Middle-class crunch: Who's to blame?
You're not imagining it: It's harder than ever to get into the middle class and stay there. Here's how you’ll succeed . . . and why many others will fail.
By Liz Pulliam Weston
Write about money, and you're going to tick someone off.
Write about poverty, affluence, whether the middle class is disappearing and if so, whose fault it is . . . and people go berserk.
Reader reaction to stories MSN Money has posted on these topics, including "Surviving (and thriving) on $12,000 a year," "I make $6.50 an hour. Am I poor?" and "Middle class living on the edge," has been overwhelming and mostly positive.
But each story has touched off vociferous debates on message boards and in e-mails about who's to blame for financial failure.
In one camp are the folks who are convinced that American workers are being squashed by the economy, the government, big corporations, lenders, the system in general. They see many, if not most, people as helpless pawns in a game that's rigged against them.
In another are those equally sure that there's no excuse for failing. If you've fallen down the economic ladder, or never figured out how to climb it in the first place, in their view it is solely and entirely Your Own Damned Fault.
The truth is somewhere in between. A decent job is no longer an easy ticket to a middle-class life. It's not just that things like health care and pensions are disappearing; it's that they're disappearing at the same time as our expectations about our lives have risen.
It's not your imagination, there is a squeeze on the middle class. MSN Money's Liz Pulliam Weston explains how it's possible for anyone to get in the middle class -- and stay there.
I believe a middle-class life is still possible for most people. But you have to be smarter, more cautious and faster on your feet than ever before. You have to obey some deceptively simple rules. And one thing is certain: Wherever you currently stand on the economic ladder, the surest way to rise is to pull yourself up.
What's middle class, anyway? "Middle class" is a squishy concept if ever there was one.
If we define it solely by income, then according to the U.S. Census Bureau, a household income of $36,000 to $57,657 in 2005 landed you squarely in the middle class. If you want to expand the definition to include "lower" and "upper" middle class, the range widens considerably, from $19,178 to $91,704. Here's the breakdown, with each "quintile" representing 20% of U.S. households:
Population group Lower limit Upper limit
1st quintile $0 $19,177 Poor/working poor
2nd quintile $19,178 $35,999 Lower middle class
3rd quintile $36,000 $57,657 Middle class
4th quintile $57,658 $91,704 Upper middle class
5th quintile $91,705 Bill Gates? Upper class
Of course, there are plenty of problems with using income figures, most notably because income alone doesn't reflect the huge variation in living costs across the U.S. Simply put, $50,000 might buy you a comfortable life in Iowa or Kentucky but keep you scrambling in San Francisco or Manhattan. And there are plenty of folks living in high-cost areas with nominally "upper middle class" or even "upper class" incomes who would adamantly reject those labels.
A more flexible definition for middle class would be having the resources to cover all your needs and some of your wants, plus the ability to save for the future.
That definition:
Doesn't necessarily mean homeownership, although it probably will; homeownership is still an achievable goal in most of the U.S., where close to 70% of all households own their own dwellings.
Certainly doesn't mean two new cars in the garage, or even one, although it probably means at least one reliable vehicle.
The middle-class crunch
MSN Money Special Coverage: How to hang on to what you've got. Doesn't mean being able to retire at 50, but it does mean being able to save for a retirement in which cat food is not a factor (unless you actually have a cat).
Sometimes, a middle-class life is out of reach Am I setting the bar too low? Some of you may think so. But inflated expectations about what constitutes a middle-class life lead many people into the kind of spending decisions that endanger their long-term financial security.
Those who are too eager to buy the trappings -- the "wants" -- are the ones who wind up with credit card debt and who overspend on homes
In other words, trying to look like you're middle class may well doom your prospects to actually be middle class.
And then there are those for whom the bar will remain too high. When I talk about most people being able to attain middle-class status, I have to carve out some exceptions. For example:
People not blessed with good, or at least decent, physical and mental health. It's hard to achieve much if you can't work. Illness, disability, addiction, depression and other afflictions can stop your economic progress in its tracks.
People who wait too long to start saving. If you hit your 50s, have never saved a dime and get bucked off the economic horse -- by a layoff, illness, disability, whatever -- your chances of being able to recover sufficiently may be dim.
People who can't or won't change. The alterations you need to make might be small, such as eating out less so you can put more into your 401(k). Or the adjustments might be big, like moving to another area or heading back to school to update your skills. Folks who are willing to consider their options, and then act, are going to be better off than those who insist it's the world that needs to change, not them.
Even if you're young enough and capable enough and willing to adapt, you've got powerful trends standing in your way. Don't expect them to be solved by politicians or to disappear in a puff of smoke.
Yes, the system is against you There are fewer good jobs for those who don't have college educations. A decline in manufacturing, waning union power and increased globalization mean it's tougher than ever to get into the middle class without a college education. But globalization and outsourcing are sniping away at white-collar jobs as well, and a fast-evolving economy mean few can be content to end their educations after four years.
The price tag for education is rising. Education was, and still is, the ticket to a more affluent life. Eight million vets grabbed this ticket in the wake of World War II, which helped fuel a huge expansion in America's middle class. Education is even more vital today, but the cost of a college education has skyrocketed and financial aid hasn't kept up, even as the comparative worth of a degree has shrunk. Loans have replaced grants as the primary source of financial aid, and too many students graduate with crippling debt.
Health care and health insurance costs are soaring. We have 47 million uninsured, and health care costs eat a big chunk out of the budgets of many who do have coverage. Two of five adults (43%) who buy individual polices, and one in four whose employers help pay for their coverage, spend more than 10% of their incomes on premiums and out-of-pocket medical expenses, according to the Commonwealth Fund.
Lenders don't care who can afford to borrow. Lenders were simply more conservative before the advent of credit scoring and securitization (the process in which most loans are bundled up and sold to investors). As lenders discovered more ways to manage risk, their willingness to extend credit soared, especially in the past 15 years. As a result:
The middle-class crunch
MSN Money Special Coverage: How to hang on to what you've got. Credit card debt exploded. The amount of money owed to credit card lenders at year end more than quadrupled, according to CardWeb.com, from $172.6 billion in 1990 to $710.9 billion in 2005.
Payday lending skyrocketed. The number of payday loan outlets zoomed, according to the Federal Reserve, from about 300 nationwide in 1992 to more than 22,000 last year. Payday lending is now a $40 billion industry.
Mortgages and other lending got riskier. That 70% homeownership statistic has been achieved, in part, by riskier loans, with lower down payments, adjustable rates and in some cases terms that allow your mortgage balance to balloon over time. Car loans, which used to average two or three years, now average five or more.
In short, it's never been easier to hang yourself.
There is a plan, and it's deceptively simple As complicated as the world has become, the middle class awaits anyone with an income and the strength to observe five vital steps:
Spend less than you make. The key to making any financial progress is to live within your means. Think it's impossible on your income? You're almost certainly wrong. And in the end, you really don't have a choice.
Limit your debt. It's costing you unnecessary interest and leaves you vulnerable to the slightest economic setback. The more you owe, the fewer choices you have.
It's not your imagination, there is a squeeze on the middle class. MSN Money's Liz Pulliam Weston explains how it's possible for anyone to get in the middle class -- and stay there.
Save for a rainy day. Even $500 in the bank could allow you to weather day-to-day crises like a car repair that could otherwise push you over the edge.
Plan for retirement. Start early, keep your mitts off the money and don't stop for any reason. Even a small amount, scraped together and invested over a lifetime, offers a much more comfortable retirement, if only psychologically, than Social Security alone.
Get the latest from Liz Pulliam Weston. Sign up to receive her free weekly newsletter.
Preferred format:HTMLPlain TextLearn more about newslettersStay sharp. You are the captain of your financial ship. You have to look for new opportunities and spot potential dangers. No one else will watch out for you and you alone, though, of course, MSN Money is here to help.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money.
Showing posts with label money. Show all posts
Showing posts with label money. Show all posts
Thursday, May 28, 2009
Thursday, October 16, 2008
Americans are saving more
By Colin Barr, senior writer
NEW YORK (Fortune) -- The economic storm pelting the U.S. economy is going to do plenty more damage to already flattened job and housing markets.
But as dark as the next three or four quarters could be, the U.S. economy appears to be undergoing a more lasting, and ultimately uplifting, shift.
Americans who for decades have spent an increasing share of their incomes and taken on more and more debt are now, for the first time in years, saving instead.
The personal savings rate, which measures the amount of disposable personal income that isn't spent, ticked up to almost 3% in the second quarter of 2008, after almost four years below 1%.
While Americans still aren't going to win any awards for thrift - consumers save more than 10% of their paychecks in creditor nations such as Germany and Japan, for instance - the return to saving carries big implications for U.S. economic health.
More saving is good over the long haul, because domestic savings create a pool of money from which companies can borrow to invest in new plants and equipment, creating the jobs that push living standards higher over time.
A growing domestic savings pool could also reduce America's need to borrow money overseas - which would make the U.S. less beholden to foreign creditors who now supply us with hundreds of billions of dollars in financing every year.
The trouble with virtue
Unfortunately, thrift will cost in the short run. Saving more means spending less - which translates into more hard times in retail and other consumer-driven businesses like the auto industry. The latest evidence of the shift came in Wednesday's steeper-than-expected pullback in retail sales. They dropped 1.2% in September, in their first year-on-year decline in six years and only their third drop in the past 16 years. Economists had been looking for a 0.7% drop.
Given that two-thirds of economic activity is consumer spending, today's thrift will exacerbate a general downturn and will weaken the impact of the massive interventions the government has made in the financial markets.
"The breadth of the decline shows a broad-based pullback in consumer spending that will not quickly turn around," writes PNC economist Stuart Hoffman, "even with the arsenal of federal firepower now aimed at the Great Financial Crisis of 2008."
Federal actions such as a $250 billion plan to buy preferred shares in banks, along with a public guarantee of bank deposits and bank debt, are aimed at unlocking credit markets and boosting economic activity. Policymakers have promised to get banks lending again, to restore economic growth that has clearly been ebbing even as government data chalked up modest gains in gross domestic product for the first half of the year.
"This plan is a means to an end," Hoffman says of the Treasury's agreement to make capital injections in banks such as Citi (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500). "The key concept is that reasonably prudent lending should be supported."
But as the economy shows further signs of deceleration - factory production and industrial capacity utilization fell sharply in September, the Federal Reserve said Thursday - the question is who the banks will be lending to. Indeed, merely plying the banks with capital isn't certain to get them lending in a world in which businesses and consumers are trying to reduce their leverage after a long run of credit expansion.
William Cline, a senior fellow at the Peterson Institute for International Economics, notes that the decline of saving in the United States over the past two decades was accompanied by a sharp increase in the rate of bank lending, as consumers cashed in on the appreciating value of their houses.
Bank credit growth, after averaging around 6.5% in the 1990s, spiked to 12% in the four years ended in 2007, Cline says. Meanwhile the U.S. personal saving rate turned negative at the height of the housing bubble in 2005, down from around 7% in the early 1990s.
"We were already on course to have some return to saving," says Cline, who is the author of the 2005 book, "The United States as a Debtor Nation." With the credit crunch making consumer credit scarcer, he adds, and reduced house prices making Americans feel poorer, "We're going to see some more pressure on household spending."
For now, that will mean more pressure on companies that sell their goods to consumers. GM (GM, Fortune 500) and Ford (F, Fortune 500) have traded at multi-decade lows this month as U.S. auto sales slowed to a pace last seen in the early 1990s. Macy's (M, Fortune 500) dropped 12% Wednesday after the department store chain cut its profit forecast, prompting ratings agency Moody's to warn that further problems could prompt a costly credit downgrade.
The government interventions mean deleveraging can continue without the risk of an economic collapse, which is obviously "extremely positive" in the long run, says Ken Kamen, a financial adviser who is president of Mercadien Asset Management in Trenton, N.J. But that doesn't mean the short run is going to be particularly enjoyable, as Wednesday's 9% stock market decline suggests.
Kamen warns his clients that before they make any hasty decisions, they should decide how much stress they can tolerate in their portfolios.
"You don't want to be resetting your financial future while the compass needle is spinning," he says. "You may need to sell assets - but only to the point where you can sleep at night."
First Published: October 16, 2008: 11:44 AM ET
NEW YORK (Fortune) -- The economic storm pelting the U.S. economy is going to do plenty more damage to already flattened job and housing markets.
But as dark as the next three or four quarters could be, the U.S. economy appears to be undergoing a more lasting, and ultimately uplifting, shift.
Americans who for decades have spent an increasing share of their incomes and taken on more and more debt are now, for the first time in years, saving instead.
The personal savings rate, which measures the amount of disposable personal income that isn't spent, ticked up to almost 3% in the second quarter of 2008, after almost four years below 1%.
While Americans still aren't going to win any awards for thrift - consumers save more than 10% of their paychecks in creditor nations such as Germany and Japan, for instance - the return to saving carries big implications for U.S. economic health.
More saving is good over the long haul, because domestic savings create a pool of money from which companies can borrow to invest in new plants and equipment, creating the jobs that push living standards higher over time.
A growing domestic savings pool could also reduce America's need to borrow money overseas - which would make the U.S. less beholden to foreign creditors who now supply us with hundreds of billions of dollars in financing every year.
The trouble with virtue
Unfortunately, thrift will cost in the short run. Saving more means spending less - which translates into more hard times in retail and other consumer-driven businesses like the auto industry. The latest evidence of the shift came in Wednesday's steeper-than-expected pullback in retail sales. They dropped 1.2% in September, in their first year-on-year decline in six years and only their third drop in the past 16 years. Economists had been looking for a 0.7% drop.
Given that two-thirds of economic activity is consumer spending, today's thrift will exacerbate a general downturn and will weaken the impact of the massive interventions the government has made in the financial markets.
"The breadth of the decline shows a broad-based pullback in consumer spending that will not quickly turn around," writes PNC economist Stuart Hoffman, "even with the arsenal of federal firepower now aimed at the Great Financial Crisis of 2008."
Federal actions such as a $250 billion plan to buy preferred shares in banks, along with a public guarantee of bank deposits and bank debt, are aimed at unlocking credit markets and boosting economic activity. Policymakers have promised to get banks lending again, to restore economic growth that has clearly been ebbing even as government data chalked up modest gains in gross domestic product for the first half of the year.
"This plan is a means to an end," Hoffman says of the Treasury's agreement to make capital injections in banks such as Citi (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500). "The key concept is that reasonably prudent lending should be supported."
But as the economy shows further signs of deceleration - factory production and industrial capacity utilization fell sharply in September, the Federal Reserve said Thursday - the question is who the banks will be lending to. Indeed, merely plying the banks with capital isn't certain to get them lending in a world in which businesses and consumers are trying to reduce their leverage after a long run of credit expansion.
William Cline, a senior fellow at the Peterson Institute for International Economics, notes that the decline of saving in the United States over the past two decades was accompanied by a sharp increase in the rate of bank lending, as consumers cashed in on the appreciating value of their houses.
Bank credit growth, after averaging around 6.5% in the 1990s, spiked to 12% in the four years ended in 2007, Cline says. Meanwhile the U.S. personal saving rate turned negative at the height of the housing bubble in 2005, down from around 7% in the early 1990s.
"We were already on course to have some return to saving," says Cline, who is the author of the 2005 book, "The United States as a Debtor Nation." With the credit crunch making consumer credit scarcer, he adds, and reduced house prices making Americans feel poorer, "We're going to see some more pressure on household spending."
For now, that will mean more pressure on companies that sell their goods to consumers. GM (GM, Fortune 500) and Ford (F, Fortune 500) have traded at multi-decade lows this month as U.S. auto sales slowed to a pace last seen in the early 1990s. Macy's (M, Fortune 500) dropped 12% Wednesday after the department store chain cut its profit forecast, prompting ratings agency Moody's to warn that further problems could prompt a costly credit downgrade.
The government interventions mean deleveraging can continue without the risk of an economic collapse, which is obviously "extremely positive" in the long run, says Ken Kamen, a financial adviser who is president of Mercadien Asset Management in Trenton, N.J. But that doesn't mean the short run is going to be particularly enjoyable, as Wednesday's 9% stock market decline suggests.
Kamen warns his clients that before they make any hasty decisions, they should decide how much stress they can tolerate in their portfolios.
"You don't want to be resetting your financial future while the compass needle is spinning," he says. "You may need to sell assets - but only to the point where you can sleep at night."
First Published: October 16, 2008: 11:44 AM ET
Thursday, October 9, 2008
Savings
By Stephen Gandel and Paul J. Lim
With banks falling like dominos, there's a lot of worry about the solvency of financial institutions. Some people are pulling their cash out of the stock market and putting it into FDIC-insured accounts, while others are hiding theirs under their mattress. Before you make any drastic moves, read these answers to some common questions about your savings.
Are there any safe havens left?
It sure doesn't feel like it. Even conservative investments - like ultrashort- term bond funds and a single money market fund - have lost value recently. But rest assured, your cash accounts are still extremely safe. To shore up confidence in money-market mutual funds after a prominent portfolio "broke the buck," the Treasury Department launched an insurance plan to guarantee their value.
What's more, bank money-market accounts and CDs are as protected as ever. While it's certainly hard to tell which banks will eventually survive this financial meltdown, your accounts are FDIC-insured.
Finally, if you're looking for a safe option within your 401(k), consider a stable value fund. These portfolios often invest in a diversified mix of short- to intermediate- term bonds that are backed by different insurers. Plus, they've been yielding around 4% lately.
Is my bank or brokerage going to disappear?
Even with the government stepping in to buy up the crummy mortgage-backed securities that are endangering the health of so many banks and brokers, this relief won't be immediate. It may take weeks for the Treasury Department to put together a team to evaluate these bonds. In the meantime, more banks and brokers could go under or be forced to sell out to healthier firms.
Still, the tally of failed banks is unlikely to come close to the number we saw in the savings and loan crisis. Between 1986 and 1995, 1,043 thrifts went under (though many of them were tiny). So far this year, only 13 banks and savings and loans have failed, according to the Federal Deposit Insurance Corporation. That includes Washington Mutual, the nation's largest S&L, which was shut down before its deposits were sold to J.P. Morgan Chase (JPM, Fortune 500).
Regardless of what the final tally is, it's important to keep in mind that your bank deposits are for the most part safe. Deposits up to $250,000 per person per institution and $500,000 for joint accounts will be protected by the FDIC (The FDIC temporarily raised the limits from $100,000 and $200,000 respectively through December 30, 2009.). Some retirement accounts are covered up to $250,000.
Investment banks and brokerages have also come under pressure. Here too you are mostly protected. Unlike commercial banks, which use your deposits to lend to other customers, brokerages are supposed to segregate your assets from theirs. So if you own 1,000 shares of General Electric and your brokerage collapses, your 1,000 shares of GE should still be there and will most likely be transferred to another broker on your behalf.
If for any reason your failed broker can't locate your securities, up to $500,000 of your assets per account is covered by the Securities Investor Protection Corporation, a nonprofit funded by member firms. With a few exceptions, SIPC limits its safety net to SEC-registered investments. So while your stocks, bonds and mutual funds will be covered, foreign currency, precious metals and commodity futures contracts won't be.
With banks falling like dominos, there's a lot of worry about the solvency of financial institutions. Some people are pulling their cash out of the stock market and putting it into FDIC-insured accounts, while others are hiding theirs under their mattress. Before you make any drastic moves, read these answers to some common questions about your savings.
Are there any safe havens left?
It sure doesn't feel like it. Even conservative investments - like ultrashort- term bond funds and a single money market fund - have lost value recently. But rest assured, your cash accounts are still extremely safe. To shore up confidence in money-market mutual funds after a prominent portfolio "broke the buck," the Treasury Department launched an insurance plan to guarantee their value.
What's more, bank money-market accounts and CDs are as protected as ever. While it's certainly hard to tell which banks will eventually survive this financial meltdown, your accounts are FDIC-insured.
Finally, if you're looking for a safe option within your 401(k), consider a stable value fund. These portfolios often invest in a diversified mix of short- to intermediate- term bonds that are backed by different insurers. Plus, they've been yielding around 4% lately.
Is my bank or brokerage going to disappear?
Even with the government stepping in to buy up the crummy mortgage-backed securities that are endangering the health of so many banks and brokers, this relief won't be immediate. It may take weeks for the Treasury Department to put together a team to evaluate these bonds. In the meantime, more banks and brokers could go under or be forced to sell out to healthier firms.
Still, the tally of failed banks is unlikely to come close to the number we saw in the savings and loan crisis. Between 1986 and 1995, 1,043 thrifts went under (though many of them were tiny). So far this year, only 13 banks and savings and loans have failed, according to the Federal Deposit Insurance Corporation. That includes Washington Mutual, the nation's largest S&L, which was shut down before its deposits were sold to J.P. Morgan Chase (JPM, Fortune 500).
Regardless of what the final tally is, it's important to keep in mind that your bank deposits are for the most part safe. Deposits up to $250,000 per person per institution and $500,000 for joint accounts will be protected by the FDIC (The FDIC temporarily raised the limits from $100,000 and $200,000 respectively through December 30, 2009.). Some retirement accounts are covered up to $250,000.
Investment banks and brokerages have also come under pressure. Here too you are mostly protected. Unlike commercial banks, which use your deposits to lend to other customers, brokerages are supposed to segregate your assets from theirs. So if you own 1,000 shares of General Electric and your brokerage collapses, your 1,000 shares of GE should still be there and will most likely be transferred to another broker on your behalf.
If for any reason your failed broker can't locate your securities, up to $500,000 of your assets per account is covered by the Securities Investor Protection Corporation, a nonprofit funded by member firms. With a few exceptions, SIPC limits its safety net to SEC-registered investments. So while your stocks, bonds and mutual funds will be covered, foreign currency, precious metals and commodity futures contracts won't be.
Monday, September 15, 2008
Credit Squeeze
WASHINGTON (CNN) -- The U.S. credit squeeze has brought on a "once-in-a-century" financial crisis that is likely to claim more big firms before it eases, former Federal Reserve chief Alan Greenspan said Sunday.
Greenspan told ABC's "This Week" that the situation "is in the process of outstripping anything I've seen, and it still is not resolved and it still has a way to go."
"Indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes," Greenspan said. He predicted that would not happen until early 2009, and said the odds of U.S. recession have gone up in recent months.
"I can't believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring," he said.
While recent declines in the prices of oil and food may help avert a recession, he said, "I wouldn't put my money on it."
The financial crunch already has claimed investment bank Bear Stearns, spurred the federal seizure of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) and left century-old Wall Street institution Lehman Brothers (LEH, Fortune 500) clinging by its fingernails after suffering nearly $7 billion in real estate-related losses.
Federal regulators and Wall Street executives were holding weekend crisis talks aimed at resolving the Lehman situation without further shock to the financial sector.
Greenspan, who left office in 2006, said he expected more failures before the crisis eases. While regulators "shouldn't try to protect every single institution," he said, companies should be kept from failing "in a sharply disruptive manner" to prevent further shocks.
Greenspan's critics say he helped inflate the housing bubble by keeping target short-term rates too low for too long, leading to reckless lending and borrowing in the housing market. But Greenspan has said the problem lay not in the loans themselves, but in their repackaging as securities and sale to investors.
Greenspan told ABC's "This Week" that the situation "is in the process of outstripping anything I've seen, and it still is not resolved and it still has a way to go."
"Indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes," Greenspan said. He predicted that would not happen until early 2009, and said the odds of U.S. recession have gone up in recent months.
"I can't believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring," he said.
While recent declines in the prices of oil and food may help avert a recession, he said, "I wouldn't put my money on it."
The financial crunch already has claimed investment bank Bear Stearns, spurred the federal seizure of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) and left century-old Wall Street institution Lehman Brothers (LEH, Fortune 500) clinging by its fingernails after suffering nearly $7 billion in real estate-related losses.
Federal regulators and Wall Street executives were holding weekend crisis talks aimed at resolving the Lehman situation without further shock to the financial sector.
Greenspan, who left office in 2006, said he expected more failures before the crisis eases. While regulators "shouldn't try to protect every single institution," he said, companies should be kept from failing "in a sharply disruptive manner" to prevent further shocks.
Greenspan's critics say he helped inflate the housing bubble by keeping target short-term rates too low for too long, leading to reckless lending and borrowing in the housing market. But Greenspan has said the problem lay not in the loans themselves, but in their repackaging as securities and sale to investors.
Thursday, September 11, 2008
Risk
(Money Magazine) -- The classic vision of retirement planning goes something like this: You start broke. You invest as best you can, and if nothing goes too terribly wrong, you finish with enough money to support yourself.
Retirement expert Moshe A. Milevsky, an associate professor at York University's business school in Toronto, sees it a bit differently. In his view, you start with all the wealth you need in the form of your lifetime earning power. Your job is to convert that personal asset as efficiently as possible into financial assets you can live off once your earning power runs out.
As for things going terribly wrong: Well, odds are that at some point in your life they will. So the key to retirement success, he says, is to identify and ensure against the risks that could knock you off track.
Milevsky's own life offers a prime lesson in how a chance event can derail the best-laid plans. He was studying graduate-level math and physics at Toronto's York University - envisioning a career "smashing atoms together," as he puts it - when his father died of cancer at age 50. The oldest of five children, Milevsky was forced to become a quick expert on his family's money.
The experience shifted his focus from academic physics to the practical math of personal finance and risk management. That unusual angle has defined his career and inspired the Individual Finance and Insurance Decisions Centre, the think tank that he founded eight years ago.
It's also the subject of the latest of his five books, "Are You a Stock or a Bond?", which lays out his views on retirement planning. In late August he spoke with managing editor Eric Schurenberg.
Question: Most advisers say the way to handle risk in retirement planning is to start out investing aggressively, with a lot of stocks in your portfolio, then gradually shift into safer assets like bonds as you get older. What's wrong with that?
Answer: It's an oversimplification. How long you have until retirement is one thing to consider when deciding how much risk to take. But there are many other variables.
Q. Like what?
A. The key is what economists call your human capital. Early in life, you tend to have very few financial assets - investments you can sell for money - but you do have a lot of time in the labor force in front of you, and that is your most valuable asset. As your career goes on, you earn a salary and devote some of it to acquiring investments. So the goal of investment management during your working life is to efficiently convert your human capital into financial capital.
Q. What does that mean other than saving adequately and investing wisely?
A. You also need to look at the risk inherent in your human capital: How stable is your job, how dependent is it on financial markets, how related is it to the economy as a whole? If you have a stable income that doesn't rise or fall with the stock market, you should have more money in stocks than the usual investment model for someone your age says you should. Otherwise - if, say, you work in the securities industry, where your income is likely to hinge a lot on the stock market - you need to invest more heavily than you might think in safe and secure bonds.
Q. Most advisers would say you also have to consider whether you have the nerve to handle a higher or lower level of risk.
A. I think advisers tend to take the mental aspect a little too far. People's risk tolerance changes every day. Yesterday the market is up: People are risk tolerant. Today the market plummets: They're no longer risk tolerant. You should build your retirement portfolios on something more stable than just your mood this morning.
Q. Have you designed your own portfolio built around your human capital?
A. Absolutely. As a tenured professor, with a very predictable income stream, I view my human capital as a bond. So to diversify, I have all my portfolio in stocks. In fact I've borrowed to invest more in stocks, so I'm actually 150% in equities.
Q. Must have been a tough year for you.
A. Yeah, the last few months have not been pretty. To take the sting out of the losses on my brokerage statement, every month or so I open a spreadsheet and recalculate all my capital, human and financial. As I said, my human capital is essentially a bond, so it has been rising in value as interest rates go down. That makes me feel better.
Q. That exercise would be less comforting, I'd imagine, to people who are close to retirement and have used up most of their human capital.
A. True. In the years right before and right after retirement, your financial security is very sensitive to market fluctuations and other risks that were not such an issue before. You need to change your mind-set from wealth accumulation to risk management.
Q. What are the risks?
A. I've run thousands of simulations of hypothetical retirements and ranked what can go wrong. Far and away the biggest causes of failure are longevity risk, inflation and a sour market early in retirement.
Q. Take us through them.
A. Longevity risk - the chance that you'll live too long for your savings - is particularly hard to plan around. Your retirement can literally last anywhere from 10 to 40 years. That wasn't a problem when you could count on a traditional "check a month for life" pension. But odds are, your employer doesn't offer one anymore.
Inflation is something you don't need to worry about in early or mid-career, when most of your wealth is in the form of human capital. That's because wages tend to keep up with inflation. But once you retire and your wealth has been transformed into financial capital, you are completely exposed to inflation risk. Over a 25-year retirement - typical for a married couple - inflation at 4% will cut the value of a $1,000 pension check to just $375.
The third big risk is a bear market. Over a few decades, you'll always have a few down markets, of course. When you're working, it doesn't matter whether the down markets occur early in your life or later. As long as you buy and hold, you'll end up with the same amount of money.
But once you retire, it matters a lot when the bear markets hit. If one occurs early in your retirement, your money won't last nearly as long as if it occurs a few years later. That's because if you start making withdrawals on top of market losses, it's hard to ever make up the lost ground.
Q. How do you hedge those risks?
A. No one kind of investment works against all three. So you need to diversify among investment products, just as you need to diversify among stocks and bonds and so on. This matters more than most people think.
Q. What investment products are we talking about?
A. One category is pensions or annuities, typically a fixed monthly check that an insurance company or pension fund guarantees to keep sending you as long as you live. That's a great solution to longevity risk.
But it's not much help against inflation, which will erode the value of any fixed payment over time. So you also need the traditional mutual fund portfolio that you manage and from which you withdraw funds over an extended period. You can choose high-returning assets like stock funds, which you'd expect to stay ahead of inflation over time.
On the other hand, those are exactly the assets that leave you vulnerable to a market downturn early in your retirement. That's where the third category comes in: the new generation of variable annuities with living benefits. They essentially promise you some upside linked to the stock market but at the same time guarantee you a minimum income for the rest of your life, regardless of when a bear market lands during your retirement.
Q. Your own research years ago showed variable annuities to be way overpriced for the benefits they provided. What changed your mind?
A. If today's variable annuities looked like the product of the same name 10 years ago, I'd still be opposed to them. They used to promise to make up losses only if you died while the market was down.
But the new ones deliver benefits you can claim while you're still alive. And the protection they provide against market losses would be very expensive if you tried to buy it some other way - say, in the options market.
So I used to be something of a crusader against variable annuities, but now I fall back on what the economist John Maynard Keynes said when someone challenged him for supposedly flip-flopping. "When the facts change," he said, "I change my mind. What do you do, sir?"
Retirement expert Moshe A. Milevsky, an associate professor at York University's business school in Toronto, sees it a bit differently. In his view, you start with all the wealth you need in the form of your lifetime earning power. Your job is to convert that personal asset as efficiently as possible into financial assets you can live off once your earning power runs out.
As for things going terribly wrong: Well, odds are that at some point in your life they will. So the key to retirement success, he says, is to identify and ensure against the risks that could knock you off track.
Milevsky's own life offers a prime lesson in how a chance event can derail the best-laid plans. He was studying graduate-level math and physics at Toronto's York University - envisioning a career "smashing atoms together," as he puts it - when his father died of cancer at age 50. The oldest of five children, Milevsky was forced to become a quick expert on his family's money.
The experience shifted his focus from academic physics to the practical math of personal finance and risk management. That unusual angle has defined his career and inspired the Individual Finance and Insurance Decisions Centre, the think tank that he founded eight years ago.
It's also the subject of the latest of his five books, "Are You a Stock or a Bond?", which lays out his views on retirement planning. In late August he spoke with managing editor Eric Schurenberg.
Question: Most advisers say the way to handle risk in retirement planning is to start out investing aggressively, with a lot of stocks in your portfolio, then gradually shift into safer assets like bonds as you get older. What's wrong with that?
Answer: It's an oversimplification. How long you have until retirement is one thing to consider when deciding how much risk to take. But there are many other variables.
Q. Like what?
A. The key is what economists call your human capital. Early in life, you tend to have very few financial assets - investments you can sell for money - but you do have a lot of time in the labor force in front of you, and that is your most valuable asset. As your career goes on, you earn a salary and devote some of it to acquiring investments. So the goal of investment management during your working life is to efficiently convert your human capital into financial capital.
Q. What does that mean other than saving adequately and investing wisely?
A. You also need to look at the risk inherent in your human capital: How stable is your job, how dependent is it on financial markets, how related is it to the economy as a whole? If you have a stable income that doesn't rise or fall with the stock market, you should have more money in stocks than the usual investment model for someone your age says you should. Otherwise - if, say, you work in the securities industry, where your income is likely to hinge a lot on the stock market - you need to invest more heavily than you might think in safe and secure bonds.
Q. Most advisers would say you also have to consider whether you have the nerve to handle a higher or lower level of risk.
A. I think advisers tend to take the mental aspect a little too far. People's risk tolerance changes every day. Yesterday the market is up: People are risk tolerant. Today the market plummets: They're no longer risk tolerant. You should build your retirement portfolios on something more stable than just your mood this morning.
Q. Have you designed your own portfolio built around your human capital?
A. Absolutely. As a tenured professor, with a very predictable income stream, I view my human capital as a bond. So to diversify, I have all my portfolio in stocks. In fact I've borrowed to invest more in stocks, so I'm actually 150% in equities.
Q. Must have been a tough year for you.
A. Yeah, the last few months have not been pretty. To take the sting out of the losses on my brokerage statement, every month or so I open a spreadsheet and recalculate all my capital, human and financial. As I said, my human capital is essentially a bond, so it has been rising in value as interest rates go down. That makes me feel better.
Q. That exercise would be less comforting, I'd imagine, to people who are close to retirement and have used up most of their human capital.
A. True. In the years right before and right after retirement, your financial security is very sensitive to market fluctuations and other risks that were not such an issue before. You need to change your mind-set from wealth accumulation to risk management.
Q. What are the risks?
A. I've run thousands of simulations of hypothetical retirements and ranked what can go wrong. Far and away the biggest causes of failure are longevity risk, inflation and a sour market early in retirement.
Q. Take us through them.
A. Longevity risk - the chance that you'll live too long for your savings - is particularly hard to plan around. Your retirement can literally last anywhere from 10 to 40 years. That wasn't a problem when you could count on a traditional "check a month for life" pension. But odds are, your employer doesn't offer one anymore.
Inflation is something you don't need to worry about in early or mid-career, when most of your wealth is in the form of human capital. That's because wages tend to keep up with inflation. But once you retire and your wealth has been transformed into financial capital, you are completely exposed to inflation risk. Over a 25-year retirement - typical for a married couple - inflation at 4% will cut the value of a $1,000 pension check to just $375.
The third big risk is a bear market. Over a few decades, you'll always have a few down markets, of course. When you're working, it doesn't matter whether the down markets occur early in your life or later. As long as you buy and hold, you'll end up with the same amount of money.
But once you retire, it matters a lot when the bear markets hit. If one occurs early in your retirement, your money won't last nearly as long as if it occurs a few years later. That's because if you start making withdrawals on top of market losses, it's hard to ever make up the lost ground.
Q. How do you hedge those risks?
A. No one kind of investment works against all three. So you need to diversify among investment products, just as you need to diversify among stocks and bonds and so on. This matters more than most people think.
Q. What investment products are we talking about?
A. One category is pensions or annuities, typically a fixed monthly check that an insurance company or pension fund guarantees to keep sending you as long as you live. That's a great solution to longevity risk.
But it's not much help against inflation, which will erode the value of any fixed payment over time. So you also need the traditional mutual fund portfolio that you manage and from which you withdraw funds over an extended period. You can choose high-returning assets like stock funds, which you'd expect to stay ahead of inflation over time.
On the other hand, those are exactly the assets that leave you vulnerable to a market downturn early in your retirement. That's where the third category comes in: the new generation of variable annuities with living benefits. They essentially promise you some upside linked to the stock market but at the same time guarantee you a minimum income for the rest of your life, regardless of when a bear market lands during your retirement.
Q. Your own research years ago showed variable annuities to be way overpriced for the benefits they provided. What changed your mind?
A. If today's variable annuities looked like the product of the same name 10 years ago, I'd still be opposed to them. They used to promise to make up losses only if you died while the market was down.
But the new ones deliver benefits you can claim while you're still alive. And the protection they provide against market losses would be very expensive if you tried to buy it some other way - say, in the options market.
So I used to be something of a crusader against variable annuities, but now I fall back on what the economist John Maynard Keynes said when someone challenged him for supposedly flip-flopping. "When the facts change," he said, "I change my mind. What do you do, sir?"
Wednesday, September 10, 2008
Warning Retiremnet Ahead Part 2
PLOT TWIST: So you've recalculated and figure working just a few more years will put retirement in the bag. But someone forgot to tell your boss.
Unfortunately, when you hit your fifties and sixties, you can't count on job security. Munnell and colleague Steven Sass calculate that only 44% of men working between the ages of 58 and 62 are with the same company that employed them at age 50, compared with 70% two decades ago. While some of those job changes are voluntary, many are the result of employers in a tough economy trying to push out older, highly paid workers with early-retirement offers.
Just ask software engineer Brian Campbell, 51, of Glendale, Ariz., who had spent his entire 28-year career with the same company until he was laid off earlier this year. He and his wife Merna, 50, an accountant who earns $40,000 a year, have more than $600,000 saved for retirement, and Brian received a generous exit package. But he knows that's not nearly enough to support them comfortably for the next 40 or more years, and he worries about what will happen if he can't find work soon. "We're going to have to really downsize our standard of living to get by on my wife's salary," he says.
Everyone in the 10- to 15-year stretch before traditional retirement age needs to realize they could be let go at any time and prepare in advance, advises John Challenger, CEO of the outplacement firm Challenger Gray & Christmas. He suggests devoting the equivalent of 10% of your work time to activities outside your current job that will help you find your next one. Join an industry trade group. Attend conferences. Connect with colleagues outside your firm as well as inside; your next job could be one division away. Get your profile up on professional networking sites like LinkedIn.
Next: Polish your skills. Your résumé should look as au courant as a recent college grad's in terms of your knowledge of the latest technology and industry practices. "You hear so much about diversifying your retirement portfolio to ensure success, but it's just as important to diversify your career portfolio to make sure you stay relevant," says Mitchell.
If you do find yourself back in the job market after eons at the same company, make peace with the fact that you may have to accept a lower salary, Challenger says.
"Often people who've been at a firm a long time are paid above market because they have a specific knowledge of how that firm works or a specific skill that was highly valued at that firm," he says. "New employers aren't necessarily going to care." Instead, he urges, think of yourself as a house that needs to sell in a soft market: Set your price too high and you won't get offers.
PLOT TWIST: You check your 401(k) and see stocks have been in The Big Sleep for a decade. You want to put all your dough back in the mattress.
When former IBM vice president Gil Saenz, 58, retired two years ago, he didn't anticipate the market's recent swoon, which has reduced his 401(k) balance from $450,000 to $350,000. Saenz and his wife Sherry, 55, a retired criminal defense attorney, still have another $350,000 in a taxable investment account, bringing their total assets to a not-too-shabby $700,000. The $100,000 in losses (on paper, at least) made Saenz question his commitment to stocks, though. "In hindsight I should have cashed out," he says.
Plenty of near and recent retirees share Saenz's discomfort with stocks. But while it's understandable that the mantra "time is on my side" doesn't resonate as convincingly now as it did when you were in your thirties and forties, that's only because you're focused on the wrong finish line.
"The issue is not when you retire but how long you then expect to need income from your retirement savings," says Christopher Jones, chief investment officer at Financial Engines and author of The Intelligent Portfolio. "With that longer perspective - 30 years or more - keeping some of your money in stocks is the only way you'll get the growth you need to beat inflation."
A recent study by T. Rowe Price demonstrates how keeping a substantial portion of your savings in stocks boosts the odds that your money will outlast you. The firm ran 100,000 market and asset-allocation scenarios to gauge the effects on financial security over a 30-year retirement, assuming a $500,000 starting portfolio, an initial 4% withdrawal rate and 3% annual raises in that withdrawal to account for inflation. A portfolio 60% in stocks and 40% in bonds got the best results: It had an 87% shot at generating the income needed, with a median $395,000 left at the end of the 30 years should you need it. Dial the stock stake down to 20% and you'd be just as likely to get the income you need, but you'd be left with a cushion of only $180,000.
What's your dream retirement?
In fact, many financial advisers recommend that after the sharp decline in stocks over the past year, you should boost the percentage of your retirement account that's invested in stocks, not reduce it.
"It may go against your instincts, but rebalancing is important now to keep your stock allocation in place," says Christine Fahlund, a senior financial planner at T. Rowe Price. "You might even want to raise your stock allocation by 5% or so, since you can buy shares these days at much lower prices."
To dampen the risks of owning stocks in the short run, however, make sure you've spread your money among different kinds of shares - big and small company stocks, for instance, with at least 20% in foreign markets and no more than 5% to 10% of the total in shares of your own employer. It seems that many people have trouble with that last part: Financial Engines reports that 43% of 401(k) participants over the age of 60 have at least double that amount in unrestricted company stock. (For help with the right mix, check out the Asset Allocation tool.)
THE SURPRISE ENDING: You finally have the money to make a clean exit. Then, as soon as you stop working, the bottom falls out of the stock market.
Stocks held for the long term can be counted on to bounce back eventually. But if you need to sell shares just as they're dropping in value - exactly the scenario many newly minted retirees have faced over the past year - you run a sharply higher risk that your money will someday run out.
That's because when the market does recover, you'll have less money invested to benefit from renewed growth. Fortunately, there's a minor tweak that can dramatically cut your risk: Instead of following the recommended regimen of withdrawing 4% from your savings in the first year of retirement, then boosting your payouts by 3% each year to compensate for inflation, give up the inflation adjustment until stocks recover. A study by T. Rowe Price concludes that this simple step cuts the odds of running out of money over a 30- year period in half, from 22% to 11%, on a sample portfolio invested 55% in stocks and 45% in bonds.
Worried that forgoing your inflation raise will bust your budget? Pull a Brett Favre and go back to work part time to make up the "lost" income. You probably won't need to put in more than a few hours a week - a 3% increase on a $75,000 annual withdrawal equals only $200 a month.
You can also buy yourself some extra protection for those later years of retirement with a longevity annuity. Unlike an immediate annuity, which starts feeding you income as soon as you make the purchase - typically in your sixties - a longevity annuity makes payments only once you reach 85 or so. And it costs a lot less: Financial Engines estimates that you'll spend 8% to 15% of your retirement stash at age 65 to purchase a longevity annuity that starts payments at age 85 vs. 60% to 70% for an immediate annuity that generates the same income but starts payments 20 years earlier.
So if you retire at 65, an annuity that pays you $55,000 a year right away might run about $600,000; sign up to get the same $55,000 a year, only with payments not scheduled to start until age 85, and you'll pay about $115,000. Adding this guaranteed income source later in life might also enable you to leave more in your estate - a bonus if you're starting to worry about the best way to leave money to your heirs.
Happy ending. You just made it through the dangerous passage. Better yet: You've helped your kids handle the sequel.
Unfortunately, when you hit your fifties and sixties, you can't count on job security. Munnell and colleague Steven Sass calculate that only 44% of men working between the ages of 58 and 62 are with the same company that employed them at age 50, compared with 70% two decades ago. While some of those job changes are voluntary, many are the result of employers in a tough economy trying to push out older, highly paid workers with early-retirement offers.
Just ask software engineer Brian Campbell, 51, of Glendale, Ariz., who had spent his entire 28-year career with the same company until he was laid off earlier this year. He and his wife Merna, 50, an accountant who earns $40,000 a year, have more than $600,000 saved for retirement, and Brian received a generous exit package. But he knows that's not nearly enough to support them comfortably for the next 40 or more years, and he worries about what will happen if he can't find work soon. "We're going to have to really downsize our standard of living to get by on my wife's salary," he says.
Everyone in the 10- to 15-year stretch before traditional retirement age needs to realize they could be let go at any time and prepare in advance, advises John Challenger, CEO of the outplacement firm Challenger Gray & Christmas. He suggests devoting the equivalent of 10% of your work time to activities outside your current job that will help you find your next one. Join an industry trade group. Attend conferences. Connect with colleagues outside your firm as well as inside; your next job could be one division away. Get your profile up on professional networking sites like LinkedIn.
Next: Polish your skills. Your résumé should look as au courant as a recent college grad's in terms of your knowledge of the latest technology and industry practices. "You hear so much about diversifying your retirement portfolio to ensure success, but it's just as important to diversify your career portfolio to make sure you stay relevant," says Mitchell.
If you do find yourself back in the job market after eons at the same company, make peace with the fact that you may have to accept a lower salary, Challenger says.
"Often people who've been at a firm a long time are paid above market because they have a specific knowledge of how that firm works or a specific skill that was highly valued at that firm," he says. "New employers aren't necessarily going to care." Instead, he urges, think of yourself as a house that needs to sell in a soft market: Set your price too high and you won't get offers.
PLOT TWIST: You check your 401(k) and see stocks have been in The Big Sleep for a decade. You want to put all your dough back in the mattress.
When former IBM vice president Gil Saenz, 58, retired two years ago, he didn't anticipate the market's recent swoon, which has reduced his 401(k) balance from $450,000 to $350,000. Saenz and his wife Sherry, 55, a retired criminal defense attorney, still have another $350,000 in a taxable investment account, bringing their total assets to a not-too-shabby $700,000. The $100,000 in losses (on paper, at least) made Saenz question his commitment to stocks, though. "In hindsight I should have cashed out," he says.
Plenty of near and recent retirees share Saenz's discomfort with stocks. But while it's understandable that the mantra "time is on my side" doesn't resonate as convincingly now as it did when you were in your thirties and forties, that's only because you're focused on the wrong finish line.
"The issue is not when you retire but how long you then expect to need income from your retirement savings," says Christopher Jones, chief investment officer at Financial Engines and author of The Intelligent Portfolio. "With that longer perspective - 30 years or more - keeping some of your money in stocks is the only way you'll get the growth you need to beat inflation."
A recent study by T. Rowe Price demonstrates how keeping a substantial portion of your savings in stocks boosts the odds that your money will outlast you. The firm ran 100,000 market and asset-allocation scenarios to gauge the effects on financial security over a 30-year retirement, assuming a $500,000 starting portfolio, an initial 4% withdrawal rate and 3% annual raises in that withdrawal to account for inflation. A portfolio 60% in stocks and 40% in bonds got the best results: It had an 87% shot at generating the income needed, with a median $395,000 left at the end of the 30 years should you need it. Dial the stock stake down to 20% and you'd be just as likely to get the income you need, but you'd be left with a cushion of only $180,000.
What's your dream retirement?
In fact, many financial advisers recommend that after the sharp decline in stocks over the past year, you should boost the percentage of your retirement account that's invested in stocks, not reduce it.
"It may go against your instincts, but rebalancing is important now to keep your stock allocation in place," says Christine Fahlund, a senior financial planner at T. Rowe Price. "You might even want to raise your stock allocation by 5% or so, since you can buy shares these days at much lower prices."
To dampen the risks of owning stocks in the short run, however, make sure you've spread your money among different kinds of shares - big and small company stocks, for instance, with at least 20% in foreign markets and no more than 5% to 10% of the total in shares of your own employer. It seems that many people have trouble with that last part: Financial Engines reports that 43% of 401(k) participants over the age of 60 have at least double that amount in unrestricted company stock. (For help with the right mix, check out the Asset Allocation tool.)
THE SURPRISE ENDING: You finally have the money to make a clean exit. Then, as soon as you stop working, the bottom falls out of the stock market.
Stocks held for the long term can be counted on to bounce back eventually. But if you need to sell shares just as they're dropping in value - exactly the scenario many newly minted retirees have faced over the past year - you run a sharply higher risk that your money will someday run out.
That's because when the market does recover, you'll have less money invested to benefit from renewed growth. Fortunately, there's a minor tweak that can dramatically cut your risk: Instead of following the recommended regimen of withdrawing 4% from your savings in the first year of retirement, then boosting your payouts by 3% each year to compensate for inflation, give up the inflation adjustment until stocks recover. A study by T. Rowe Price concludes that this simple step cuts the odds of running out of money over a 30- year period in half, from 22% to 11%, on a sample portfolio invested 55% in stocks and 45% in bonds.
Worried that forgoing your inflation raise will bust your budget? Pull a Brett Favre and go back to work part time to make up the "lost" income. You probably won't need to put in more than a few hours a week - a 3% increase on a $75,000 annual withdrawal equals only $200 a month.
You can also buy yourself some extra protection for those later years of retirement with a longevity annuity. Unlike an immediate annuity, which starts feeding you income as soon as you make the purchase - typically in your sixties - a longevity annuity makes payments only once you reach 85 or so. And it costs a lot less: Financial Engines estimates that you'll spend 8% to 15% of your retirement stash at age 65 to purchase a longevity annuity that starts payments at age 85 vs. 60% to 70% for an immediate annuity that generates the same income but starts payments 20 years earlier.
So if you retire at 65, an annuity that pays you $55,000 a year right away might run about $600,000; sign up to get the same $55,000 a year, only with payments not scheduled to start until age 85, and you'll pay about $115,000. Adding this guaranteed income source later in life might also enable you to leave more in your estate - a bonus if you're starting to worry about the best way to leave money to your heirs.
Happy ending. You just made it through the dangerous passage. Better yet: You've helped your kids handle the sequel.
Warning Retiremnet Ahead Part 1
Money Magazine) -- The decade before you quit the work force, along with the five years immediately after, is the most sensitive period in an entire lifetime of retirement planning. The saving, investment and career decisions you make during this time will dictate in a major way whether you'll spend the next 30 to 40 years enjoying the life you've always looked forward to or eating the early-bird special at Denny's.
Even if you do everything right, perils outside of your control lurk at every turn: A parent or adult child suddenly needs your financial help, so you can't save as much as you'd planned. You develop a health problem and are forced to stop working sooner than you expected. An employer pushes you into early retirement. Or the financial markets suddenly and sharply turn against you. Sound familiar?
Welcome to the Dangerous Passage, starring...you.
"It's natural to have a queasy feeling at this time in your life, wondering if your retirement will happen as planned," says Joseph Chadwick of the Longevity Alliance, a financial services firm that specializes in retirement products. "But there's no need to panic."
Dim the lights to view the plot twists you may encounter and the strategies you need to follow to keep your story moving in the right direction. Understand that whatever dangers you face, you still have time. You just need to do what Hollywood does when the script isn't building to the desired ending: rewrite.
OPENING SCENE: Retirement is closing in like G-men on the heels of Bonnie and Clyde. But you don't have the dough you need.
Sure, you've been steadily contributing to your 401(k) and IRA for years now. But it's still awfully hard to amass as much as the experts say you'll need. The numbers are ridiculously daunting: If you're currently in your fifties, your retirement portfolio at this point should be worth six to eight times your salary. By 60 you should have saved about 11 times your income, and by 65 the equivalent of 15 times your earnings.
And the markets aren't exactly helping matters lately. The housing slump has thwarted dreams of cashing in and retiring on the house, while lackluster stock market returns haven't provided the gains you were banking on. "For much of the past 25 years the markets did most of the work for you, but you can't expect them to carry you in the future," warns Bill Bengen, a financial adviser in El Cajon, Calif. He adds, "The only way you'll reach your retirement goal is to commit to having more money pulled out of your paycheck."
You probably have plenty of opportunity to save more in taxadvantaged plans. In a recent survey of nearly a million 401(k) accounts, retirement research firm Financial Engines found that a quarter of 401(k) investors 50 or older don't even contribute enough to qualify for the maximum employer match (typically 50% of the amount you put in, up to 6% of your salary).
And only 6% of eligible participants take full advantage of catch-up provisions that allow those 50 or older to save an extra $5,000 a year in a 401(k), for a total of $20,500 this year (you can put an additional $1,000 in an IRA, or up to $6,000 in 2008).
Ultimate guide to retirement
The time to start pumping up those contributions is now, right now, even if you plan to stay in the work force another 10 years or more. Because you never know when something could happen to change your plans. More than a fifth of the retirees in a Sun Life survey reported that they had been forced into retirement, eight years earlier than expected on average, typically because of downsizing or ill health.
And if you do keep working, the sooner you get with the savings program, the greater the benefit. A couple who manage to save an extra $10,000 a year for 10 years - that is, who both max out their catch-up contributions - could retire with an extra $152,000, assuming they earn an average of 8% a year.
Before you convince yourself that kicking in $416 more a month (which is what $5,000 a year amounts to) will put you in a financial bind, go ahead and try it. Automating contributions is often all that it takes to get on - and stay on - a more rigorous savings plan. Then put some elbow grease into wringing any excess out of your spending so you don't feel a financial pinch. "
From making your home more energy-efficient to limiting your shopping to mostly sale items, it's amazing how a lot of small savings can help over time," says financial adviser Lou Stanasolovich, founder of Legend Financial Advisors in Pittsburgh. Rethinking your bigger-ticket expenditures will, of course, help matters too. "I am always amazed when people tell me they just spent $10,000 on a big family vacation but then complain about how they can't afford to contribute more money to their 401(k)," says Stanasolovich.
PLOT TWIST: Okay, okay, you're all set to start saving more - a lot more. Then your kid shows up with an acceptance letter to NYU.
In theory, saving more should be easier now than at any other time in your life. After all, you're in your peak earning years and are mostly done with establishing a comfortable home and raising a family and paying the hefty bills that go with that.
If only. You may be past orthodontics and summer camp - and that's a big maybe given the older age at which many boomers started families - but you're likely still spending serious money on your kids. Nearly 60% of boomers and almost 40% of those 60 and older with children over 18 say they're still supporting them to some degree, from paying for college to lending a hand with rent, a car or other expenses, the Pew Research Center reports. Nearly 30% of boomers are also supporting an aging parent, sometimes at the same time as they're helping their kids.
What's your dream retirement?
So if family responsibilities prevent you from saving as much as you should, where will the extra money you need for retirement come from? "Working longer is the best possible safety valve to ensure you will have enough retirement income," says Olivia Mitchell, head of the Boettner Center for Pensions and Retirement Security at the University of Pennsylvania. "Every year you delay retirement is a year you can save more and a year you don't draw down your savings."
Adds Alicia Munnell, director of Boston College's Center for Retirement Research: "No one is suggesting you have to keep working until you are 90. Just two or three more years will help tremendously."
The math is compelling. According to an analysis by T. Rowe Price, every year you postpone retirement adds about 7% to the retirement income you can eventually expect to earn from your investments. A 62-year-old who delays his exit from the work force until age 65 will see the income generated from his retirement account rise 22% (based on a salary of $100,000, a well-diversified portfolio worth $500,000 and 15% annual salary contributions); if he waits until 67, he'll get 39% more.
Staying on the payroll longer likely also means you'll be able to postpone drawing Social Security benefits. While you can collect starting as early as age 62, your benefits will be permanently reduced if you do; every year you delay between ages 62 and 70 adds 8% to your eventual payout. For example, someone who retires this year and qualifies for the maximum early benefit can collect $20,244. Put off drawing the benefit until age 70 and the annual payout will be $35,629 (in today's dollars).
Working longer is the wonder cure for a multitude of ailments that can imperil your retirement plan. It buys time for your portfolio to recover from the market's recent nosedive. And it helps keep health-care costs in check until you qualify for Medicare at age 65.
That's why Julius Roy is still behind the counter as a pharmacist in Slidell, La. at 60 and why he intends to stay there a few more years. Although Julius and his wife Diane, 64, also a pharmacist, have more than $1.6 million in their investment accounts, he doesn't want to give up his employer-provided health insurance. Having undergone double bypass surgery when he was 40, he figures he'd have a tough time qualifying for a private policy and might still face big expenses if he was hit by a major illness. "Staying at work a few more years to stay insured could make all the difference to my financial security in the long run," Julius says.
Even if you do everything right, perils outside of your control lurk at every turn: A parent or adult child suddenly needs your financial help, so you can't save as much as you'd planned. You develop a health problem and are forced to stop working sooner than you expected. An employer pushes you into early retirement. Or the financial markets suddenly and sharply turn against you. Sound familiar?
Welcome to the Dangerous Passage, starring...you.
"It's natural to have a queasy feeling at this time in your life, wondering if your retirement will happen as planned," says Joseph Chadwick of the Longevity Alliance, a financial services firm that specializes in retirement products. "But there's no need to panic."
Dim the lights to view the plot twists you may encounter and the strategies you need to follow to keep your story moving in the right direction. Understand that whatever dangers you face, you still have time. You just need to do what Hollywood does when the script isn't building to the desired ending: rewrite.
OPENING SCENE: Retirement is closing in like G-men on the heels of Bonnie and Clyde. But you don't have the dough you need.
Sure, you've been steadily contributing to your 401(k) and IRA for years now. But it's still awfully hard to amass as much as the experts say you'll need. The numbers are ridiculously daunting: If you're currently in your fifties, your retirement portfolio at this point should be worth six to eight times your salary. By 60 you should have saved about 11 times your income, and by 65 the equivalent of 15 times your earnings.
And the markets aren't exactly helping matters lately. The housing slump has thwarted dreams of cashing in and retiring on the house, while lackluster stock market returns haven't provided the gains you were banking on. "For much of the past 25 years the markets did most of the work for you, but you can't expect them to carry you in the future," warns Bill Bengen, a financial adviser in El Cajon, Calif. He adds, "The only way you'll reach your retirement goal is to commit to having more money pulled out of your paycheck."
You probably have plenty of opportunity to save more in taxadvantaged plans. In a recent survey of nearly a million 401(k) accounts, retirement research firm Financial Engines found that a quarter of 401(k) investors 50 or older don't even contribute enough to qualify for the maximum employer match (typically 50% of the amount you put in, up to 6% of your salary).
And only 6% of eligible participants take full advantage of catch-up provisions that allow those 50 or older to save an extra $5,000 a year in a 401(k), for a total of $20,500 this year (you can put an additional $1,000 in an IRA, or up to $6,000 in 2008).
Ultimate guide to retirement
The time to start pumping up those contributions is now, right now, even if you plan to stay in the work force another 10 years or more. Because you never know when something could happen to change your plans. More than a fifth of the retirees in a Sun Life survey reported that they had been forced into retirement, eight years earlier than expected on average, typically because of downsizing or ill health.
And if you do keep working, the sooner you get with the savings program, the greater the benefit. A couple who manage to save an extra $10,000 a year for 10 years - that is, who both max out their catch-up contributions - could retire with an extra $152,000, assuming they earn an average of 8% a year.
Before you convince yourself that kicking in $416 more a month (which is what $5,000 a year amounts to) will put you in a financial bind, go ahead and try it. Automating contributions is often all that it takes to get on - and stay on - a more rigorous savings plan. Then put some elbow grease into wringing any excess out of your spending so you don't feel a financial pinch. "
From making your home more energy-efficient to limiting your shopping to mostly sale items, it's amazing how a lot of small savings can help over time," says financial adviser Lou Stanasolovich, founder of Legend Financial Advisors in Pittsburgh. Rethinking your bigger-ticket expenditures will, of course, help matters too. "I am always amazed when people tell me they just spent $10,000 on a big family vacation but then complain about how they can't afford to contribute more money to their 401(k)," says Stanasolovich.
PLOT TWIST: Okay, okay, you're all set to start saving more - a lot more. Then your kid shows up with an acceptance letter to NYU.
In theory, saving more should be easier now than at any other time in your life. After all, you're in your peak earning years and are mostly done with establishing a comfortable home and raising a family and paying the hefty bills that go with that.
If only. You may be past orthodontics and summer camp - and that's a big maybe given the older age at which many boomers started families - but you're likely still spending serious money on your kids. Nearly 60% of boomers and almost 40% of those 60 and older with children over 18 say they're still supporting them to some degree, from paying for college to lending a hand with rent, a car or other expenses, the Pew Research Center reports. Nearly 30% of boomers are also supporting an aging parent, sometimes at the same time as they're helping their kids.
What's your dream retirement?
So if family responsibilities prevent you from saving as much as you should, where will the extra money you need for retirement come from? "Working longer is the best possible safety valve to ensure you will have enough retirement income," says Olivia Mitchell, head of the Boettner Center for Pensions and Retirement Security at the University of Pennsylvania. "Every year you delay retirement is a year you can save more and a year you don't draw down your savings."
Adds Alicia Munnell, director of Boston College's Center for Retirement Research: "No one is suggesting you have to keep working until you are 90. Just two or three more years will help tremendously."
The math is compelling. According to an analysis by T. Rowe Price, every year you postpone retirement adds about 7% to the retirement income you can eventually expect to earn from your investments. A 62-year-old who delays his exit from the work force until age 65 will see the income generated from his retirement account rise 22% (based on a salary of $100,000, a well-diversified portfolio worth $500,000 and 15% annual salary contributions); if he waits until 67, he'll get 39% more.
Staying on the payroll longer likely also means you'll be able to postpone drawing Social Security benefits. While you can collect starting as early as age 62, your benefits will be permanently reduced if you do; every year you delay between ages 62 and 70 adds 8% to your eventual payout. For example, someone who retires this year and qualifies for the maximum early benefit can collect $20,244. Put off drawing the benefit until age 70 and the annual payout will be $35,629 (in today's dollars).
Working longer is the wonder cure for a multitude of ailments that can imperil your retirement plan. It buys time for your portfolio to recover from the market's recent nosedive. And it helps keep health-care costs in check until you qualify for Medicare at age 65.
That's why Julius Roy is still behind the counter as a pharmacist in Slidell, La. at 60 and why he intends to stay there a few more years. Although Julius and his wife Diane, 64, also a pharmacist, have more than $1.6 million in their investment accounts, he doesn't want to give up his employer-provided health insurance. Having undergone double bypass surgery when he was 40, he figures he'd have a tough time qualifying for a private policy and might still face big expenses if he was hit by a major illness. "Staying at work a few more years to stay insured could make all the difference to my financial security in the long run," Julius says.
Friday, September 5, 2008
Why your kids expect to be rich part 2
It's the media's fault. I usually disdain arguments that blame "the media" for anything. For one thing, "the media" isn't one big monolith, despite Rupert Murdoch's best efforts. For another, most media outlets are so chaotic and disorganized they have a tough time organizing annual company picnics, let alone a vast conspiracy.
But there's no question we're bombarded with details of the lives of the rich and famous. Those who consume a steady diet of such pap can get a distorted idea of what's normal.
It's society's fault. Our whole society, and our economy, is built on the idea that "money will make you happy," said attorney Jon Gallo, co-author with his wife, Eileen Gallo, of the book "The Financially Intelligent Parent." "It's part of our cultural ethos. . . . These teenagers are just epitomizing that."
In reality, money doesn't add much to people's happiness once they're raised above the subsistence or poverty level.
"Money does make a huge difference when you're talking about going from $8,000 a year to $30,000," said Gallo, citing the research of Harvard psychology professor Daniel Gilbert, who wrote "Stumbling on Happiness." "Between $50,000 and $500,000, though, the difference is scarcely measurable."
Many of the things that do make us happy, such as a sense of purpose and strong relationships with family and friends, don't necessarily add much to our nation's gross domestic product. In fact, Gallo joked that our economy "would grind to a halt" if people gave up the idea that happiness lies in more money and more stuff.
It's the parents' fault. Have you ever traded in a perfectly good used car for a newer one? Bemoaned your financial state and wished out loud for a raise -- or a winning lottery ticket? Expressed envy about someone else's income or lifestyle?
And you're wondering why your kids are so darned materialistic?
Children are awfully good at picking up the messages we send them, consciously or otherwise, said Mary Hunt, author of several books including "Debt-Proof Your Kids." If we believe "more is better," they're likely to believe that, too -- and they often don't have the real-world experience to understand that money is a limited resource and that every expenditure has consequences.
"They watch their parents swiping plastic, living on credit, keeping up with the neighbors," Hunt said. "Kids learn through observation and emulation, and without allowing them to experience suffering, yearning and delayed gratification, they grow up with unrealistic ideas of what life it really about."
3 things parents can do So what's the antidote? Most of us parents don't want to quash our children's dreams, but there are ways to tune them into reality. For instance:
Talk with your kids about their career aspirations. Once they get beyond the "I want to be a ballerina-veterinarian-astronaut" stage, you can start having real conversations about their interests and what jobs might suit them. Research together what those jobs actually pay, advised Kristine Dixon, Schwab's director of consumer education. You can get average hourly earnings for different professions from the U.S. Department of Labor's National Compensation Survey (this is a .pdf file; data for specific jobs start on Page 7) or see typical salaries across the country with Salary.com's Salary Wizard. Contrast that with what people typically spend on shelter, food, transportation and other living expenses in your area. (If you're comfortable revealing details of your family's finances, you can show them what you spend.)
Give your kids some hands-on experience with money. If your children's only money skill is knowing how to successfully nag you into buying something, they will be woefully unprepared for the real world -- either that, or you'll still be supporting them when they're 50. Better to start turning chunks of cash over to them now, either in the form of an allowance or in payment for work around the house, and let them make decisions on how to spend it. As one poster on the Your Money message board put it, "Let them learn when a lesson is cheap." By the time they're in high school, they should be assuming more responsibility for their own living expenses, as I wrote in "Why allowances don't work."
Adjust your own attitudes about money. Recognize that even if you do win that raise, or that lottery jackpot, you'd adjust pretty quickly to the improvement in your circumstances and would soon want even more. That's not to say you shouldn't be ambitious or want to improve your family's financial circumstances -- far from it. But expecting money to be the magic-ticket solution to all your problems is just as unrealistic for you as it is for your teenager.
Columns by Liz Pulliam Weston,
But there's no question we're bombarded with details of the lives of the rich and famous. Those who consume a steady diet of such pap can get a distorted idea of what's normal.
It's society's fault. Our whole society, and our economy, is built on the idea that "money will make you happy," said attorney Jon Gallo, co-author with his wife, Eileen Gallo, of the book "The Financially Intelligent Parent." "It's part of our cultural ethos. . . . These teenagers are just epitomizing that."
In reality, money doesn't add much to people's happiness once they're raised above the subsistence or poverty level.
"Money does make a huge difference when you're talking about going from $8,000 a year to $30,000," said Gallo, citing the research of Harvard psychology professor Daniel Gilbert, who wrote "Stumbling on Happiness." "Between $50,000 and $500,000, though, the difference is scarcely measurable."
Many of the things that do make us happy, such as a sense of purpose and strong relationships with family and friends, don't necessarily add much to our nation's gross domestic product. In fact, Gallo joked that our economy "would grind to a halt" if people gave up the idea that happiness lies in more money and more stuff.
It's the parents' fault. Have you ever traded in a perfectly good used car for a newer one? Bemoaned your financial state and wished out loud for a raise -- or a winning lottery ticket? Expressed envy about someone else's income or lifestyle?
And you're wondering why your kids are so darned materialistic?
Children are awfully good at picking up the messages we send them, consciously or otherwise, said Mary Hunt, author of several books including "Debt-Proof Your Kids." If we believe "more is better," they're likely to believe that, too -- and they often don't have the real-world experience to understand that money is a limited resource and that every expenditure has consequences.
"They watch their parents swiping plastic, living on credit, keeping up with the neighbors," Hunt said. "Kids learn through observation and emulation, and without allowing them to experience suffering, yearning and delayed gratification, they grow up with unrealistic ideas of what life it really about."
3 things parents can do So what's the antidote? Most of us parents don't want to quash our children's dreams, but there are ways to tune them into reality. For instance:
Talk with your kids about their career aspirations. Once they get beyond the "I want to be a ballerina-veterinarian-astronaut" stage, you can start having real conversations about their interests and what jobs might suit them. Research together what those jobs actually pay, advised Kristine Dixon, Schwab's director of consumer education. You can get average hourly earnings for different professions from the U.S. Department of Labor's National Compensation Survey (this is a .pdf file; data for specific jobs start on Page 7) or see typical salaries across the country with Salary.com's Salary Wizard. Contrast that with what people typically spend on shelter, food, transportation and other living expenses in your area. (If you're comfortable revealing details of your family's finances, you can show them what you spend.)
Give your kids some hands-on experience with money. If your children's only money skill is knowing how to successfully nag you into buying something, they will be woefully unprepared for the real world -- either that, or you'll still be supporting them when they're 50. Better to start turning chunks of cash over to them now, either in the form of an allowance or in payment for work around the house, and let them make decisions on how to spend it. As one poster on the Your Money message board put it, "Let them learn when a lesson is cheap." By the time they're in high school, they should be assuming more responsibility for their own living expenses, as I wrote in "Why allowances don't work."
Adjust your own attitudes about money. Recognize that even if you do win that raise, or that lottery jackpot, you'd adjust pretty quickly to the improvement in your circumstances and would soon want even more. That's not to say you shouldn't be ambitious or want to improve your family's financial circumstances -- far from it. But expecting money to be the magic-ticket solution to all your problems is just as unrealistic for you as it is for your teenager.
Columns by Liz Pulliam Weston,
Why your kids expect to be rich part 1
Why your kids expect to be rich
Turns out most kids think they'll soon earn six-figure incomes. Here's why their expectations are so removed from reality and how you can help your offspring avoid the fallout.
By Liz Pulliam Weston
Plenty of adults are delusional about money, so it shouldn't come as too much of a shock that teenagers can be unrealistic when it comes to their future finances.
Still, the extent to which teens misjudge their prospective earning power says something interesting -- about them and about the rest of us.
I refer to tidbits from the "Teens and Money" survey Charles Schwab released earlier this year. This poll of 1,000 Americans aged 13 to 18 from a variety of socio-economic backgrounds found that 73% believed they would earn "plenty of money" when they were adults.
In fact, the teenage boys expected to make an average $174,000 annually. Teenage girls expected to earn $114,200.
The reality check:
Median earnings of men who worked full time, year round in 2005, the latest year for which Census Bureau statistics are available, was $41,386.
Women working full time made a median $31,858.
Fewer than 5% of the U.S. population makes more than $100,000, according to the bureau. Only one household out of six report a six-figure income, according to the Federal Reserve's 2004 Survey of Consumer Finances.
Great expectationsYou might expect teens to overestimate their potential earning power if they were planning to become professional athletes, actors or hip-hop recording artists.
But sports and entertainment ranked only in the middle of the 20 career options chosen by the surveyed teens. Far more popular were medicine (including jobs as doctors, nurses and medical technicians), technology (including jobs in programming, network operations and computer repair) and teaching, the three career fields that most interested the kids polled.
Yes, teaching. Now you begin to see how truly out of whack these kids' earnings estimates are.
So what, you might say. Let the kids have their fantasies. They'll find out the truth soon enough.
But that's the problem. These adolescents will soon be making decisions about money that will affect their lives for years, even decades, to come. Those who misjudge their earning power could:
Take on crippling student-loan debt. I hear from too many young graduates with six-figure student loans and salaries under $50,000. These debts cut into their ability to save for retirement, buy a home or meet other financial goals. And you typically can't shake off student-loan debt in bankruptcy court or anywhere else; this is debt that can literally follow you to the grave.
Overspend on credit cards. Eight out of 10 college students have at least one credit card, and many graduate with significant balances. It's easy to justify paying only the minimum on your cards if you think a fat paycheck is just around the corner. But that bad habit can quickly snowball into huge debts that, at best, cost the borrowers thousands of dollars in interest and at worst lead them to bankruptcy.
Overspend on everything else. People who don't understand that there are limits to their financial resources, and that tough choices must be made, are suckers for a credit industry that's happy to let them overspend on cars ("The real reason you're broke") and homes ("Who's most at risk for foreclosure?"), among other expenses.
Fail to take advantage of the time value of money. Once overcommitted, young people find it tough to come up with even the paltry amounts it would take to make them rich in their later years ("Young all but ignore 401(k)s, IRAs"). For example: Every dollar you tuck away in a Roth IRA when you're 21 could grow to nearly $30 by the time you're 65, assuming 8% average annual returns. Wait 10 years to start funding your retirement, and that same dollar grows to less than $14.
Dream all you want, but plan for realitySo clearly, there are serious potential consequences to overestimating future income, and in a minute I'll address what parents can do to help their kids avoid the worst fallout.
But to get there, we need to understand why teens assume they'll be rich -- or if not rich, at least very well off. There are several potential explanations, including:
Turns out most kids think they'll soon earn six-figure incomes. Here's why their expectations are so removed from reality and how you can help your offspring avoid the fallout.
By Liz Pulliam Weston
Plenty of adults are delusional about money, so it shouldn't come as too much of a shock that teenagers can be unrealistic when it comes to their future finances.
Still, the extent to which teens misjudge their prospective earning power says something interesting -- about them and about the rest of us.
I refer to tidbits from the "Teens and Money" survey Charles Schwab released earlier this year. This poll of 1,000 Americans aged 13 to 18 from a variety of socio-economic backgrounds found that 73% believed they would earn "plenty of money" when they were adults.
In fact, the teenage boys expected to make an average $174,000 annually. Teenage girls expected to earn $114,200.
The reality check:
Median earnings of men who worked full time, year round in 2005, the latest year for which Census Bureau statistics are available, was $41,386.
Women working full time made a median $31,858.
Fewer than 5% of the U.S. population makes more than $100,000, according to the bureau. Only one household out of six report a six-figure income, according to the Federal Reserve's 2004 Survey of Consumer Finances.
Great expectationsYou might expect teens to overestimate their potential earning power if they were planning to become professional athletes, actors or hip-hop recording artists.
But sports and entertainment ranked only in the middle of the 20 career options chosen by the surveyed teens. Far more popular were medicine (including jobs as doctors, nurses and medical technicians), technology (including jobs in programming, network operations and computer repair) and teaching, the three career fields that most interested the kids polled.
Yes, teaching. Now you begin to see how truly out of whack these kids' earnings estimates are.
So what, you might say. Let the kids have their fantasies. They'll find out the truth soon enough.
But that's the problem. These adolescents will soon be making decisions about money that will affect their lives for years, even decades, to come. Those who misjudge their earning power could:
Take on crippling student-loan debt. I hear from too many young graduates with six-figure student loans and salaries under $50,000. These debts cut into their ability to save for retirement, buy a home or meet other financial goals. And you typically can't shake off student-loan debt in bankruptcy court or anywhere else; this is debt that can literally follow you to the grave.
Overspend on credit cards. Eight out of 10 college students have at least one credit card, and many graduate with significant balances. It's easy to justify paying only the minimum on your cards if you think a fat paycheck is just around the corner. But that bad habit can quickly snowball into huge debts that, at best, cost the borrowers thousands of dollars in interest and at worst lead them to bankruptcy.
Overspend on everything else. People who don't understand that there are limits to their financial resources, and that tough choices must be made, are suckers for a credit industry that's happy to let them overspend on cars ("The real reason you're broke") and homes ("Who's most at risk for foreclosure?"), among other expenses.
Fail to take advantage of the time value of money. Once overcommitted, young people find it tough to come up with even the paltry amounts it would take to make them rich in their later years ("Young all but ignore 401(k)s, IRAs"). For example: Every dollar you tuck away in a Roth IRA when you're 21 could grow to nearly $30 by the time you're 65, assuming 8% average annual returns. Wait 10 years to start funding your retirement, and that same dollar grows to less than $14.
Dream all you want, but plan for realitySo clearly, there are serious potential consequences to overestimating future income, and in a minute I'll address what parents can do to help their kids avoid the worst fallout.
But to get there, we need to understand why teens assume they'll be rich -- or if not rich, at least very well off. There are several potential explanations, including:
Parents gone wild (for their kids)
Parents gone wild (for their kids)
Moms and dads are spending with abandon on their kids while sacrificing their own needs, such as saving for retirement.
Stretching a $30,000 income isn't easy for Brittiany Dillon and her husband. Each month, gas and grocery bills alone eat up their disposable cash.
But when it comes to their 2-year-old daughter, the young parents -- she is 21, and he is 23 -- simply can't say no.
"You want your child to have this idyllic childhood and not say, 'My mommy never did this for me,' " says Dillon, a stay-at-home mom.
For their daughter's first and second birthdays, the couple threw bashes that set them back at least $600. Christmas gifts, planned to not exceed $50, somehow hit at least $300. That may not seem like a lot of money, but it's a fortune for the Dillons, who last year moved back in with family so they could make payments on their $30,000 credit card debt, accumulated after a failed business start-up. (They have since paid the credit card balances down to $13,000 and rented an apartment on their own.)
"We've done a lot of things (for her) we know we can't afford," Dillon says. "It's an emotional thing."
The Dillons aren't alone. When it comes to the kids, parents often let emotions rule over financial prudence. Often, that leads to financial mistakes most are embarrassed to admit.
Mistakes are common Parents, even those with generous incomes, overspend on birthday gifts, buy homes in the best school districts that leave them house-rich but cash-poor, or pay thousands of dollars in private-school tuition while carrying thousands more in credit card debt. School trips and lavish family vacations take priority over retirement savings.
"I'm fascinated by the universality of these mistakes," says Marie Claire Allvine, a certified financial planner in Chicago and a co-author of "The 7 Most Important Money Decisions You'll Ever Make." "The interesting thing with parents is, they're with the best of intentions, trying to do all the right things. And they stumble into errors."
In wealthy Westchester, N.Y., a couple earning $200,000 a year could barely afford the $2,500 fee that Kathy Boyle, a New York certified financial planner, charged for creating a plan.
"If you drive by their house in Westchester, their life seems like nirvana. They live in a $1.1 million home on a gorgeous road, with two luxury cars in the driveway," Boyle says. "But walking inside their financial house, it's in shambles."
Today, their 19-year-old son's college bills are paid by a generous family friend because they cannot afford them. Yet the mother stays at home with the 13-year-old daughter.
Boyle advised the mother to consider going back to work, but she declined, saying her daughter "needs her." The extra income could have helped the couple tackle their $20,000 credit card debt and maybe start a college-savings fund for their daughter.
Living beyond one's means -- so the kids can have the best -- is a common picture in the wealthy suburbs, Boyle says. It's also a particularly common scenario with divorced couples. Mothers often insist on keeping the house, even if they can't afford it, because they don't want to "uproot" their children.
"I can't tell you how many women tell me, 'I don't want to move to another school district. I've got to keep the kids steady.' And they don't realize that with no income, they may not be able to refinance if they need money down the line," Boyle says.
To be sure, such mistakes are so often rooted in family values that it's difficult, if not impossible, to override. That's OK as long as parents understand the trade-offs, says Elaine Scoggins, a certified financial planner in Seattle.
Telling parents they need to pay themselves first or else risk ending up penniless in retirement, Scoggins has found, often does the trick. "When they realize how they could affect their own independence and elder years, they become more motivated to cut back in other areas," she says.
Where things go wrong Here are four common mistakes parents make:
Ignoring their retirements. "Every new parent seems to jump into 529 plans before their babies are sleeping through the night," Allvine says. "They don't look at the trade-offs in their own financial lives -- specifically getting themselves out of debt or funding their retirement -- as higher priorities than college education." Borrowing for school, after all, is easy and relatively cheap compared with other kinds of debt. Remember, the kids can always get student loans, while no one will give you a loan for retirement.
A bedroom for everyone. "Somewhere in time, good parents decided every child needed a bedroom," Allvine says. "Bigger houses, bigger mortgages, bigger real-estate taxes. They all lead to longer commutes, the need for two incomes and, often, the AMT (alternative minimum tax). Along the way, they're convinced the house was a 'good investment,' not an expense, but they're trapped in these higher fixed costs, lowering both quality of life now and financial options -- retirement, debt payoff, the chance to quit or change a job -- down the line."
Keeping up with the Joneses' kids. "Throughout the suburbs of America, there is a fierce competition for who can throw the most lavish birthday parties for their children," says Scoggins. "Renting ponies, carnival rides, etc., is a common scene. Setting the bar so high can destroy a child's appreciation of the fact that some of the best things in life are free and set him up for a lifetime of needing a high-cost lifestyle in order to be happy."
Not teaching them about money. "Parents who are struggling themselves to get the most out of their money become terrible role models and teachers for their children," Allvine says. "Instead of preparing their children to be financially independent by the time they get to college, I see parents either overprotect or educate inappropriately. Tracking Disney's stock is not going to teach a child how to balance a checkbook, learn to be charitable or communicate some day with a spouse or partner."
This article was reported and written by Aleksandra Todorova for SmartMoney
Moms and dads are spending with abandon on their kids while sacrificing their own needs, such as saving for retirement.
Stretching a $30,000 income isn't easy for Brittiany Dillon and her husband. Each month, gas and grocery bills alone eat up their disposable cash.
But when it comes to their 2-year-old daughter, the young parents -- she is 21, and he is 23 -- simply can't say no.
"You want your child to have this idyllic childhood and not say, 'My mommy never did this for me,' " says Dillon, a stay-at-home mom.
For their daughter's first and second birthdays, the couple threw bashes that set them back at least $600. Christmas gifts, planned to not exceed $50, somehow hit at least $300. That may not seem like a lot of money, but it's a fortune for the Dillons, who last year moved back in with family so they could make payments on their $30,000 credit card debt, accumulated after a failed business start-up. (They have since paid the credit card balances down to $13,000 and rented an apartment on their own.)
"We've done a lot of things (for her) we know we can't afford," Dillon says. "It's an emotional thing."
The Dillons aren't alone. When it comes to the kids, parents often let emotions rule over financial prudence. Often, that leads to financial mistakes most are embarrassed to admit.
Mistakes are common Parents, even those with generous incomes, overspend on birthday gifts, buy homes in the best school districts that leave them house-rich but cash-poor, or pay thousands of dollars in private-school tuition while carrying thousands more in credit card debt. School trips and lavish family vacations take priority over retirement savings.
"I'm fascinated by the universality of these mistakes," says Marie Claire Allvine, a certified financial planner in Chicago and a co-author of "The 7 Most Important Money Decisions You'll Ever Make." "The interesting thing with parents is, they're with the best of intentions, trying to do all the right things. And they stumble into errors."
In wealthy Westchester, N.Y., a couple earning $200,000 a year could barely afford the $2,500 fee that Kathy Boyle, a New York certified financial planner, charged for creating a plan.
"If you drive by their house in Westchester, their life seems like nirvana. They live in a $1.1 million home on a gorgeous road, with two luxury cars in the driveway," Boyle says. "But walking inside their financial house, it's in shambles."
Today, their 19-year-old son's college bills are paid by a generous family friend because they cannot afford them. Yet the mother stays at home with the 13-year-old daughter.
Boyle advised the mother to consider going back to work, but she declined, saying her daughter "needs her." The extra income could have helped the couple tackle their $20,000 credit card debt and maybe start a college-savings fund for their daughter.
Living beyond one's means -- so the kids can have the best -- is a common picture in the wealthy suburbs, Boyle says. It's also a particularly common scenario with divorced couples. Mothers often insist on keeping the house, even if they can't afford it, because they don't want to "uproot" their children.
"I can't tell you how many women tell me, 'I don't want to move to another school district. I've got to keep the kids steady.' And they don't realize that with no income, they may not be able to refinance if they need money down the line," Boyle says.
To be sure, such mistakes are so often rooted in family values that it's difficult, if not impossible, to override. That's OK as long as parents understand the trade-offs, says Elaine Scoggins, a certified financial planner in Seattle.
Telling parents they need to pay themselves first or else risk ending up penniless in retirement, Scoggins has found, often does the trick. "When they realize how they could affect their own independence and elder years, they become more motivated to cut back in other areas," she says.
Where things go wrong Here are four common mistakes parents make:
Ignoring their retirements. "Every new parent seems to jump into 529 plans before their babies are sleeping through the night," Allvine says. "They don't look at the trade-offs in their own financial lives -- specifically getting themselves out of debt or funding their retirement -- as higher priorities than college education." Borrowing for school, after all, is easy and relatively cheap compared with other kinds of debt. Remember, the kids can always get student loans, while no one will give you a loan for retirement.
A bedroom for everyone. "Somewhere in time, good parents decided every child needed a bedroom," Allvine says. "Bigger houses, bigger mortgages, bigger real-estate taxes. They all lead to longer commutes, the need for two incomes and, often, the AMT (alternative minimum tax). Along the way, they're convinced the house was a 'good investment,' not an expense, but they're trapped in these higher fixed costs, lowering both quality of life now and financial options -- retirement, debt payoff, the chance to quit or change a job -- down the line."
Keeping up with the Joneses' kids. "Throughout the suburbs of America, there is a fierce competition for who can throw the most lavish birthday parties for their children," says Scoggins. "Renting ponies, carnival rides, etc., is a common scene. Setting the bar so high can destroy a child's appreciation of the fact that some of the best things in life are free and set him up for a lifetime of needing a high-cost lifestyle in order to be happy."
Not teaching them about money. "Parents who are struggling themselves to get the most out of their money become terrible role models and teachers for their children," Allvine says. "Instead of preparing their children to be financially independent by the time they get to college, I see parents either overprotect or educate inappropriately. Tracking Disney's stock is not going to teach a child how to balance a checkbook, learn to be charitable or communicate some day with a spouse or partner."
This article was reported and written by Aleksandra Todorova for SmartMoney
Raising your $290,000 Baby Part 2
Transportation Cost through age 17: $20,670 to $38,670
Transportation can eat 13% to 14% of the total. This includes the purchase and finance charges of vehicles, repair and fuel expenses and insurance.
What you can do
Avoid buying a new car. Estimates hold that the value of a new car drops by as much as 40% in the first two years of ownership. Instead, look into a used car such as a relatively new model that's coming off of a one- or two-year lease. It's likely to be in good shape, may have some of its original warranty in place and, best of all, should be available at a huge discount off its original price.
After you've found the car, don't forget to shop for the best insurance rates. The cost of auto insurance can vary by several hundred dollars for the exact same level of coverage. Use our auto insurance planner to find the best deal. Here's how to cut the costs of insuring a teen driver.
Tax tips
If your children work for you and use your car for business purposes, then the business percentage (business miles over total miles) of your gas, insurance, repairs, interest, maintenance, registration, depreciation, tolls and parking are all deductible. Alternatively, you can deduct your business miles at 48.5 cents for 2007, plus tolls, parking and interest expense for your car.
Put your children's cars in your name. It reduces the insurance you have to pay (multiple-vehicle discount) and allows you to deduct any business expenses incurred on your return. The downside is that you may be liable for any accidents. That's why you have auto insurance . . . which is deductible to the extent the car is used in business.
Clothing Cost through age 17: $8,430 to $12,720
Clothing accounts for about 6% of the total costs at higher incomes and 4% at lower incomes.
What to do
New parents quickly discover the cottage industry of saving and sharing newborn and toddler clothes, so take full advantage to skirt the outlandish expense of buying clothes for your little one(s). Also, seek out some of the thousands of manufacturer outlets across the country where you can buy perfectly good clothes at upward of 50% off their original price.
The Internet also offers outlet-shopping opportunities -- at Bluefly, for example, shoppers can choose from dozens of designer labels at discounts as large as 75%.
Buy neutral-colored clothing that can be shared easily among siblings, regardless of gender. Shop sales, and shop at the end of season, so you're not paying a premium for your children's clothes. Finally, as your children get older and start generating some sort of income -- baby-sitting, shoveling snow, perhaps a part-time job -- make it clear to them that, should they want a designer-label piece of clothing, they'll have to cough up at least part of the cost, if not all of it.
Clothing is not deductible. However, advertising is deductible if you are self-employed. If you are an employee, remember that you can be self-employed with a second job. Schnepper had shirts made for his children to promote his book, with "Ask My Dad How to Pay Zero Taxes" printed on the front. That's tax-deductible advertising. Think Century 21 and their gold jackets.
How does your baby measure up?A dietitian from Childrens Hospital Los Angeles explains how to gauge your baby's growth and weight gain.
Health care Cost through age 17: $11,520 to $17,250.
Health care represents 6% to 8% of the total costs, but those numbers are misleading. For some families, it's a nonissue; for others, the numbers can be mind-boggling.
What to do
Because much of this expense comes from health insurance premiums, it pays to shop around if you have the option of choosing your insurance carrier. Monthly premiums can vary a lot. Sites such as eHealthInsurance.comalso offer information on health maintenance organizations (HMOs) and preferred provider organizations (PPOs).
From there, you can trim your health-care expenses by going with the largest deductible you can handle. Also, check to see if your premiums are lower if you pay semiannually or annually instead of more frequently. If the cost of prescription drugs seems off the chart, check to see if Internet-based drugstores can supply you for less -- two are Drugstore.com and Rx.com. If you can't afford health insurance, you can find free care.
If you work for a large company, make certain you use your employer's cafeteria plan if one is available. This lets you set aside pretax dollars for expenses such as deductibles, copayments and noncovered items such as dentistry and eyeglasses. It doesn't reduce the cost of health care directly, but it shaves money off the taxes you pay on money that does go toward medical bills.
Tax tips
Medical expenses are deductible to the extent that they exceed 7.5% of your adjusted gross income. Such expenses include not only doctors and hospitals, but also dentists, prescription drugs, medical insurance and any necessary medical equipment.
If you are self-employed, 100% of your health-insurance costs can be deducted, without any reduction, even if you don't itemize.
Anything you pay for the diagnosis, cure, relief, treatment or prevention of any disease is deductible.
Child care/education Cost through age 17: $13,710 to $38,220
These expenses account for 10% to 13% of the overall cost -- up several percent from last year. Big caveat: The figures do NOT include college.
What to do
If staying at home full time isn't feasible, look into forming a cooperative with other parents. For instance, each parent could agree to look after all of the children in the group for a certain number of hours a week. However, this may require a potential investment in day-care equipment and local licensing if enough children are involved. Alternatively, if you have a parent of your own nearby, see if he or she would be willing to do some baby-sitting.
Tax tips
Child care: If you and your spouse both work (or one is disabled or a full-time student), then you qualify for the child-care credit. That credit, a dollar-for-dollar reduction in your tax, ranges from a minimum of 20% to a maximum of 35% of the first $3,000 you pay for a child under age 13. For two or more children, the credit tops out at $6,000. That could mean, if you have two children in care, an additional $2,100 in your pocket.
Here's where it gets to be fun. Not only does the credit apply to child care and baby-sitting, but it counts any home care necessary for you both to work. Therefore, if you hire a maid to clean your house because you work, the cost of that maid counts toward the credit! The cost of a day camp can be deducted too, but not if it includes overnight stays.
Don't forget the child tax credit. For each child under age 17, you will get a credit of $1,000 for 2007. The credit phases out as your income exceeds $110,000 ($75,000 if single or head of household).
Education: Set up an education IRA or invest with various state prepaid tuition plans where the income is either tax deferred or completely excluded.
Alternatively, or in addition, invest some dollars under your children's names. The income will be taxed to them at their lower rates.
Once they enter college, the Hope Credit and the Lifetime Learning Credit will reduce your taxes further. The Hope Credit, for the first two years of college (freshman and sophomore years), is 100% of the first $1,100 in qualified expenses and 50% of the next $1,100, or $1,650 out of the first $2,000 paid. The Lifetime Learning Credit, which covers the last two years of undergraduate studies plus any graduate courses, is 20% of the first $10,000 paid. (See "Tax breaks to get your youngster through Yale.")
When they graduate, interest on any student loans may be deductible -- even if you don't itemize. You can deduct up to $2,500 in student-loan interest above the line.
Miscellaneous Cost through age 17: $13,890 to $33,690
This last category takes in 10% to 12% of the total cost and includes things such as personal-care items, entertainment and reading materials.
What to do
Stock up on personal-care items at bulk warehouses where the cost is cheaper per item. To trim the expense of fun, check out entertainment clubs where, for a flat fee, you get significant discounts at restaurants, movie theaters, fast food joints and theme parks. To cut down on the expense of books, rely on your local library or used-book stores. Likewise, if you're in the mood to rent a movie, many libraries have substantial tape collections.
If your children are interested in summer camps, check out local community organizations rather than sending them off to two-week camps that can run into the thousands of dollars. Music? Rent the instrument to begin, with a purchase option if your child sticks with it. Don't forget about pawnshops and used equipment, either. And, as with other sorts of more discretionary expenses, expect older children earning part-time income to contribute something.
Tax tips
Instead of paying strangers to mow your lawn or clean your pool, pay your children. If you are self-employed, hire your children to work for you. The IRS has validated children as young as age 7 to work for their parents' unincorporated businesses. For 2007, you can employ and pay your children as much as $5,350 (plus another $4,000 if they opt for a deductible IRA) each, tax-free to them and deductible to you. If your business is not incorporated, and your children are under age 18, you don't have to pay Social Security, Medicare, state unemployment or disability, either.
Let them use these dollars, tax-deductible to you, to pay for these miscellaneous expenses. Then smile and think about how much you are going to cost them when you get older.
By MSN Money staff
Transportation can eat 13% to 14% of the total. This includes the purchase and finance charges of vehicles, repair and fuel expenses and insurance.
What you can do
Avoid buying a new car. Estimates hold that the value of a new car drops by as much as 40% in the first two years of ownership. Instead, look into a used car such as a relatively new model that's coming off of a one- or two-year lease. It's likely to be in good shape, may have some of its original warranty in place and, best of all, should be available at a huge discount off its original price.
After you've found the car, don't forget to shop for the best insurance rates. The cost of auto insurance can vary by several hundred dollars for the exact same level of coverage. Use our auto insurance planner to find the best deal. Here's how to cut the costs of insuring a teen driver.
Tax tips
If your children work for you and use your car for business purposes, then the business percentage (business miles over total miles) of your gas, insurance, repairs, interest, maintenance, registration, depreciation, tolls and parking are all deductible. Alternatively, you can deduct your business miles at 48.5 cents for 2007, plus tolls, parking and interest expense for your car.
Put your children's cars in your name. It reduces the insurance you have to pay (multiple-vehicle discount) and allows you to deduct any business expenses incurred on your return. The downside is that you may be liable for any accidents. That's why you have auto insurance . . . which is deductible to the extent the car is used in business.
Clothing Cost through age 17: $8,430 to $12,720
Clothing accounts for about 6% of the total costs at higher incomes and 4% at lower incomes.
What to do
New parents quickly discover the cottage industry of saving and sharing newborn and toddler clothes, so take full advantage to skirt the outlandish expense of buying clothes for your little one(s). Also, seek out some of the thousands of manufacturer outlets across the country where you can buy perfectly good clothes at upward of 50% off their original price.
The Internet also offers outlet-shopping opportunities -- at Bluefly, for example, shoppers can choose from dozens of designer labels at discounts as large as 75%.
Buy neutral-colored clothing that can be shared easily among siblings, regardless of gender. Shop sales, and shop at the end of season, so you're not paying a premium for your children's clothes. Finally, as your children get older and start generating some sort of income -- baby-sitting, shoveling snow, perhaps a part-time job -- make it clear to them that, should they want a designer-label piece of clothing, they'll have to cough up at least part of the cost, if not all of it.
Clothing is not deductible. However, advertising is deductible if you are self-employed. If you are an employee, remember that you can be self-employed with a second job. Schnepper had shirts made for his children to promote his book, with "Ask My Dad How to Pay Zero Taxes" printed on the front. That's tax-deductible advertising. Think Century 21 and their gold jackets.
How does your baby measure up?A dietitian from Childrens Hospital Los Angeles explains how to gauge your baby's growth and weight gain.
Health care Cost through age 17: $11,520 to $17,250.
Health care represents 6% to 8% of the total costs, but those numbers are misleading. For some families, it's a nonissue; for others, the numbers can be mind-boggling.
What to do
Because much of this expense comes from health insurance premiums, it pays to shop around if you have the option of choosing your insurance carrier. Monthly premiums can vary a lot. Sites such as eHealthInsurance.comalso offer information on health maintenance organizations (HMOs) and preferred provider organizations (PPOs).
From there, you can trim your health-care expenses by going with the largest deductible you can handle. Also, check to see if your premiums are lower if you pay semiannually or annually instead of more frequently. If the cost of prescription drugs seems off the chart, check to see if Internet-based drugstores can supply you for less -- two are Drugstore.com and Rx.com. If you can't afford health insurance, you can find free care.
If you work for a large company, make certain you use your employer's cafeteria plan if one is available. This lets you set aside pretax dollars for expenses such as deductibles, copayments and noncovered items such as dentistry and eyeglasses. It doesn't reduce the cost of health care directly, but it shaves money off the taxes you pay on money that does go toward medical bills.
Tax tips
Medical expenses are deductible to the extent that they exceed 7.5% of your adjusted gross income. Such expenses include not only doctors and hospitals, but also dentists, prescription drugs, medical insurance and any necessary medical equipment.
If you are self-employed, 100% of your health-insurance costs can be deducted, without any reduction, even if you don't itemize.
Anything you pay for the diagnosis, cure, relief, treatment or prevention of any disease is deductible.
Child care/education Cost through age 17: $13,710 to $38,220
These expenses account for 10% to 13% of the overall cost -- up several percent from last year. Big caveat: The figures do NOT include college.
What to do
If staying at home full time isn't feasible, look into forming a cooperative with other parents. For instance, each parent could agree to look after all of the children in the group for a certain number of hours a week. However, this may require a potential investment in day-care equipment and local licensing if enough children are involved. Alternatively, if you have a parent of your own nearby, see if he or she would be willing to do some baby-sitting.
Tax tips
Child care: If you and your spouse both work (or one is disabled or a full-time student), then you qualify for the child-care credit. That credit, a dollar-for-dollar reduction in your tax, ranges from a minimum of 20% to a maximum of 35% of the first $3,000 you pay for a child under age 13. For two or more children, the credit tops out at $6,000. That could mean, if you have two children in care, an additional $2,100 in your pocket.
Here's where it gets to be fun. Not only does the credit apply to child care and baby-sitting, but it counts any home care necessary for you both to work. Therefore, if you hire a maid to clean your house because you work, the cost of that maid counts toward the credit! The cost of a day camp can be deducted too, but not if it includes overnight stays.
Don't forget the child tax credit. For each child under age 17, you will get a credit of $1,000 for 2007. The credit phases out as your income exceeds $110,000 ($75,000 if single or head of household).
Education: Set up an education IRA or invest with various state prepaid tuition plans where the income is either tax deferred or completely excluded.
Alternatively, or in addition, invest some dollars under your children's names. The income will be taxed to them at their lower rates.
Once they enter college, the Hope Credit and the Lifetime Learning Credit will reduce your taxes further. The Hope Credit, for the first two years of college (freshman and sophomore years), is 100% of the first $1,100 in qualified expenses and 50% of the next $1,100, or $1,650 out of the first $2,000 paid. The Lifetime Learning Credit, which covers the last two years of undergraduate studies plus any graduate courses, is 20% of the first $10,000 paid. (See "Tax breaks to get your youngster through Yale.")
When they graduate, interest on any student loans may be deductible -- even if you don't itemize. You can deduct up to $2,500 in student-loan interest above the line.
Miscellaneous Cost through age 17: $13,890 to $33,690
This last category takes in 10% to 12% of the total cost and includes things such as personal-care items, entertainment and reading materials.
What to do
Stock up on personal-care items at bulk warehouses where the cost is cheaper per item. To trim the expense of fun, check out entertainment clubs where, for a flat fee, you get significant discounts at restaurants, movie theaters, fast food joints and theme parks. To cut down on the expense of books, rely on your local library or used-book stores. Likewise, if you're in the mood to rent a movie, many libraries have substantial tape collections.
If your children are interested in summer camps, check out local community organizations rather than sending them off to two-week camps that can run into the thousands of dollars. Music? Rent the instrument to begin, with a purchase option if your child sticks with it. Don't forget about pawnshops and used equipment, either. And, as with other sorts of more discretionary expenses, expect older children earning part-time income to contribute something.
Tax tips
Instead of paying strangers to mow your lawn or clean your pool, pay your children. If you are self-employed, hire your children to work for you. The IRS has validated children as young as age 7 to work for their parents' unincorporated businesses. For 2007, you can employ and pay your children as much as $5,350 (plus another $4,000 if they opt for a deductible IRA) each, tax-free to them and deductible to you. If your business is not incorporated, and your children are under age 18, you don't have to pay Social Security, Medicare, state unemployment or disability, either.
Let them use these dollars, tax-deductible to you, to pay for these miscellaneous expenses. Then smile and think about how much you are going to cost them when you get older.
By MSN Money staff
Raising your $290,000 Baby part 1
Raising your $290,000 baby
Children are priceless, but raising them is one of the most expensive things you'll ever do. Here's how much it costs, along with some strategies for lowering expenses.
By MSN Money staff
Every newborn child is a bundle of joy. But you'd better have a bundle of cash on hand if you want to raise one.
Families making more than $74,900 a year will spend a whopping $289,380 to raise a second child born in 2006 through age 17, estimates the Center for Nutrition Policy and Promotion, a division of the U.S. Department of Agriculture. Higher-income families in urban areas in the West will spend the most, $304,740.
Though not as steep, the figures for lower-income families are just as unsettling: $197,700 for families earning $44,500 to $74,900 and $143,790 for families making less than that. That breaks down to nearly $15,800 a year from birth to age 2 for families in the $74,900-plus income bracket. This is no back-of-the-envelope guesstimate. The survey involves interviews with about 5,000 households, four times a year.
Talk back: Add it up . . . how much will you spend on your children this year?
The cost per child goes down for larger families. A child with no siblings costs 24% more than one with a sibling, for example. As a percentage of household expenditures, an average couple will spend 26% on an only child, 42% on two children and 48% on three children. As the child ages, costs rise through age 5, fall slightly between ages 6 and 11, and then top out at $16,970 a year from ages 15 to 17.
How much will your family spend?*
Income/ age
Total
Housing
Food
Trans.
Clothes
Health
Care/ school
Misc.
*Estimates of expenditures on the younger child in a two-child, two-parent family. To estimate expenses for an only child, multiply the figure by 1.24. To estimate expenses for each of three children, multiply by 0.77.
Sobering? No doubt. Misleading? Yes. The study doesn't take into account certain expenses incurred by some families, such as heavy medical bills or pricey private schools. It's a composite average, and, by definition, that means your numbers will be a little (possibly a lot) higher or lower. And because the survey ends at age 17, it doesn't take into account the millions of college students who are supported in part or in full by their parents. In 2020, you'll need nearly $225,000 for a private college or $105,000 for an in-state public university. (Run the numbers with our tuition calculator.)
The study also doesn't consider lost income that occurs when one parent stops working or takes off several years to raise the children during the early years -- or takes a lesser-paying job with more-predictable hours.
Before you take a vow of celibacy, look on the bright side: There are ways to trim the expenses.
The study breaks down overall expenditures into various categories and subsections. (The information is used by state agencies and court systems to determine child-support guidelines and foster-care payments, among other things.) We'll go through each of the major categories, give the total expense for families from the low to high ends, and then offer cost-cutting ideas and some tax tips from our tax expert, Jeff Schnepper.
Housing Cost through age 17: $47,820 to $107,340
Housing is the single biggest expense of raising children, comprising 33% to 37% of the overall annual expense.
What you can do
You could ignore one of the basic assumptions used in calculating additional housing costs. You could decide not to move into a larger home. The table assumes that for each child you have, you're going to add 100 to 150 square feet of living space to your home. By definition, that means you're going to either renovate your existing house or buy a new one. Go against the flow and figure out how to use the space you've got.
For many families, that solution won't get it done. Try this: If you've had your mortgage for a while and plan to stay in your home, keep track of mortgage rates and consider refinancing when the rate is more than a percentage point below your current mortgage. It can save hundreds to thousands of dollars on the loan. You can get an idea about current rates and offers at MSN Money's Mortgage & Refinance page.
Challenge your property tax bill if you think it's too high. (See "Are you paying too much in property tax?") The National Taxpayers Union estimates that as much as 60% of taxable property in the United States is over-assessed.
Additionally, make your home as energy efficient as you can. That means everything from replacing old and inefficient furnaces and water heaters to bolstering insulation.
Finally, give some thought to moving to a less-expensive place to live. That could mean a smaller house across town -- or in a completely different part of the country. What with median home prices in some areas topping $600,000, look into parts of the country where housing prices (and property taxes) may be a bit more manageable. Realtor.org regularly releases statistics on existing-home sales by state.
Tax tips
Make as much as possible of your housing costs tax-deductible. Interest and real-estate taxes are deductible. Use your home equity to finance other expenditures. The interest on debt of up to $100,000 secured by the equity in your house is tax deductible. It doesn't matter what you use the money for.
Consider a home office. Now, you can qualify for a home office even if you do only managerial duties or simple record-keeping there. Prior to 1999, it had to be where you actually performed the activities of your job.
If you have a home office, you can deduct the percentage you use for business of all your housing costs. These include interest, taxes, insurance, utilities, landscaping, depreciation and the cost of any furniture or equipment you use in your home office. For more about claiming those deductions, see "The tax traps of working at home."
Food Cost through age 17: $27,750 to $41,490
This accounts for 14% to 19% of the overall expense (families at lower incomes spend a higher percentage on food).
What you can do
Set strict limits on the more discretionary forms of food spending. For example, tell your children they can spend no more than $7 a week on fast food. That alone may save a couple hundred of dollars a year.
Use the Web to shop for bargains.
There are -- literally -- thousands of shopping-related Web sites, and many of them now allow you to compare costs among similar items. Here's a simple trick that really works: When you're searching for a specific item, go to one of the search engines and type in that item and the word "discount." You'll be amazed at what you'll find. Or, you can go to extremes like the "Web's best shoppers" do.
Consider joining a warehouse club such as Costco, BJ's or Sam's Club. They're not suited to everyday shopping, but they let you stock up on certain items in quantity, often at substantial savings. Look to these places for items such as soda, canned and dried goods, and other sorts of nonperishables. If you lack adequate storage space, divide your bulk goodies among neighbors and friends.
Wholesale food services, which sell meat, noodles, fish and other groceries in bulk, will deliver to your door. Not only can you plan meals well in advance, but shoppers also can save close to 50% off conventional grocery store prices, although you still have to go to the store to buy fruits, vegetables and other items.
For other tips on supermarket savings, see "Take a big bite out of grocery bills."
Tax tips
If you're self-employed, you can deduct 50% of your meals and entertainment, if business related. If your children refer clients or customers to you, you can deduct the cost of taking them to a restaurant if business is discussed.
If self-employed, you also can deduct the cost of food for a business party. Make a separate shopping trip and keep records of your business guests and the business discussed.
If your children are old enough to work for you and are required to be on the business premises and available for work during lunch, then the cost of that lunch (if available to all employees) is deductible to you and tax-free to your children! Again, proper record-keeping is paramount here, as is the rule of reason.
Children are priceless, but raising them is one of the most expensive things you'll ever do. Here's how much it costs, along with some strategies for lowering expenses.
By MSN Money staff
Every newborn child is a bundle of joy. But you'd better have a bundle of cash on hand if you want to raise one.
Families making more than $74,900 a year will spend a whopping $289,380 to raise a second child born in 2006 through age 17, estimates the Center for Nutrition Policy and Promotion, a division of the U.S. Department of Agriculture. Higher-income families in urban areas in the West will spend the most, $304,740.
Though not as steep, the figures for lower-income families are just as unsettling: $197,700 for families earning $44,500 to $74,900 and $143,790 for families making less than that. That breaks down to nearly $15,800 a year from birth to age 2 for families in the $74,900-plus income bracket. This is no back-of-the-envelope guesstimate. The survey involves interviews with about 5,000 households, four times a year.
Talk back: Add it up . . . how much will you spend on your children this year?
The cost per child goes down for larger families. A child with no siblings costs 24% more than one with a sibling, for example. As a percentage of household expenditures, an average couple will spend 26% on an only child, 42% on two children and 48% on three children. As the child ages, costs rise through age 5, fall slightly between ages 6 and 11, and then top out at $16,970 a year from ages 15 to 17.
How much will your family spend?*
Income/ age
Total
Housing
Food
Trans.
Clothes
Health
Care/ school
Misc.
*Estimates of expenditures on the younger child in a two-child, two-parent family. To estimate expenses for an only child, multiply the figure by 1.24. To estimate expenses for each of three children, multiply by 0.77.
Sobering? No doubt. Misleading? Yes. The study doesn't take into account certain expenses incurred by some families, such as heavy medical bills or pricey private schools. It's a composite average, and, by definition, that means your numbers will be a little (possibly a lot) higher or lower. And because the survey ends at age 17, it doesn't take into account the millions of college students who are supported in part or in full by their parents. In 2020, you'll need nearly $225,000 for a private college or $105,000 for an in-state public university. (Run the numbers with our tuition calculator.)
The study also doesn't consider lost income that occurs when one parent stops working or takes off several years to raise the children during the early years -- or takes a lesser-paying job with more-predictable hours.
Before you take a vow of celibacy, look on the bright side: There are ways to trim the expenses.
The study breaks down overall expenditures into various categories and subsections. (The information is used by state agencies and court systems to determine child-support guidelines and foster-care payments, among other things.) We'll go through each of the major categories, give the total expense for families from the low to high ends, and then offer cost-cutting ideas and some tax tips from our tax expert, Jeff Schnepper.
Housing Cost through age 17: $47,820 to $107,340
Housing is the single biggest expense of raising children, comprising 33% to 37% of the overall annual expense.
What you can do
You could ignore one of the basic assumptions used in calculating additional housing costs. You could decide not to move into a larger home. The table assumes that for each child you have, you're going to add 100 to 150 square feet of living space to your home. By definition, that means you're going to either renovate your existing house or buy a new one. Go against the flow and figure out how to use the space you've got.
For many families, that solution won't get it done. Try this: If you've had your mortgage for a while and plan to stay in your home, keep track of mortgage rates and consider refinancing when the rate is more than a percentage point below your current mortgage. It can save hundreds to thousands of dollars on the loan. You can get an idea about current rates and offers at MSN Money's Mortgage & Refinance page.
Challenge your property tax bill if you think it's too high. (See "Are you paying too much in property tax?") The National Taxpayers Union estimates that as much as 60% of taxable property in the United States is over-assessed.
Additionally, make your home as energy efficient as you can. That means everything from replacing old and inefficient furnaces and water heaters to bolstering insulation.
Finally, give some thought to moving to a less-expensive place to live. That could mean a smaller house across town -- or in a completely different part of the country. What with median home prices in some areas topping $600,000, look into parts of the country where housing prices (and property taxes) may be a bit more manageable. Realtor.org regularly releases statistics on existing-home sales by state.
Tax tips
Make as much as possible of your housing costs tax-deductible. Interest and real-estate taxes are deductible. Use your home equity to finance other expenditures. The interest on debt of up to $100,000 secured by the equity in your house is tax deductible. It doesn't matter what you use the money for.
Consider a home office. Now, you can qualify for a home office even if you do only managerial duties or simple record-keeping there. Prior to 1999, it had to be where you actually performed the activities of your job.
If you have a home office, you can deduct the percentage you use for business of all your housing costs. These include interest, taxes, insurance, utilities, landscaping, depreciation and the cost of any furniture or equipment you use in your home office. For more about claiming those deductions, see "The tax traps of working at home."
Food Cost through age 17: $27,750 to $41,490
This accounts for 14% to 19% of the overall expense (families at lower incomes spend a higher percentage on food).
What you can do
Set strict limits on the more discretionary forms of food spending. For example, tell your children they can spend no more than $7 a week on fast food. That alone may save a couple hundred of dollars a year.
Use the Web to shop for bargains.
There are -- literally -- thousands of shopping-related Web sites, and many of them now allow you to compare costs among similar items. Here's a simple trick that really works: When you're searching for a specific item, go to one of the search engines and type in that item and the word "discount." You'll be amazed at what you'll find. Or, you can go to extremes like the "Web's best shoppers" do.
Consider joining a warehouse club such as Costco, BJ's or Sam's Club. They're not suited to everyday shopping, but they let you stock up on certain items in quantity, often at substantial savings. Look to these places for items such as soda, canned and dried goods, and other sorts of nonperishables. If you lack adequate storage space, divide your bulk goodies among neighbors and friends.
Wholesale food services, which sell meat, noodles, fish and other groceries in bulk, will deliver to your door. Not only can you plan meals well in advance, but shoppers also can save close to 50% off conventional grocery store prices, although you still have to go to the store to buy fruits, vegetables and other items.
For other tips on supermarket savings, see "Take a big bite out of grocery bills."
Tax tips
If you're self-employed, you can deduct 50% of your meals and entertainment, if business related. If your children refer clients or customers to you, you can deduct the cost of taking them to a restaurant if business is discussed.
If self-employed, you also can deduct the cost of food for a business party. Make a separate shopping trip and keep records of your business guests and the business discussed.
If your children are old enough to work for you and are required to be on the business premises and available for work during lunch, then the cost of that lunch (if available to all employees) is deductible to you and tax-free to your children! Again, proper record-keeping is paramount here, as is the rule of reason.
Will our kids be dumb and broke part 2
Although Jump$tart and its members applaud stand-alone courses that students must pass, usually in high school, they are promoting the idea that the younger financial education starts, the better.
Jump$tart has created a set of voluntary standards that include benchmarks for elementary, middle and high school. The network's approach is to build students' financial skills from basic concepts to more-sophisticated decisions.
Here are some of its benchmarks for understanding credit that millions of Americans are clearly lacking:
By the fourth grade, students should understand that responsible borrowers pay back loans as promised.
By the eighth grade, students should understand how interest rates and loan lengths affect the cost of credit.
By the 12th grade, students should be able to define standard credit card disclosure terms and know how to fill out an application. ("Not that we are suggesting they apply for credit but they understand how to do so," Levine hastened to add.)
How kids learn about money Despite an apparent hodgepodge of laws, standards and requirements, Duvall believes educators are making progress on a clearer blueprint for giving kids financial skills they will keep for life.
That's a tall order, as most of us forget fractions the minute we're on summer vacation.
But what money has on its side, in a sense, is that financial knowledge can be made concrete for kids from Day One. Everyone, even a young child, deals with money or watches parents deal with money every day.
Even though financial requirements are all over the map right now, Duvall pointed out that every lesson counts. It's hard to know whether a 16-year-old will retain any of the high school skills she learned when she's 26 and buying her first car, but she might.
"My argument from the start is that we have a lot of work to do," Duvall said. "And it's better to have taught kids something rather than nothing."
What you can do The other advantage of financial education being rather fluid right now is that everyone can and should get involved. There may be no more important way to contribute to the world than to take one of these steps:
Contact your school board. Whether you're a parent or not, writing a basic letter of endorsement for financial education will help build momentum at the local level.
Learn what's out there. Jump$tart operates a national clearinghouse of financial literacy programs, and Levine suggested sending some to your schools because "sometimes teachers don't know where to start." Jump$tart recommends two curricula that schools can adopt: the National Council on Economic Education's Financial Fitness for Life, a comprehensive K-12 program available for purchase; and High School Financial Planning, a four-year curriculum created by the National Endowment for Financial Education. The latter is free.
Be a better role model. "You don't have to be the teacher, but just have a conversation with your children," Levine said. "Take something specific like a stimulus check or bonus or tax refund, and make a minibudget within that, so kids can see how you make financial decisions with a finite amount."
According to the National Foundation for Credit Counseling's survey, parents are among the most powerful influences on how and what kids learn about money. About half of those who closely monitor their finances reported learning those money-management skills at home.
By MP Dunleavey
Jump$tart has created a set of voluntary standards that include benchmarks for elementary, middle and high school. The network's approach is to build students' financial skills from basic concepts to more-sophisticated decisions.
Here are some of its benchmarks for understanding credit that millions of Americans are clearly lacking:
By the fourth grade, students should understand that responsible borrowers pay back loans as promised.
By the eighth grade, students should understand how interest rates and loan lengths affect the cost of credit.
By the 12th grade, students should be able to define standard credit card disclosure terms and know how to fill out an application. ("Not that we are suggesting they apply for credit but they understand how to do so," Levine hastened to add.)
How kids learn about money Despite an apparent hodgepodge of laws, standards and requirements, Duvall believes educators are making progress on a clearer blueprint for giving kids financial skills they will keep for life.
That's a tall order, as most of us forget fractions the minute we're on summer vacation.
But what money has on its side, in a sense, is that financial knowledge can be made concrete for kids from Day One. Everyone, even a young child, deals with money or watches parents deal with money every day.
Even though financial requirements are all over the map right now, Duvall pointed out that every lesson counts. It's hard to know whether a 16-year-old will retain any of the high school skills she learned when she's 26 and buying her first car, but she might.
"My argument from the start is that we have a lot of work to do," Duvall said. "And it's better to have taught kids something rather than nothing."
What you can do The other advantage of financial education being rather fluid right now is that everyone can and should get involved. There may be no more important way to contribute to the world than to take one of these steps:
Contact your school board. Whether you're a parent or not, writing a basic letter of endorsement for financial education will help build momentum at the local level.
Learn what's out there. Jump$tart operates a national clearinghouse of financial literacy programs, and Levine suggested sending some to your schools because "sometimes teachers don't know where to start." Jump$tart recommends two curricula that schools can adopt: the National Council on Economic Education's Financial Fitness for Life, a comprehensive K-12 program available for purchase; and High School Financial Planning, a four-year curriculum created by the National Endowment for Financial Education. The latter is free.
Be a better role model. "You don't have to be the teacher, but just have a conversation with your children," Levine said. "Take something specific like a stimulus check or bonus or tax refund, and make a minibudget within that, so kids can see how you make financial decisions with a finite amount."
According to the National Foundation for Credit Counseling's survey, parents are among the most powerful influences on how and what kids learn about money. About half of those who closely monitor their finances reported learning those money-management skills at home.
By MP Dunleavey
Will our kids be dumb and broke part 1
Will our kids be dumb and broke?
You don't have to be a parent to know that this country has a giant spending problem -- and that we must teach the next generation to do better. But how?
We've gone from being a nation with a slight overspending problem to a country steeped in more debt than in the entire history of lending and borrowing. Homes, jobs and futures are on the line.
The situation is dire. According to a survey commissioned by the National Foundation for Credit Counseling and released in April:
A third of Americans have no personal nonretirement savings.
A quarter have saved nothing for retirement.
One in 10 have trouble with mortgage payments.
Millions struggle to pay bills on time, with 7%, or about 15 million adults, getting calls from collectors or considering bankruptcy.
What the data make perfectly clear is that we cannot afford to raise another generation that's skidding toward financial disaster, ignorant of the most basic concepts about debt and savings.
"Thanks to the subprime-mortgage crisis, everyone is seeing the consequences of financial illiteracy. It's a front-page issue now," said Robert F. Duvall, the president and chief executive of the National Council on Economic Education.
Study after depressing study shows that millions of Americans can't handle even the basics of their financial lives, never mind the complexity of money in this high-tech, "your mortgage is really a magic carpet" era.
To his point, Duvall said he was at that moment attending an international conference on financial education, along with 250 people locally and 500 participating via webcast, including representatives from 44 countries. The conference was sponsored by the U.S. Treasury and the Office of Economic Cooperation and Development.
"This is a global issue now," Duvall said. The battle cry that's being heard from all sides: "Education, education, education."
Financial educators, unite! At first, financial literacy was a struggling grass-roots effort propelled by concerned parents and educators.
The movement has gained strength and momentum in recent years, as people throughout America and the world have begun witnessing one of the hairiest, scariest financial climates start to ravage lives everywhere.
Though the causes are complicated -- let's not forget the massive deregulation of the banking and credit industries in the 1980s, never mind our leetle credit crisis -- educators are realizing there is only one way to turn this Titanic around.
Duvall was recently asked to testify in Congress before the House Financial Services Committee, chaired by Rep. Barney Frank, D-Mass.
After his testimony, lawmakers asked Duvall the $500 billion question: If there were one thing he would recommend to remedy the mortgage and credit crisis, what would it be?
Business school for kidsSee how one Chicago school teaches kids about financial literacy.
"We keep trying to get a quick fix for problems that have been staring us in the face," Duvall said. The truth is that building a money-smart populace is going to require four things:
A public that demands it.
Continuing pressure from parents and watchdogs.
Money to provide schools and teachers with the resources they need to teach financial skills.
Testing to make sure kids are mastering the knowledge they need.
Teach your children well Clearly, the answer is to implement a nationwide financial-education curriculum by tomorrow, right?
Not so fast.
In this country, education is largely a local issue. While financial-education programs are on the rise, different states, counties and school districts are taking different approaches, said Laura Levine, the executive director of the Jump$tart Coalition, a network of 180 organizations focused on developing financial education.
The coalition offers a map of states' efforts to make money skills a part of kids' education.
And there is some good news from the 2007 biennial report card released by the National Council on Economic Education:
Forty states report personal-finance education as part of their K-12 curricula, up from 21 in 1998.
Seven states, up from four in 2002, now make personal-finance education (as part of another class or as a stand-alone credit) a requirement for high school graduation: Georgia, Idaho, Illinois, Kentucky, Missouri, New York and Utah.
Alabama requires that personal finance be taught in middle school.
By MP Dunleavey
You don't have to be a parent to know that this country has a giant spending problem -- and that we must teach the next generation to do better. But how?
We've gone from being a nation with a slight overspending problem to a country steeped in more debt than in the entire history of lending and borrowing. Homes, jobs and futures are on the line.
The situation is dire. According to a survey commissioned by the National Foundation for Credit Counseling and released in April:
A third of Americans have no personal nonretirement savings.
A quarter have saved nothing for retirement.
One in 10 have trouble with mortgage payments.
Millions struggle to pay bills on time, with 7%, or about 15 million adults, getting calls from collectors or considering bankruptcy.
What the data make perfectly clear is that we cannot afford to raise another generation that's skidding toward financial disaster, ignorant of the most basic concepts about debt and savings.
"Thanks to the subprime-mortgage crisis, everyone is seeing the consequences of financial illiteracy. It's a front-page issue now," said Robert F. Duvall, the president and chief executive of the National Council on Economic Education.
Study after depressing study shows that millions of Americans can't handle even the basics of their financial lives, never mind the complexity of money in this high-tech, "your mortgage is really a magic carpet" era.
To his point, Duvall said he was at that moment attending an international conference on financial education, along with 250 people locally and 500 participating via webcast, including representatives from 44 countries. The conference was sponsored by the U.S. Treasury and the Office of Economic Cooperation and Development.
"This is a global issue now," Duvall said. The battle cry that's being heard from all sides: "Education, education, education."
Financial educators, unite! At first, financial literacy was a struggling grass-roots effort propelled by concerned parents and educators.
The movement has gained strength and momentum in recent years, as people throughout America and the world have begun witnessing one of the hairiest, scariest financial climates start to ravage lives everywhere.
Though the causes are complicated -- let's not forget the massive deregulation of the banking and credit industries in the 1980s, never mind our leetle credit crisis -- educators are realizing there is only one way to turn this Titanic around.
Duvall was recently asked to testify in Congress before the House Financial Services Committee, chaired by Rep. Barney Frank, D-Mass.
After his testimony, lawmakers asked Duvall the $500 billion question: If there were one thing he would recommend to remedy the mortgage and credit crisis, what would it be?
Business school for kidsSee how one Chicago school teaches kids about financial literacy.
"We keep trying to get a quick fix for problems that have been staring us in the face," Duvall said. The truth is that building a money-smart populace is going to require four things:
A public that demands it.
Continuing pressure from parents and watchdogs.
Money to provide schools and teachers with the resources they need to teach financial skills.
Testing to make sure kids are mastering the knowledge they need.
Teach your children well Clearly, the answer is to implement a nationwide financial-education curriculum by tomorrow, right?
Not so fast.
In this country, education is largely a local issue. While financial-education programs are on the rise, different states, counties and school districts are taking different approaches, said Laura Levine, the executive director of the Jump$tart Coalition, a network of 180 organizations focused on developing financial education.
The coalition offers a map of states' efforts to make money skills a part of kids' education.
And there is some good news from the 2007 biennial report card released by the National Council on Economic Education:
Forty states report personal-finance education as part of their K-12 curricula, up from 21 in 1998.
Seven states, up from four in 2002, now make personal-finance education (as part of another class or as a stand-alone credit) a requirement for high school graduation: Georgia, Idaho, Illinois, Kentucky, Missouri, New York and Utah.
Alabama requires that personal finance be taught in middle school.
By MP Dunleavey
Failure to Launch Part 2
So after temping for a year, Bravo impulsively decided to get a master's degree in teaching -- in the hope that an advanced degree would be the ticket to a better life. Instead, she racked up another $70,000 in student debt and discovered she doesn't have the stomach to be an elementary-school teacher after all.Now, living at home, Bravo says she knows dozens of young people who are doing the same thing, most of them struggling to save money, get a grip on debt or come up with some kind of viable career plan.Bravo has decided to focus on her ballroom dancing skills and become a professional dance teacher. "They can make $70 or $80 an hour," she says.
Lack of preparation Nicole Relyea laughs pretty hard at the idea that anyone might believe 20-somethings move back home as a cushy exit ramp from life's pressures. "Right, right, it's much easier trying to live with your parents, looking over your shoulder all the time," she jokes.
The real problem, she says, is that college students need more preparation to deal with the drastic shifts that life demands of them after graduation, both financially and career-wise.
"You think, six months ago I had a great on-campus job and social life. Now, I'm living at home, I have two friends and no academic stimulation for the first time in 20 years -- sitting in the basement, surfing the Internet, looking for work," Relyea says. "It's like, wow, I was just studying the cultural history of aborigines and now I'm looking at jobs where the main duties are answering the phone and typing.
"How are you supposed to make that shift? It's really something nobody prepares you for."
Relyea herself struggled to find a job after graduating in 2004 with $15,000 in student loans. She moved back home to save money and, like Bravo, she temped for more than a year. She finally landed a full-time position with a nonprofit in her hometown of Madison, Wis.
Still, her $26,000 salary barely covered rent, living expenses and $160 in monthly student-loan payments. She also was studying to get her certificate in massage therapy and weighing graduate school.
"The graduate degree would be for me, because I like school," she says, "but the massage-therapy certification might be the most useful thing I have."
Real-life solutions Because it's Hollywood, the parents in "Failure to Launch" can hire a sexy consultant (Sarah Jessica Parker) to help get their reluctant son to move out -- and give the audience a lot of laughs.
But "Quarterlifer's Companion" co-authors Abby Wilner and Cathy Stocker worry that the mooching-off-mom-and-dad stereotype is getting more attention than the real issue: Most new grads need some helping making a realistic financial plan. Here are some steps:
Put aside preconceptions. Parents may assume that colleges provide seniors with some kind of exit strategy, but that's not the case, says Relyea. "Nobody says, 'Okay, today we're going to learn how to write a cover letter.'"
There are on-campus career talks and seminars, of course, but harried seniors don't always realize the importance of making time for those, Relyea adds.
Provide senior orientation. Start by helping your adult children recognize that things are going to be different now and ask them questions.
Six months before graduation, for example, ask about credit-card and student-loan debt. "You don't want to stress them out," says Stocker, "but you can say, 'Let's make a game plan together.'"
Offer financial training wheels. Wilner and Stocker recommend that parents and 20-somethings take advantage of the fact that living at home can be a kinder, gentler financial learning environment.
New grads "can chip in with some of the monthly bills, so you get hang of bill paying," suggests Wilner. "This is also a good time to form a budget. Monitor your spending. Keep receipts. Get a realistic idea of what you spend and how to manage it."
Stocker adds that parents can encourage saving by offering to "match" a portion of whatever their 20-something socks away.
Easy ways to save money nowGot 20 minutes? That's all it takes to put $2,500 in your back pocket, according to one expert.Discuss expectations on both sides. While everyone I spoke to for this article stressed that living with the folks can be a smart financial move, without a clear plan or a deadline for finding a job, the situation can backfire.
To prevent nest-induced inertia, "The Quarterlifer's Companion" offers a contract that helps both parties define the terms of shared living conditions, including how the new "roommate" is going to contribute to the household; what his or her goals are; and when he or she might move out.
Both parties review the contract every three months, say, to evaluate progress and make any needed adjustments.
Show, don't tell. While it may be tempting to push your 20-something toward a job ("Let me introduce you to my friend Marv in accounting"), allow your adult child to hold the job-hunting reins.
But do provide the same kind of networking advice you might to a friend. Relyea says the most helpful thing her mother did was to take her to networking events and professional lunches, where eventually Relyea met a contact who led to her current job.
By MP Dunleavey
Lack of preparation Nicole Relyea laughs pretty hard at the idea that anyone might believe 20-somethings move back home as a cushy exit ramp from life's pressures. "Right, right, it's much easier trying to live with your parents, looking over your shoulder all the time," she jokes.
The real problem, she says, is that college students need more preparation to deal with the drastic shifts that life demands of them after graduation, both financially and career-wise.
"You think, six months ago I had a great on-campus job and social life. Now, I'm living at home, I have two friends and no academic stimulation for the first time in 20 years -- sitting in the basement, surfing the Internet, looking for work," Relyea says. "It's like, wow, I was just studying the cultural history of aborigines and now I'm looking at jobs where the main duties are answering the phone and typing.
"How are you supposed to make that shift? It's really something nobody prepares you for."
Relyea herself struggled to find a job after graduating in 2004 with $15,000 in student loans. She moved back home to save money and, like Bravo, she temped for more than a year. She finally landed a full-time position with a nonprofit in her hometown of Madison, Wis.
Still, her $26,000 salary barely covered rent, living expenses and $160 in monthly student-loan payments. She also was studying to get her certificate in massage therapy and weighing graduate school.
"The graduate degree would be for me, because I like school," she says, "but the massage-therapy certification might be the most useful thing I have."
Real-life solutions Because it's Hollywood, the parents in "Failure to Launch" can hire a sexy consultant (Sarah Jessica Parker) to help get their reluctant son to move out -- and give the audience a lot of laughs.
But "Quarterlifer's Companion" co-authors Abby Wilner and Cathy Stocker worry that the mooching-off-mom-and-dad stereotype is getting more attention than the real issue: Most new grads need some helping making a realistic financial plan. Here are some steps:
Put aside preconceptions. Parents may assume that colleges provide seniors with some kind of exit strategy, but that's not the case, says Relyea. "Nobody says, 'Okay, today we're going to learn how to write a cover letter.'"
There are on-campus career talks and seminars, of course, but harried seniors don't always realize the importance of making time for those, Relyea adds.
Provide senior orientation. Start by helping your adult children recognize that things are going to be different now and ask them questions.
Six months before graduation, for example, ask about credit-card and student-loan debt. "You don't want to stress them out," says Stocker, "but you can say, 'Let's make a game plan together.'"
Offer financial training wheels. Wilner and Stocker recommend that parents and 20-somethings take advantage of the fact that living at home can be a kinder, gentler financial learning environment.
New grads "can chip in with some of the monthly bills, so you get hang of bill paying," suggests Wilner. "This is also a good time to form a budget. Monitor your spending. Keep receipts. Get a realistic idea of what you spend and how to manage it."
Stocker adds that parents can encourage saving by offering to "match" a portion of whatever their 20-something socks away.
Easy ways to save money nowGot 20 minutes? That's all it takes to put $2,500 in your back pocket, according to one expert.Discuss expectations on both sides. While everyone I spoke to for this article stressed that living with the folks can be a smart financial move, without a clear plan or a deadline for finding a job, the situation can backfire.
To prevent nest-induced inertia, "The Quarterlifer's Companion" offers a contract that helps both parties define the terms of shared living conditions, including how the new "roommate" is going to contribute to the household; what his or her goals are; and when he or she might move out.
Both parties review the contract every three months, say, to evaluate progress and make any needed adjustments.
Show, don't tell. While it may be tempting to push your 20-something toward a job ("Let me introduce you to my friend Marv in accounting"), allow your adult child to hold the job-hunting reins.
But do provide the same kind of networking advice you might to a friend. Relyea says the most helpful thing her mother did was to take her to networking events and professional lunches, where eventually Relyea met a contact who led to her current job.
By MP Dunleavey
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