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For the sheer simplicity they bring to 401(k) investment decisions, retirement experts have been big fans of target date funds for years.

Now, their popularity is soaring with the people who really count: employees.

Last year, 401(k) participants poured a record $70 billion into target date funds (TDFs), an investment option that automatically shifts the asset allocation in the portfolio to reduce risk as employees approach a designated retirement date. TDFs have become the first choice for people who, rather than go it alone and pick their own mutual funds, like having their employer’s mutual fund manager do it.

According to a new report by Morningstar, the Chicago research firm, the new money flowing in has averaged $66 billion annually over the past three years, a 28 percent increase over the prior three-year period. The inflows exclude new money from investment returns.

The surge in new invested money has been more about the intensity of baby boomers’ efforts to save for an impending retirement, Morningstar said, than the fact that strong returns usually pull investors into the stock and bond markets.

In another major development, TDFs invested in passive index funds are now investors’ predominate choice. This is a full reversal from a decade ago, when most TDFs were invested by stock pickers.  (Although more money is now flowing into passively invested TDFs, actively managed TDFs still hold more in total assets.)

Investors of all ages are moving into TDFs, but the biggest inflows come from baby boomers in their late 50s and early 60s who’ve picked a TDF with a designated 2025 retirement date.

Boomers are doing so for two reasons. Many have hit their peak earnings levels and can contribute more to their retirement plans. Second, said Morningstar’s Jeff Holt, they are “more conscientious” – and no doubt more concerned – about preparing for their fast-approaching retirement than are young adults.

TDFs are now a permanent feature of the retirement plan landscape.

Squared Away writer Kim Blanton invites you to follow us on Twitter @SquaredAwayBC. To stay current on our blog, please join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.  

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Just as the wealth and income gap between the well-to-do and working people is growing, so, too is retirement inequality.

Researchers increasingly want to know what’s behind this phenomenon. They’ve uncovered reasons ranging from low-income workers’ greater difficulty saving to the well-to-do’s longer life spans – which means they’ll get more out of their Social Security benefits.

Having a low income doesn’t necessarily mean a retiree can’t live comfortably. What matters is how much of their earnings they will be able to replace with Social Security and any savings.

Even by this standard, lower-income workers come up short: 56 percent are at risk of having a lower standard of living when they retire. The decline is slightly less for middle-income workers – 54 percent – but the risks fall sharply, to 41 percent, for the people at the top.

The roots of this inequality span Americans’ lives from cradle to grave:

  • In our 401(k) system, financial security in retirement increasingly hinges on how much people can save in their 401(k)s as they work. But it’s harder for low-income workers to save, mainly because their employers are less likely to offer a savings plan, according to a 2017 study by The New School for Social Research. The study also found that basic living expenses gobble up more of their paychecks, and they experience more financial disruptions from layoffs and divorce, leaving less for savings.
  • Some research assesses inequality trends for specific groups of people.  Incomes tend to rise over time, even after being adjusted for inflation, but they rise more slowly for people near the bottom of the earnings scale. Lower earnings translate later to lower retirement incomes.  For example, the future retirement income of well-heeled members of Generation X, relative to today’s retirees in the high-income bracket, is estimated to be two times more than it will be for low-income Gen-X retirees, according to an Urban Institute study.
  • A trend in this country is toward later and later retirements as older workers try to beef up their future finances.  The exception, however, is one group with much to gain from a larger monthly Social Security check: men with just a high school education, according to a forthcoming report by the Center for Retirement Research (CRR).

    Among the incentives to retire later is the decline in reliable income coming from traditional pensions in the private sector, which are dwindling. But this powerful incentive gives less encouragement to less-educated workers, because their employers were less likely, even decades ago, to provide pension coverage, a situation that persists today. Also limiting their ability to work longer: the health of men with lower education levels, who often have physically demanding jobs, hasn’t improved as much as the overall population’s.
  • A 2017 CRR study finds that many older workers will find a new job or career so they can add a few years to their work histories, delaying Social Security and saving more. But this strategy is less effective for people in lower socioeconomic ranks, because when they do make a move, they tend not to work as long as workers at the top.
  • Another study focuses on a big disadvantage for African-American retirees. Owning a home can boost retirement finances – a retiree might be able to pay off the mortgage, eliminating their biggest expense, or sell the family home and move someplace cheaper. But African-Americans’ homeownership rate has been declining since the Great Recession, reducing their retirement resources, the Urban Institute found.
  • Delaying Social Security is critical to retirement security, because the resulting larger monthly checks continue for as long as they’re alive. But one well-known study found that low-income workers’ life spans aren’t increasing as rapidly as people at the top of the earnings scale. Because of this slower growth, another study finds, those with lower life expectancies have less of an incentive to delay claiming their benefits.

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.

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Sky-high city rent, college loan payments, and the low-paying days of an early career are a bad combination for today’s Millennial.

Liz Patterson

Liz Patterson has solved all that.  The carpenter built herself a 96-square-foot house on top of a flatbed truck for less than $7,000 in Manitou Springs, Colorado, a hip neighborhood near Colorado Springs.

The house “represents my monetary freedom – it’s the whole reason I did it,” the 27-year-old said.

Tiny houses, which average 500 square feet, are only about 1 percent of U.S. home sales. But builders say that sales continue to grow as Generation-X buys them as Airbnb rental properties, and baby boomers park their “granny pods” in an adult child’s backyard.

Patterson’s house before

Tiny houses actually make the most sense for 20-somethings in rebellion, given their financial constraints and a distaste for all the junk their parents accumulated over a lifetime, said Shawna Lytle, a spokeswoman for Tumbleweed Tiny Homes Company in Colorado Springs, which built its first tiny house in 1999. The national tiny house price is $23,000.

Five years earlier, the tiny house movement had started in Tokyo. Recently, a handful of U.S. communities, including Spur, Texas, and Berkeley, California, have modified their zoning rules or building codes to accommodate them. The laws are a patchwork: houses on wheels must sometimes be classified as RVs, and some cities set size minimums for houses with foundations.

Young adults who want to buy tiny houses can encounter another obstacle: difficulty obtaining a home loan, even at their more modest prices.  Patterson has the edge over most Millennials who might want a tiny home: she’d trained as a carpenter before college and could build – rather than borrow and buy – a place.

She came to this decision, indirectly, through the career frustrations that are common in her generation. Unable to find a non-profit job with her history degree from Colorado State, she was scraping together a living as a waitress and nursing home employee. Again and again, her $1,200 rent blew a big new hole in her small budget. Money, she felt, had become her “enemy” and gave her a “quarter-life crisis.”

Around the same time she was spinning her wheels professionally, she began to realize that she’d rather work as a carpenter.  That, in turn, led to the Eureka moment: she would use her skill to solve her financial problems and get a house. In 2014, she sold her worldly possessions, bought a flatbed truck through Craigslist, and started collecting high-quality building supplies discarded from luxury properties – pine floors from the Black Hills and some awesome outdoor sconces from a Kansas farmhouse.

After

Patterson was working backstage at an amphitheater when she raised the frame and put the sheathing up on the structure, parked in her friends’ salvage yard. She ended her apartment lease and moved into the still-unfinished home with a loft bedroom. The entire project took two years from start to finish.   [Building it also solved her career problem. The experience snared her a carpenter’s position at Tumbleweed, which is making 15-20 houses per month.]

Patterson has used her financial freedom to buy an extravagance more typical of baby boomers: travel. In two years, she has visited New York City, Chicago, Boston, New Orleans, and Santa Fe. For the first time, she has money in the bank. She’s saving up for her own acre of land, though she still has a long way to go.

Her next plan is to someday sell the tiny house, pocket the profits, and build another tiny house on that new plot of land.

But Patterson has already achieved her American Dream. “I haven’t lived paycheck to paycheck since 2014,” she said.

Squared Away writer Kim Blanton invites you to follow us on Twitter @SquaredAwayBC. To stay current on our blog, please join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.  

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Karen Dobson

Kay Dobson is 68, and it’s time to retire from her job as the jack of all trades at the Augusta Circle Elementary School in Greenville, South Carolina.

But she isn’t quite as ready for her June retirement as she could’ve been. She recently learned that an admitted unfamiliarity with Social Security’s arcane rules cost her about $31,000 for two years of foregone spousal benefits based on her husband’s earnings.

“I had not the vaguest idea that I would be eligible for that,” she said.

Dobson is hardly the first person to make a painful mistake like this. People have all kinds of misconceptions about Social Security, or they lack a basic understanding of how it works – that the government calculates benefits using their 35 highest years of earnings, that the size of the monthly checks depends on the age the benefits start, and that working women, like Dobson, are often entitled to a spousal benefit based on their husband’s work record and earnings.

Two years ago, Dobson could have applied for this benefit, because she’d reached her full retirement age – 66.  But since she didn’t know this at the time, Social Security recently sent her a check for $7,800 for only six months retroactively – typically the maximum period for retroactive spousal benefits.

Her $1,300 monthly checks are starting to come in now too.  When she turns 70, she’ll start collecting a larger benefit based on her own earnings from a long-time career in the school system.

This particular strategy – file for spousal benefits and delay your own – is now available only to people who turned 62 prior to Jan 2, 2016.  The unintended loophole was eliminated, because it subverted the original intent of the spousal benefit, which was designed with an eye to retired households with a low-earning or non-working spouse. (The spousal benefit, in and of itself, remains intact and can be a big help to older households in which a working wife earned less than her husband. If that’s the case, her Social Security benefit would be increased until it is equal to half of his full retirement benefit if she claims at or above her own full retirement age.)

The central point here is that ignorance of program rules can mean substantial losses for retirees.  For low- or middle-income retirees, the consequences can be especially dire since they’re already scraping by.

Dobson had to do her retirement planning all on her own, after her husband, Dan, was diagnosed with a neurological condition.  She only happened to learn about the spousal benefit during a pension consultation with W. Dave Erwin, a Greenville financial adviser and consultant that the school district has made available to employees who want help with their retirement finances.

The mistake isn’t going to make or break the Dobson’s finances. Kay describes herself as upper middle class – her husband was a banker – and they have savings and a good long-term care policy, which few people do. But it would’ve been nice to have enjoyed that extra money or put it in the bank.

Erwin said that his experience advising other clients confirms what the research shows: big gaps in older Americans’ Social Security knowledge – even among smart, well-educated people like Dobson. “They know 25 percent of what they need to know,” he said.

To prevent lost opportunities and get the most out of Social Security, it’s critical to know all the rules that apply to you.

Squared Away writer Kim Blanton invites you to follow us on Twitter @SquaredAwayBC. To stay current on our blog, please join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.  

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Diane Taylor

Betty Taylor is 74 and retired from a job she held for more than a decade filling Spiegel catalog orders and packing them up for shipping – she left in 1984. Diane Taylor, 70, was a packer and then a keypunch operator there between 1982 and 1995.

But the sisters, who live together in their late mother’s house on Chicago’s Southwest Side, couldn’t track down anyone who could confirm that their low-paying jobs entitled them to Spiegel pensions.

This is more common than one might think.

When a single employer or union has continued to maintain its pension plan over several decades, retiring workers know where to go to sign up for their benefits. But the sisters’ pensions got lost amid the confusion and paperwork shuffle around a series of mergers, bankruptcies, and name changes at Spiegel.

Betty Taylor

The confusion dates back to 1988, when the catalog company, which was founded by Joseph Spiegel after the Civil War, purchased Eddie Bauer. By 2003, Spiegel, loaded down with debt, was filing for bankruptcy protection and was subsequently acquired by the investors in Spiegel’s sole remaining asset, Eddie Bauer. The investors later transferred Spiegel’s pensions to Eddie Bauer’s corporate entity. In 2009, Eddie Bauer also went into bankruptcy, sending the pension funds to their final resting place: the federal Pension Benefit Guaranty Corporation (PBGC), which insures the pensions of failing companies.

Diane felt that a pension, if it existed, could really help out with her precarious finances. And she was pretty certain she remembered a pension from her years at Spiegel. So she started calling around.

“I got the runaround for four years,” she said. “I was persistent, and I was going to keep on until I had one foot in the grave,” Diane said.

First, she said she called Eddie Bauer, who told her to call someone representing the former Spiegel, who sent her right back to Eddie Bauer. She inquired at her Teamsters office, which agreed that her long tenure should entitle her to a pension. She researched the matter on a friend’s computer – nothing. She made a little progress after finding the name of another person to call at Eddie Bauer. He said he saw her name on a list and referred her to someone else inside Eddie Bauer, who said sorry no pension.

Last year, Diane’s and, later, Betty’s pensions were finally located after Diane sought out a Chicago legal services agency, which referred her to the Pension Action Center (PAC) at the University of Massachusetts Boston.

The PAC assists people in Illinois and New England with all types of pension problems, but tracking down missing pensions is one of its main missions. The organization has recovered more than $58 million in pension benefits for some 9,000 clients since 1994.

On May 5, 2017, the PAC opened Diane’s and Betty’s cases, after Diane mentioned that her sister had worked at Spiegel too. A few months later, Diane received a $11,000 retroactive check in the mail for unpaid benefits, along with her first $200 monthly pension check. Three months after that, PAC resolved Betty’s case, resulting in a $23,000 lump sum and $217 a month.

It took some detective work at the PAC to confirm the pensions and begin the payments. Sophie Esquier, the PAC attorney who handled the Taylors’ case, had to go over the same ground Diane did – but she knew what to ask for. She called the PBGC, which frequently coordinates with PAC investigators to establish retired employees’ pension eligibility and begin paying them.

The PBGC needed proof. As a first step, one of PAC’s summer interns called the Teamsters’ Chicago local to get Diane’s, and, later, Betty’ work records. Armed with the information, Esquier called the PBGC. The same answer came back again: “the PBGC had no record” of the Taylor sisters’ pensions, Esquire said.

The PBGC’s denial of the pension didn’t make sense to her, because “both women worked there for over 10 years.” At that point, she decided to open the sisters’ cases.

The PAC contacted the PBGC again and asked officials there to look into it further. The PBGC went to the U.S. Social Security Administration and was able to establish the sisters’ detailed employment and earnings record on file there. The documents were what the PBGC needed to grant the Taylors their pensions.

Things are still tight for Betty. But the pension, on top of her $1,300 Social Security check, helps. “As long as I pay exactly the bills” and no more, she said, “$217 gives more wiggle room.”

Squared Away writer Kim Blanton invites you to follow us on Twitter @SquaredAwayBC. To stay current on our blog, please join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.  

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Eldercare: Dealing with Dementia- March 6, 2018 - YouTube

Caregiver in a nursing home can be grueling work, but my aunt loved it. In one of life’s cruel ironies, she died soon after retiring to take care of her husband, who is developing dementia.

The great responsibility for his care fell suddenly on his children and grandchildren, and they’re struggling with it.

I texted this video to a couple of my uncle’s daughters because it provides invaluable information and insight into the myriad causes of Alzheimer’s and the unique way its symptoms manifest in each individual. It also explains why diagnosis by a physician is critical – turns out, some people appear to have dementia, but the cause of their cognitive decline isn’t Alzheimer’s and may be reversible.

The speaker, Tammy Pozerycki, owns Pleasantries, which operates adult day care centers in the greater Boston area. In 1906, Dr. Alois Alzheimer, a brain researcher, first identified and described the disease. “It’s 2018, and we have no cure,” said Pozyercki – placing the burden on caregivers to manage the disease.

Full disclosure: her presentation was sponsored by Boston College’s human resources department for the benefit of employees. This blog is based at the Center for Retirement Research at Boston College.

Squared Away writer Kim Blanton invites you to follow us on Twitter @SquaredAwayBC. To stay current on our blog, please join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.  

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When once-simple financial tasks become difficult or confusing, it can be the canary in the coal mine signaling that an elderly person is developing dementia.

Financial problems will soon follow once people with cognitive impairment start miscalculating and missing payments, forgetting and misplacing accounts, or falling victim to fraud.

But some good news has come out of a new study of Medicare recipients: the vast majority of the 5.5 million people over 65 with established dementia – usually though not always Alzheimer’s disease – are receiving help from family and other caregivers with balancing their checkbooks, depositing and withdrawing money, and conducting transactions.

Even better, they are actually benefitting from it. The seniors who receive assistance are more likely to be able to pay for their essential expenses like rent, food, prescriptions and utilities, according to researchers at the Center for Retirement Research, which also sponsors this blog.

There was bad news in the report too: a nontrivial share of the older Americans with established dementia – that is, dementia for at least three years – aren’t getting any help. This problem is expected to grow in future generations. One major reason is longer and longer life spans, which exponentially increase the risk of dementia. Nearly one in three people over 85 are in some stage of dementia. Compounding this is the fact that today’s older workers have fewer children and have divorced more, which shrank the pool of who would be willing to pitch in and help them.

Having a caregiver helping with money management wouldn’t necessarily make an elderly person better off financially. Suppose a daughter is unfamiliar with her mother’s finances or a husband isn’t good at managing his own money. In extreme cases, caregivers sometimes steal from the trusting seniors in their care. Even so, it turns out that it’s better to receive help than not.

The researchers find that financial assistance virtually eliminates the ill effects of dementia on the elderly’s financial conditions.  It’s important to point out that they controlled for factors that can enhance someone’s financial savvy, such as education and wealth – people with more money can afford professional help, for example.

Dementia sufferers who don’t get any assistance remain at risk, however. Their family or friends may want to consider some good alternatives, such as the financial services offered by state and local Area Agencies on Aging or the U.S. Social Security Administration’s Representative Payee Program.

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.

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Different people, different strategies.

Myra Hindus and Jewell Jackson

Myra Hindus of Boston, semi-retired at 68, had her financial adviser estimate the 401(k) withdrawals necessary to support her $4,500 monthly budget, which the adviser also prescribed. But Hindus isn’t fully at ease about her finances, despite the professional advice, a paid-off mortgage, and a good bit more savings than most people have.

“It’s a bunch of guesswork,” said the former diversity administrator and consultant to major universities who hedges her bets by teaching college social work courses.

What overwhelms her are the many unknowns that will determine whether her money lasts as long as she does. What if her adviser is wrong? Or what if she lives well into her 90s – like her mother did? She’s also uncertain of the impact of her younger partner’s coming retirement, which isn’t sorted out yet.

“No one knows when you’re going to die so you can’t base it on that. We’re all in the stock market, and we don’t know what will happen to that,” she said.

Brian Jarvis and Connie O’Brien

Brian Jarvis and Connie O’Brien of Beavercreek, Ohio, also have advantages most baby boomers don’t: small pensions from their former employer, Northrop Grumman, and a mortgage paid off with their private-sector salaries. But they got lucky too. The odds that their withdrawal strategy would succeed improved a few months after they retired, in 2010, when President Obama signed the Affordable Care Act.  The couple, who are too young for Medicare, no longer had to buy expensive private health insurance – access to the government health exchange drastically reduced the expense.

Jarvis feels confident they will continue to be able to fund their $55,000 yearly budget for groceries, dinner with friends, taxes, utilities, vacations, and trash pickup. The predictability of these expenses dictates the withdrawal strategy. “Take out what we need” and no more, he said.

Wrestling with how much to spend is a good problem to have. And although the well-laid plans in the Hindus and Jarvis households could still be derailed by unanticipated events, at least they have a plan – and savings to worry about. More than half of boomers approaching retirement have no money in a 401(k).

For those who do have savings, paralysis is the more common reaction. Much is at stake for typical boomers, who have accumulated just $135,000 in their 401(k) and IRA accounts combined. Is this even enough money to support their standard of living after retiring? If deciding how much of the 401(k) to spend and how fast can be a headache for people in good financial shape, it’s a migraine for boomers with less.

Miscalculations can wreak havoc on retirement finances too. And not many people can do the complex calculations required to find an optimal rate of withdrawal. There’s also the possibility of a devastating event that’s impossible to predict: after the 2008 stock market crash, boomers who’d planned to retire in a few years watched helplessly as a third of their stock nest eggs were wiped out.

One solution to these myriad issues is using retirement savings to buy an annuity, which guarantees a set amount of monthly income for life – but few do it.

To preserve their finite resources, retirement experts recommend that boomers planning their retirement use the strategies that the two households profiled here are using. (Full disclosure: Hindus is a friend of this blogger.)

  • Track spending and review sources of retirement income. The first step, before retiring, is getting an accurate estimate of how much will be required to maintain one’s standard of living into retirement. The second step is calculating whether income from savings plus Social Security and perhaps a pension will be enough to pay basic expenses.
  • Delay Social Security. A monthly Social Security check grows a whopping 76 percent for people who wait to sign up for their benefits at age 70, rather than 62, the earliest age of eligibility. Benefits also increase incrementally for each year they’re postponed.One option is to work longer before filing for Social Security.  Both Hindus and Jarvis decided on a different strategy, albeit one that is unaffordable for most retirees: retire and live off of savings for a few years in order to delay Social Security. Hindus postponed her benefits until last year, after turning 68; Jarvis and O’Brien, 63, will wait until their late 60s.
  • Carefully plan a withdrawal strategy. Ad hoc or reactive 401(k) withdrawals can get retirees into trouble. Many financial advisers recommend the 4-percent rule of thumb for withdrawals. Retirees have decent odds that their money will last if they withdraw an annual amount equal to 4 percent of their initial account balance at retirement, adjusted for inflation.

These steps won’t eliminate the uncertainties but they should reduce the guesswork.

Squared Away writer Kim Blanton invites you to follow us on Twitter @SquaredAwayBC. To stay current on our blog, please join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.  

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The 1980s featured bankrupt Texas savings and loans. Then, in the mid-2000s, Countrywide failed to clearly disclose to customers the spike in their subprime mortgage payments in year 3. In 2016, 5 million customers learned about their fabricated Wells Fargo accounts. And last year, Equifax breached 140 million customers’ privacy.

No wonder people are flocking to the friendly credit union in their church, labor union or workplace.

The widespread fraud reports making headlines with regularity have fed a perception that “fraud happens in the banking world and a lot of it goes unpunished,” said Mike Schenk, senior economist for the Credit Union National Association (CUNA).

“It’s not just Countrywide as an abstract concept. It’s that Countrywide put people into these toxic mortgages to make a buck.”  The 2008 stock market and housing crashes, fueled partly by the collapse of several subprime lenders, hammered this point home.

CUNA has a bold marketing message: credit unions care more about their customers than impersonal banking behemoths. Schenk said he has the evidence to prove credit unions are benefiting from Wall Street’s financial shenanigans: membership increased an “astonishing” 4 percent in 2017, as the U.S. population grew less than 1 percent.

Of course, most banks aren’t bad guys, and they provide services that small credit unions can’t.  Banks frequently upgrade their technology – Bank of America’s ATMs are cutting edge. Large banks also have much larger networks of ATMs and branches, and they can service the large corporate accounts credit unions aren’t equipped to do.

So, what do credit unions do better?  Here are their three big advantages:

  • Their top priority, by default, is the customer, who is also the credit union’s owner. When banks commit fraud, they have other loyalties: they are trying to boost profits to please their institutional stockholders, Schenk said. Bank managers and chief executives also own stock, creating another incentive to pump up the share price. Wells Fargo’s fake accounts increased its sales and hurt customers’ credit scores.
  • Small is beautiful translates to much better deals for borrowers and depositors at credit unions, which can be more flexible in their underwriting than banks taking orders from headquarters. At a credit union, for example, the average interest rate on a $30,000, 5-year car loan is 3.05 percent, with monthly payments of $540. The same car loan from a bank charges 4.35 percent, with $557 payments. The additional interest on the bank loan adds up to more than $1,000 over the life of the loan.
  • Due to credit unions’ affiliations with churches, unions and other local organizations, their customer service is more personal than the major banks’. For example, one in four credit unions is operated by an individual employer, so the customer knows the credit union staff because they work together.

If you’re convinced you should move your business to a credit union, you can probably find one in your area.

Squared Away writer Kim Blanton invites you to follow us on Twitter @SquaredAwayBC. To stay current on our blog, please join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.  

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It’s a simple concept. Deposit retirees’ Social Security checks right before their big-ticket bills come, especially rent.

The U.S. Social Security Administration’s current schedule for depositing pension checks in bank accounts is based on each retiree’s birth date– it can be the second, third, or fourth Wednesday of each month.

The problem is that cash-strapped, low-income seniors receiving the earlier checks, on the second or third Wednesdays, can fall into a common behavioral trap: they spend the money soon after it comes in and then can’t cover the rent, mortgages or credit cards due at the beginning of the following month.

According to a clever new study, people who get these early monthly checks are at greater risk of resorting to desperate measures like payday loans than are seniors receiving them on the fourth Wednesday.

Such measures of financial distress are occurring “even though the pay schedule is known in advance,” write researchers Brian Baugh and Jialan Wang.

The advantage of Social Security deposits made on the fourth Wednesday is that retirees can get the big expenses out of the way first, forcing them to make do for the rest of the month with the money they have left. Indeed, people with fourth-Wednesday deposits had fewer bounced checks, account overdrafts, and payday loans, the researchers found.

They concluded this after first tracking the Social Security deposits flowing into some 34,000 bank accounts and the recurring payments flowing out – groceries, gas, retail, and other charges.  It was impractical to track rent payments, typically low-income retirees’ largest expense, because rent usually is paid with a personal check to a landlord, who is unidentifiable in a bank account. As a proxy for rent, the researchers tracked mortgage payments.

A partial explanation for what might be happening is that seniors whose Social Security deposits and bill due dates are mismatched will concentrate their spending early in the month, because the check is burning a hole in their pocket.

And for good reason: low-income people constantly make impossible choices. Do they forgo a trip to the grocery store to pay a medical bill? Can they afford a gift so that a grandson can attend a birthday party, or should he be told he can’t go?

The researchers suggest that new policies and technologies that align income with spending would help retirees.

One such policy might be to move all Social Security deposits to just before the largest bills are due. This wouldn’t give financially vulnerable retirees any more money. But it might give them better odds of budgeting their money well.

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.

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