying too much attention to it until it breached the six-figure mark. It’s understandable how people could look at a $10K, $20K, or even a $50K balance and think, “I’ll just pay the penalty and take the money”. This was no doubt a matter of necessity rather than choice in many cases in the years following the onset of the Great Recession.

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Is Obamacare a Disincentive to Work?

As an early retiree, I can tell you first hand how the Affordable Care Act has been a tremendous help financially. If you’ve got no debt and a modest lifestyle, you don’t need much income to live on and, prior to 2014, health care would have been one of your biggest expenses, even if you were in good health and didn’t have to worry about getting coverage.

It’s easy to see how the ranks of early-retirees will swell, however, the effect will be limited as most people have not saved nearly enough to exit their cubicles for good.

For younger workers, however, it’s a different situation since they’ve got many years of employment ahead of them rather than already thinking about calling it quits as someone in their 40s or 50s might be doing and here’s where it gets interesting, as explained by CBO Director Douglas Elmendorf the other day:

It’s clear there’s a big disincentive to work – the non-partisan CBO chief says so himself.

Former Bush Administration economist Keith Hennessey takes a stab at the impact this would have for a young family thinking about improving their lot in life by working more or seeking higher paying jobs (that typically require more hours and/or stress). However, you slice it, this results in some horrendous marginal tax rates, particularly when you factor in other government benefits that are reduced or lost as incomes rise.

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A Brief History of Retirement

Sometimes we forget how much things have changed over the years and how previous generations just, basically, kept working until they died.

Click above to see the entire graphic.

Today, the U.S. retirement system ranks only 11th out of 15 developed nations surveyed.

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Wealth is Relative

Here’s a pretty interesting article by Morgan Housel at Motley Fool in which he looks at two very different approaches to making and spending money.

Gary Kremen founded online dating site Match.com. When The New York Times interviewed him in 2007, he was 43 years old and worth $10 million. Still, he didn’t feel rich. He lived in Silicon Valley with friends who were far richer. Kremen “logs 60- to 80-hour workweeks because, he said, he does not think he has nearly enough money to ease up,” the Times wrote. “You’re nobody here at $10 million,” Kremen said.

Now meet Pete, who doesn’t want to give his last name. He’s 39 years old and has been retired for almost a decade. He lives in Colorado with his wife and 8-year-old son in what he calls “a badass life of leisure.” Pete and his wife quit work at age 30 when they owned a house outright and had around $600,000 in investments, generating enough money to spend $25,000 a year for life, “which goes quite far if you have no rent or mortgage to pay” he told MarketWatch this week.

Wealth is relative. Those are probably the three most important words in personal finance. Gary makes $25,000 a week and feels inadequate. Pete makes $25,000 a year and feels so rich that he retired eight years out of college. How rich you are has very little to do with how much money you have in the bank and a lot to do with your expectations of what you need that money to do for you. It’s a two-part equation, and a lot of people become miserable ignoring the second part.

I’d never heard the term hedonic treadmill before, but, presumably that’s because I haven’t felt the need to go searching for what makes me unhappy.

It is surely a cultural thing (having much to do with being half-German), but I’ve never really understood the popular American approach toward money in which you ratchet up your spending and raise your standard of living at least as much as your earnings increase.

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